Wednesday, December 19, 2012

The Case for (and against) Chained Inflation

Obama is compromising again, and among his latest offers is acceptance of computation of inflation using the "chained" consumer price index.  In truth, the "chained" computation makes a lot of sense, because it accounts for something we all (ought to have) learned in basic economics — the substitution effect.  If the brand name product's price goes up, we buy the store brand.  If beef gets too expensive, we buy pork.  Chained computation of inflation really does reflect the actual cost of living — for most people.  The cost of inflation really does have less impact — on most people — than the current computation of CPI indicates.

For the elderly, though, chained computation does not work.  People getting by on Social Security payments already are substituting the pork (or the cat food) for the beef, and some of their largest expenses are not part of the CPI "market basket" — health care costs.

Most of the people who re-elected Obama (including the elderly) do not have a clue what the new measure of inflation means, which probably is why Obama put it on the table.  Maybe Our President will look more liberal in his second term, but he's still the guy whose economic team's godfather is Robert Rubin.

Who will Obama select to replace Timmy Geithner?  (I think we can assume it won't be Joseph Stiglitz.)

As for Timmy, he has not yet been CEO of Citi, but there still is plenty of time.  Wall Street ├╝ber alles.

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