Committee for a Responsible Federal Budget

Momentum Continues to Grow for the Chained CPI

The chained CPI, a policy option that has been endorsed by experts, organizations, and many others from across the political spectrum and has just received another loud endorsement, this time courtesy of Alan Viard at the American Enterprise Institute. The chained CPI, a more accurate measure of inflation, would reduce our deficit by hundreds of billions over the next ten years if applied throughout the federal budget, slightly reducing the growth in inflation-indexed programs while also raising revenues.

Switching to the chained CPI has already received broad bipartisan support, popping up in recommendations from the Fiscal Commission, the Domenici-Rivlin Debt Reduction Task Force, the Center for American Progress, the Progressive Policy Institute, the Heritage Foundation, AEI, and many others.

While many of these endorsements have relied largely on the technocratic element that if certain spending programs and elements of the tax code are to be indexed to inflation, then we should be measuring inflation as accurately as possible. Alan Viard argues that while the technical case for the chained CPI as a more accurate measure is very strong, it is an incomplete argument and that the case for using chained CPI is based on the budget realities that will require both restraint in entitlement spending and increased revenues.

To briefly recap the accuracy points we made in our policy paper on the chained CPI, it would more precisely measure inflation as compared to the current CPI measures by accounting for something known as upper-level subsititution bias," a fancy way to explain when consumers start buying more products across and not within product categories when prices change. For example, consumers would likely buy more oranges and other fruits if the price of apples went up, which is not accounted for in the current inflation measure. In our analysis of the chained CPI, we also discuss the budgetary merits of moving to a more accurate measure--highlighting how the savings come from across the budget and include both spending and revenue savings.

Viard also strongly endorses the chained CPI, but sees its downward effects on deficits and debt as the primary argument for supporting it. He argues that if it were not for our "dire fiscal outlook" that demands solutions from both the spending and revenue sides of the budget, tax brackets would ideally be indexed to nominal income growth so that the average earner would not face any higher or lower tax brackets over time from real income growth.

As Viard says:

The real case for switching to the chained CPI is grounded in fundamental budget realities. The fiscal imbalance will ultimately have to be addressed by bipartisan agreements that restrain entitlement spending and increase revenue. It will not be possible to address the imbalance on the spending side of the budget alone or on the revenue side alone, nor will it be possible for either major political party to unilaterally tackle the problem in a durable manner. A switch to the chained CPI is attractive because it combines revenue increases and entitlement cuts in a way that has attracted bipartisan support.

We believe that as long as our policy is to index benefit programs and the tax code to keep pace with inlfation, that policy should be implemented using the most accurate meaure of inflation. But we agree with Viard that our fiscal imbalance makes the case for switching to the chained CPI far more compelling than a simple matter of technical accuracy. As we have said before:

Addressing our fiscal challenges will require many tough choices and policy changes - but switching to the chained CPI represents neither. Such a change offers policymakers the rare opportunity to achieve significant savings spread across the entire budget by making a technical improvement to existing policies. As such, across-the-board adoption of the chained CPI should be at the top of the list for any deficit reduction plan or down payment.

Moving to chained CPI is win-win by improving the technical accuracy of how we measure inflation while also helping to bring spending and revenues more in line. With bipartisan support growing for the chained CPI, it is certainly something that the Super Committee should look at for its recommendations, especially one that is part of a “Go Big” aproach.