We have Janet Yellen to thank for Chained CPI
A full transcript of Yellen's Feb. 5, 1997 confirmation hearing is available here. [There,] Yellen endorsed establishing a new statistical metric that would allow the federal government to reduce Social Security payments over time, by revising the consumer price index, or CPI, the government's standard measurement for inflation.
"I agree with the principle that Social Security and the tax system should be appropriately indexed to take account of movements in the cost of living. I believe we need as accurate a measure as we can possibly have of the cost of living," Yellen said. "I believe that we are now obtaining broad agreement among professionals that the CPI does overstate the actual increase, properly measured, in the cost of living."
Once in office, Yellen put that belief into action, writing a letter to the Bureau of Labor Statistics encouraging it to devise a cheaper inflation metric. BLS Commissioner Katharine Abraham responded that the agency had been testing the new measure in an experimental mode, and planned to deploy it in 1998.
At the time, this new metric, known as chained CPI, was being aggressively pursued by House Speaker Newt Gingrich (R-Ga.), following then-Fed Chair Alan Greenspan's criticism of the existing cost-of-living calculations. Greenspan and other economists had argued that the consumer price index overstated cost-of-living changes by failing to calculate the way that households substitute different goods for each other when prices rise.* While BLS developed the statistic, it has not been applied to Social Security. Some economists argue that a more appropriate inflation measure for Social Security would look at price changes for elderly people [no duh!], and the BLS does track an experimental metric addressing inflation for older Americans.
Chained CPI has been a major point of contention in budget negotiations between Obama and congressional Republicans, with both camps alternating between supporting the measure and decrying it. Adopting Chained CPI to cut Social Security is extremely unpopular with both the general public and senior citizens.
So I'm very pleased that a multi-faceted specimen of recto-cranial inversion like Larry "Natural Ability" Summers will be denied his Fed Chair bauble, and be forced, sobbing, to accumulate yet more coin hiring out his legendary brilliance and Rubinite connections in the dreaded private sector; Summers is the very definition of a "public man."
At the same time, while giving Summers the ol' heave ho is a righteous act and good politics that might drag the Overton Window slightly left, good politics doesn't immediately translate into good policy, as Yellen's views on Chained CPI show. "Be careful what you wish for; you might get it" was made for situations like this.
So let's not confuse a solid base hit with a game-winning grand slam, OK?
NOTE * That is, chained CPI is the idea that if you substitute offal for beef, your standard of living has not dropped.