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Obama is Showing Some Guts on the Budget. Don't Celebrate Just Yet.

Chained CPI is far from dead

Andrew Harrer-Pool/Getty Images News/Getty Images

The White House revealed yesterday that the president’s budget will not contain chained CPI this year. That has set off a round of applause among liberals who have long hated President Barack Obama’s willingness to include it in his budget. But the celebration is premature. Obama is still as willing as ever to trade chained CPI for increased taxes on the rich—by closing loopholes—in a grand bargain. He’s just become more realistic about the possibility of reaching a deal with Republicans.

Here’s why liberals hate chained CPI so much: Every year, the government applies a cost-of-living adjustment (COLA) to Social Security benefits so that they keep up with inflation. Currently, the COLA calculation that they use is called CPI-W. However, economists believe that CPI-W overstates inflation, because it does not take into account the fact that when the price of one good rises, consumers often purchase a different good instead of paying the higher price. For instance, when the price of beef rises, consumers will buy chicken instead. (The economic term for this is a substitution effect.)

To account for that, the Bureau of Labor Statistics (BLS) created chained CPI, which reflects how all consumers change their purchases in response to price changes. But chained CPI is also not an accurate inflation measure for seniors, because it represents cost-of-living changes for all urban consumers. Seniors, however, do not purchase a similar assortment of goods as your average urban consumer. For instance, they purchase a lot more health care services, which, until recently, have been growing way faster than inflation. That means that chained CPI (and CPI-W for that matter) understates the cost-of-living changes for seniors, cutting their benefits. (BLS has also created an inflation measure specifically designed for seniors, but it's still in an experimental phase.)

That’s why liberals don’t want Obama to agree to chained CPI, and why they were so happy that he didn’t include it in his budget. But the White House hasn’t backed away from it. Yesterday, a White House official said:

“However, over the course of last year, Republicans consistently showed a lack of willingness to negotiate on a deficit reduction deal, refusing to identify even one unfair tax loophole they would be willing to close, despite the President’s willingness to put tough things on the table.  The offer to Speaker Boehner remains on the table for whenever the Republicans decide they want to engage in a serious discussion about a balanced plan to deal with our long-term fiscal challenges that includes closing loopholes for the wealthiest Americans and corporations, but the chained CPI provision will not be included in this year’s budget."

The White House hasn’t changed its mind of chained CPI. It’s just accepted the political reality of the Republican position. Liberals can celebrate all they want, but if House Speaker John Boehner called the president tomorrow and said he’s ready to craft a grand bargain, Obama would offer chained CPI in a heartbeat. But Boehner's not going to do that, and Obama knows it. Eliminating chained CPI from the budget is just a nice way for him to offer liberals a faux victory without actually changing his negotiating stance.