Question

Preface:

In the 1990s politicians in Washington D.C. were looking for ways to balance the budget. Former Federal Reserve Chairman Alan Greenspan brought attention to the importance of the Consumer Price Index (CPI) and its link to cost-of-living adjustments (COLAs) in several areas of the federal budget--most notably Social Security. Alan Greenspan argued that the CPI overstated inflation and thus led to unjustified COLAs. According to Alan Greenspan, these unjustified COLAs therefore increased the deficit, and if the overstatements in the CPI were corrected this would contribute to balancing the budget.

The Senate Finance Committee created the Boskin Commission in the 1990s to examine possible overstatements of the CPI. The commission came out with its estimate that the CPI overstated inflation by 1.1%.

Answer the following questions:

1. If the Boskin Commission's estimate was right and the CPI overstates inflation by 1.1 % every year--what does that say about real GDP per capita and living standards in general in the United States, which are affected by the CPI ?

2. What are some of the sources of this possible overstatement of the CPI, which is calculated by the Bureau of Labor Statistics?

Your response must be at least two paragraphs (***I want you to be highly critical of the assertions propagated by Alan Greenspan and the Boskin Commission. You need to critically analyze their assertions***). In addition, it is required to reply to at least two other students' posts by offering respectful suggestions, comments, or critiques related to the subject matter and their post.

Answer 1

1 it means that real GDP is more and quality of life is better because less cpi needs to be in denominator of equation for real GDP than is actually placed

2 There are many reasons. One is that it does not reflect changes in quality. A laptop of today is better than of yesterday even though prices might not have changed( due to technological improvements.) But it may be argued that quality if airtravel, milk etc has also decreased

Another reason cited is it does not take into consideration the substitution effect. Cpi measures prices of fixed bundle of goods. However this effect is only between 0.1-0.2%. Boskin panel considered it 0.3% which is not justified

Similarly it us argued that it does not take into account low cost stores like Walmart. But only about 15% of goods used in index can actually be obtained in low cost stores.