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February 1996
Volume 14, Number 2

Define It Away
Llewellyn H. Rockwell, Jr.

People made fun of Gerald Ford's buttons that said "WIN," meaning "Whip Inflation Now." The buttons and the accompanying propaganda campaign implied that consumers' bad vibes were the cause of inflation. Ha, Ha.

Now, the White House, members of both parties, and their court economists have done Gerry one better. Lacking any strategy for getting rid of inflation, they intend to redefine it. Their new formula will show prices going up more slowly. This will help the government, but for anyone trying to keep tabs on unceasing monetary destructionism, it's a terrible, even dangerous, idea.

Redefining the Consumer Price Index will have large and immediate repercussions. Thanks to a Nixon-era change, Social Security benefits are increased automatically by inflation. The higher prices go, the larger the checks. A deliberate dumbing down of the CPI is a way of saving money. That--supposedly--is why Republicans support it.

Cutting spending in times of $1.7 trillion budgets is, of course, a moral obligation. But there are better ways. Why not cut or eliminate cost-of-living adjustments themselves? It turns out that the American Association of Retired Persons opposes this direct route, but won't oppose changing the inflation rate.

A seedier side to this scheme has to do with taxes, and Republicans are hushmouthed about it. If government statistics reveal less inflation, the tax brackets won't adjust to price movements. The difference between actual and official inflation will net billions for the government. And here we see a secret purpose: to extract more wealth from the American people in ways they won't detect.

From the taxpayer's point of view, then, the proposed change means higher taxes, better disguised, although the Republican supporters of the plan won't tell you that.

To drum up support, backers are quick to reassure us that all good economists say the current CPI understates the real inflation rate. But if economists could know the real inflation rate, there would be no need for a CPI. We'd only need to consult the financial fortune tellers.

In the old days, only Austrian School economists criticized government economic data. They refuted the idea that economic activity can be accurately quantified and debunked the gizmos economists use to pretend it can.

But nowadays, there's a raging debate on the CPI. Every theory is shot down by someone else, and on seemingly solid grounds. There are hundreds of formulas and strategies for determining the direction and range of price movements. There's the "geometrical" formula, the "harmonic average" formula, and the "arithmetic" formula currently in use. Moreover, everyone has an idea of what should and shouldn't be in there and how much it should count.

Why so much debate? Because every attempt to discover an inflation rate is necessarily flawed. We can't just measure inflation the way we measure the height of a tree. Prices reflect too many variables. We can't be sure what accounts for changes. It makes no sense to lump together price changes for incomparable goods.

Nor is there a "price level" in the sense that there's a sea level, and the desire to make it stable (monetarism was the most elaborate) is a futile exercise. Let's say: liver transplants are going up in price, computers are going down in price, and milk remains the same. What can we conclude about movements in the overall price level? Honestly speaking, nothing.

There is no "average" price for goods and services because there are no "average" buyers of goods and services. There are only specific consumers who purchase specific products and services. People who buy college tuition for five children experience a different "inflation rate" than twentysomething techno-hermits.

Neither is there a definite "inflation rate" waiting to be unveiled. Even when the government is goosing the money supply, inflation affects different goods and sectors at different times and to varying degrees.

All that said, we do need some way to gauge the effects of monetary policy on prices. The index number, for all its faults, is about the best we can do. The CPI, like all index numbers, is generated by comparing the data from one "basket" of goods in period A with the data from the same basket in period B, and formulating the change.

The results will be fraught with errors. To retain some modicum of honesty, we must adhere to two rules. The formula must be inclusive of many goods, sectors, regions, etc., and it must be consistent. The best and practically only way to render an index number utterly useless is to change its definition in mid-course.

That, of course, is precisely what the politicians are planning to do, and not because the current CPI is wildly inaccurate. The problem, if anything, is that it is revealing the wrong thing: that prices keep going up. What the government wants is a measure--any measure--that shows less inflation.

The Federal Reserve always promises that it's working to bring down inflation, but, as Murray N. Rothbard shows in The Case Against the Fed, it never does. Since the Fed came into being, the dollar's value has plummeted to less than a penny, and even at a 3% inflation rate, prices will tend to double every 25 years.

Now we can tell why the Fed supports the CPI change. It wants to cover its crimes by appearing more successful at "battling inflation." What the Fed doesn't want to talk about is the real cause of inflation: not greedy consumers, avaricious workers, or price-gouging corporations, but the central bank itself, and its power and practice of creating money out of thin air.

If the government and the Fed really want to lower inflation, there's an easy way to do it. Stop the printing presses with a gold standard. With no artificial increases in the money supply and a growing economy, prices would tend to fall over the long run. The norm in the computer industry would become economy wide under sound money.

A truly inflation-free economy would spur savings and growth, be free of business cycles, restrict government power, and restore living standards. To reduce inflation by defining it away, on the other hand, is like eliminating debased coinage by readjusting the scales. It's something only government would do.


Llewellyn H. Rockwell, Jr. is president and founder of the Ludwig von Mises Institute


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