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Unformatted text preview: the dismal science The search for better economic policy. The CPI and the Rat Race New evidence on the old question of whether money buys happiness. By Paul Krugman Posted Sunday, Dec. 22, 1996, at 3:30 AM ET Let's talk about inflation indexing and the meaning of life. Early this month a panel of economists, led by Stanford's Michael Boskin, made semiofficial what most experts have been saying for some time: The Consumer Price Index overstates inflation. Nobody really knows by how much, but Boskin and company made a guesstimate of 1.1 percent annually. Compounded over decades, this is a huge error. This conclusion is controversial. Some people are upset because any reduction of inflation estimates will reduce Social Security benefits, which are indexed to the CPI. Others are upset because a revision of recent price history would mean abandoning a worldview on which they have staked their reputations. Quite a few people have committed themselves to the story line that productivity is up but real wages are down. If inflation has been lower than was previously assumed, that means the real value of wages may have gone up after all. And some economists with no particular ax to grind simply have doubts about the methodology. B oskin may be right or wrong, but one argument by his critics is clearly wrong. They say: Suppose it's true that inflation has been less than the official increase in the CPI over the past few decades. If you assume a lower inflation rate and recalculate real incomes back to--say, 1950--you reach what seems to be a crazy conclusion: that in the early 1950s, the era of postwar affluence, most Americans were living below what we now regard as the poverty line. Some critics of the Boskin report regard this as a decisive blow to its credibility. 1 The idea that most Americans were poor in 1950 is indeed absurd, but not because of Boskin's numbers. After all, even if you use an unadjusted CPI, the standard of living of the median family (50 th percentile) in 1950 America appears startlingly low by current standards. In that year, median-family income in 1994 dollars was only about $18,000. That's about the 20dollars was only about $18,000....
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This note was uploaded on 04/26/2008 for the course ECN 115 taught by Professor Jia during the Summer '06 term at Northeastern.
- Summer '06