We now know that President Obama’s budget will include a provision that cuts Social Security and veterans benefits, and raises middle class taxes.
If you’ve been following the budget contretemps for the past couple years you know that the provision is called Chained CPI, and you may even know how it works.
What’s less widely understood is that measure itself has fluctuating budgetary effects — ones that could mitigate its consequences for seniors and middle class workers, but make rank and file Republicans less receptive to treating it as a concession significant enough to win their support for a “grand bargain” that includes higher taxes on wealthy Americans.“What neither side seems to have noticed,” writes Obama’s former budget chief Peter Orszag in a Bloomberg op-ed, “is that the difference between the chained CPI and the standard CPI has been diminishing. That means the impact of switching indexes may not be as great as many assume. … A decent guess is that, over the next decade, the effect on the deficit of adopting the chained index would be less than $150 billion. Social Security benefits even 20 years after retirement would be reduced by less than 2 percent.”
That’s less than half of the more than $300 billion in total deficit reduction the Congressional Budget Office projected earlier this year.
Chained CPI differs from traditional measures of inflation by reflecting an assumption that people will react to rising prices by substituting cheaper products for more expensive ones. If the assumption is correct — and many economists dispute that it’s an appropriate assumption for goods and services seniors disproportionately consume — then the index the government currently uses to calculate benefit growth is too generous.
In its estimates, CBO assumes that the chained index grows about a quarter of a percentage point more slowly than the standard indices. But in recent years that’s ceased to be true, and for the past two years that difference has shrunk to just over one tenth of one percent.
Explaining the underlying causes of this narrowing is difficult. But if the current trend holds, it means CBO is overestimating the policy’s 10-year impact on the budget — and thus on beneficiaries and taxpayers. It also means that Republicans who study up will be less likely to accept a face-value trade of chained CPI for higher taxes.
Obama oddly got what he wanted when progressives and Republican leaders, for very different reasons, rejected his offer, which the administration leaked to the media last week. Part of the goal was to win the battle for elite opinion by positioning himself between those on his left criticizing him for preemptively conceding (and, worse, putting Social Security on the chopping block) and the entire GOP, which evidently can’t take yes for an answer.
But the strange religion of the establishment demands that Obama concede something with a hefty mix of fiscal contraction and real pain for regular people. And if its adherents come to view Chained CPI as an incredible shrinking benefit cut, his act of triangulation will fail.