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INFLATION, SOCIAL SECURITY AND AGGREGATE DEMAND

July 8, 2016

INFLATION, SOCIAL SECURITY AND AGGREGATE DEMAND

I have many “pet peeves” in the way government programs are structured and run and one of my most “pet” is the “bundle of sticks” we put together to ascertain the inflation rate, always retroactively in a game of catch-up, and without “sticks” that should be in the “bundle.” Let me elaborate.

The Reagan Administration decided that the “bundle” which determines the inflation rate should not include food or energy since they were too volatile to measure. So what? An algorithm and a few button pushes and you have solved the issue (if it is one) of volatility. Is that long since gone Administration trying to tell me that we should not include food and energy into the measure of inflation? Doesn’t everybody eat? Doesn’t everybody use energy (gas for the car, turning the lights on etc.)?

Why isn’t there every reason to include food and energy in measuring inflation in a year’s time, and every year, especially when a mere nudge of the inflation rate can amount to billions of dollars paid out to social security recipients and into aggregate demand, both very desirable outcomes given our underperforming economy with its tepid demand due in turn to wage inequality? Did the Reagan Administration short-change retirees and, if so, why? Retirees have to eat and use energy sources, too, and are among the most vulnerable population to be targeted. Indeed social security is the only source of income for millions.

Though not into conspiracy theories, I suspect something sinister in this exercise. Republicans can’t get rid of social security and (so far) have been unable to privatize it, but there are things that they can do to make the program less friendly to the old and retired who have paid into the program all their working lives. One of such things is to reduce the rate of inflation by ignoring such “sticks” as food and energy, and thus reducing the gross payout to social security recipients and the consequent loss of demand in our economy (which is limping along in great need of stimulation what with our current worship of austerity as policy). With the omission of food and energy from the inflation equation, we are effectively REDUCING the income of such recipients, since any “increases” will be eaten up by failure to take such “sticks” into account. What we are doing does not accord with facts on the ground and is grossly unfair to retirees.

It is bad enough that the rate of inflation is always figured retroactively (the previous year) because those on fixed incomes have already paid for such inflation, but to add insult to injury to deliberately omit “sticks” that plainly should be in the “basket” is a bridge too far.

So why am I so worked up on this old policy judgment that subsequent administrations have done nothing to reverse? It’s not just because it is neither fair, just, nor a rational choice of “sticks” to be included but, to reiterate, it means that retirees, even when the government announces that social security recipients (and others whose pension increases are subject to the official rate of inflation) are getting a “raise,” that they are in fact getting a reduction due to failure to include all the “sticks” that should have been in the “bundle” from which the annual calculation is announced, not to mention that such retirees have already paid for last year’s inflation from current income, which makes it a double whammy.

The obvious result is that the purchasing power of such retirees is wrongly reduced and that aggregate demand in the economy is correspondingly reduced, both of which are highly undesirable outcomes in an economy already underperforming with aggregate demand at best tepid due to wage and wealth inequality and other policies that continue to enrich the already rich and further impoverish the already poor.

We need to elect people this fall who will correct such travesties (as well as many more in need of correction) and get this country and its economy back on track. It’s doable, so let’s do it.    GERALD      E

 

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