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Politics

The Major Budget Issue Both Parties Are Getting Very Wrong

On the surface, it appears that only those receiving government assistance are affected. This is a flat-out lie. In fact, it’s much worse.

US President Barack Obama answers a question about sequestration at the White House in Washington on March 1, 2013 following a meeting with US Speaker of the House John Boehner and Congressional leaders. (Getty Images)

Many of my writing and speaking engagements have presented facts that politicians have deliberately and repeatedly miscalculated the Consumer Price Index (CPI), the government’s primary measure of inflation. Now, as President Obama releases his budget, they are about to do it again, with one goal in mind: make it appear that the massive increases in government spending are smaller than they actually are. On the surface, it appears that only those receiving government assistance are affected. This is a flat-out lie. In fact, it’s much worse. This trick affects all Americans, and middle-class folks will be hurt the most.

Listen carefully.

The government ties its annual spending increases to the increase in the cost of living each year. That spending increase is determined by the rate of inflation, which is provided to us as the Consumer Price Index. If the government can trick us into believing that inflation, as measured by the CPI, is really very low, then we’ll believe that government spending increase is really very low.

But what if the rate of inflation is actually higher than the government claims, but reported as being low? What if inflation is actually 10% instead of the 2% the government claims? Then the government can increase spending 10% while saying it is only increasing it 2%.

They do this by changing the way the CPI is calculated, and keeping that change very quiet.

How the CPI Works

Up until 1983, the government measured a fixed basket of goods and services to determine inflation. The components were the same and their weighting was the same. Each year, the government would adjust the CPI to reflect whatever the percentage change was in the cost of the basket. This is how it had been done going back to the 1700's.

Then, in the early 1980's and again in the 1990's, to push their political agenda, Washington changed the nature of the CPI.  They claimed the CPI overstated inflation because it didn't allow for substitution of less expensive items for higher cost items. Both parties touted the benefits of the new calculation as being “more accurate and reflective of the true cost of living increase.”

This new calculation was used to measure the cost of maintaining constant standard of living year over year, even though the cost of the items weren't cheaper. The only thing that changed was the calculation. This was met with little opposition because most Americans weren’t aware of it.

So, by keeping the CPI measurement lower than it really was, the government could claim that it was keeping its spending increases low.

But what’s good for the government is terrible for you. In fact, it’s the worst thing that can happen to middle-class Americans.

The president's budget was released today (Getty Images.)

How It Affects You

Once again, both political parties are supporting legislation that will alter this calculation against Americans’ interests. While the government claims that inflation is “under control,” in truth, prices on the top 500 items we actually spend money on is rising 9-10% annually!

Annual wage increases and corporate defined-benefit pension plans’ monthly payments tied to the CPI. If the CPI is less than the true cost of living increase that Americans endure each year, then most Americans will lose purchasing power each year.  If the CPI doesn’t reflect how much more it costs to live from one year to the next, anyone whose lives are impacted by CPI-linked income increases will find it more difficult to keep a consistent lifestyle from one year to next. Slowly but surely, they will fall into financial hardship. When this occurs, they will find their last resort to make ends meet will be to rely on government assistance.

Most Americans already believe that inflation runs higher than the reported data. You don't need to look any further than your own bills. Do you really think, after looking at your own real-life experiences and trying to maintain a constant standard of living, that your cost of living has risen only 1.5% each year?

How does the government play this trick?  It makes subtle, unannounced changes to the definitions and calculations of inflation each year. Specifically, changes made to the definition of CPI methodologies have reflected theoretical academic constructs that do not reflect the real world use of the CPI.  The public is not aware of these alterations, nor do they understand them.

This couldn't come at a worse time. We are already experiencing the worst devaluing of our currency via quantitative easing in our history. In other words, our money is worth less and less as the government prints more and more of it. By combining this devaluation with reduced increases in cost-of-living adjustments, a diabolical assault on the middle-class results. It’s a double whammy. Their money is worth less and less, and their cost of living adjustment is less than it should be. We will feel it as we find our money buys substantially less each year, but won’t understand why it happens unless we call attention to its cause.

Once again, both parties are supporting another stealth change in how the CPI is calculated.  You need to know this will harm all of us in very real, very tangible ways. So when you read this week that the president’s budget plan includes a subtle and simple change in the CPI calculation  (to make it rise slower) that will only impact entitlement programs such as social security, know that that just isn't the case. It is really a tax on all of us in the private sector whose wages rise each year from our employers.

One last thing…
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