A bit more than a decade ago, a group of politicians and economists came up with a backdoor way to cut Social Security. They claimed that the consumer price index (CPI) overstated the annual inflation rate by more than a full percentage point. This mattered for SS because after retirement, benefits are indexed to changes in the CPI. Based on the alleged overstatement, they proposed reducing the annual cost of living adjustment by approximately 1.0 percentage points. This would cut SS benefits by hundreds of billions of dollars over future decades (ignoring compounding, someone who receives benefits for 20 years would see an average benefit cut of approximately 10 percent). This effort got beaten back for reasons that I have written about elsewhere (see The United States Since 1980) but it seems as though the SS cutting crew may now be missing an opportunity. The NYT reports that CDs sales are plummeting, down by 20 percent from last year. The reason is that people are getting free music off the web. Well, if people get music for free that they used to pay for, then this is clearly a decline in price. However, the CPI will not pick this up. The CPI is measuring the sale price of CDs, comparing this year's price to last year's price. It is ignoring the fact that people may be getting an even larger amount of music for free than what they buy from the recording industry. It is possible to design methodologies that would pick up the gains to consumers from getting free music. As a practical matter this would have only a trivial impact on the CPI. (Approximately 0.1 percent of consumer spending goes to buy CDs, so even a 20 percent reduction in purchased music would only imply a 0.02 percentage point overstatement in the CPI.) But a better methodology would make it easier to measure the gains to consumers from the Internet and overcoming the music industry's copyright monopolies. (Similar methodologies could be applied to printed materials, videos, and DVDs.)
--Dean Baker
