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1976/11/18 - Economic Policy Board
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1976/11/18 - Economic Policy Board
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The original documents are located in Box 63, folder "1976/11/18 - Economic Policy Board"
of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 63 of the James M. Cannon Files at the Gerald R. Ford Presidential TMC.
ECONOMIC POLICY BOARD
EXECUTIVE COMMITTEE MEETING
November 18, 1976
8:30 a.m.
Roosevelt Room
AGENDA
1. Multiple Consumer Price Indexes and Indexed
OMB
Programs
2. Potential OPEC Price Increase
FEA
3. Economic Outlook
Troika II
FORD LIBRARY &
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE
UNITED
OFFICE OF MANAGEMENT AND BUDGET
STECUTIVE
STATE
WASHINGTON, D.C. 20503
NOV 16 1976
MEMORANDUM TO: THE EXECUTIVE COMMITTEE OF THE ECONOMIC
POLICY BOARD
From:
James f Lynn
Subject:
Multiple Consumer Price Indexes and Indexed
Programs
Summary
Statement of Issue
The CPI is being updated and revised for the first time since
1963. Beginning in April 1977, two revised indexes will be
published. Which index should be used for measuring automatic
cost-of-living increases for Federal programs linked to the
CPI?
Analysis
The current CPI, which was designed to measure the purchasing
power of the dollar for urban wage earners and clerical workers,
covers about 35 percent to 40 percent of the population. As of
April, a revised index for urban wage earners and clerical
workers will be published. The other new index, to be
published beginning in April, will cover all urban households
and will include about 80 percent of the population, double the
coverage of the current index.
1/ The existing index will continue to be published for 6 months
to provide continuity for bargaining agreements that have
been made on the basis, of this index.
2
Both the revised consumer price index for urban wage earners
and clerical workers and the new index for all urban house-
holds will be calculated and published for at least the next
3 years. After extensive review during this period, a decision
will be made as to whether only the all-urban index or both
the indexes are needed. Two years ago the labor unions argued
strongly that a separate index for wage earners and clerical
workers should be retained.
Either of the two new indexes could be used as the basis for
determining the automatic cost-of-living increases for Federal
programs linked to the CPI. We do not know whether one of
the indexes will consistently rise faster than the other, and
if one index were to rise faster we do not know which one it
would be. Consequently, we do not know how the budget would
be affected by choosing one index rather than the other.
OMB's General Counsel is of the opinion that shifting to the
index for all urban households will require legislation.
If we decide to propose using the all-urban CPI, it is
important that the Administration make its recommendation before
BLS publishes the new indexes next April and also that the
Congress enact the necessary legislation before that date. If
we do not recommend the all-urban index until later and mean-
while the other index has risen faster, it would appear that
we were making our choice mainly to save money. Also -- and
most importantly -- if our recommendation or the legislation
is delayed, there is a danger that because of political pressure
we would be "gamed" into using whichever index initially increases
more. (It should be noted that even if one index rises more
rapidly than the other initially, there is no guarantee that it
will continue to do so in the future.)
A discussion of the options follows and a more extensive paper
is attached as Tab A.
3
Options
Option 1
-- Propose legislation in the 1978 budget to
shift to the all-urban CPI.
Pro
-- We cannot be certain which of the indexes
would be a better measure of the price
changes that affect specific beneficiary
groups, but the all-urban index has the
advantage in this respect of covering most
of the beneficiaries of Federal programs
linked to the CPI. The current index
excludes most such beneficiaries.
-- It would help to focus attention on the
index that is better for measuring inflation.
-- It would make it easier to discontinue the
index for wage earners and clerical workers
later. This would save money and reduce
confusion.
Con
It will require legislation to change from
the index for urban wage earners and clerical
workers, and the Congress may not be willing
to shift to an index with which they have no
experience.
Option 2
:
Announce that the index for urban wage earners
and clerical workers is the applicable index
under current law and that the Administration
will consider proposing legislation on the
new index after gaining experience with it.
Pro
-- It would not require legislation at this time.
-- It might be politically less controversial.
4
Con
-- Would result in using the less desirable
index from a conceptual point of view.
-- Would result in the likelihood that a
shift to the broader index would result
only if it produced larger automatic
cost-of-living increases.
-- Would show an Administration lack of
confidence in the work of BLS in
developing the new index, especially since
BLS initially planned to produce only the
all-urban index.
-- If we delay and if the new index rises more
rapidly than the old one, the absolute level
of the two indices will obviously differ at the
end of three years. There will then be strong
pressures for a one-time, catch-up adjustment.
(February 1977 is the only date on which the
absolute levels of the two indices are certain
to be equal.)
Option 3 -- Propose a weighted average of the two indices
with the weights gradually shifting over the
three-year period so that the new index receives
a 100 percent weight in the fourth year.
Pro
-- Allows the Congress to "diversify their risks"
between the two indices and may thereby make
the change more acceptable.
Con
The new index was proposed because it is
superior conceptually. A proposal to average
the old and the new indices may imply that we
are not confident in our new concept.
-- Implies averaging the weights obtained from our
new broader sample with the weights obtained
from a sub-group within that sample. This has
little logical appeal.
-- A weighted average with shifting weights is a
complex concept which may not be well understood
by the public and the Congress.
TAB A
Issue: Multiple Consumer Price Index
Statement of Issue
The consumer price index (CPI) is being updated and revised for the
first time since 1963. Beginning in April 1977, two revised indexes will
be published. Which index should be used for measuring automatic cost-of-
living increases for Federal programs linked to the CPI?
Analysis
The current CPI, which was designed to measure the purchasing power of
the dollar for urban wage earners and clerical workers, covers about 35% to
40% of the population. As of April, a revised index for urban wage earners
and clerical workers will be published. This index will be an updated and
improved version of the current index. It will incorporate revisions to
consumer expenditure patterns -- the current index is based on a consumer
expenditure survey taken in 1960-61, whereas the revised index will be based
on a survey taken in 1972-73 -- as well as technical improvements in sampling.
The other new index to be published beginning in April will cover all
urban households and will include about 80% of the population, double the
coverage of the current index. An expansion of coverage has been under
consideration for many years and has been strongly recommended by many. Fifteen
years ago, for example, a committee appointed by the National Bureau of Economic
Research, under contract with the Bureau of the Budget, concluded:
A more comprehensive index for the entire population, not only
the wage and salary earners, should be made
From the viewpoint of general public policy and scientific study,
our basic need is for a more comprehensive Consumer Price Index
covering the entire population. This is the index that is appropriate
to the measurement of the changes in welfare of the Nation and to
the measurement of inflation (and hence the guidance of monetary and
fiscal policy. )
-Both the revised consumer price index for urban wage earners and clerical
workers and the new index for all urban households will be calculated and
published for at least the next 3 years. During this period the relative
movements of these two indexes will be studied. After extensive review of the
performance of the two indexes -- including discussions with the Congress,
professional economic and statistical groups, and the BLS Research Advisory
Councils -- a decision will be made as to whether only the all-urban index
or both the indexes are needed. Two years ago the labor unions argued strongly
that a separate index for wage earners and clerical workers should be retained.
1/ The existing index will continue to be published for 6 months to provide
continuity for bargaining agreements that have been made on the basis of this
2/ See index. National Bureau of Economic Research, The Price Statistics of the Federal
Government: Review, Appraisal, and Recommendations, also published in Government
Price Statistics, Part 1, Hearings before the Subcommittee on Economic Statistic
of the Joint Economic Committee (87th Cong., 1st sess., 1961), PP. 21, 56.
2
Either of the two new indexes could be used as the basis for determining
the automatic cost-of-living increases for Federal programs linked to the CPI.
We do not know whether one of the indexes will consistently rise faster than
the other, and if one index were to rise faster we do not know which one it
would be. Consequently, we do not know how the budget would be affected by
choosing one index rather than the other.
We believe that the new CPI for all urban households would be the better
basis for determining automatic cost-of-living increases. We cannot be certain
which of the indexes would be a better measure of the price changes that affect
specific beneficiary groups. However, the all-urban index has the advantage
in this respect of covering most of the beneficiaries of Federal programs linked
to the CPI (e.g., social security, SSI, Federal employees retirement); the
index for urban wage earners and clerical workers, on the other hand, excludes
most beneficiaries. Choosing the index for all urban households has two further
advantages. It would help to focus attention on the index that is better for
measuring inflation, and it would make it more likely that money might be saved
and confusion reduced by later discontinuing the index for wage earners and
clerical workers.
OMB's General Counsel is of the opinion that shifting to the index for
all urban households will require legislation.
If we were to use the new index, and such action were challenged
in court, I believe the decision would most probably turn upon the
court's answer to the question: is the Government using that
measurement which Congress intended be used when it enacted the
Federal program statute? Most likely, a court would examine the
history of the CPI
...
and, in my view, conclude that Congress
was referring to the published measure of the changes in cost-of-living
as reflected by purchasing patterns of urban wage and salary
...
workers. [Emphasis added.] Most likely, the court would recognize
the distinction between those changes which provide a more accurate
way of making this measurement, and those which change the basic
concept of the CPI itself.
If it is decided to move to the new index, the question of when to make
that move needs to be addressed. Historical data for both indexes will be
based on the index for urban wage earners and clerical workers simply because
historical data are not available for more comprehensive coverage. An immediate
shift to the all-urban CPI, therefore, would mean that the initial cost-of-living
increases would be calculated on data that are not fully comparable (e.g., the
September 1977 increase in civil service and military retired pay, which will be
based on the CPI increase from December 1976 to June 1977).
We do not believe that this comparability problem is serious. Therefore,
if legislation is proposed to shift to the more comprehensive CPI, we recommend
that the shift become effective with the March 1977 index, which BLS will
publish in April 1977. Any alternative to this proposal would be confusing and
3/ Internal OMB memorandum from Steven D. Needle (GC) to David G. Mathiasen
(BRD), dated March 5, 1976.
3
would delay the application of the new index because of the diversity of
cost-of-living adjustments in Federal programs. For example, the July 1978
social security benefit increase will be based on the increase in the CPI
from the first quarter of CY 1977 to the first quarter of CY 1978. Thus,
for social security, fully comparable data for the all-urban CPI will not
be available until the July 1979 increase is calculated.
If we decide to propose using the all-urban CPI, it is important that
the Administration make its recommendation before BLS publishes the new
indexes next April and also that the Congress enact the necessary legislation
before that date. If we do not recommend the all-urban index until later
and meanwhile the other index has risen faster, it would appear that we were
making our choice on the basis of saving money. Also -- and most importantly --
if our recommendation or the legislation is delayed, there is a danger that
because of political pressure we would be "gamed" into using whichever index
initially increases more. [It should be noted that even if one index rises
more rapidly than the other initially, there is no guarantee that it will
continue to do so in the future.]
Options
Option 1 -- Propose legislation in the 1978 budget to shift to the
all-urban CPI.
Pro
-- We cannot be certain which of the indexes would be a
better measure of the price changes that affect specific
beneficiary groups, but the all-urban index has the
advantage in this respect of covering most of the bene-
ficiaries of Federal programs linked to the CPI. The
current index excludes most such beneficiaries.
-- It would help to focus attention on the index that is better
for measuring inflation.
-- It would make it more likely that money might be saved and
confusion reduced by later discontinuing the index for wage
earners and clerical workers.
Con
-- It will require legislation to change from the index for
urban wage earners and clerical workers, and the Congress
may not be willing to shift to an index with which they have
no experience.
4
Option 2 -- Announce that the index for urban wage earners and
clerical workers is the applicable index under
current law and that the Administration will consider
proposing legislation on the new index after gaining
experience with it.
Pro
-- It would not require legislation at this time.
-- It might be politically less controversial.
Con
-- Would result in using the less desirable index from a
conceptual point of view.
-- Would result in the likelihood that a shift to the broader
index would result only if it produced larger automatic
cost-of-living increases.
-- Would show an Administration lack of confidence in the work
of BLS in developing the new index, especially since BLS
initially planned to produce only the all-urban index.
-- If we delay and if the new index rises more rapidly
than the old one, the absolute level of the two indices
will obviously differ at the end of three years. There
will then be strong pressures for a one-time, catch-up
adjustment. (February 1977 is the only date on which
the absolute levels of the two indices are certain to
be equal.)
Option 3 -- Propose a weighted average of the two indices with
the weights gradually shifting over the three year
period so that the new index receives a 100 percent
weight in the fourth year.
Pro
-- Allows the Congress to "diversify their risks"
between the two indices and may thereby make the
change more acceptable.
Con
-- The new index was proposed because it is superior
conceptually. A proposal to average the old and
the new indices may imply that we are not confident
in our new concept.
5
-- Implies averaging the weights obtained from our
new broader sample with the weights obtained
from a sub-group within that sample. This has
little logical appeal.
-- A weighted average with shifting weights is a
complex concept which may not be well understood
by the public and the Congress.