Krugman: Rumors of a Deal (WTF?) - updated

[elleng]

32. Explanation:

'Theoretically, chained CPI seems like a totally reasonable way to think about changes in the cost of living in an economy, so it's hard to object on principle to using this measure to adjust changes in government benefits, tax brackets, and so on. In addition, there is a potential efficiency argument to be made in favor of chained CPI approach to deficit reduction. When it comes to taxes and policy changes, there are two types of costs that occur. The first is a transfer of money from households and companies to the government, and the second is a loss of economic activity that occurs (deadweight loss, in economic terms). (For example, if I value a t-shirt at $15 and you can produce it for $13, a $3 tax will prevent an otherwise value-creating transaction.) While the first cost is important from a distributional perspective, the second is important from an efficiency perspective as well. As counterintuitive as it may seem, taxes and policy changes are more efficient (not necessarily more fair, however) when people don't change their behavior in response to them, since then there is only transfer and no loss of economic activity. And hey, people can't change their behavior fully if they don't understand how policy changes are affecting them, right?

As an economist, I think that there is long-term potential to improve policy by incorporating chained CPI as a more accurate cost of living index. That said, the government shouldn't try to leverage the lack of understanding of it's citizens, efficient or not, and should instead work on educating the public about what the change means for them. In addition, the government needs to avoid a rush to adopt the index as a short-term fix without fully thinking through the logistics and distributional impact of its implementation.'

http://www.huffingtonpost.com/jodi-beggs/chained-cpi_b_2297631.html