are rising and vice versa. Nordhaus also argues that similar anomalies occur in a number of other instances: government environmental, health, and safety regulations require firms to incur costs that are passed on in higher prices for private goods, but the value of the associated benefits is not offset against them. Employers provide fringe benefits to workers, especially pensions and health insurance, whose costs are passed along in higher prices while, again, the benefits are ignored. Ideally, according to Nordhaus, one should estimate the value of the benefits provided and make the necessary adjustments. Since that is not feasible, he recalculates the CPI by subtracting the ratio of these items to aggregate consumption expenditures on the assumption that their cost to consumers is matched by the benefits they finance. He finds that, over the period 1960 to 1995, when both employer fringe benefits and pollution abatement costs were rising relative to aggregate consumption, a CPI stripped of all of those costs, which he calls an augmented COLI (ACOLI), would have risen by 0.4 percent a year slower than the published index (Nordhaus, 1997).
The panel believes that the issues raised by Nordhaus should be explored in the context of research on satellite accounts and the development of expanded and integrated national accounts that we discussed earlier. But we do not believe, nor does Nordhaus recommend, that adjustments of the kind outlined above be incorporated in the flagship CPI. Nor, we conclude, should they be incorporated in any measure used to index public benefits and the tax code.
In the case of sales taxes and mandated pollution control costs, we have discussed the limited or nonexistent mechanisms that exist for equating the marginal tax costs and benefits of public goods, especially at governmental levels higher than local communities. In addition, even if the assumption of cost-benefit equality were assumed, several difficulties remain. Many of the public goods furnished by government are intermediate goods used by business firms in the production of private goods whose benefits are reflected in lower production costs for private goods and therefore already included in the CPI. Also, if we subtract from the index an estimate of the price-raising effects attributable to mandated pollution control activities, must we not also undertake the formidable task of estimating, and adding to the index, the costs directly imposed on consumers from the “free” use of the environment by producing firms, which gave rise to the need for the environmental controls in the first place? It is difficult to justify the first step without the second.
The treatment in the CPI of goods provided in-kind to employees as fringe benefits raises a number of issues. There is a wide, even if not universal, consensus that, apart from some tax advantages and except during short-run transition periods, overall compensation packages are not affected by how they are parceled