to the quantity and quality of the goods delivered. As a general rule, an increase in sales taxes is passed on to consumers in the form of higher prices and shows up as an increase in the CPI. Some economists argue that increases in sales tax rates should be adjusted out of any index whose objective is to measure the cost of living, on grounds that the addition to living costs caused by the higher sales tax rates is offset by the benefits from the additional public goods provided thereby (Nordhaus, 1998).

In the examples noted above, one could argue the existence of a rough connection between what individual consumers pay in taxes and the quantity or quality of the services they receive. But what about pure public goods, such as national defense or law enforcement, the benefits of which are not parceled out to individuals? Every individual, willy-nilly, gets the same “quantity” of national defense. Nevertheless, accepting a broad definition of the standard of living would extend the domain of the index to include the value of public goods with net taxes (i.e., taxes minus transfer payments) treated analogously to prices in a cost-of-living index.

In a similar vein, the enactment of environmental, health, and safety regulations requires businesses to incur extra costs that, when passed on in higher prices, are captured by the CPI. But these regulations reduce environmental damages (broadly defined) and increase consumer welfare. Should an estimate of such additional costs be subtracted from the CPI on grounds that they are balanced by the welfare gains?

Employer-Provided Fringe Benefits

In the United States, employers pay, in part or in full, for a wide range of “inkind” benefits for their workers, health insurance being the most prominent example. The CPI now excludes from the weights assigned to medical care the value of the health insurance premiums paid by employers. Is that treatment appropriate? More generally, how should the BLS treat in-kind employer fringe benefits in designing the CPI?

SUBSTITUTION

The traditional Laspeyres version of the COGI weights the prices of various items in both the initial (reference) and ending (comparison) periods by the quantities purchased in the reference period. Considered from the standpoint of an individual household, such an index reflects the percentage increase in expenditures the household would have to incur in order to buy the reference period basket of goods at the new, comparison period prices.7 But when faced with

7  

Technically, the index is the ratio of the comparison period to the base period expenditures, but the percentage change is simply that ratio minus 1.0 (times 100).



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