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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
The arguments of this chapter reappear in subsequent chapters of this report as we deal with specific topics. On the basis of our discussion in this chapter, we present two general conclusions, largely about the conceptual basis for price and cost-of-living indexes, which serve to guide our more detailed conclusions and recommendations in the rest of this report.
Conclusion 2-1: An unconditional cost-of-living index is an unsuitable conceptual basis for the CPI. While research aimed at better understanding the economic effects related to changes in such matters as life expectancy, crime rates, or the environment would be useful for evaluating various aspects of public policy, the CPI should not change in response to changes in such factors.
Conclusion 2-2: Within the general conceptual framework of cost-of-living indexes, the appropriate theoretical concept for the CPI is aconditionalcost-of-living index that is restricted to private goods and services and in which environmental background factors are held constant.
On the broader issue of assessing the relative merits of COGI and COLI conceptual approaches as a guide for construction of the CPI, various members of the panel strike the balance differently. All panel members find it difficult to think about the definition of goods and about quality change without considering what it is that consumers value, and we agree that it is impossible to think about substitution behavior without the concept of a constant standard of living that allows price changes to be converted into a monetary equivalent. For all these issues, especially the last, the cost-of-living framework is central. However, some panel members are skeptical about our ability to define a constant standard of living in an economy in which the nature of goods and services is constantly changing. They are therefore concerned about BLS adopting a conceptual framework that is not always well defined in the presence of quality change. They are also concerned about the BLS adopting an approach that differs from that of many statistical agencies around the world. All panel members do agree that the COGI and the conditional COLI that the panel recommends share many common aspects. We also concur that neither conceptual approach, viewed in its pure form, can provide the single guide to index construction. Rather, each of them can make a contribution toward dealing with the various problems that arise in designing the CPI. Taking a pragmatic approach, the panel found that it could come, sometimes by different routes, to unanimous agreement on all of the specific recommendations in this report. But in its inability to achieve unanimity behind a recommendation that the cost-of-living framework be the sole appropriate basis for construction of the CPI, our panel differs from the Stigler committee and Boskin commission.