those two periods. Consequently, the conditional COLI that is needed cannot be reproduced by the superlative index. One interpretation of this result is that environmental changes that affect marginal rates of substitution among private goods will reduce the accuracy with which a superlative index measures the conditional cost of living.

The extent to which changes in outside conditions affect the accuracy of a superlative index in meeting its stated objective will depend on how significantly the changes in outside conditions alter the pattern of preferences for private goods between the reference and comparison periods and how those alterations interact with the changes in relative prices that occur over the same period. If the weights used in the index are frequently updated, as the BLS now plans, a slow and gradual drift in such outside conditions as the quality of the physical environment or the crime rate are not likely to have much effect. But an event such as an unusually severe winter might have more noticeable, even if temporary (and reversible), consequences.


Incorporating into a cost-of-living index the effects of changes in environmental conditions and government-provided public goods would require analytical and measurement techniques that, in most cases, go well beyond the current state of the art. But even if measurement of such effects were feasible, conceptual question arise about whether a cost-of-living-index should take them into account. Put another way, what should be included and what excluded from the variables that are held constant in a conditional COLI? Should the index incorporate the net effects on consumer welfare (not already reflected in the costs of private production) from such public goods as those furnished by the military establishment, the preservation of wilderness areas, or the provision of law and order? Do the effects of changes in the state of national security belong in the index, implying, for example, that a large drop in the cost of living occurred at the end of the Cold War when the threat to national security almost surely declined? What about the motor vehicle accident rate (whose effects would probably be easier to measure than those associated with, say, the crime rate)? Should the index include increases in longevity arising from general improvements in medical knowledge and techniques (as distinguished from those associated with particular medical procedures which, conceptually, should be treated as a quality change in a private good)? How feasible is it to make such a separation? In its discussion of quality-of-life issues the Boskin et al. (1996) report cited as negative factors, presumably tending to drive up the cost of living, “such social issues as divorce, illegitimacy, and the reduced role of the nuclear family.” In concept, at least, should the cost of living be defined to include effects of intangible factors such as these?

The panel distinguishes sharply between what is appropriate for inclusion in

The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement