At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes (2002) / Chapter Skim
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3 Index Domain
3 Index Domain
Pages 94-105
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From page 94... ...
as a framework for making decisions about the CPI and "accepts the COLI as the measurement objective for the index," with the caveat that "while the CPI may be described formally in the context of a cost-of-living index, there is no single all-purpose definition of this target" (Bureau of Labor Statistics, 1997c:3~. From the standpoint of an individual consumer, an all-encompassing COLI, defined without limits on its scope or domain, would have to take into account effects on the consumer's standard of living arising from changes in the social and physical environment, such as air quality and the crime rate, and in the provision of public goods furnished by the government.
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From page 95... ...
For most if not all of the purposes for which it would be needed, a conditional cost-of-living index should measure the expenditure ratio needed to maintain the reference period's standard of living, given constancy of the environmental conditions at their reference period status. If changes in environmental conditions do occur between the reference and comparison periods, the superlative index that is used to approximate the conditional COLI would, as desired, exclude their direct effect on the household's standard of living.
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From page 96... ...
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.
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From page 97... ...
and a superlative index, as well as indexes for population subgroups when that appears appropriate. 3The literature on the macroeconomic difficulties posed by deflation deals with the effect on consumer and business purchases from expectations of falling prices for private goods and services; it nowhere suggests that this problem might somehow be offset by negative effects on living standards flowing from a deterioration in environmental, social, or other outside conditions.
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From page 98... ...
That is, it must measure the expenditures necessary to maintain a given standard of living, taking into account the value to consumers positive or negative flowing from changes in those variables. Correspondingly, an expanded measure of changes in national output would include the value of changes in the provision of goods by government and, with the appropriate sign, the value of any changes in the flow of damages from various kinds of environmental "bade," weighted by their implicit prices.4 Increases in pollution, crime, congestion or other environmental damages, arising chiefly from human activity, would reduce the expanded output measure, while activities (such as pollution controls)
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From page 99... ...
But these techniques are highly controversial. The hypothetical nature of the question posed, the lack of any budget constraint on the respondent, and the absence of any behavioral observations cloud the results from contingent valuation approaches (see Diamond and Hausman, 1997~.
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From page 100... ...
Of course, GDP does measure and include the gross amounts spent by federal, state, and local governments to purchase goods and services ($1.7 trillion in 2000~. These goods and services include such diverse items as arms purchases and the wages of the armed forces; the wages and salaries of teachers, police forces, and other civil servants; the building of highways and dams; and the maintenance costs of the national parks.
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From page 101... ...
Rather, it can best be pursued in the process of developing an integrated set of expanded output measures and their associated price indexes. Several considerations point in that direction.
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From page 102... ...
Any research program of the BLS to develop experimental measures that substantially expand the domain of its various price indexes should be carried out in close concert and coordination with the BEA effort. OTHER DOMAIN ISSUES Taxes and Government Programs Governments, particularly state and local governments, use sales taxes and similar levies to finance part of their expenditures.
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From page 103... ...
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.
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From page 104... ...
Employer-provided health insurance benefits raise more difficult questions. Unlike pension contributions and employer-paid social security taxes, they (principally)
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From page 105... ...
On the other hand, while the appropriate conceptual treatment of employer-paid fringe benefits is not an open-and-shut issue, the panel does recommend in Chapter 6 that the BLS also publish a supplemental medical care price index that, among other features, includes health care expenditures financed by employers. CONCLUSION AND RECOMMENDATION Drawing from the arguments presented in this chapter, the panel offers the following conclusion and recommendation: Conclusion 3-1: Under either rubric, COGI or COLI, the domain of the "flagship" or official CPI and any subgroup indexes that are produced should be confined to the boundaries that the BLS has adopted changes in the prices of private goods and services.
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