11:23 pm, July 11, 2014

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  • The fallacy of chained CPI
    Just me
    As a non-economist I am going to try to explain the fallacy of chained CPI, as I perceive it. The principle fallacy of chained CPI is that it treats the marginal rate of substitution as if it were identical to the declining rate of marginal utility. This is not the case. In the former case one is measuring the rate at which consumers will exchange one product for another where the products have the same (or substantially similar) utility. In the latter case one is measuring the diminishing rate of satisfaction consumers derive from purchasing another unit of the same product. Why is this important? Simply put, the marginal rate of substitution speaks to the exchange of one (perceived) equivalent unit for another (usually based in cost). The level of utility remains constant. Chained CPI is based in the premise that people will "give up" steak for chicken (if that's all they can afford) because chicken costs less and has the same utility. It then ignores that there is a point (along the indifference curve) at which utility declines. Kraft Macaroni and Cheese, while less costly, does not hold the same nutritional value (and thus has less utility) than chicken. The substitution is forced, not by the declining marginal utility of purchasing chicken (because the utility of chicken has not changed for the consumer) but rather by financial constraints. The consumer would CHOOSE chicken, rather than Kraft Macaroni and Cheese, if they could afford it, but cannot. The chained CPI therefore punishes the people upon whom it is inflicted, by imposing an artificial economic constraint (based on a forced marginal rate of substitution.) Further, the chained CPI ignores the unintended consequences arising from this constraint, specifically as the utility of the things retirees and SSI beneficiaries buy declines (typically nutritional value), the cost of healthcare rises dramatically. As the cost of healthcare has always outstripped the rate of inflation (significantly) the only way that Chained CPI CAN provide a cost benefit is if the consequent costs in health care are also capped. If these costs continue to rise, while the rate of benefits (provided) continue to decline, the cost of unfunded healthcare will more than offset any benefit derived from the chained CPI.
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  • Very Impressive and
    Budgetweenie
    I, for one, support your argument. What is of further interest to me is, whether we would expect a continuation of the same practices that brought us to this point in the decision tree. Chief of my concerns is that, as the trust funds become more robust, in the opinion of some lawmakers, what would prevent a resumption of raiding them for other purposes. Fool me once, shame on...
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  • CHAINED CPI
    Kenny Ray
    Pretty darn good analysis for a "non-economist" :o) I too agree with you. While I don't like the Chained CPI, I find the prospect of my federal employee health benefits being converted to a voucher system a lot more disturbing.
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  • Punishing savers rewards bad choices
    contrarian
    Your kids lose financial aid for college if families save. Most of the mortgage crisis was from interest only mortgages. Your 401K get taxed at full income rates while carried interest only pays capital gains tax rates. The incentives and hoops are crazy these days. I'm not just talking about the govt telling you what toilet or light bulb you can buy. C-CPI is just a way of tricking people into taking less, because virtually noone will understand it. What they will understand is that their checks aren't going up, just like us FedEmps who haven't seen an increase in four years.
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  • You are mostly right
    Moderate
    I understand the gist of what you are writing and agree with most of it. The savings crisis has been around for years. I am a baby boomer and can truthfully write that my contemporaries have not saved properly. I am also laughed at because of the way I live. But, 2 of my kids are through college without debt and the third is going slower with it. My cars are 10 and 12 years old, but work reasonably well (Hondas) I stress coupons and sales. And yes, we had higher priced vacations pre kids. With kids, the price went sharply down. I also will have a decent pension (not great), but a small thrift plan (not depending on it) We have had some help over the years, but not a large amount.-----The mortgages were worse than you think. They were shaped to get people to qualify so someone would get a commission (a froiend worked in the business and told me stories.) There are other items with the mortgage issues but you get the picture.C-CPI is a fraud.---- It does not measure inflation. To do so, you must compare the same product and not the same type of product.-----As far as light bulbs and toilets are concerned, there is a reason for it.
    worker
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  • Crunching the COLA Numbers
    vetdude
    "We do not promote saving for retirement in this country, just spend, spend, spend (70 percent consumer economy). This is why we have had a negative savings rate. Only half of Americans invest in the stock market and many do not have pensions any more. Many will be in a world of hurt in their retirement. I do not want to be part of this crowd! Keep saving and investing in the future…" — Emily in Washington State So who's going to take care of all the poor souls who spent, spent, spent, either by reckless abandon or just trying to make ends meet, and never put any money away for retirement? Poverty will take on a whole new meaning in the years ahead. --------------------------------------------------------------------------------
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  • Poor souls?
    Linda
    The Poor Souls will go on SOcial Security Disability when they can't get a job like they are now, an increase of 8 million over the last four years ( if I remember correctly). If they can't get that, they will go on Welfare. Many on Social Security and Medicare also also o. Medicaid. Who is going to pay for that? Us Poor Slobs who saved for our retirement by paying higher taxes in the future. I expect taxes to increase dramatically in 20 years, if they don't change the system now. The question is why are not most people saving for retirement? Why? Because they have to have the Smart Phone, hit car, fancy vacations and can't "afford" to save for retirement. Now, some are barely sqeeking by due to lack of education, initiative or other factors, I have some sympathy for those people as they usually don't know enough to get on Welfare, the others I don't have much sympathy as I know I will be paying more because I did save.
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  • Linda gives the GOP/Tea/Corporate Party line.
    Jerry A.
    I was expecting Linda to use Reagan's old "welfare queen" quip. How about some reality? Many people do not save money because... they don't have any money to save. When corporations cut benefits, cut hours, cut salaries, outsource better jobs, and block any increase to the minimum wage (and average wages too), while inflation keeps going up (along with CEO pay), then what do average people have left? The bribed politicians have allowed or encouraged the corporations to strip everything like locusts. Now federal employees are on the chopping block with the excuse that we are better paid than the private sector. (No kidding, they got robbed to pay for executive stock options and bonuses.) Forget that. Do you know why so many people need Medicare and welfare and food stamps, Linda? Because the corporations are not paying them enough to survive. Some retail stores like Wal-Mart and their close competitors are giving newly hired employees instructions on how to apply for government assistance in their hiring packets! These companies are using the government to subsidize their profits by deliberately underpaying employees. When someone can only find a job or jobs with a less than living wage, do you expect them to starve? The GOP/Tea Party/Corporate line is "yes", but I do not agree.
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  • no incentives to come off gov't assistance
    Rob
    People have done the math and for many it makes more sense to take gov't assistance than to focus on becoming self-sufficient. The womb to the tomb utopia is gaining momentum. People want it and the average Joe is going to pay for it through higher taxes. Sorry folks, but this is what the people voted for. We're almost at the point of no return. 3.5 more years and our country will be locked into the European model. This is the "transformation" POTUS said he would bring to this country and frankly I'm not sure why anyone is surprised. The GOP can forget about ever winning the White House again. Their only hope is to hold onto as many congressional districts as possible.
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  • "...for many it makes more sense to take gov't assistance..."?
    FERS Fed
    And ironically enough, more of them live in 'red' states than in 'blue' states. Source: http://www.usnews.com/opinion/blogs/economic-intelligence/2012/09/18/obama-supporters-subsidize-romney-supporters-with-their-taxes-
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  • Myth Collapsed
    ben
    The Blue state vs. Red State subsidies, when analyzed individually, give different results than posited. Alaska is mostly federally owned land. Fed government makes payments in lieu of property taxes to regions (no counties), towns and state governments. The same is done in DC. Alabama has four very large military installations that make up much of the payment. Alabama and Florida are big retirement states. The residents draw social security and medicare -- not welfare programs.
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  • Post sources
    FERS Fed
    please?
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  • Agree with Rob
    Linda
    Corporations want to bring in people from other countries to man the low wage jobs. Why? Because people make more on Welfare than working. There is a problem with this both ways. And I have seen people go snow skiing all day with their new outfit and new boards and then stop and the pharmacy for their welfare drugs. I have an issue with this. I also know people who buy time shares, new cars and complain they have no retirement. Some people also are dumb enough to pull the retirement they have to try and save their homes, and loose them anyway because they bought more home than they could afford. What we need is a basic home economics class in highschool. Better yet, middle school. And I don't mean sewing!
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  • To Linda
    Moderate
    Again I do not totally agree with you. Corporations should not be permitted to import cheap labor. Perhaps they need to pay decent wages (competitive wages) for these jobs instead of importing labor which will lower wages. You are right about the skiers if this is widespread. You can always find some instances like this.----And Rob, you cannot be self sufficient raising a family with a minimum wage job. If possible, while they are on welfare, give them training and education that will make them independent.
    worker
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  • Linda
    Moderate
    You and Jerry are partially right and I partially disagree with you. It is very difficult to get a job that pays decently. You cannot support a family on $10/hour. That is why some of these people go on disability. You and I are lucky as we have jobs that pay us a living wage. We also have medical benefits. However, I do agree with you that those who are working should, if possible, save as much as reasonably possible. Low income people should not have cell phones or smart phones. And if you are better off, you should save more. I agree that you should get the fancy stuff after you have allocated money for the necessary things. I also agree with you about fancy cars. However, the person making minimum wage will generally not be able to save.---Jerry, although Linda is fiscally conservative, she is not tea party. They are the real hard heads.
    worker
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  • Whatever
    RadicalVet
    Hey, add in a chained price freeze too
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  • Beef to chicken
    PAULE
    In the future I guess we will see the example of Tuna to cat food, is this when we get sick of the bull????
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  • Killing Us Softly
    Richard729
    Federal employees are being hammered because they are the low-hanging fruit for bean counters who have no immediate process in place to spread the cuts around. So, with no advocates remaining to protect current and retired federal workers the order of the day for jelly-spined politicians seems to be, "Yeah, sure it hurts those millions federal workers, retirees and their families but we know how much the public hates federal workers because we've been bashing them unfairly for decades. So, too bad federal workers but once we've impoverished the millions of you we might have to go after the tax loopholes and tax dodges for the rich. Gasp! But, we are too cowardly to upset our corporate benefactors who pay us to keep hands off of their wealth which has been acquired through extortion, Ponzi schemes, embezzlement, chicanery and tax gimmicks that we know the IRS doesn't even understand."
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