Memo To: George Tilghman, client, Oppenheimer Capital
From: Jude Wanniski
Re: Trent Lott, Gold and the CPI
At 08:38 AM 12/10/96 EST, you wrote yesterday in your "Bear Tracks": I was surprised by two things. One, I had been sure you were dismayed that Trent Lott said what he did on TV. (I read about it in Dick Stevenson's piece yesterday, but didn't see Lott on TV.) Do you think the threat against Fed's independence from politics is not such a bad thing? You gave Clinton credit for laying off the Fed, but you let Lott off the hook despite publicly flexing his muscles? I'm not sure I trust Lott to be pushing for lower rates for the right reasons. I mean, he may be right in this instance, but aren't we better off keeping him out of it for fear that the next time he will not have thought things through?
Secondly, I was not suspicious that the CPI fix was motivated by anything other that improving its accuracy. I realize the huge impact it would have on budget calculations is on the minds of those "eminent" economists, but it seems cynical to say these people are motivated to take resources away from the old in order to balance the budget. The goal of arriving at an accurate cost of living adjustment is a worthy one for all the same reasons the dollar ought to be fixed to gold. Yes, I appreciate what you say about two breadwinners doing what one used to, but does the CPI not have any problems owing to product improvements and to changes over time in the composition of things and services that people actually consume? I realize you're trying to drive home the point about the breadwinner burden, but the basket of goods and services one 80 year old woman consumes has not changed as much as has the basket consumed by the median-aged person over time. Where have these economists made their errors if the CPI has not been overstated?
My response to these two questions:
Trent Lott did not plan his attack on Greenspan. If he did, it would have concerned me, because I would have wondered what evil influences might be at his elbow that I don't know about. It came as a sign of Lott's frustration with Greenspan's general arguments against growth. It thus enables the issue to be ventilated at a very high level, because Lott is a high level guy. See the Journals lead editorial Friday, December 13, and you will note they are encouraging Lott in the direction of the Mack bill on targeting prices. I sent Lott a memo encouraging him to discuss the relative price of gold. This is how national debates get started when they need to start. I'm comfortable with Trent as I would not be with Henry Gonzalez, who Fed bashes without a learning curve. Nothing but good can come out of Trent Lott's zapping of Greenspan.
About the CPI issue. It's not that I'm cynical. I just know that when bureaucrats who are charged with saving money for the government, and are rewarded for coming up with ideas, they will bend their brains to that task. I've been following this CPI issue for almost 10 years, since it first became an issue at the Dept of Commerce. Big businessmen were especially interested in limiting the COLAs in their wage contracts. The whole idea of adjusting the CPI to include technological advances was inserted by people like Mike Darby, a UCLA monetarist, who served as asst secretary of commerce in the Reagan/Bush years. That's when Greenspan and Wayne Angell first began thinking of the adjustment process, and I assume how Moynihan became interested. You can theoretically do anything you want with a CPI if your goal is to balance the budget, and that's what these guys are driven toward, even though they all make pious statements about how they just want to get the numbers correct. Monetary inflation is what we are talking about, though, not technological advance. Money throughout history has been a proxy for labor, not capital. There is no monetary deflation when a man puts down a shovel and gets into a steam shovel. There is no inflation when a man gets out of a steam shovel and picks up a shovel.
The value of a dollar, as measured by the needs of old folks on pensions, including my mother, should be that which relates to labor, not capital. If you have to pay a man $1 an hour to dig with a shovel 25 years ago and you have to pay him $10 an hour today, the $1 has lost 90% of its value. You can't tell my mother that she should buy a cellular telephone instead of hiring a man to dig a hole with a shovel. In the last 20 years, my mother's living patterns have remained constant, yet the CPI-adjusted Social Security check she has received has steadily lost value. This is because the CPI understates inflation by including technological advances. Rent on her little apartment went from $120 per month to $1200 per month, as did utility costs. Transportation costs went up by a factor often — check taxis, trains and buses. Any kind of repair work has climbed at the same rate. Television sets cost much less, but the quality of tv shows has declined so drastically that she has to pay a steep monthly cable cost to watch shows on Nickelodeon that she used to watch free 30 years ago. A movie ticket for a double feature 30 years ago was 50 cents for the matinee. Now it is $5 for one film and she can't go anyway, because the local theater closed, and now would have to take a taxi both ways to a shopping mall where there is a cineplex.
All this has been happening because our Ruling Class has been brainwashed, as George Orwell predicted in his book, 1984. Alan Greenspan has forgotten what he used to know about money, because he wants to balance the budget. All my old friends in journalism, who are being paid at ten times the wage for what they did 30 years ago, are unable to see that people who are on Social Security have a hard time living on income that has risen only 3 V6 times with the CPI adjustment. They are also brainwashed a la Orwell, and complain that the old folks are stealing from the young folks by an inaccurate CPI. They do so because they are in denial — out of fear that they do not know how to fix the system. I have no such problem, because I know how to fix the system without cheating the little old ladies who already can't live on their Social Security checks. It's not so much a matter of cynicism, you see, as it is perspective. If Greenspan would only be honest with himself and the universe of people he must deal with every day, he could also tell them how to fix the system. He is afraid they would laugh at him for sounding so much like me, so he goes into denial.
Thanks for the e-mail. As you can see, it stimulated me into digging a deeper hole than I had thought I'd be digging this morning. At no extra cost to you, by the way.