I Am Not a Crank Jude Wanniski March 6, 1997

Memo To: Bob Bartley, WSJ
From: Jude Wanniski
Re: Reporting

When I was learning the reporter's trade, I was taught to keep asking questions until I run out of people with answers. We invented the "reported editorial," you and I, in the editorials of the '70s, which is what you have been doing in covering and editorializing on the financial scandals of the Clinton administration, and which Dan Henninger has done in PDA bunglings. Your shortfall in recent years has been in the area where you and I pioneered, in economic and public finance. The editorials in this area, while better than the Washington bureau's reporting, continue to reflect a shallow reporting effort. In this morning's lead editorial, "Do the Right Thing," I am dismissed by name as a crank who believes the CPI does not overstate inflation. Nobody from the page ever called me to ask why I am of the belief that the CPI in the past understates inflation. By the way, in addition to Wanniski, both Jack Kemp and Steve Forbes are on record in arguing the CPI does not overstate inflation. I watched the Crier report on the Fox network last night and saw Jimmy "Investment Banker" Rogers ridiculing Greenspan and Boskin and the CPI baloney, saying any ordinary person knows prices have risen faster than the CPI and that the idea of adjusting the index is a backdoor way of raising taxes and cutting spending. Please, Bob, read your editorial this morning and then explain to me how raising taxes will create more room to cut taxes.

There is a problem in Social Security that was created in the 1970s when Congress reacted to the stagflation by double-indexing the system. They realized the blunder and went in to take out the double-index, but in the process they increased the income-replacement for retirees, from an average of 30-35% for ordinary workers in 1975-80, to 43% today. The blunder was never corrected by the Greenspan-Moynihan commission, when they "fixed" the system in the 1980s ~ the problem of unfunded liabilities that we first raised in our editorials of the 1970s — by recommending tax increases to cover the shortfall. Because they did not take into account the possibility of a Reagan supply-side economic expansion, they overfunded the system with their steep payroll tax hikes. At the same time, to sell their "solution," left in place the overly generous benefits that occur to first-time recipients. I found this history by calling people I respect in public finance until I hit upon Aldonna Robbins, who we think of as part of the Robbins1 flat-tax team. She worked as a career technician in the Carter Treasury Department and the Reagan Treasury and informed me that she also discovered back in the Carter years that a mistake had been made in sharply cutting back the CPI in order to save money in bipartisan fashion. This was done by assuming that rental space would perpetually cost less than home ownership. Her internal study found that rental space quickly caught up with owned, mortgaged homes, which meant the downsizing of the CPI could not be justified. Other smaller changes in the CPI were forced in order to save SSI money, she said. This of course also has had the effect, since the Reagan years, of adjusting tax brackets for inflation at a lesser amount than should be done — which means a steady upward creep on the Laffer Curve.

My persistence in asking these questions arose because of our belief — yours and mine — that there is a "Golden Constant," by which consumer prices eventually track rises and falls in the dollar gold price. In the last 30 years, the gold price is up 1000%, but the CPI is only up 400%. The CPI should be up by more like 600% or 700%, with the rest due up over a longer period as still depressed commodity prices in many areas react to economic expansion. The Bureau of Labor Statistics, by the way, has been compiling a separate "experimental" CPI market basket for retired people. David Gitlitz has been told by the AFL-CIO that it shows the CPI understating inflation for old folks by 0.3% annually. Now I believe that where we are being led is to have the BLS make the CPI adjustment and inform Congress that the SSI should not be adjusted for less inflation, but that it should be done for taxes. In other words, no spending cuts, only tax increases.

The solution is really to eliminate future inflation by fixing the gold price at $350, which would sharply reduce the 75-year actuarial assumptions that now posit staggering deficits in SSI. There is also a need to correct the income-replacement problem which the Greenspan Commission left untouched. This requires an increase in the retirement age, which we have been arguing for decades. If the current CPI understates inflation as I believe it does, when there is zero inflation the CPI will be negative. We only need work through the little bubble that remains from the gold-price inflation of the Nixon/Carter years. Either that, or we should confront directly the errors that Greenspan and Moynihan allowed to be built into the system on income-replacement benefits, which they are now trying to correct with an even greater mistake.

By the way, Greenspan yesterday told the House Banking Committee that the price of gold is his best price guide to future inflation. The WSJournal's account of Greenspan's testimony by Jacob Schlesinger (a rookie on the beat) did not mention this critical piece of information. Indeed, Schlesinger's account was a joke, in that Greenspan read the same prepared text that he read last week before Senate Banking, and Schlesinger treated it as if it were new news. "Greenspan Sees More Risk of Inflation." I suggest you get a transcript from Reuters or Bloomberg and point this out to your readers.