Friday, December 28, 2012

Another TINSTAAFL Moment

Ruth Marcus warns her readers that her op-ed on inflation indexing would be boring. Perhaps it's a sign of economic nerdiness that I found her piece quite compelling.

As a nation we're stumbling over bills to what we thought had been free lunches. (My cryptic title is an abbreviation for There is no such thing as a free lunch, a cornerstone of economic thought.) According to Marcus, our federal government has generously but imprecisely calculated price level changes. This practice has allowed Social Security recipients to essentially get raises from year to year in their benefits. In other words, Social Security benefits rose in real not just nominal terms. Meanwhile, taxpayers received a break because when tax brackets change from year to year in overstated amounts, individuals' tax bills are rising at a rate slower than their income might be. The economic jargon for this, I guess, would be that the methods for calculating changes in tax rates was going in reverse of bracket creep.

Okay, let me pull out of economic nerdvana. There's an interesting point in what Marcus shows regarding chain-weighted CPI adjustments. For years recipients of Social Security and taxpayers for federal income tax have been getting a small bargain: getting more than the benefits were designed to deliver or paying less than the code intended, respectively. Fractions of a percent, when compounded and when of billions of dollars, add up over time. And those dollars contribute to our deficit. Fixing this imprecision will pinch millions of Americans.

Marcus is illustrating an interesting phenomenon that is symbolic of much else in our political and economic life. As citizens and taxpayers we are accustomed to getting more from government than we put in. It's true with Social Security benefits where we draw far more than we contribute. It's true of income taxes where we squeeze every last deduction out of our returns. It's true of our real estate taxes (at least in Southeastern Pennsylvania), where we pay a bill based on millage of our appraised property value, and our appraised property value is sometimes less than 20% of what the real estate market determines our houses are worth. It's true of our public services, where we expect exceptional services for minimal prices.

And so our fiscal cliff approaches, and no deal is in sight. No wonder. Perhaps 2013 is the year we start realizing what the lunch costs.

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