DRI-297 for week of 10-20-13: Bad News on the Journalism Watch

An Access Advertising EconBrief:

Bad News on the Journalism Watch

“Never ascribe to venality that which can be explained by mere stupidity.” Many a pundit and commentator would profit from this bit of folk wisdom. Economists have more occasion to remember it than most – but heeding it sometimes requires more forbearance than any human should have to display.

“Bad News for Social Security Recipients”

A recent AP story appeared on MSN with the video caption reading: “Bad News for Social Security Recipients.” The sub-head broke the bad news: “Social Security Raise to be Among Lowest in Years.” The piece was bylined to one Stephen Ohlemacher.

The body of the story revealed that the facts were as advertised. “For the second straight year, millions of Social Security recipients can expect historically small increases in their benefits come January. Preliminary figures suggest a benefit increase of roughly 1.5%, which would be among the smallest since automatic increases were adopted in 1975, according to an analysis by the Associated Press.” So far, so good – or bad, depending on how you choose to put it. The story says that retirees saw an annual increase in those benefits of comparatively small magnitude. It relies on our casual understanding that most retirees depends on Social Security benefits for the bulk of their annual income.

The punchline – with the emphasis on “punch” – comes with the next line. “Next year’s raise will be small because consumer prices, as measured by the government’s Consumer Price Index, went up only 1.6% this past year.” If you’re an economist, you stare in silent disbelief at this line before the involuntary reaction hits, like the reflex when the doctor strikes your knee with the rubber hammer. You shout in disbelief, or derision, or anger, or merriment. You can’t believe what you just read – that anybody could write this as honest reporting or commentary.

Contrary to the headline, this isn’t bad news for social-security recipients. It is bad news for journalism.

The Return of the Broken-Window Fallacy

The purpose of a Cost of Living Index (COLA) is to compensate those covered by it for price changes. In theory, benefits indexed to consumer prices should rise by an amount just sufficient to enable consumer purchasing power to remain intact after price increases. That is, any combination of consumer goods affordable before the price increases should be affordable after the price increases and COLA adjustment. In practice, no price index works that well because the enormous number of goods and typically vast array of price changes defeat the best efforts of any price index to reflect every nuance and variation.

Nonetheless, it makes absolutely no sense to say that it is “bad news when prices don’t go up [much] because that results in only a small upward COLA adjustment.” That is tantamount to saying that you suffered the bad fortune of a minor auto accident because you could only collect a small collision-insurance reimbursement.

It is best that prices don’t go up at all, just as it is best that you suffer no auto accident whatsoever. It may be the case that, because your personal consumption pattern is so idiosyncratic, the price index that determines your COLA does not adequately compensate you for the actual price increases that your particular consumption goods suffered over the survey period. (Just as it may also be true that your insurance adjustor does not adequately reward you for the actual damages your car suffers in an accident.) If the price index or insurance adjustment fails to adequately protect you, that is “bad news,” but stable prices and safe driving are not bad things just because you cannot collect on the respective forms of insurance that protect you when they break down.

And to say otherwise, as reporter Ohlemacher plainly does, is just crazy.

The 19th-century French economic Frederic Bastiat earned immortality by identifying the fallacy of the broken window. Even as early as 1848, self-appointed economic savants were declaring that destructive events such as vandalism were disguised blessings because their cleanup and reconstruction afforded employment and income to carpenters, glaziers, stonemasons and such. It was Bastiat who pointed out the fallacy in this solemn nonsense. The time and effort spent in reconstruction is lost to new construction, while the end result simply gets us back to square one, prior to the destruction. If the destruction had never happened, those same carpenters, glaziers, stonemasons, et al, could have been building new structures, leaving us better off than before. It is clearly folly to suggest that wealth can be enhanced by destroying wealth, then building it up again.

In the present day, it is just as fallacious to claim that the relative lack of a disaster is a bad thing because it denies us the opportunity to be compensated for the disaster. At least in theory, all that compensation accomplishes is… well, compensation. It just gets us back to even, back to square one. At best. If the compensation is imperfect, it may not even do as well as that. And all forms of inflation indexation are imperfect.

The Nuts and Bolts of Indexation

A great microeconomist once described blackboard analysis in the classroom as “getting down on our hands and knees” to examine a problem closely. The issue of indexation for price changes affects so many people that it merits minute examination. Let’s haul out the nuts and bolts of the problem highlighted by this news story and get down on all fours with them.

Last year, many thousands of prices changed over the course of the calendar year. Enough of them rose to cause the Consumer Price Index – which we can think of as a kind of weighted average of all price changes – to rise by a modest amount just under 2%. This rise in the price index triggered a “cost-of-living-adjustment” (COLA) in the benefits paid out by the Social Security Administration. Hurrah!

But wait – we cheered when Social Security benefits went up, but we forgot to boo the price increases that occurred last year, before the benefit increase took place. After all, the benefit increase is only intended to compensate us for price increases that have already taken place in the past, when our Social Security payments were stuck at their previous lower level. Assuming the CPI perfectly adjusts to account for all the price increases, the price index change and the resulting upward revision in our benefits will exactly compensate us for the price increases. Now our buying power is back to where it was at the start of last year, before the price increases took place. So there is really no great reason to cheer, since the COLA is only getting us back to even, so to speak, in terms of our purchasing power.

Except we’re not even, are we? Or rather, we weren’t even last year, when we had to buy goods and services for the whole year with prices higher but possessing only our lower pre-indexation benefit amount. Alas, our COLA indexation comes in arrears; as long as inflation persists, our real income is like a dog always chasing its tail but never quite able to catch it. Of course, indexation is one heck of a lot better than nothing, but it is not a panacea for the detrimental effect of inflation on fixed incomes.

Think back to the news story. The bad news for Social Security recipients is that the coming year’s benefit adjustments are among the smallest ever. Why? “Next year’s raise will be small because consumer prices…haven’t gone up much in the past year.” Well, if small price increases produce small benefit increases and larger price increases would have produced larger benefit increases, then the author is clearly implying that larger price increases would have brought good news this year instead of bad news. But we just showed that larger price increases last year would have made recipients even worse off last year than they actually were – then this year’s benefit increase would merely have gotten them back to even.

So the author is wrong. No, that doesn’t quite capture it. He is gloriously, symmetrically wrong, in the sense that his flatfooted declaration is the exact opposite of the truth. This is truly industrial-strength stupidity. But that isn’t all.

No price index works perfectly. As soon as the statistician introduces more than one good or service into the index, unavoidable imprecision crops up. When thousands of goods are indexed, this problem mushrooms. That is why the Bureau of Labor Statistics calculates so many different versions and subsets of the various price indices, of which the Consumer Price Index is merely the best known. The statisticians are trying valiantly to tailor these sub-indices to the income and consumption patterns of identifiable groups. This is another way of saying that, in actual practice, indexation using the CPI as its base does not exactly compensate for the previous year’s price changes. Moreover, the degree of variance from the ideal differs from person to person and group to group.

At least in principle, this technical imprecision might work in either direction – either in or against the consumer’s favor. As it happens, though, our news story makes certain claims on that score. “Advocates for seniors say the government’s measure of inflation doesn’t accurately reflect price increases older Americans face because they tend to spend more of their income on health care. Medical costs went up less than in previous years but still outpaced other consumer prices, rising 2.5%. ‘This (COLA) is not enough to keep up with inflation, as it affects seniors,’ said Max Richtman, who heads the National Committee to Preserve Social Security and Medicare. ‘There are some things that became cheaper but they are not the things that seniors buy. Laptop computers have gone down dramatically but how many people at 70 are buying laptop computers?'”

In other words, the author of our news story has introduced evidence that the COLA fails to compensate Social Security recipients for purchasing power lost to inflation. He has introduced no counterbalancing evidence, even though ample evidence to the contrary is available. (Some will be adduced below.) Now how does the author’s central contention – that Social Security recipients face bad news created by the failure of prices to rise more last year – look? According to the logic and evidence the author has written into his own article, the author’s own conclusion looks even stupider than it did when first stated. To recipients’ disadvantage that the COLA adjustment is attained in arrears, the author has now added the further disadvantage that the adjustment allegedly fails to compensate Social Security recipients for the full effects of inflation on their purchasing power. Both of these disadvantages are triggered by price increases; the bigger the price increase, the more wounding the disadvantage.

The author’s industrial-strength stupidity has now ratcheted up to industrial-strength stupidity squared.

Stupidity, Yes – But What Else?

The author of this story displayed stupidity on an epic scale. That much is beyond doubt. Is stupidity alone enough to account for such a breathtaking display? Might there be a concealed agenda at work to motivate such blindness to elementary logic?

Not so long ago, a news story underwent a fairly rigorous editing process prior to publication. It is highly unlikely that any national publication would have allowed anything as ghastly as this to slip past its editors. But today, journalism as it once was no longer exists. Its place has been taken by advocacy thinly veiled as reporting or commentary.

The prevailing bias is leftward in general and pro-Obama-administration in particular. The Obama issue du jour is – or was, when the article appeared – the federal-government shutdown. Sure enough, much of the article’s content is intended to rake up sympathy for Social Security recipients, the largest entitlement group whose check receipts were threatened by the shutdown.

The bad-news recipients are characterized as “millions of Social Security recipients, disabled veterans and retirees.” They are wholly dependent on government for their incomes, which are now – for the second year in a row – “historically small.” And, to top it off, “the exact size of the cost-of-living adjustment, or COLA, won’t be known until the Labor Department releases the inflation report for September. That was supposed to happen Wednesday, but the report was delayed by the government shutdown. [emphasis added]…The Social Security Administration has given no indication that raises would be delayed because of the shutdown, but advocates for seniors said the uncertainty was unwelcome…More than one-fifth of the country is waiting for the news.”

A story can also be slanted by what is left out as well as what is included. While Mr. Ohlemacher’s story plants the impression of seniors as badly used by the CPI, economist Michael Boskin has the opposite impression in his Wall Street Journal op-eds over the years. In 2005, Boskin estimated that CPI indexing overestimated inflation by 80-90 basis points, or nearly one full percentage point. More recently, n the course of listing numerous ways in which the federal government can save money by eliminating waste, fraud and abuse in its budget, Boskin suggests switching Social Security indexation to the chained CPI, which would estimate inflation more conservatively than does the current version. (The chained CPI would adjust the index every month for “upper-level substitution bias” – a recondite way of describing the fact that the index currently captures economic substitution induced by price changes better for close substitute goods than for more distant substitutes.) Formerly, straight-news stories would have cited opposing views like this one, for “balance.” These days, a balanced story is a rarity.

It is tempting to believe that ideological or partisan political bias blinded the author to his egregious mistakes and nourished a single-minded search for stories that conformed to a pre-set template of “helpless victims endangered by short-sighted government shutdown.”

Another ideological agenda on display in the article is that of the victimized group. Here it is seniors. The above-quoted reference to COLA bias against senior consumption patterns is the tipoff. But there is no mention of the fact that economists warned for years that Social Security benefits over-compensated for inflation. Instead, we get bite-sized quotes from victims picked for their emotive power.

“‘It is very important to get the COLA because everything else you have in your life is on an upward swing, and if you’re on a downward swing, that means your quality of life is going down,’ said Gaskins [Alberta Gaskins, of the District of Columbia, who “is concerned about household bills], who retired from the Postal Service in 1989.” Somehow, the juxtaposition of Ohlemacher’s inane analysis of indexation, his dry technical explanations of COLAs and price changes and the “Gaskins Swing Index” lends a surreal aura to this article. It almost seems as though Ohlemacher approached a garden-fresh set of facts on Social Security and set out to knead, pound and stretch them into as much propaganda dough as he could mold. The result doesn’t rise and leaves a mess in the oven for the reader to deal with.

Yesterday’s Hack is Today’s Hero

In the journalistic jungle of yesteryear, writers who sold their soul for a buck were called “hacks.” They were understood to be willing to say anything on behalf of anybody who paid their (not too elevated) price. Today’s front-line reporters have adopted the work habits and standards of yesterday’s hacks. But unlike the hacks, they do not suffer for it by being relegated to the fringes and netherworld of journalism. A search on Mr. Ohlemacher reveals that he writes often for salon.com, MSN and the Associated Press. Copious samples of his work are available online. His do not appear to be the credentials of a hack. But the reasoning displayed in this article is an insult to the discipline of economics. The fact that Ohlemacher’s piece includes some technical details about COLAs and their calculation does not mitigate the gravity of his offense as outlined above.

Still… there is that old adage to contend with. “Never ascribe to venality that which can be explained by mere stupidity.”

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