Longer Run Recommendations

Recommendation xi.

The BLS should develop a research program to look beyond its current "market basket" framework for the CPI.

This recommendation suggests that the BLS should develop research programs exploring "quality of life" issues such as time-saving benefits of new medical procedures and new communication devices, and changes in the social or natural environment caused by rising crime or new diseases. Because these things clearly affect our standard of living, a complete accounting of U.S. economic progress would include them.

We do, however, have a reservation about this recommendation. Implicit in this recommendation is a suggestion that the BLS should adjust the CPI for these effects. Valuing changes in time allocation or in the general social environment may well require too many subjective judgments to furnish an acceptable basis for adjusting the CPI. Furthermore, arriving at a comprehensive measure of changes in the quality of life would be quite difficult, yet making such adjustments in only a few selected cases could make the CPI less accurate if these cases are not representative. Finally, it is unclear whether "quality of life" valuations really belong in an index used for the escalation of payments and adjustment of tax parameters. For example, the advisory commission suggests that the CPI rent index should have made a quality adjustment for changes in climate as renters migrated to the south.26   Such a quality-of-life adjustment, however, is properly viewed as out of scope under the current definition of the CPI.27   Most of the uses of the CPI have evolved within the context of an index limited to market goods and services, and presumably the appropriate uses of an index that incorporated changes in crime levels, disease incidence, or income tax rates would be somewhat different from the current uses of the CPI.

In summary, the BLS has no specific plans to implement this recommendation. Measurement of changes in "quality of life" may require too many subjective judgments to furnish an acceptable basis for adjusting the CPI. Furthermore, it is unclear whether "quality of life" valuations are an appropriate part of an index of change in the price of market goods and services.

Recommendation xii.

BLS should investigate the ramifications of the embedded assumption of price equilibrium and the implications of it sometimes not holding.

Any systematic method for distinguishing quality change from price change must be based on some theoretical framework and set of assumptions. In most cases the BLS, like academic economists who do research in this field, relies on one or another assumption about price equilibrium. An equilibrium assumption underlies hedonic methods for quality adjustment, for example, as well as the matched model price comparisons commonly used by the BLS.28 Although virtually all systematic methods for quality adjustment are based to some extent on assumptions about price equilibrium, the nature of the assumptions differs between methods. Of the methods used for quality adjustment by BLS, two (the "overlap method" and the "link method") are based on a particularly strict equilibrium assumption—that quality differences can be inferred from the price differences between individual items.29 The hedonic method, in contrast, allows for random deviations of prices from equilibrium values and may allow for differences in rates of price change between items of different vintages.

The commission recommends that the BLS investigate the assumption of price equilibrium that underlies certain quality adjustment and item substitution procedures. We agree that reducing reliance upon this assumption can sometimes make the CPI more accurate, particularly for long run comparisons. Indeed, the BLS already has made considerable progress in doing this. Recent tabulations indicate that item replacements adjusted for quality using the methods that embody a strong price equilibrium assumption (i.e., the "overlap method" and the "link method") declined from about 2 percent of prices collected in 1983 to 0.62 percent in 1995.30   In addition, the CPI for prescription drugs now reflects consumers’ savings from buying therapeutically equivalent generic substitutes for branded products. We plan to continue research on avoiding bias from unwarranted price equilibrium assumptions.

In summary, the BLS agrees with this recommendation, has made considerable progress in reducing reliance on quality adjustment methods that require strong price equilibrium assumptions, and plans to continue research and progress in this area.

Recommendation xiii.

The BLS will require a number of new data collection initiatives to make some progress along these lines. Most important, data on detailed time use from a large sample of consumers must be developed.

The final longer run recommendation is that the BLS should develop new data collection initiatives on time use and "quality of life" issues. These data would support the research programs described in the commission’s first longer run recommendation. We agree that time use data would be valuable to researchers, and we concur with the focus on using them for supplementary indicators rather than as part of the main cost-of-living framework. Accordingly the BLS has established a Time Use Working Group that is developing a set of recommendations for using the Current Population Survey (CPS) sample to conduct a survey of how individuals spend their time. The Group has been charged with developing a survey approach, and specifying sample size, data collection methodology, schedule and budget and staffing requirements. The report will be ready by mid-summer 1998.

In summary, the BLS agrees that measures of time use have research value and currently is undertaking a study of time use, but considers such studies to be supplementary to rather than a part of the CPI’s particular cost of living framework.

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Last Modified Date: October 16, 2001