Do The Numbers Lie?

Are you better or worse off than you were five years ago? Ten years ago?

Consider carefully. Beware the conventional wisdom that you've been cheated, messed over by the system. From your own pocketbook experience, on the job or off, in the supermarket or on vacation, answer this. Can you and Americans like you buy more with your income today than a decade or two ago?

Federal Reserve chairman Alan Greenspan says, yes, most Americans are better off. House Speaker Newt Gingrich and a growing number or congressional lawmakers agree, as do most economists. Labor Secretary Robert Reich, liberal activists and many journalists say, no, we're worse off. Incomes are in fact eroding. Who's right? It depends on which numbers you use -- and that is fast becoming the focus of vigorous national debate. Greenspan, Gingrich and others, for reasons of their own, want to change the way we calculate our economic well-being to reflect their more optimistic view. The stakes are huge. Income taxes, social security, retirement benefits, personal wages, even the federal deficit -- all could go up or down, depending on who prevails.

We've always argued over the figures behind our economics. Remember "lies, damn lies and statistics"? We dispute the true size of the trade deficit, the budget, the unemployment rate. The Fed's decision to raise interest rates last week, for the seventh time in a year, prompted similar feuding. Is the central bank protecting us from inflation or is it undermining economic growth-taking income from all Americans? Yet while such arguments wax and wane like tides, the dispute now rising is of considerably greater consequence, Greenspan himself touched it off last month when he told Congress that the government's flagship stat, the consumer price index, is seriously out of whack. Does that matter? You bet -- especially to Republicans who have seized on Greenspan's suggestion as an opportunity to painlessly cut the budget by simply playing with numbers.

Let's work the math. According to Fed studies, the CPI overstates price increases by between .5 and 1.5 percentage points. That may not sound like much. But the CPI rose last year by only 2.7 percent. So Greenspan is suggesting that inflation itself is inflated by more than one third, The implications are enormous, If we trimmed our official inflation index to what Greenspan theorizes it ought to be, Bill Clinton could take a big step toward a balanced federal budget. Why? Because all sorts of things, from cost-of-living adjustments in social security and military pensions to pay increases for federal employees, are pegged to the CPI. Lower it, and Uncle Sam spends less. Using a "better" CPI, by the Fed's reckoning, could chop $150 billion from federal spending by the year 2000.

It would also radically alter our picture of our income and earnings. Those who believe our personal well-being is in jeopardy often find support from the Census Bureau. whose statistics show that family buying power has been declining steadily since the early 1970s -- if the current CPI is factored in. They also cite the Labor Department's monthly survey of the average wage and salary paid to all U.S. nonfarm employees. (That's most of us.) By that measure, "real" inflation-adjusted earnings have fallen by 8 percent, from $8.03 an hour (in 1982 dollars) to $7.40, since 1970. Such evidence is troubling, but there's a paradox. By any statistical index, the U.S. economy has been indisputably growing. How, then, can economic pessimists claim that incomes have fallen into a mysterious black hole?

The answer is, if Greenspan and others are right, that they haven't. You can already smell the '96 campaign. If Democrats claim people are worse off, Republicans will argue that the American Dream is alive and well. By adjusting incomes for inflation in the manner Greenspan recommends, most families would have modestly gained ground since the '70s, not lost it. Recalculating the Labor Department's hourly earnings numbers, using Greenspan's inflation factor, would show average compensation for America's 125 million employees rising by 19 percent since 1970. That works out to a growth rate of about 1 percent annually-a far cry from the 2 or 8 percent growth of the golden '60s. but hardly a sign that living standards are collapsing.

What does Greenspan know that others don't? At bottom, he's simply trying to keep up with the times. "When it comes to inflation, we may be in a whole new world," explains Richard Syron, a former president of the Boston Federal Reserve Bank and now chairman of the American Stock Exchange. For one thing, Syron and other economists say, the old CPI doesn't account very well for gains in quality and technology. An example: Mom pays more for a new refrigerator than she did five years ago. How do you factor in the value of that water filter, the automatic ice maker, its admirable new energy efficiency and cuddly long-term warranty?

Such anomalies are well known, which is one reason most economists back Greenspan. Not all would set the "real" CPI as low as he does, however. Congress's official inflation-tabulator, Robert Reisehauer, director of the Congressional Budget Office, figures the current index is overstated by only half a point. Yet even by that more modest measure, the Congressional Budget Office figures the federal government could save tens of billions of dollars a year by calculating the CPI more realistically. That's the upside, of course. The downside is this: if you're living on welfare or social security, you lose when payments are figured using a lower cost-of-living index. Ditto for employees, public or private, whose annual pay raises are pegged to inflation. And reo member, income-tax payers: standard deductions, personal exemptions and tax brackets are all automatically raised each year for inflation. A lower CPI, therefore, means everybody pays a bit more in taxes.

Will the change be made? Sometime, though probably not right away. Both political parties have pledged not to muck with social security, nor are they eager to raise taxes. Seniors groups are already crying foul and liberal Democrats are on the attack. "If Gingrich wants to take $150 billion from the American people by cutting benefits and raising taxes, he should propose that directly," said Pete Stark, the senior Democrat on the Joint Economic Committee. Still, Republicans, joined by many Democrats, are pushing an amendment to balance the federal budget by 2002. A technical fix, particularly one that produces real savings without forcing much sacrifice, will look very good indeed. The problem is that it would do little to stiffen Washington's political will. Jiggering the numbers may help get our financial house in order, but it's no substitute for a thorough cleaning.

What the United States could save if the consumer price index was revised.

SAVINGS[a] PROGRAM 1996-2000 Social Security $54.6 Supplemental Security Income 4.6 Veterans pensions 0.4 Federal retirement 12.0 Earned Income Tax Credit 3.3 Debt interest 8.0 Total savings $82.9

a FISCAL YEARS, IN BILLIONS OF DOLLARS. SOURCE: FEDERAL RESERVE