The Price of Macroeconomic Imprecision: How Should the Law Measure Inflation?
James Ming Chen
Michigan State University - College of Law
Hastings Law Journal, Vol. 54, p. 1375, July 2003
Minnesota Legal Studies Research Paper No. 05-36
Inflation touches many areas of law, and the law's response to inflation constitutes a policymaking opportunity in its own right. Legislators have long realized that the use of specific dollar figures or economic formulas can render statutes obsolete. Yet Congress's response to the most basic type of economic change hardly reflects careful policymaking. Federal statutes specifying one price index strongly favor the Bureau of Labor Statistics' Consumer Price Index (CPI) over the implicit price deflator (IPD) derived from the Bureau of Economic Affairs' computation of the gross domestic product. The IPD, however, boasts two methodological advantages that enable it to outperform the CPI in many circumstances. The IPD not only covers a deeper range of goods and services in the economy; it also eschews the fixed-weighted market-basket approach of the CPI. Both features offset the CPI's tendency to over report the rate of price change in the U.S. economy. Adopting the superior inflation index does present a daunting legal task. Because courts cannot countermand specific legislative references to one index or the other, and because neither index suits for all legislative needs, substitution of the IPD for the CPI (or vice versa) must almost invariably be achieved through piecemeal amendment.
This article begins by providing a very brief comparison of inflation with discount rates and purchasing power parity. It then discusses how legal responses to inflation can affect a wide range of interests, some of which transcend the strictly economic realm. The article focuses on manifestations of the phenomenon in three discrete areas of public law: taxation, constitutional law, and rate regulation. Congress's preferred method of accommodating macroeconomic volatility suffers from serious drawbacks. After conducting a detailed comparison of the CPI with the IPD, this article suggests potential solutions for flawed legal measures of inflation.
Number of Pages in PDF File: 90
Keywords: Inflation, discount rates, purchasing power parity, consumer price index, implicit price deflator, price-level regulation
JEL Classification: C10, E30, E31, L51, O47
Date posted: August 6, 2005