Wednesday, April 10, 2013

Federal Budget: All about us

For anyone who is into federal budget browsing (And who isn't!), a link to the table of contents of the Obama Administration's budget proposal released today. Read it here.

I haven't done a deep read, but it strikes me that the one of the most significant change proposed is adopting the chained CPI as the method the government uses to calculate inflation, a change that has been strongly advocated by Republicans.

The chained CPI reduces Social Security payments to seniors and benefits for veterans, not just now but for decades to come, in a way that compounds the reductions and so will have a major impact on the well-being of people who are now in the middle of their working lives, not just the present group of retirees and vets.

Those reductions in turn will impact programs locally that deal with poverty and homelessness. How many old people and vets will lose their housing as a result of this change?

The proposal also alters how tax brackets are calculated, which impacts all areas of policy, since what the government does must be paid for somehow by someone, and changing brackets also changes which someone pays the most.

If the chained CPI becomes the "normal" consumer price index, the one reported in the media each month, then it has a political impact. By lowering the inflation calculation, chained CPI has the power to make consumers feel better about the economy and therefore make them more likely to shop.

Happy shoppers make for happy voters.

Consumer prices impact the expectations of policy-makers, including the Federal Open Market Committee, which sets monetary policy in part based on expectations of inflation.

Which finally comes down to the traders, whose market analysis relies in part on where we think inflation is going. In end, fellow traders, it's all about us.

So changing the CPI calculation cuts into a lot of areas and, I think, deserves serious attention.

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