By Kathleen O’Toole

Next month at a West Terre Haute, Indiana, appliance store, one shopper will search for a particular answering machine; at a San Francisco area hospital, another will check the price of a particular form of heart surgery; in Kansas City, another will compare this month's to last month's price for a first-run movie ticket. These three "comparison shoppers" are among the 400 that every month fan out across the country to check prices of thousands of products and services for the nation's consumer price index. It is a vast and in many ways impressive effort, but one that Stanford economist Michael Boskin believes is flawed.

The lists of goods and services used for the index are "relics," he says, from the 1980s. Today people are beating the price of theaters by renting videotapes and forgoing the cost of both the theater and the babysitter. People who suffer heart attacks are often treated with clot-dissolving drugs instead of surgery, and cellular phones, not answering machines, are selling like hotcakes.

Boskin wants real shoppers' habits to show up quicker in the nation's consumer price index (CPI), the official measure of inflation. That, he says, will lower the nation's official rate of inflation by 1.1 percent. If things are not corrected soon, the overstatement compounds over time and in just 12 years the federal debt will be one trillion dollars higher.

Boskin became frustrated with flaws in official statistics when he was chairman of President Bush's Council of Economic Advisers. Now, four years out of that job, the 51-year-old Tully Friedman Professor of Economics and senior fellow at the Hoover Institution has created a firestorm in Washington over the unlikely subject of statistics. Last year, he headed a five-member blue-ribbon panel that told Congress the nation's official inflation rate has been wrongly measured. The commission's December report seems to have convinced many influential national and foreign leaders, including Alan Greenspan, the highly respected chairman of the Federal Reserve Board. It caught elected politicians' attention because it pointed out a way for them to tackle the nation's budget crunch. The commission recommended:

* The Bureau of Labor Statistics should adopt new CPI formulas and, with added financial resources, move faster to keep up with changes in the economy.

* Congress and the president should stop automatically adjusting the tax code and federal spending programs by the CPI, and choose a more realistic inflation adjustment number. In the meantime, if Democrats and Republicans can agree to a downward adjustment of 1.1 percent, the move would go a long way toward balancing the federal budget.

The commission's recommendations opened a Pandora's Box, and Boskin, as the man with the key, has become the center of nationwide attention. His name made page one for weeks while economists and other experts had a field day with the ramifications of the commission's report. "The Boskin report demolishes the theory that living standards have stagnated," wrote Newsweek, referring to conventional wisdom that holds that the nation has been falling downhill economically since about 1973. The New York Times said the commission suggests that "much of the economic debate of the last few decades has been based on the wrong premises, and therefore is simply irrelevant." The Washington Post asked, "Are we better off than we think we are?"

Boskin, never one to be satisfied with publishing in academic journals read only by his peers, comes alive in the spotlight. His answer to the Post's question is an unequivocal yes.

"Instead of falling by 13 percent, American real average earnings have risen by 13 percent from 1973 to 1995," he says. "Real median income over the same period grew 36 percent, not 4 percent. The poverty rate would be substantially smaller." Because components of the CPI are used to calculate the national income, "real growth in gross domestic product is understated."

A 1.1 percentage-point overstatement of inflation doesn't seem so much for the federal budget, but when the official rate is slightly below 3 percent, the change would lower the inflation rate to around 2 percent - about as stable as prices have been in decades.

Much of the change in the CPI that the Boskin commission proposes is relatively without controversy among economists. It relates to the fact that the index was never intended to be a cost-of-living measure but is used as if it was. The government began collecting data for an index of price change in 1918. Today, it collects prices each month for 71,000 goods and services from 22,000 outlets in 44 geographic areas. The items are a representative basket of urban consumers' purchases of food, clothing, shelter, fuel, transportation, medical services - even haircuts - at a given point in time. From this, the government calculates changes in the price of the median household's market basket - assuming the basket's contents remain the same for about a decade.

High inflation in the 1970s prompted a heavy reliance on the CPI. By 1981, Congress had indexed tax brackets and Social Security benefits to the CPI. Even many people in private business who knew it wasn't a true measure of the cost of living used it, says commission member Ellen Dulberger of IBM, because it was published monthly in the Wall Street Journal and allowed them to agree on how to adjust contracts. It's as if the whole country got caught up using the CPI. At a Senate committee hearing, Democrat Bob Graham of Florida likened it to "using a thermometer to measure distance." According to Boskin, that is how taxpayers get tax breaks and Social Security recipients, government employees and pensioners get larger checks than Congress intended.

The proposal also has attracted some powerful enemies, including the American Association of Retired Persons, whose leaders, simply put, go ballistic with Boskin's assertion that the cost of Social Security needs to be checked or it will drag down the economy when the baby boom retires.

"If there ever was a case of pick up the hood and fix the engine à la Ross Perot, this is it," Boskin says.

Anyone searching for an ivory tower at Stanford would be well advised to stay away from Room 214 of the Herbert Hoover Memorial Building. Since the Advisory Commission to Study the Consumer Price Index released its report, phone calls, faxes and visitors have poured into Boskin's office there. "It's better to be busy than bored, to be in demand than not," he says, parroting a lesson learned as a child.

A trim man with a strong tennis game and enough punchlines to charm any audience, Boskin makes friends easily. Washington insiders say he made enemies there too, but not as many as others. He went out of his way to socialize with people he disagreed with. There are very few academic economists who know as much or more than he does about the CPI, and even fewer who can deal effectively with questions from politicians, reporters or economists outside this specialty, said commission member Dale Jorgenson, chairman of Harvard's economics department. "A lot of my colleagues have spent a fair amount of time in Washington and they are not as attuned to this political role that he plays." Boskin translates back and forth between theorists and politicians, and he is persuasive, Jorgenson said. "Of course, he's gotten a lot of exposure from it, but he is also catching a lot of flak."

Boskin holds himself to high standards in almost everything he tackles. He taught a class in public finance last year, for example, that attracted 150 students. He had planned for 40. He wound up taking the students in small groups to the faculty club for lunch. He also spent finals week administering an oral test - students had to pretend they were a national policy adviser arguing a case to a Cabinet member.

Demonstrating some of his political skills on a recent day, Boskin juggled an interview with a reporter and incoming phone calls from Democratic Sen. Daniel Patrick Moynihan, the office of New Jersey Republican Governor Christine Whitman, a staffer from the House Budget committee and Alan Greenspan's counterpart at the German Bundesbank, Hans Tietmeyer. Everybody wanted to talk about the commission's report.

Says John Shoven, Stanford's dean of humanities and sciences: "When I first came to Stanford, it was known primarily as a great place for theoretical economics, partly because of geography." But Boskin is among a growing number of Stanford and Hoover economists who routinely hop planes to the capital, he said. Boskin's CPI work "is one of the most important public policy studies that economists have done this generation."

Janet Norwood, who headed the Bureau of Labor Statistics when Boskin was Bush's closest economic adviser, worries that the high profile Boskin has given the CPI could lead to the politicization of American statistics. But she praises Boskin for his "personal involvement and interest" in trying to get CPI problems fixed when he was part of the Bush administration.

The CPI report is like a snowball rolling downhill, gathering new questions, Boskin explained after Tietmeyer's call. At first foreign media treated it as a U.S. curiosity, but then they started to ask if the same statistical problems applied to their countries. Boskin believes that the general problem applies to all industrialized economies. "As people get richer, they consume more quality, greater convenience and variety, not just more of the same things," he says, and the current statistical systems are better at tracking quantity than quality.

Boskin draws on personal experience, not just statistics. The grandson of immigrants and son of a small Los Angeles contractor who dropped out of college during the Depression, Boskin is aware that, on his professor's salary, he can afford central heating and air conditioning, whereas his grandfather stoked a wood- and coal-burning furnace and his parents "never dreamed of air conditioning," which is now in 75 percent of American homes. His wife, Boskin notes, "can keep track of her mother in San Diego while she is commuting to San Francisco. Her mother can always reach her because of cellular phones."

Both the strength and the weakness of the CPI, Boskin says, lies in its underlying simplicity. The fixed market basket, recalculated only once every decade, "becomes less and less representative over time as consumers respond to price changes and new choices." VCRs didn't enter it until 1987 - after half of Americans had bought one and the prices dropped 30 percent or more per year. Cellular phones, already purchased by 60 million Americans, won't make the CPI list until 1998. Many consumers also have switched to discount stores or to shopping on weekends - changes in habits that aren't reflected in the price quotes.

Changing from a fixed basket of goods and services to a cost-of-living index also involves acknowledging that consumers have many ways to avoid price increases. The CPI formula assumes that "when the price of Granny Smith apples goes up, you do not substitute [with] Delicious apples; when the price of hamburger goes up, you don't buy chicken parts or macaroni," Boskin says. "We are not saying [consumers] are not worse off if the price of something they buy goes up. They are. At the same time they are not as badly off as if they were unable to substitute at all, which is what the current formulas estimate."

More controversial are proposals that would take into account changes in a product's quality when adjusting the price that consumers pay. If a new model refrigerator costs more but is more durable, energy efficient or safer than the old one, the price increase should not be counted wholly as price inflation, the commission argues.

"Take automobiles," says Shoven. "Nobody bothers to check oil anymore because oil almost never leaks. Flat tires are almost a thing of the past. When I was growing up, my family took drives on Sundays up to the mountains, and I remember lots of cars on the side of the road with overheating problems." The government has modified its procedures in recent years to more accurately measure quality changes in cars, but the Boskin commission contends there is substantial overlooked quality in other products that evolve rapidly with new technology. Consumer electronics, such as televisions, and medical care top the list.

Statistical and theoretical breakthroughs, as well as scanner data from stores, make the task of measuring quality change easier now, even if the job is bigger, Boskin says. But some critics say many quality comparisons can't be done objectively and negative changes in quality also need more emphasis. Bob Bosworth of the Brookings Institution, for example, thinks there is "an inherent set of problems of accurately measuring quality that at present lies beyond the capabilities of the science."

The critics are right to point out that the government cannot capture all quality changes immediately, Boskin says. Sales of fax machines and cellular phones, for example, took off faster than anyone expected because consumers discovered they increased their efficiency. The commission suggests two replacements for the CPI - a revised monthly index and a yearly index that can be adjusted as new information becomes available.

Boskin points to research being done by young economists like Mark McClellan, an assistant professor at Stanford, and a Harvard colleague. They analyzed data on all 200,000 elderly Americans who were treated for heart attacks between 1984 and 1991 and found that, while treatment costs increased 4 percent annually above general inflation, the costs were actually 2 percent below inflation when they put a value on the length of patients' lives following the treatment.

How official statistics will change is yet to be seen. Boskin put the odds of a revision of the CPI at 50-50 and then changed his mind. "As an optimist," he grinned, "I believe the odds are 51-49 in my favor." ST