By fiddling with statistics, the US Government is able to come up with any figures it wants to, and, of course, it wants to come up with the figures that make it look good. Therefore, unemployment rates and inflation are doctored to make them lower than they actually are. GDP is doctored to make it seem larger than it actually is. The pernicious part is that seniors count on their cost of living adjustments (COLAs) which are pegged to the inflation rate to help them keep their heads above water. By understating the inflation rate seniors have been cheated out of their COLAs to the tune of 70% of their entire check by some estimates.
And, of course, the Bush Administration does not have to admit that we're in a recession by understating the inflation rate at 2% whereas by assuming the inflation rate is 5% (which is more in tune with reality), we would definitely be in a recession. So a recession - like beauty - is in the eyes of the beholder and the government technocrats who lie with statistics have a different definition of beauty than you or I do. Why does understating the inflation rate get the government out of a recession? Because when you adjust for inflation, it lowers the GDP to the point that we've had negative growth for two straight quarters and - bingo - that's the "definition" of a recession. Of course, you could define it in a different way...
Kevin Phillips has done an excellent job in running down the inflation boondoggle:
Billionaire California bond manager Bill Gross calls it "a haute con job." Bloomberg News columnist John Wasik describes it as "a testament to the art of economic spin." More and more shoppers and consumers simply disbelieve it.
The subject of this scorn is the federal government's vaunted Consumer Price Index or CPI. Americans are now beginning to understand that this indicator has its own share of gimmicks not unlike a sub-prime mortgage or the six pages of fine print that accompanies your credit card agreement.
Some of these CPI ingredients -- product substitution weightings, "hedonics" (price reductions for added product quality or satisfaction), and use of owner's equivalent rent (instead of home ownership costs) -- have a comic aspect suitable to mockery by Bill Maher, Stephen Colbert or Jon Stewart. But in a larger sense, they're not remotely funny. That's because the federal minimalization and misrepresentation of inflation, pursued statistically over the last 25 years, has been the main buttress of Washington's over-favorable and self-serving portraiture of the U.S. economy.
Understating the inflation rate has meant that the government has limited payouts to seniors whose social security COLAs are linked to the CPI. It also means that wage contracts tied to the CPI have saved corporations tons of money while underpaying workers. According to Phillips some $250 billion a year could be involved. Understating inflation also means that savers get a lower rate of return on their savings accounts while banks get to borrow money more cheaply.
Now anyone who has purchased gas or food recently - isn't that all of us ... hello! - knows that the price of these commodities has skyrocketed. Although the price of housing has deflated recently, anyone who bought a house say in the years from 2000 to 2006 knows that the cost of buying a house increased tremendously during those years. Yet neither housing costs nor food nor gas has been included in the CPI by the government.
Oil is up over 80 percent in the last twelve months. The New York Times' consumer reporter, W.P. Dunleavy, wrote on May 3 that his own groceries now cost $587 a month, up from $400 a year earlier. That's a 40 percent increase. Reports in the financial press make frequent reference to foreign investors who distrust the U.S. dollar because they calculate true U.S. inflation at 6% to 9% including food and energy.
California economist John Williams, who runs an organization called Shadow Statistics, contends that if Washington still used the CPI measurements applied back in the 1970s, inflation would be in the 10 percent range. My own analysis, set out in much more detail in an article in the May issue of Harper's, comports with that of the cynical foreign investors.
Therein lies the danger. If the current inflation rate is really 6-9 percent instead of the 2-3 percent claimed by government and most U.S. money managers, then Washington's official estimates that the economy still grew at a rate of some 0.6 percent in the first quarter of 2008 become nonsense. Subtracting a 6-9 percent inflation rate from nominal GDP growth would identify an economy that was deteriorating and shrinking, not growing. Concerned foreign dollar-holders would become even more concerned.
The deception started in the Kennedy Administration where the jobless statistics started taking a toll on the "Camelot" image. What to do to get the jobless rate down? Well, how about this? Stop counting "discouaged workers" or those who had "dropped out of the labor force" or "those who were not actively looking for work." I suppose all those had also decided to drop out of the eating and drinking force as well. Lyndon Johnson continued the deception by combining the social security budget with the general budget in the "unified budget". This masked the budget deficit.
Now Richard Nixon topped them all by defining inflation downward and excluding food and energy costs from the CPI because they were too "volatile". In this way he arrived at "core inflation." What? Excluding the most essential aspects of economic life in order not to be embarrassed by the inflation rate? Yes, this is what Nixon actually did. Consequently, why should any American believe what the government tells them about inflation, recession, unemployment etc.? And why shouldn't social security recipients demand back payments on all the money they've been cheated out of by the government's redefining of statistics? Oh, and don't forget all that economic activity the government talks about is largely confined to the top 1% of income earners while the vast majority see their economic situation deteriorate.
In 1983, under the Reagan Administration, inflation was further finagled when the Bureau of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different "Owner Equivalent Rent" measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs. Because low inflation encourages low interest rates, which in turn make it much easier to borrow money, the BLS's decision no doubt encouraged, during the late 1980s, the large and often speculative expansion in private debt—much of which involved real estate, and some of which went spectacularly bad between 1989 and 1992 in the savings-and-loan, real estate, and junk-bond scandals. Also, on the unemployment front, as Austan Goolsbee pointed out in his New York Times op-ed, the Reagan Administration further trimmed the number by reclassifying members of the military as "employed" instead of outside the labor force.
The distortional inclinations of the next president, George H.W. Bush, came into focus in 1990, when Michael Boskin, the chairman of his Council of Economic Advisers, proposed to reorient U.S. economic statistics principally to reduce the measured rate of inflation. His stated grand ambition was to move the calculus away from old industrial-era methodologies toward the emerging services economy and the expanding retail and financial sectors. Skeptics, however, countered that the underlying goal, driven by worry over federal budget deficits, was to reduce the inflation rate in order to reduce federal payments—from interest on the national debt to cost-of-living outlays for government employees, retirees, and Social Security recipients.
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Nothing, however, can match the tortured evolution of the third key number, the somewhat misnamed Consumer Price Index. Government economists themselves admit that the revisions during the Clinton years worked to reduce the current inflation figures by more than a percentage point, but the overall distortion has been considerably more severe. Just the 1983 manipulation, which substituted "owner equivalent rent" for home-ownership costs, served to understate or reduce inflation during the recent housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely, hedonic adjustment, an unusual computation by which additional quality is attributed to a product or service.
The hedonic adjustment, in particular, is as hard to estimate as it is to take seriously. (That it was launched during the tenure of the Oval Office's preeminent hedonist, William Jefferson Clinton, only adds to the absurdity.) No small part of the condemnation must lie in the timing. If quality improvements are to be counted, that count should have begun in the 1950s and 1960s, when such products and services as air-conditioning, air travel, and automatic transmissions—and these are just the A's!—improved consumer satisfaction to a comparable or greater degree than have more recent innovations. That the change was made only in the late Nineties shrieks of politics and opportunism, not integrity of measurement. Most of the time, hedonic adjustment is used to reduce the effective cost of goods, which in turn reduces the stated rate of inflation. Reversing the theory, however, the declining quality of goods or services should adjust effective prices and thereby add to inflation, but that side of the equation generally goes missing. "All in all," Williams points out, "if you were to peel back changes that were made in the CPI going back to the Carter years, you'd see that the CPI would now be 3.5 percent to 4 percent higher"—meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are.
Furthermore, when discussing price pressure, government officials invariably bring up "core" inflation, which excludes precisely the two categories—food and energy—now verging on another 1970s-style price surge. This year we have already seen major U.S. food and grocery companies, among them Kellogg and Kraft, report sharp declines in earnings caused by rising grain and dairy prices. Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor Department acknowledged that in January, the price of imported goods had increased 13.7 percent compared with a year earlier, the biggest surge since record-keeping began in 1982. From Maine to Australia, from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years of rapid growth in the supply of money from the world's central banks (not least the U.S. Federal Reserve), as well as by massive public and private debt creation.
70%?!! That means that seniors should be getting almost twice what they're getting now in their monthly checks. And since what seniors need most - food and energy - isn't even counted in the CPI - thanks to Nixon - the statistical deceit is appalling! Core inflation? Schmore inflation! The American public is being deceived - about unemployment, economic growth, inflation - you name it. The government's incentive is to misrepresent all these indices because it puts them in a more favorable light and it masks the economic distortions going on in this economy, the massive transfer of wealth from the poor and middle class to the rich and the increasing economic inequality. Economic activity looks good because most of it takes place among the very wealthy. Exclude the top 1% of income earners and the picture for the rest of the population looks dismal.
And then, as long as we're talking about social security, there is the little issue of funding it. I have blogged previously about the unfairness of capping social security contributions at around $100,000, annual income, when CEOs and hedge fund managers are making $100 million and more per year. These annual incomes are far in excess of anything remotely resembling what a person needs to live on. And then they charge self-employed people 15% of their earned income for their social security contribution even if the person is receiving social security and still working because they can't live on what they're getting in social security. Of course, the rich have to make absolutely no social security contributions on their unearned income - income from rents, interest and dividends. And then there's the little issue of rich people who have sky high retirement incomes still receiving social security. It's insane. They don't need it. It should be means tested. All in all the whole program from start to finish which ever end you want to look at is a total botch job, thanks to the Republicans whose goal is to eliminate it altogether.
The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.
Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowing, and interest payments—all indexed or related to inflation—could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.
Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crisis "can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI. . .With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates." Were mainstream interest rates to jump into the 7 to 9 percent range—which could happen if inflation were to spur new concern—both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down an even rockier slope.
