I notice no one commented on this. Does that mean everyone
agrees with it? It's old news?
On May 7, 2:56 pm, "*Anarcissie*" <anarcis...@[EMAIL PROTECTED]
> wrote:
> Numbers Racket
> Why the economy is worse than we know
> KEVIN PHILLIPS
> Harper's Magazine v.316, n.1896 1may2008
>
> http://www.mindfully.org/Reform/2008/Pollyanna-Creep-Economy1may08.htm
>
> Mindfully.org note:
> This article is from the original. It is not complete. To obtain the
> complete article, please go to Harper's Magazine.
>
> Kevin Phillips's new book, Bad Money: Reckless Finance, Failed
> Politics, and the Global Crisis of American Capitalism, was published
> last month by Viking.
>
> If Wa****ngton's harping on weapons of mass destruction was essential
> to buoy public sup****t for the invasion of Iraq, the use of deceptive
> statistics has played its own vital role in convincing many Americans
> that the U.S. economy is stronger, fairer, more productive, more
> dominant, and richer with op****tunity than it actually is.
>
> The corruption has tainted the very measures that most shape public
> perception of the economy=97the monthly Consumer Price Index (CPI),
> which serves as the chief bellwether of inflation; the quarterly Gross
> Domestic Product (GDP), which tracks the U.S. economy's overall
> growth; and the monthly unemployment figure, which for the general
> public is perhaps the most vivid indicator of economic health or
> infirmity. Not only do governments, businesses, and individuals use
> these yardsticks in their decision-making but minor revisions in the
> data can mean major changes in household circumstances=97inflation
> measurements help determine interest rates, federal interest payments
> on the national debt, and cost-of-living increases for wages,
> pensions, and Social Security benefits. And, of course, our statistics
> have political consequences too. An administration is helped when it
> can mouth banalities about price levels being "anchored" as food and
> energy costs begin to soar.
>
> The truth, though it would not exactly set Americans free, would at
> least open a window to wider economic and political understanding.
> Readers should ask themselves how much angrier the electorate might be
> if the media, over the past five years, had been citing 8 percent
> unemployment (instead of 5 percent), 5 percent inflation (instead of 2
> percent), and average annual growth in the 1 percent range (instead of
> the 3=964 percent range). We might ponder as well who profits from a
low-
> growth U.S. economy hidden under statistical camouflage. Might it be
> Wa****ngton politicos and affluent elites, anxious to mislead voters,
> coddle the financial markets, and tamp down expensive cost-of-living
> increases for wages and pensions?
>
> Let me stipulate: the deception arose gradually, at no stage stemming
> from any concerted or cynical scheme. There was no grand conspiracy,
> just accumulating op****tunisms. As we will see, the political blame
> for the slow, piecemeal distortion is bipartisan=97both Democratic and
> Republican administrations had a hand in the abetting of political
> dishonesty, reckless debt, and a casino-like financial sector. To see
> how, we must revisit forty years of economic and statistical
> dissembling.
>
> A SHORT HISTORY OF "POLLYANNA CREEP"
>
> The story starts after the inauguration of John F. Kennedy in 1961,
> when high jobless numbers marred the image of Camelot-on-the-Potomac
> and the new administration appointed a committee to weigh changes. The
> result, implemented a few years later, was that out-of-work Americans
> who had stopped looking for jobs=97even if this was because none could
> he found=97were labeled "discouraged workers" and excluded from the
> ranks of the unemployed, where many, if not most, of them had been
> previously classified. Lyndon Johnson, for his part, was widely
> rumored to have personally scrutinized and sometimes tweaked Gross
> National Product numbers before their release; and by the 1969 fiscal
> year, Johnson had orchestrated a "unified budget" that combined Social
> Security with the rest of the federal outlays. This innovation allowed
> the surplus receipts in the former to mask the emerging deficit in the
> latter.
>
> Richard Nixon, besides continuing the unified budget, developed his
> own taste for statistical improvement. He proposed albeit
> unsuccessfully=97that the Labor Department, which prepared both
> seasonally adjusted and non-adjusted unemployment numbers, should just
> publish whichever number was lower. In a more consequential move, he
> asked his second Federal Reserve chairman, Arthur Burns, to develop
> what became an ultimately famous division between "core" inflation and
> headline inflation. It the Consumer Price Index was calculated by
> tracking a bundle of prices, so-called core inflation would simply
> exclude, because of "volatility," categories that happened to he
> troublesome: at that time, food and energy. Core inflation could he
> spotlighted when the headline number was embarrassing, as it was in
> 1973 and 1974. (The economic commentator Barry Ritholtz has joked that
> core inflation is better called "inflation ex-inflation"=97i.e.,
> inflation after the inflation has been excluded.)
>
> I n 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=97much 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=97from interest on the national debt to cost-of-living
> outlays for government employees, retirees, and Social Security
> recipients.
>
> It was left to the Clinton Administration to implement these
> convoluted CPI measurements, which were reiterated in 1996 through a
> commission headed by Boskin and promoted by Federal Reserve Chairman
> Alan Greenspan. The Clintonites also extended the Pollyanna Creep of
> the nation's employment figures. Although expunged from the ranks of
> the unemployed, discouraged workers had nevertheless been counted in
> the larger workforce. But in 1994, the Bureau of Labor Statistics
> redefined the workforce to include only that small percentage of the
> discouraged who had been seeking work for less than a year. The longer-
> term discouraged=97some 4 million U.S. adults=97fell out of the main
> monthly tally. Some now call them the "hidden unemployed." For its
> last four years, the Clinton Administration also thinned the monthly
> household economic sampling by one sixth, from 60,000 to 50,000, and a
> dispro****tionate number of the dropped households were in the inner
> cities; the reduced sample (and a new adjustment formula) is believed
> to have reduced black unemployment estimates and eased worsening
> poverty figures.
>
> Despite the present Bush Administration's overall penchant for
> manipulating data (e.g., Iraq, climate change), it has yet to match
> its predecessor in economic revisions. In 2002, the administration
> did, however, for two months fail to publish the Mass Layoff
> Statistics re****t, because of its embarrassing nature after the 2001
> recession had supposedly ended; it introduced, that same year, an
> "experimental" new CPI calculation (the C-CPI-U), which shaved another
> 0.3 percent off the official CPI; and since 2006 it has stopped
> publi****ng the M-3 money supply numbers, which captured rising
> inflationary impetus from bank credit activity. In 2005, Bush
> proposed, but Congress shunned, a new, narrower historical wage basis
> for calculating future retiree Social Security benefits.
>
> By late last year, the Gallup Poll re****ted that public faith in the
> federal government had sunk below even post-Watergate levels. Whether
> statistical deceit played any direct role is unclear, but it does seem
> that citizens have got the right general idea. After forty years of
> manipulation, more than a few measurements of the U.S. economy have
> been distorted beyond recognition.
>
> AMERICA'S "OPACITY" CRISIS
>
> Transparency is the hallmark of democracy, but we now find ourselves
> with economic statistics every bit as opaque=97and as vulnerable to
> double-dealing=97as a subprime CDO. Of the "big three" statistics, let
> us start with unemployment. Most of the people tired of looking for
> work, as mentioned above, are no longer counted in the workforce,
> though they do still show up in one of the auxiliary unemployment
> numbers. The BLS has six different regular jobless measurements=97U-1,
> U-2, U-3 (the one routinely cited), U-4, U-5, and U-6. In January
> 2008, the U-4 to U-6 series produced unemployment numbers ranging from
> 5.2 percent to 9.0 percent, all above the "official" number. The
> series nearest to real-world conditions is, not surprisingly, the
> highest: U-6, which includes part-timers looking for full-time
> employment as well as other members of the "marginally attached," a
> new catchall meaning those not looking for a job but who say they want
> one. Yet this does not even include the Americans who (as Austan
> Goolsbee puts it) have been "bought off the unemployment rolls" by
> government programs such as Social Security disability, whose
> recipients are classified as outside the labor force.
>
> Second is the Gross Domestic Product, which in itself represents
> something of a fudge: federal economists used the Gross National
> Product until 1991, when rising U.S. international debt costs made the
> narrower GDP assessment more palatable. The GDP has been subject to
> many further fiddles, the most manipulatable of which are the
> adjustments made for the presumed starting up and ending of businesses
> (the "birth/death of businesses" equation) and the amounts that the
> Bureau of Economic Analysis "imputes" to nationwide personal income
> data (known as phantom income boosters, or imputations; for example,
> the imputed income from living in one's own home, or the benefit one
> receives from a free checking account, or the value of employer-paid
> health-and-life-insurance premiums). During 2007, believe it or not,
> imputed income accounted for some 15 percent of GDP. John Williams,
> the economic statistician, is briskly contemptuous of GDP numbers over
> the past quarter century. "Upward growth biases built into GDP
> modeling since the early 1980s have rendered this im****tant series
> nearly worthless," he wrote in 2004. "[T]he recessions of 1990/1991
> and 2001 were much longer and deeper than currently re****ted [and]
> lesser downturns in 1986 and 1995 were missed completely."
>
> 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-owner****p 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 ****ft 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=97and these
> are just the A's!=97improved 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 op****tunism,
> 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"=97
> 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=97food and energy=97now 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, re****t 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 im****ted 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.
>
> THE U.S. ECONOMY EX-DISTORTION
>
> 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=97all indexed or related to inflation=97could 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=97which could happen if inflation were to spur new concern=97both
> Wa****ngton 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.
>
> The credit markets are fearful, and the financial markets are nervous.
> If gloom continues, our humbugged nation may truly regret losing sight
> of history, risk, and common sense.
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