Everything is worse than you think

Sorry for all the posting today, but with the holiday came a recharging of batteries and there’s lots of really great stuff out there right now. In fact, this Kevin P. Phillips post at Harpers is so dead-on I’m going to steal a bunchload just in case you don’t click the link.

Numbers racket: Why the economy is worse than we know

If Washington’s harping on weapons of mass destruction was essential to buoy public support 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 opportunity than it actually is.

The corruption has tainted the very measures that most shape public perception of the economy—the 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.

 

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 3–4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?

 

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 report, 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 publishing 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 reported 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.

 

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 important series nearly worthless,” he wrote in 2004. “[T]he recessions of 1990/1991 and 2001 were much longer and deeper than currently reported [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-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.

 

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.

 

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.

Again, I understand why many friends are upset about Obama’s shift to the center (not the right, not really). But given the godawful mess he’s about to inherit, he’d be insane not to heal the Rove-manufactured breach between left and right. It will take every American’s hard work and sacrifice to dig us out of the hole we’re in. Obama is correct in thinking there is a real opportunity here. Even Republican office seekers are fuming over what’s been predatory business as usual on the dog-eat-god oil hungry right. Yes, I’d love to be all about indictments and trials and punishment next year, but as I used to say when I was touting Wes Clark: we need a guy with a shovel to come in and clean up after the elephant act.

I think Kevin Phillips has just demonstrated the severity of the elephantine diarrhea we’re beginning to experience. If Obama doesn’t want to take the rap for George Bush’s Great Depression (GBGD), he’d better pull us all together and get us on the same page pronto. We don’t have the luxury of playing political games like Rove did. The world economy is teetering thanks to a feckless frat rat who never tired of wielding the branding (coat hanger) iron.

If Obama can make some fundamental changes that work out well and soften the harsh landing ahead, he’ll have plenty of political capital to get some of our agenda enacted.

The more I watch Obama, the more convinced I am that he’ll govern even better than he campaigns. 

¬|–=µ

A dying news media’s failings accumulate:

Romenesko gives Brauer bigger audience for Strib conflict of interest

Monopoly-minded MPR, protecting their flock from competing interpretations of the local news

More on the flatter-rama succorshow Rush had to endure at the hands of the NY Times Magazine

Gawker’s latest boredwithit moment comes at Rex’s expense

There are still newspapers with classical music critics? Why? Anything classical worth writing about could as easily fall under the heading of New Music. I mean, we’re not still writing about Beethoven in newspapers, are we?

¬|–=µ

Demko on Kinsley on Franken. (Much better than Kinsley on Franken, and way way better than Franken on Franken.)

¬|–=µ

Jack Shepard has filed to run against Coleman in the Sept. 9 Republican Party primary. Shepard, you may recall, is the man who runs his political campaigns via website from Italy.

Doug Grow

If Shepard weren’t a joke, this would be a good thing for Coleman. Contested primaries are free publicity for the nominee. Given a strong state party to punish campaigners who “damage the brand,” and you have a spirited contest that helps to create a positive narrative, establishing the nominee as a proven winner.

This endorsement nonsense is all about control. Control that wants to pick a nominee without risk of contradiction from a not always cooperative public, all but guaranteeing a chilly reception on primary day from otherwise like-minded voters who would like to have some say in the choosing of the nominee.

¬|–=µ

Michael Bloomberg, a not always predictable but usually Republican pseudo independent, is coming to town to raise money for the party of Jesse Ventura.

Mark my words: if Ventura’s on the ballot, Coleman gets re-elected. Sure, it might come as the result of a Sunday before the election YouTube of Franken doing a “cunt” skit. You don’t like me saying it? Real or fake would make no difference — this would be the dingleberry on the top of the GOP’s shit sundae for Al.

¬|–=µ

Quotes. At $30, it sounds like a good deal.

¬|–=µ

Sexy Red-Headed Nuns in the land o’ my peeps.

¬|–=µ

Gulnara Karimova, second runner up after the fact in today’s inaugural Cunt of the Day pageant.

¬|–=µ

Last week’s winners, this week’s quiz.

4 Comments

Comments RSS TrackBack Identifier URI