Lies, Damned Lies, and Statistics

Most regular visitors to Financial Armageddon probably know what I think of many of the statistics put out by the U.S. government (but since my blog is not [yet] X-rated, I will avoid spelling it out).

For example, anybody with half a brain -- that tends to exclude many pundits, economists and so-called Wall Street experts -- can see that there is no possibility whatsoever that inflation in this country has been as "contained" as the CPI data -- "core" or otherwise -- would have us believe (that said, I still believe the greatest near term threat going forward is deflation stemming from a bursting credit bubble, not more inflation).

Regardless, in a post at one of my regular must-read sites, DollarCollapse, John Rubino (its publisher and the co-author, along with James Turk, of The Collapse of the Dollar and How to Profit from It) highlights an article that suggests skepticism about official lies -- er, statistics -- may be going mainstream.

In yet another sign that the end is near, Harper’s Magazine, that venerable fount of left wing culture, has become a source of clear-eyed financial journalism. In February it ran a cover story by iTuilip’s Eric Janszen explaining America’s devolution from goods-production to paper shuffling. Janszen calls this the FIRE economy (for Finance, Insurance, and Real Estate) and concludes that it can only survive by blowing ever-bigger bubbles (read the article here for Eric’s prediction on where the next bubble will appear).

And the May Harper’s just hit the newsstands with a cover story by veteran political analyst Kevin Phillips on how the U.S. government has been systematically distorting the economic numbers it reports. Here’s his opening:

Almost four decades have passed since the United States scrapped its last currency ties to precious metals. Our copper and nickel coinage still retains some metallic value, but not nearly enough for the purpose of currency tampering--the historic temptation of inflation-plagued or otherwise wayward governments, including, at times, our own. Instead, since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed. 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.

According to Phillips, this misinformation campaign began under LBJ, continued under Reagan, took off under Clinton, and was refined by Bush. So the enterprise is bi-partisan. And it’s not just one statistic. Our leaders lie about unemployment, inflation, growth and the deficit.  Because Social Security payments are indexed to inflation, government statisticians suppress reported inflation, and thus their need to increase monthly SS checks, by arbitrarily eliminating from their calculations products that are rising too quickly in price. If they were adjusted for the true cost of living, today’s Social Security checks would be 70% higher and the Federal deficit would be exploding. (Questions for seniors: Why haven’t you burned down the White House? Are you waiting for the Baby Boomers to do it?)

Since the true level of unemployment would upset voters in crucial swing states, the government simply eliminates whole categories of people from the statistical workforce so they don’t show up as unemployed. To make GDP look better Washington “imputes” (i.e. makes up) new income sources and credits them to homeowners and others. When the money supply starts growing to fast to effectively hide, the Fed just stops reporting measures like M3. And the lies, like our accumulated debts, keep getting bigger. If Washington suddenly decided to tell the truth, America's vital statistics would look like this:

Inflation	12%
Unemployment	12%
Economic Growth	Negative
National Debt	$60 Trillion

The really cool thing about Phillips’ article is that he cites as his main source none other than John Williams of Shadow Government Statistics. Williams is already a folk hero in sound money circles, where his numbers are seen as far more trustworthy than anything coming out of the Fed or Treasury. To see him given this much respect in Harper’s means the idea that we’re being conned on a vast scale is no longer the paranoid fantasy of a few lonely gold bugs. Now it’s the conventional wisdom.

Comments

[Independent Accountant]

The financial group I was a member of from 1988 to 2005 regularly did its own statistics work. We would conclude inflation was 2-3% higher than reported and unemployment was 12-17%, you heard it 12-17% the way we figured it. Year after year. Finally others are concluding we were right. We estimated average Americans' incomes peaked in 1973 and now are about 35% lower. Our estimates disagree with official statitics. So? John Williams has a website titled shadowstats about phony government statitics. I blog about them from time-to-time too. Uncle Sam's distorted statistics have been obvious since the Boskin Commission Report was adopted.

[A. Zarkov]

The Federal Reserve uses the "core inflation" to predict future prices to make monetary policy. They eliminate the most noisy components, food and energy so as to provide a kind of cheap smoother so they can extrapolate the time series for prediction. If effect they are applying zero weights to these components, a not so optimum procedure. There are other smoothing algorithms that work much better. However I see nothing sinister in using core inflation to make predictions. There does appear to be some fiddling with data when it comes to the hedonic adjustments and the replacement of the arithmetic average with the geometric average. I wonder if BLS would provide the raw data used in the market basket. If they refuse then file a freedom of information request. If that fails, then I would think something sinister is going on. The run up in housing prices does not appear in the CPI because they use rents as a surrogate for housing costs. Since the two have diverged over the last ten years, the CPI fails to capture this aspect of the price picture. Tax increases don't appear in the CPI (but fee increases do), which is another source of distortion that BLS defines away. We should not get too carried away with seeing conspiracies.

[biologist]

I agree with Independent Accountant - the real inflation is about 2% higher than the reported one (normal US suburb). The 12% number of the blog looks like made up by some kind of ProphetOfDoom.

The unemployment rate of the blog looks about right: I recently read that 13% of all men 25-55 are not employed. 12% real unemployment therefore looks right - there has to be a correction for the independent rich, who may be about 1% of the population.

[Truesincerity]

Spend time amongst the common folk (middle america and working poor) you will get all the statistics you need...damn all the algorithms and geometric shapes etc.

[Bruce]

I wouldn't believe these clowns if they told me the sky was blue!

[Lady From Middle America]

Thanks for this post. Although I've been aware of dodgy government statistics ever since the days of the Boskin Commission, I haven't really dug into this issue until fairly recently. I'm glad you provided me a few more links that I can follow.

On a gut level (and we know how much economists HATE the person-from-the-street perspective), the 12% unemployment rate seems about right. The 12% inflation rate looks about right to me just from doing my weekly grocery shopping. As far as the inflation rate for other goods and services, it's hard for me to say. There are so many "sale" prices and value-added prices for everything on the market, it's hard to tell what the true retail price is for anything.