August 03, 2010
Cooking the economic books
In yesterday's post I discussed the different measures labeled U-1 through U-6 that are used to measure the rate of unemployment. Kevin Philips, in an interesting article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper's magazine, points out how the 'official' unemployment rate U-3 masks the true state of affairs.
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 [U-3]. 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.
If you want a rule of thumb, the 'real' rate of unemployment (i.e., U-6), which would (and should) include so-called 'discouraged' workers, 'marginally attached' workers, and workers who are forced to work part-time for economic reasons, would be roughly twice the officially reported unemployment rate (U-3). So currently the figure would be close to 20%.
Phillips says that these multiple measures of unemployment were introduced over time, giving the public the impression that the number of unemployed is smaller than it really is, a phenomenon that has been labeled as 'Pollyanna Creep' in unemployment. The process began in the early 60s in the Kennedy administration, which decided to take the out-of-work people who had stopped looking for jobs for whatever reason (even if it was for relevant reasons like no jobs were there to be found) out of the unemployed category and put them in the category of 'discouraged workers', thus lowering the unemployment figures. Reagan inflated the size of the labor force by including the military in it, again effectively reducing the unemployment rate without any substantive gains. Bill Clinton added to the manipulation by making the unemployment sampling size smaller by dropping a disproportionate number of inner city households and changing the formulas to produce lower black unemployment.
But it was not only unemployment figures that have been manipulated to provide a rosier picture of the nation's economic health. Successive governments have also manipulated other key economic indicators such as the Consumer Price Index (CPI) (that measures the rate of inflation) and the Gross Domestic Product (GDP) (which should reflect the size of the economy).
You would think that measuring the CPI would be simple and straightforward. You take some year as the baseline for calculating the cost of a basic basket of goods and services that people need to live (rent/mortgage, food, energy, clothing, etc.) and then calculate how the total cost of that basket changes over time. Basically the same idea as goes into stock market indices like the Dow Jones or S&P. But what governments do when the CPI number comes out too high is change the formula to make it smaller.
One method of lowering the CPI is by product substitution. If the price of an item in the original basket of goods (say a particular cut of meat) gets more expensive, it is assumed that people shift to a lower cost item (say ground beef). So by changing an item in the basket to a cheaper one, the CPI is lowered. Another finagle is changing the product weighting. If one item gets too high it is assumed that people buy less of that and more of the cheaper items in the basket, again reducing the CPI. There is also something called the hedonistic adjustment which assumes that improvements in the quality of products and services reduces the effective cost of goods.
In other words, the basket of goods and the way of measuring its cost is not kept constant but keeps changing. One might be able to make the case that such changes are meaningful since they reflect reality (after all people do change their buying habits based on cost) except that Phillips says that the changes are always in the direction of lowering costs, thus reducing the CPI, and never the other way around, which is what makes it a boondoggle. When conditions get better and people feel flush, ground beef is not replaced with steak in the CPI basket, though that too reflects reality.
There are other methods of disguising the CPI. Richard Nixon created a new category called the 'core' inflation rate that was arrived at by excluding things like food and energy that were creating high inflation rates in his time. In other words, he removed from the inflation index those things that were the main causes of inflation, a neat trick. This figure is still reported. Ronald Reagan finagled the housing rent component in the CPI to reduce its impact on inflation. The administrations of George H. W. Bush and Bill Clinton continued this practice.
Next: Other fiddles
POST SCRIPT: Boom times for the oligarchy
Because of loss of employment and income, increasing numbers of people are using up the money they had set aside for retirement to stay afloat now, which makes the idea of raising the retirement age even more pernicious. Meanwhile, employers have been taking advantage of the recession to squeeze workers even more to increase their profits. As Bob Herbert says, "The recession officially started in December 2007. From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent. In many cases, bosses told panicked workers who were still on the job that they had to take pay cuts or cuts in hours, or both. And raises were out of the question… the carnage that occurred in the workplace was out of proportion to the economic hit that corporations were taking." He quotes professor Andrew Sum who studies labor issues saying that what is unprecedented now is that "At the end of the fourth quarter in 2008, you see corporate profits begin to really take off, and they grow by the time you get to the first quarter of 2010 by $572 billion. And over that same time period, wage and salary payments go down by $122 billion."
So times are booming for the oligarchy who not only are doing well while most of the country isn't, they also delight in flaunting their wealth, as epitomized by the Clintons reportedly spending anywhere in the range of one to five million dollars on their daughter's wedding. Paul Craig Roberts points out that the Clintons did not start out in life rich and spent most of their lives in government jobs. He asks us to ponder whose interests they were serving while in government that has enabled them to reap such rich rewards now. He raises a similar question about England's Tony Blair's newly acquired wealth.