Listening In (the numbers behind the lies...how the US is fudging numbers) [View All]

A very dismal prospect. No question, this is the dismal end of the science— even for a dismal scientist! But the longer I’ve looked at the numbers and the statistical series as they’ve evolved over the decades, the more that I’ve started finding things in the numbers that most people do not see. One thing that you find when you look into all this is that the federal government is very honest in terms of disclosing what it does. It always footnotes the changes and provides all the fine details. Nonetheless, some of the changes are nothing short of remarkable and the pattern over time is what I call Pollyanna Creep—

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What has happened over time is that the methodologies employed to create the widely followed series, such as what used to be called the GNP but is now widely followed as the GDP, the CPI, the employment numbers, all have had biases built into them that result in overstating economic growth and understating inflation— both of which are admirable political goals

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Real unemployment right now—figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression—is running about 12%. Real CPI right now is running at about 8%. And the real GDP probably is in contraction. I venture that if you talked about those numbers now with the average person, they would say that they seem reasonable. If you tell them that people are playing with the official numbers, they say, “Yep, I figured that. There are no great surprises there.” I guess what I am saying is that my work shows that the economic perceptions of non-professionals actually have some real validity; there are in fact reasons for the disconnect between official statistics and what the populous is feeling.

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One of the prime examples of how the system has really degenerated over time is the CPI. There was a very deliberate effort in the early 1990s under the auspices of Michael Boskin, who at the time was the head of the Council of Economic Advisors, in conjunction with Alan Greenspan, who, of course, was Fed Chairman, to “fix” the CPI. The story, very simply, was that CPI was supposedly overstating inflation. The pitch was that if people go out to shop and find that buying a steak is getting expensive, they buy hamburger instead. Therefore, their cost of living is really less than it would be if they always had to buy a fixed basket of goods, which is what the CPI was originally designed to measure. That was the whole purpose of the CPI, to measure the change in the cost of a fixed basket of goods over time. You’d have a steak, a loaf of bread, a gallon of milk, whatever. You’d price them out one year and then you’d price out exactly the same goods the next year. You’d look at the difference in the cost and that was your annual rate of inflation. It was a measure of how much the cost of a consistent and constant standard of living was going up. What Boskin and Greenspan argued was, “We should allow for substitution here because people can buy hamburger instead of steak, when steak goes up.” The problem is that if you allow substitutions, you aren’t measuring a constant standard of living. You’re measuring the cost of survival. You can keep substituting down and have people buy dog food instead of hamburger. It happens. But that’s not the original concept behind the CPI. The reason substitution of the items in the CPI basket became a hot topic in Washington at the time—and it was talked about very openly—was because the CPI was (and is) being used to adjust Social Security payments to compensate for increases in the cost of living, and tamping it down would hold down Uncle Sam’s outlays.