Pollyanna Creep

Tue, Apr 15, 2008 | Jared Woodard

Economy, Inflation, Politics

CPI - Real and

Our April 6 post entitled “Three Reasons to Scrap GDP” considered what’s wrong with drawing too many conclusions about the health of the economy based on this one highly fretted-over number. This week it’s the inflation indexes, PPI and CPI, that will be in the news, along with the tidily trimmed down “core” readings. And what, exactly, does “core” mean? Why, it means we don’t count food or energy prices, of course. So how and why did we start caring about a number that measures inflation by leaving out what at times (like now) are the most inflationary pieces? This and other inadequacies, inaccuracies, and distortions in U.S. government economic statistics are explained in an eye-opening article by political and economics writer and commentator Kevin Phillips.

In “Numbers Racket: Why the economy is worse than we know”, published in the May issue of Harper’s Magazine, Phillips surveys the many changes that politicians and bureaucrats in every administration since Kennedy’s have made to the way readings on U.S. economic health are compiled and reported, conveniently masking problems that the country was experiencing at the time. Phillips puts it this way:

Since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics…. The effect…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.

Economist John Williams, whose Shadow Government Statistics web site serves as one of Phillips’s main sources, has dubbed the phenomenon “Pollyanna Creep”. Whenever unemployment is too high, or GDP is too low, or inflation is snowballing, administrations rationalize tweaks that make it look like things really aren’t so bad.

The idea of “core” inflation was cooked up by Nixon-appointed Federal Reserve chairman Arthur Burns. Burns decided that food and energy prices – which…gee, whaddya know…were making inflation look awfully high in the 1970s – should be excluded from the new “core” number because of their “volatility”. As a result, the Bureau of Labor Statistics (BLS) last month, for example, was able to report that producer prices for finished goods “other than food and energy” rose just 2.4 percent between February 2007 and February 2008, even though overall prices had climbed 6.4 percent.

Subsequent administrations continued to tinker with inflation calculations, in ever more creative ways. In 1983, the BLS decided that “owner equivalent rent” was a better way to measure the housing-cost component of the Consumer Price Index, replacing the actual cost of owning a home with an estimate of what the house might cost to rent. In the 1990s, CPI calculations were reshaped to give more weight to services, retail and finance. More recently, CPI has undergone more bizarre adjustments: cheaper products are substituted for ones that have become less affordable (assuming that if you can’t afford New York strip steak, you’ll buy hamburger instead, and – what a relief – your cost of living hasn’t increased); likewise, goods and services that quickly go up in price are discounted on the assumption that people are using them less because they’re too expensive; and, perhaps strangest of all, certain cost numbers are reduced in order to reflect a supposed increase in value that comes from quality improvement. According to data from ShadowsStats.com, if all the changes since 1983 were undone, newspapers would be sporting banner headlines about 12% inflation, instead of one-column, below-the-fold items reporting 4% annual CPI growth.

Similarly, unemployment numbers have been sliced and diced and massaged and fudged – don’t even think about trying to figure out the business “birth/death model”, Unemploymentwhich sometimes is the source of all the reported “new” jobs, and more – to the point where real unemployment may be more than twice the official rate. GDP gets a boost from the birth/death model too (all those phantom jobs generate a lot of paychecks), not to mention all the other “imputed income” you get from, for example, the rent you don’t pay because you own the home you live in.

Phillips’s conclusion:

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….

He is careful to note, however, that “both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector.” This latter phenomenon is why we like to side with the house – using iron condors to collect income from risk-takers when the odds are in our favor, instead of sitting at the blackjack table wondering if the next card will mean 21 or bust.

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  1. Employment Outlook Disappoints. . .uh, Cheers Market | Condor Options Says:

    [...] written at length about how government statistics have been manipulated to make things seem better than they actually [...]


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