I have always viewed
the word “data” as meaning raw data. It is whatever it is period. In my
mind, it is no longer considered “data” if someone has already massaged
it for some reason or another.
The “data” should always remain as raw data; because the more it is massaged
to take in more and more exceptions to the model, it gets further and further
away from what the raw data was initially conveying.
As pointed out in this post, a supposedly informed investor is not really
informed at all, if the “data” he is basing his decisions on has been changed
in ways the investor is unaware of. As a result, the “data” becomes useless;
however, damage is done because everyone making decisions based on that
“data” is making faulty decisions on defective data. This is a scary thought
considering where we are financially and economically, not only in this
Country but around the world.
Invictus is a street
insider, a long-suffering “lifer” whose close work
with Wall Street research teams gives him unique
insight into the current strategist spat.
Enjoy:
~~~
It was noted
back in October that a feud seemed to be
simmering between the former Merrill Lynch Chief
North American Economist David Rosenberg (now at
Gluskin Sheff) and those who succeeded him,
Economist Ethan Harris and Strategist David Bianco
(who replaced Rich Bernstein).
Often nuanced in nature and discernible only to
those who read the research from both shops, the
differences occasionally bubble to the surface, as
they have in the past few days. The nub of it,
obviously, is that Rosenberg’s outlook is decidedly
dour, in sharp contrast to his successor(s), who are
much more bullish.
So nuke another bag of popcorn, as the gloves
appear to be coming off.
In a research note last week, Bianco asserted
that it is an “investor misperception” that the
consumer (PCE) is really 70% of U.S. GDP:
Personal Consumption Expenditures (PCE)
do indeed make up about 70% of US GDP, making
total US PCE or household spending about 15% of
the global economy and bigger than the entire
Chinese economy (Chart 2). How then can the US
economy and the rest of the world grow with the
US consumer in retrenchment? To answer that, we
take a closer look at the composition of PCE.
Only 25% of personal consumption
is discretionary spending
What many investors fail to realize is
that the majority of PCE is not made up of
iPods, handbags and dinners at the local Outback
Steakhouse. Instead, about 75% of household
spending is non-discretionary in nature, such as
housing, healthcare, energy, food eaten at home
and other household staples. We think it is
worth noting that most of these
non-discretionary items are made in the US.
While there is certainly room to reduce
non-discretionary spending, the areas of
consumer spending feeling the brunt of higher
household saving rates are cars, travel,
apparel, restaurants and other discretionary
items that make up about 25% of PCE, equivalent
to 20% of US GDP (Chart 3) or less as many of
these nondiscretionary items are imported.
20%
of US GDP is still significant, but far less
than the 70% figure that makes the headlines.
Another figure sure to make the headlines this
time of year is retail sales. The contribution
to US GDP from retail sales has actually been
declining for over ten years.
Excluding
supermarkets, retail sales are under 40% of
total consumption, or about 25% of GDP.
Bianco’s piece was referenced in last Saturday’s
Barron’s.
On Monday, Rosenberg was having none of it:
The “Streetwise” column in the current
edition of Barron’s (It’s Still Too Early to
Worry Too Much) runs with a series of assertions
otherwise dubbed “common misperceptions” — one
of them being that the U.S. consumer is really
not 70%+ of the economy because “only a quarter
of it is truly discretionary.”
We’ll get back to this in a second, but
the fact of the matter is that much of what
appears to be non-cyclical is in fact, cyclical
(like elective surgery in health care; veal
chops in the food category, etc). Second, even
if this assertion is correct that ‘only’ 25% of
consumer spending is economic-sensitive, it begs
the question as to why that is important in
anyone’s analysis. Is 25% small? If it is, then
what is going to be the driver for the economy
going forward; government spending? If 25% is
small, then how is it that on average consumer
spending manages to generate 300 basis points of
growth for the economy coming out of recessions
— because they are buying more soap and
toothpaste with the other 75%? Maybe that 25%
(and that number is not correct but it doesn’t
matter in any event) is a huge swing factor in
recessions and expansions for overall GDP
growth. Once again, this is a classic failure to
assess the economic shifts at the margin.
Even if consumer discretionary spending
is just 25% of the total expenditure pie (and
hence 17.5% of GDP), that would still make it
the largest cyclical component of the economy —
almost double capital spending and exports, just
as an example, and almost eight times larger
than housing and commercial construction.
Stay tuned. I expect this one’s not over by a
longshot.
Byno:
This debate is long on bluster and short on rigor.
25% of whom? Is that an average ala Bill Gates and the bar full of
firemen? [BR: All US Consumers]
75% of American families make less than 75k/yr according to the
census bureau. Furthermore, the BLS tells me that the average American
family spends 17k/yr just for housing. In fact, food, transportation,
housing and healthcare account for 75% of the average family’s annual
expenditures. What about insurance and hair cuts and clothing and
student loans and cable and 401ks and cell phones etc ad nauseum?
It’s not enough that this duel is vapid; it’s also lazy research on
the authors’ parts.
Rob Dawg:
It is over. Rosenberg wins by knockout. At that he is being kind to
accept 25% of PCE as being discretionary at face value. As the mortgage
lenders and municipalities have learned most painfully the modern
consumer seems to treat even debt repayment and taxes as being
discretionary. Even healthcare. Our plan changes in January are causing
my family to switch from top tier to second tier. Technically between
contributions employer+employee we will be paying less thus showing
there is elasticity to be found in the 75% Bianco considers a fixed
cost. Don’t even get me started on cars, washers, other consumer
durables.
Mannwich:
@Rob Dawg: My wife and I did the SAME thing with our health plan – we
traded down. We’re also holding off on several big purchases like a car,
refrigerator, oven, and dishwasher (the latter three being very old too,
but still functional) for the foreseeable future.
The only thing we did do was replace all of our second floor windows
using the $1,500 Energy Star tax credit. Thank you very much, Timmay-bucks.
bsneath:
I’m leaning towards the Rob Dawg conclusion.
I too have reduced a number of “fixed costs” myself, mainly in the
insurance, finance, telecom and household services sectors and plan
more. It turns out that many fixed costs really are not that fixed.
An interesting read on the real economy is railroad car loadings – chart
over at CR. Both total loadings and inter-modal loadings are about 85%
of 2007 levels. This indicates to me that the real economy, even with
the artificial stimulus measures, is about 85% of what it once was. And
once the artificial stuff goes away?????
Transor Z:
First of all, retail ex groceries is moronic.
A lot of what Bianco wants to characterize
as non-discretionary are household expenses that are scaled to income.
True, consumption of things like oxygen, water, food calories, shelter
and heat are non-negotiable below a certain threshold. But that’s stupid
disingenuous analysis.
As Rosie shorthands it, food scales between Kraft Easy Mac and veal
cutlets. Housing choices scale between steam heat-included/
absentee-slumlord/firetrap family of four crammed into 1 BR and less
than 1000 sq feet to nicer digs. Energy costs are closely associated
with housing choice.
As Manny notes, health care choices are scalable and indeed most large
employers offer different choices, scaling from VPI Pet Insurance to
blue chip PPO.
Household sundries, same thing: generic vs name-brand. Clothing? Same.
I am so sick and tired of these motherfucking snakes on this
motherfucking plane bad-faith analyses that never start with a model
household budget.
Bokolis:
I grew up across the street from the PJs, so I know that location and
square footage are discretionary, I know the type of shit you buy at the
supermarket- to say nothing of whether you choose to clip coupons and
pack one of those club cards- is discretionary, and what type of
coverage you get, unless mandated, is surely discretionary…to say
nothing of whether you rock Canali or Karako suits; True Religion or
Levi jeans.
Bianco must have had someone sit in for him in Sociology 101…you know,
where they took all those things you thought were natural and showed
that they are choices you make based on your indoctrination (I don’t
know what was said after that because I was in the quad playing soccer
for most of the rest of the semester). For that matter, it looks like
Bianco was doing the same during his Economics classes. Granted, the way
they teach it renders it junk science. But, as Carlito explained, if you
can’t see the angles no more, you’re in trouble.
That said, I’ve always thought that the average wage slave (not unlike
myself…I wasn’t just ditching Soc; I was at the track during Poli Sci)
is hemmed into about 90% (hence, the slavery) of his expenditures. In my
own defense, I save 30% of my take-home (excludes the non-Roth portion
of my 401k); I’d overshoot on the other side. But, I am an expense
manager, not your average wage slave.
FrancoisT:
Even if consumer discretionary spending is just 25% of the total
expenditure pie (and hence 17.5% of GDP), that would still make it the
largest cyclical component of the economy — almost double capital
spending and exports, just as an example, and almost eight times larger
than housing and commercial construction.
By factoring in the relative importance instead of the absolute number,
we hereby declare this round a win for Rosie.
J’ai dit!
Mannwich:
I would add the personal spending habits are sticky. People won’t
change their habits until reality is FORCED upon them (generally), but
it’s quite surprising to find out just how much one can “do without” or
trade down when they really take a good look at one’s expenses. Bye bye
cable TV, home phone (have a cell now, who needs a home phone),
expensive wine and beer, eating out, ballgames, those extras at the
grocery store, that new winter coat (the ones in the closet look just
fine, thanks), new boots, hats, gloves, scarves, sneakers, yada, yada,
yada, the list goes on and on and one.
October 24th, 2009 | www.ritholtz.com
Following my rant about the
putzes at the NAR, a few people asked me to better explain the Seasonality
Adjustment issues.
Here goes nuthin:
I certainly understand that we have to do seasonal adjustments. One
cannot report that Retail Sales fell 80% in January (for obvious reasons)
but most of all, because to do so would be misleading. The sources of
data report information to inform the public, media repeats what is
said, and we pass along interpretations to make things clearer, to get
at an objective truth.
The NAR does the opposite.
Let’s look at the specifics of the adjustments this year and see
where they went awry.
Whenever we have an outlier year — like Sept 2009 — then we know
that seasonally adjusted results will be utterly misleading. That is
an issue when we seasonally adjust, as every statistician, economist
and number cruncher is well aware. An honest broker of information
recognizes that, and reports it the data in a way that is not misleading.
The NAR is no such honest broker (pun intended).
Most people are unfamiliar with what goes into the methodology of
Seasonal adjustments, and how they are performed. When people misunderstand
statistical methods, it allows folks like the NAR to make major misrepresentations,
and get away with their misrepresentations. It is incumbent on the people
who are “numerate” — who understand mathematics — to explain it.
There is a mathematical assumption in SA that the annual seasonal
changes will occur around the same time each year. There is also a presumption
that the month-to-month changes will be approximately equal, or at least
of similar magnitude, from season to season. This forms the baseline
for the seasonal adjustment.
Hence, when we are discussing EHS, the prior years’ monthly August-to-September
drops are the basis for making the newest seasonality adjustment.
As
Rex pointed out, the past decade of August to September EHS changes
were:
- 1999 -19%
- 2000 -17.7%
- 2001 -26%
- 2002 -17.1%
- 2003 -12.5%
- 2004 -15.5%
- 2005 -15.2%
- 2006 -19.2
- 2007 -28.9%
- 2008 -10%
This range was 10% to 28.9%. That averages to 17.2% in the typical
September. This is the key element in impacting any subsequent seasonal
adjustment (different SA methodologies may use differing time periods).
This year, the fall was 5.3%. Hmmm, that was highly aberrational
— I wonder why? We (and the NAR) know the reason: Due to ZIRP
and the soon to be expiring 1st time home buyers $8,000 Tax credit,
the drop was minor – much smaller than it usually is when we go from
August to September in EHS.
The tax credit very likely extended the selling season by at least
a month. It pulled some sales forward, and perhaps created other sales
where there might not have been.
But the seasonal adjustment does not know that; The math PRESUMES
THE AUGUST/SEPTEMBER DECLINE IS OF TYPICAL MAGNITUDE OF THE PRIOR 10
YEARS.
That creates a misleading — lets even say false — appearance
when the seasonally adjustments are performed.
Again, someone trying NOT to mislead will inform the reader of that
directly. But calling it a SURGE? Only if you are innumerate —
or a liar. Any honest statistician who worked on these numbers KNOWS
that the seasonal adjustment was going to create a big bump, a misleading
number, based on the historical data.
And thats the whole point. The NAR knows that calling this a surge
will mislead readers, but they report the data — DOWN 5.3% — as a
“SURGE.” What else might their goal be BUT TO MISLEAD THE PUBLIC?
I refuse to facilitate that. And I will call anyone an unprofessional
liar, a distorter of the data who claims this was surge. THIS MEANS
YOU, NAR !
The folks who are unfamiliar with seasonal adjustments will get caught
in the scam. This was not an ordinary seasonal adjustment — it was highly
misrepresentative.
I know better. And now, you know better. Unfortunately, most folks
do not.
Mannwich:
Thank you, thank you, thank you, Barry. I can tell you in my
immediate area that a lot of real estate agents appear to be
getting a tad desperate as homes languish longer on the market.
The ones that haven’t sold by now won’t have a chance at selling
until spring unless they are significantly marked down. The
“surge” in home sales is over for the time being. And like auto
sales, the next few months are going to be an absolute
bloodbath.
The NAR knows this, which is why they, and other real estate
hacks are desperately pushing for the credit to not only be
extended, but to be expanded to $15K and to cover EVERYONE. My
agent even said this to me outright.
DeDude:
I think the honest spin free reporting would have stated the
year-over-year increase with a statement that “it is not clear
how much of this increase was a result of the tax credit for new
home buyers”. I also like the approach of averaging the last 3-5
data points when dealing with something that has a lot of swings
in it. Maybe a 3 month average of Y-o-Y changes would have a
better change of grasping at reality.
super_trooper:
Maybe I’m missing the point here, but why not just compare to
the same month of the previous year, or just calculate
everything on a moving year, 12 month basis, compared to the
previous 12 months. Also, there was a $7500 tax credit from
april 1st 2008 until the 8k started, so you have to take into
consideration when you compare 07 to 08 and 09.
VennData:
“The production numbers are up, Comrades,” says the
N.S.S.R.’s General Secretary of the Party, Yun.
Laguna Beach has seven hundred agents. There are currently about
four hundred listings in the MLS (historically high) which is
not even one listing per agent…
http://realestate.yahoo.com/California/Laguna_Beach
…normally there are a hundred or so – with a six month inventory
– means those 700 agents get 200 sales a year (at six percent of
average asking price of 1.3M-ish …no one pays full commission
…you get the picture.) Furthermore the 80/20 rule means the star
brokers get the lion’s share of that. In a city of about 10K
units, with 20K comrades…
http://lagunabeach.areaconnect.com/statistics.htm
…there’s a huge inventory of un-productive realtors there in the
“realtor’s paradise.” I see a re-allocation of resources ahead.
Pot Farming anyone?
So, look for General Secretary of the Party Yun to begin
incorporating “Co-operative Growing Statistics” in future
five-year plans.
“The price of weed will always go up.”
By Kevin
P. Phillips
Kevin Phillips’s new book,
Bad Money: Reckless Finance, Failed Politics, and the Global Crisis
of American Capitalism, is published Viking.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.
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. Not
only do governments, businesses, and individuals use these yardsticks
in their decision-making but minor revisions in the data can mean major
changes in household circumstances—inflation measurements help determine
interest rates, federal interest payments on the national debt, and
cost-of-living increases for wages, pensions, and Social Security benefits.
And, of course, our statistics have political consequences too. An administration
is helped when it can mouth banalities about price levels being “anchored”
as food and energy costs begin to soar.
The truth, though it would not exactly set Americans free,
would at least open a window to wider economic and political understanding.
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?
Let me stipulate: the deception arose gradually, at no stage
stemming from any concerted or cynical scheme. There was no grand conspiracy,
just accumulating opportunisms. As we will see, the political blame
for the slow, piecemeal distortion is bipartisan—both Democratic and
Republican administrations had a hand in the abetting of political dishonesty,
reckless debt, and a casino-like financial sector. To see how, we must
revisit forty years of economic and statistical dissembling.
A short history of “pollyanna creep”
This apt phrase originated with John Williams, a California-based
economic analyst and statistician who “shadows,” as he puts it, the
official Washington numbers. In a 2006 interview, Williams noted that
although few Americans ever see the fine print, the government “always
footnotes the changes and provides all the fine detail. Nonetheless,
some of the changes are nothing short of remarkable, and the pattern
over time is what I call Pollyanna Creep.” Williams is one of the small
group of economists and analysts who have paid any attention to the
phenomenon. A few have pointed out the understatement of the Consumer
Price Index—the billionaire bond manager Bill Gross has described it
as an “haute con job,” and Bloomberg columnist John Wasik has dismissed
it as “a testament to the art of spin.” In 2003, a University of Chicago
economist named Austan Goolsbee (now a senior economic adviser to Barack
Obama’s presidential campaign) published an op-ed in the New York
Times pointing out how the government had minimized the depth of
the 2001–2002 U.S. recession, having “cooked the books” to misstate
and minimize the unemployment numbers. Unfortunately, the critics have
tended to train their axes on a single abuse, missing the broad forest
of statistical misinformation that has grown up over the past four decades.
The story starts after the inauguration of John F. Kennedy
in 1961, when high jobless numbers marred the image of Camelot-on-the-Potomac
and the new administration appointed a committee to weigh changes. The
result, implemented a few years later, was that out-of-work Americans
who had stopped looking for jobs—even if this was because none could
be found—were labeled “discouraged workers” and excluded from the ranks
of the unemployed, where many, if not most, of them had been previously
classified. Lyndon Johnson, for his part, was widely rumored to have
personally scrutinized and sometimes tweaked Gross National Product
numbers before their release; and by the 1969 fiscal year, Johnson had
orchestrated a “unified budget” that combined Social Security with the
rest of the federal outlays. This innovation allowed the surplus receipts
in the former to mask the emerging deficit in the latter.
Richard Nixon, besides continuing the unified budget, developed
his own taste for statistical improvement. He proposed—albeit unsuccessfully—that
the Labor Department, which prepared both seasonally adjusted and non-adjusted
unemployment numbers, should just publish whichever number was lower.
In a more consequential move, he asked his second Federal Reserve chairman,
Arthur Burns, to develop what became an ultimately famous division between
“core” inflation and headline inflation. If the Consumer Price Index
was calculated by tracking a bundle of prices, so-called core inflation
would simply exclude, because of “volatility,” categories that happened
to be troublesome: at that time, food and energy. Core inflation could
be spotlighted when the headline number was embarrassing, as it was
in 1973 and 1974. (The economic commentator Barry Ritholtz has joked
that core inflation is better called “inflation ex-inflation”—i.e.,
inflation after the inflation has been excluded.)
In 1983, under the Reagan Administration, inflation was
further finagled when the Bureau of Labor Statistics decided that housing,
too, was overstating the Consumer Price Index; the BLS substituted an
entirely different “Owner Equivalent Rent” measurement, based on what
a homeowner might get for renting his or her house.
This methodology, controversial at the time
but still in place today, simply sidestepped what was happening in the
real world of homeowner costs. Because low inflation
encourages low interest rates, which in turn make it much easier to
borrow money, the BLS’s decision no doubt encouraged, during the late
1980s, the large and often speculative expansion in private debt—much
of which involved real estate, and some of which went spectacularly
bad between 1989 and 1992 in the savings-and-loan, real estate, and
junk-bond scandals. Also, on the unemployment front, as Austan Goolsbee
pointed out in his New York Times op-ed, the Reagan Administration
further trimmed the number by reclassifying members of the military
as “employed” instead of outside the labor force.
The distortional inclinations of the next president, George
H.W. Bush, came into focus in 1990, when Michael Boskin, the chairman
of his Council of Economic Advisers, proposed
to reorient U.S. economic statistics principally to reduce the measured
rate of inflation. His stated grand ambition was to move
the calculus away from old industrial-era methodologies toward the emerging
services economy and the expanding retail and financial sectors. Skeptics,
however, countered that the underlying goal, driven by worry over federal
budget deficits, was to reduce the inflation
rate in order to reduce federal payments—from interest on the national
debt to cost-of-living outlays for government employees, retirees, and
Social Security recipients.
It was left to the Clinton Administration
to implement these convoluted CPI measurements, which were reiterated
in 1996 through a commission headed by Boskin and promoted by Federal
Reserve Chairman Alan Greenspan. The Clintonites also
extended the Pollyanna Creep of the nation’s employment figures. Although
expunged from the ranks of the unemployed, discouraged workers had nevertheless
been counted in the larger workforce. But in 1994, the Bureau of Labor
Statistics redefined the workforce to include only that small percentage
of the discouraged who had been seeking work for less than a year. The
longer-term discouraged—some 4 million U.S. adults—fell out of the main
monthly tally. Some now call them the “hidden unemployed.” For its last
four years, the Clinton Administration also thinned the monthly household
economic sampling by one sixth, from 60,000 to 50,000, and a disproportionate
number of the dropped households were in the inner cities; the reduced
sample (and a new adjustment formula) is believed to have reduced black
unemployment estimates and eased worsening poverty figures.
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. After forty
years of manipulation, more than a few measurements of the U.S. economy
have been distorted beyond recognition.
America’s “opacity” crisis
Last year, the word “opacity,” hitherto reserved for Scrabble
games, became a mainstay of the financial press. A credit market panic
had been triggered by something called collateralized debt obligations
(CDOs), which in some cases were too complicated to be fathomed even
by experts. The packagers and marketers of CDOs were forced to acknowledge
that their hypertechnical securities were fraught with “opacity”—a convenient,
ethically and legally judgment-free word for lack of honest labeling.
And far from being rare, opacity is commonplace in contemporary finance.
Intricacy has become a conduit for deception.
Exotic derivative instruments with alphabet-soup initials
command notional values in the hundreds of trillions of dollars, but
nobody knows what they are really worth. Some days, half of the trades
on major stock exchanges come from so-called black boxes programmed
with everything from binomial trees to algorithms; most federal securities
regulators couldn’t explain them, much less monitor them.
Transparency is the hallmark of democracy, but we now find
ourselves with economic statistics every bit as opaque—and as vulnerable
to double- dealing—as a subprime CDO. Of the “big three” statistics,
let us start with unemployment. Most of the people tired of looking
for work, as mentioned above, are no longer counted in the workforce,
though they do still show up in one of the auxiliary unemployment numbers.
The BLS has six different regular jobless measurements—U-1, U-2, U-3
(the one routinely cited), U-4, U-5, and U-6. 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. 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.
Second is the Gross Domestic Product, which in itself represents
something of a fudge: federal economists used the Gross National Product
until 1991, when rising U.S. international debt costs made the narrower
GDP assessment more palatable. 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.
Furthermore, when discussing price pressure, government
officials invariably bring up “core” inflation, which excludes precisely
the two categories—food and energy—now verging on another 1970s-style
price surge. This year we have already seen major U.S. food and grocery
companies, among them Kellogg and Kraft, report sharp declines in earnings
caused by rising grain and dairy prices. Central banks from Europe to
Japan worry that the biggest inflation jumps in ten to fifteen years
could get in the way of reducing interest rates to cope with weakening
economies. Even the U.S. Labor Department acknowledged that in January,
the price of imported goods had increased 13.7 percent compared with
a year earlier, the biggest surge since record-keeping began in 1982.
From Maine to Australia, from Alaska to the Middle East, a hydra-headed
inflation is on the loose, unleashed by the many years of rapid growth
in the supply of money from the world’s central banks (not least the
U.S. Federal Reserve), as well as by massive public and private debt
creation.
The U.S. economy ex-distortion
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. If what we have been sold in recent
years has been delusional “Pollyanna Creep,” what we really need today
is a picture of our economy ex-distortion. For what it would reveal
is a nation in deep difficulty not just domestically but globally.
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.
The credit markets are fearful, and the financial markets
are nervous. If gloom continues, our humbugged nation may truly regret
losing sight of history, risk, and common sense.
October 4th, 2009 at 9:26 am
BR @ top “We should get back to actually counting, rather than imagining, jobs”
I’m just about sure the banks super-computerized infrastructure does (or could/should). That would be very valuable right. But we don’t share value, people pay for it. Government included. Get your own info. So what does that realization bring. Maybe banks should be DISallowed to trade in markets .. ie insider information paid for by all of us.