Manipulating the Masses

If you believe the government, annual inflation is running less than 3.5%, unemployment is less than 5%, annual GDP growth is about 3.5%, and the 2005 federal deficit was $318 billion.

In reality, however, annual inflation is over 8%, unemployment is around 12%, and annual GDP growth is flat. Not only does common experience support the latter set of numbers, but also taking a close look at how government economic reporting has been manipulated over time. What will surprise many, though, is that the annual 2005 federal deficit was $3.5 trillion (not billion). That extraordinary number is as reported by the U.S. Treasury, using generally accepted accounting principles.

In 1996 – the middle of the Clinton economic miracle – the Kaiser Foundation conducted a survey of the American public that purported to show how out of touch the electorate was with economic reality. Most Americans thought inflation and unemployment were much higher, and economic growth was much weaker, than reported by the government. The Washington Post bemoaned the economic ignorance of the public. The same results would be found today.

Neither the Kaiser Foundation nor the Post understood that there was – and still is – good reason for the gap between common perceptions and government reporting: government data are biased in politically correct directions and increasingly have diverged from common experience and reality since the mid-1980s. Inflation and unemployment reports are understated, while employment and other economic data are overstated, deliberately.

For several years, I conducted surveys among business economists as to how they viewed the quality of government economic data. The following were actual comments:

The senior economist of a major retail company told me, “Quality varies. The retail sales numbers are terrible, but money supply data are great.”

The senior economist at a major bank offered, “There’s a problem with money supply, but I think retail sales are pretty good.”

The point is that when an economist knows a sector well, he also recognizes the limitations and distortions of related economic reporting. Gathering and reporting accurate information on a timely (one-month) basis for components of the U.S. economy is nearly impossible. Nonetheless, most career government statisticians in Washington work diligently to provide the best information possible within the limits of the existing reporting system. A number of reporting distortions, however, are not accidental.

The popularly followed economic series are subject to two forms of manipulation. First is the event-driven alteration of data, where specific employment numbers, for example are massaged to help political circumstances. Such is the nature of what appears to be happening at present, with presidential approval ratings doing some historical bottom bouncing.

The second type of manipulation is more insidious, though, where reporting methodologies are altered so as to build reporting biases into a series. Changes in CPI weighting methodology during the Clinton administration (and as proposed by the earlier Bush administration), for example, were designed to understate the CPI so as to cheat social security recipients out of some of their cost of living adjustments. That purpose was espoused particularly by former Fed Chairman Alan Greenspan.

Here is how the reporting system shenanigans have evolved over time. The first regular reporting of
now-popular statistics such as gross national/domestic product (GNP/GDP), unemployment and the consumer price index (CPI) began in the decade following World War II. Modern political manipulation of the government’s economic data began as soon as practicable thereafter, with revisions to methodology often incorporating positive reporting biases. As a result, investors and most economists, relying on the government’s data, often miss underlying economic reality.

Consider:

– During the Kennedy administration, unemployment was redefined with the concept of “discouraged workers” so as to reduce the popularly followed unemployment rate.

– If Lyndon Johnson didn’t like the growth that was going to be reported in the GNP, he sent it back to the Commerce Department, and he kept doing so until Commerce got it right. The Johnson administration also was responsible for gimmicking the accounting that hides most of today’s federal deficit.

– Richard Nixon had a highly publicized war with the Bureau of Labor Statistics on the unemployment data. Nixon wanted to report the unemployment rate as the lower of the seasonally adjusted or unadjusted number, at any given time, but not specify same to the public. While that approach was unconscionable at the time and never used, basically the same methodology was introduced in 2004 as “state-of-the-art” by the current Bush administration.

– The Carter administration was caught deliberately understating inflation.

– Systemic changes were introduced during the Reagan administration to boost reported GNP/GDP growth and to lower CPI inflation on a regular basis. The wildest manipulations, however, happened at the time of the 1987 liquidity panic. In addition to intervention in the futures markets by the New York Fed to help prop the stock market after the October 19th crash, direct and heavy manipulation of the trade deficit data, under the direction of the Federal Reserve and U.S. Treasury, was used in conjunction with massive currency intervention to help bottom the dollar and to contain the currency panic at year-end 1987.

– The first Bush Administration began efforts at the systematic reduction of the reported rate of CPI inflation, and it worked an outside-the-system GDP manipulation aimed at helping with the failed 1992 reelection bid.

– As former Labor Secretary Bob Reich explained in his memoirs, the Clinton administration had found in its public polling that if the government inflated economic reporting, enough people would believe it to swing a close election. Accordingly, whatever integrity had survived in the economic reporting system disappeared during the Clinton years. Unemployment was redefined to eliminate five million discouraged workers and to lower the unemployment rate; methodologies were changed to reduce poverty reporting, to reduce reported CPI inflation, to inflate reported GDP growth further, among others.

– The current Bush administration has expanded upon the Clinton era initiatives, particularly in setting the stage for the adoption of a new and lower-inflation CPI and in further redefining the GDP and the concept of seasonal adjustment. Event driven manipulations appear to be underway in an effort to help boost flagging presidential approval ratings.

As a result of the systemic manipulations, if the CPI and GDP methodologies of 1980 were applied to today’s data, you would get the 8%-plus inflation and flat economic growth discussed in the opening paragraph. Using unemployment methodology of 1960 generates an estimate of current 12% unemployment.

When Main Street, U.S.A., does not believe the government’s reporting, the reality of common experience usually is the better estimate of what is happening in the economy. The damage from the fraudulent statistics, however, is much more serious than just politics as usual, the misguidance of overly trusting investors, or the massive cheating of Social Security recipients (payments would 70% higher using the CPI methodology of 1980).

The masking of the actual annual $3.5 trillion deficit is setting up the nation for an eventual national bankruptcy/U.S. dollar collapse. Putting that $3.5 trillion in perspective, consider this: If the government seized 100% of everyone’s salary and wages, the government still would show a deficit. But that is a story in itself.

Regards,

John Williams
for The Daily Reckoning