Friday, July 18, 2008

Lies about the economy

Of course as readers of TWM know, we believe in a healthy skepticism of anything the federal government has to say which contradicts obvious reality. This includes such memes as "The war in Iraq is actually going well", "Afghanistan is actually under control", "The President is a firm believer in the Constitution", etc. But when they give you solid numbers you can trust them, right? When they tell you that unemployment is up to 5.5% from a historic low of 4.5%, you think "Well, maybe that 1% isn't that bad." Or that the CPI (consumer price index) is 2.8, only marginally above its average historic level. Well, not quite. Not exactly. See, the government has all the numbers, and you can indeed get all the numbers. But what the government does first is transform them. Now transforming numbers is not necessarily an evil thing. I work with data quite a bit myself and I can tell you that raw numbers don't mean an awful lot by themselves. You have to turn it into some quantity that's both useful and understandable. Of course, numbers sometimes say things you don't want them to. That's when you use statistics to cover up the truth. As the saying goes, "there are lies, damned lies, and statistics." As this article from Harper's discusses, that's all too true.

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.

Let me excerpt some examples:

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.

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.

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.

And the result of these distortions are thus:

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.

“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.

To sum it up:

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.

What would change if these statistics were cited instead of the whitewashed ones our government puts out? Well, there'd certainly be an even greater demand for change. There's quite a focus on the economy right now, but even now most proposed policies don't address our fundamental problems. A proposed bailout of Fanny Mae and Freddie Mac won't actually bring any more liquidity to an economy that was only still growing because of the massive debt we allowed to rack up. An economy pegged to consumer spending requires the kind of steady purchasing power that the average American doesn't have, but has been convinced they have through the easy availability of credit. It's a self-feeding cycle, as Americans are both required to have credit to make large purchases and convinced that taking out large lines of credit is safe. Which it is...until somebody realizes that the whole structure of the economy is actually built on sand.

Our economy is, in reality, a very, very complex maze of interactions and money. It is possible, however, to understand some points about it without difficulty. Believe it or not, there was once a time when people bought homes and cars for straight cash. That's not even possible for the average American now, when home prices are at least 4 times the amount we make in a year. And certainly nobody's entire yearly income is disposable, which is why it takes some 20 years to pay off a house depending on the loan terms you get. Or 5 years for a car, or 2 years for a washer and dryer, etc, etc. We can't actually afford the luxury we live in. If credit wasn't available (either through a store or credit card), how many of those large-screen lcd tvs would have sold by now? The question is why can't we afford these things? What's the root of the problem?

One part is that Americans' average earnings have not kept up with inflation. This may be due somewhat to the fact that inflation is under-reported. Wages are not really pegged to an actual cost of living, except in that businesses should pay enough to keep personnel from jumping ship. Minimum wage is supposed to be, of course, but it's obvious that whatever calculation they used to come up with the figure for minimum wage, it did not come up with an actual living wage. This also reflects the continuing growth of the gap between the top earners in America and everybody else. I'd have to say that concentration of wealth at the top is a natural occurrence at least in our capitalist society, if not an attribute of capitalism itself. Obviously we need to redirect this money from on high to down low. Before anybody starts labeling me a commie, let me state that this doesn't need to be literally taking money from the rich and giving to the poor. I'd say that taking money from the rich is fine since they get it off the backs of the working class, but putting money itself in the hands of the poorest probably isn't very effective.

Another problem is our reliance on credit. That seems to be undergoing a "correction" as economists call it, i.e. the subprime mortgage housing crisis. Ripples from that collapse are still spreading out. It has reached all the way into student loans. How can we end this dependency? It's easy for your credit counselors to tell you "cut up those cards!" and that is a good beginning...but what if you absolutely need a car now? What if you can't even come up with $3,000 to buy a car outright? It may be called an auto loan, but it's credit just the same. And even more so housing. I'm not very happy about the idea that I'll either pay too much in rent to live in a decent area or owe for 20 years to live in a house which has no safety net. I think we have to make it so that no matter what, as long as you're willing to work you never slip through the cracks. Mass transit in the case of cars, and perhaps mass housing in the case of houses.

I don't think there's any obvious, easy answer. I can't tell you what to tax to move the most money from those that don't need it to those that do, but I do believe we can do more than we have been. It's not supposed to be our burden to provide all the answers anyway. Progressives have always believed that the government can be used as a tool to solve these kinds of social problems anyway. This is certainly a problem that needs to be presented to the government.

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