Cooking the economic books

In yesterday’s post I discussed the different measures labeled U-1 through U-6 that are used to measure the rate of unemployment. Kevin Philips, in an interesting article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper’s magazine, points out how the ‘official’ unemployment rate U-3 masks the true state of affairs.

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 [U-3]. 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.

If you want a rule of thumb, the ‘real’ rate of unemployment (i.e., U-6), which would (and should) include so-called ‘discouraged’ workers, ‘marginally attached’ workers, and workers who are forced to work part-time for economic reasons, would be roughly twice the officially reported unemployment rate (U-3). So currently the figure would be close to 20%.

Phillips says that these multiple measures of unemployment were introduced over time, giving the public the impression that the number of unemployed is smaller than it really is, a phenomenon that has been labeled as ‘Pollyanna Creep’ in unemployment. The process began in the early 60s in the Kennedy administration, which decided to take the out-of-work people who had stopped looking for jobs for whatever reason (even if it was for relevant reasons like no jobs were there to be found) out of the unemployed category and put them in the category of ‘discouraged workers’, thus lowering the unemployment figures. Reagan inflated the size of the labor force by including the military in it, again effectively reducing the unemployment rate without any substantive gains. Bill Clinton added to the manipulation by making the unemployment sampling size smaller by dropping a disproportionate number of inner city households and changing the formulas to produce lower black unemployment.

But it was not only unemployment figures that have been manipulated to provide a rosier picture of the nation’s economic health. Successive governments have also manipulated other key economic indicators such as the Consumer Price Index (CPI) (that measures the rate of inflation) and the Gross Domestic Product (GDP) (which should reflect the size of the economy).

You would think that measuring the CPI would be simple and straightforward. You take some year as the baseline for calculating the cost of a basic basket of goods and services that people need to live (rent/mortgage, food, energy, clothing, etc.) and then calculate how the total cost of that basket changes over time. Basically the same idea as goes into stock market indices like the Dow Jones or S&P. But what governments do when the CPI number comes out too high is change the formula to make it smaller.

One method of lowering the CPI is by product substitution. If the price of an item in the original basket of goods (say a particular cut of meat) gets more expensive, it is assumed that people shift to a lower cost item (say ground beef). So by changing an item in the basket to a cheaper one, the CPI is lowered. Another finagle is changing the product weighting. If one item gets too high it is assumed that people buy less of that and more of the cheaper items in the basket, again reducing the CPI. There is also something called the hedonistic adjustment which assumes that improvements in the quality of products and services reduces the effective cost of goods.

In other words, the basket of goods and the way of measuring its cost is not kept constant but keeps changing. One might be able to make the case that such changes are meaningful since they reflect reality (after all people do change their buying habits based on cost) except that Phillips says that the changes are always in the direction of lowering costs, thus reducing the CPI, and never the other way around, which is what makes it a boondoggle. When conditions get better and people feel flush, ground beef is not replaced with steak in the CPI basket, though that too reflects reality.

There are other methods of disguising the CPI. Richard Nixon created a new category called the ‘core’ inflation rate that was arrived at by excluding things like food and energy that were creating high inflation rates in his time. In other words, he removed from the inflation index those things that were the main causes of inflation, a neat trick. This figure is still reported. Ronald Reagan finagled the housing rent component in the CPI to reduce its impact on inflation. The administrations of George H. W. Bush and Bill Clinton continued this practice.

Next: Other fiddles

POST SCRIPT: Boom times for the oligarchy

Because of loss of employment and income, increasing numbers of people are using up the money they had set aside for retirement to stay afloat now, which makes the idea of raising the retirement age even more pernicious. Meanwhile, employers have been taking advantage of the recession to squeeze workers even more to increase their profits. As Bob Herbert says, “The recession officially started in December 2007. From the fourth quarter of 2007 to the fourth quarter of 2009, real aggregate output in the U.S., as measured by the gross domestic product, fell by about 2.5 percent. But employers cut their payrolls by 6 percent. In many cases, bosses told panicked workers who were still on the job that they had to take pay cuts or cuts in hours, or both. And raises were out of the question… the carnage that occurred in the workplace was out of proportion to the economic hit that corporations were taking.” He quotes professor Andrew Sum who studies labor issues saying that what is unprecedented now is that “At the end of the fourth quarter in 2008, you see corporate profits begin to really take off, and they grow by the time you get to the first quarter of 2010 by $572 billion. And over that same time period, wage and salary payments go down by $122 billion.”

So times are booming for the oligarchy who not only are doing well while most of the country isn’t, they also delight in flaunting their wealth, as epitomized by the Clintons reportedly spending anywhere in the range of one to five million dollars on their daughter’s wedding. Paul Craig Roberts points out that the Clintons did not start out in life rich and spent most of their lives in government jobs. He asks us to ponder whose interests they were serving while in government that has enabled them to reap such rich rewards now. He raises a similar question about England’s Tony Blair’s newly acquired wealth.


  1. Bruce says

    Mano -- trying to work through this thought in my head. People seem offended at the idea that there should be a ceiling on what an entrepeneur should make. I don’t mean that everyone should make $200,000 or less, but here’s why some cap (through a tax system) seems appropriate. There is surely a cap on what labor makes. Your postscipt suggests this with workers being asked to “sacrifice” for the “good of the company.”

    If a millionaire starts a company, and I think most would support that person becoming a billionaire if the company succeeds. If a worker under that start-up company makes $10/hour and expects to make $50/hour when the company goes big (this would be a modest $100,000 gross salary), people throw their arms in the air at “out of control labor costs.”

    This all seems dreadfully inconsistent to me!

  2. Robert Allen says

    It comes down to competition, and the ability of a person to contribute to the income of a company. If you work for a startup, try to negotiate a deal where you earn shares in the company. In reality, an accountant or other easily replaceable person will not be able to negotiate such a deal because plenty of other people are willing to work for a set wage. If you are the person driving the creativity and innovation in the company, then you are primarily responsible when the company succeeds, and the company owner would be smart to share a big slice of the pie with you. For lower level workers, the difference to the company bottom line between doing an adequate job and doing a great job is usually small. For the CEO, the difference could be billions of dollars. Is it unreasonable to take 10% of profits that you created as your cut?

    Steve Jobs’ decisions led to millions of people being able to buy an iPhone. Take the maximum dollar amount people would have been willing to pay for their new phones, subtract the actual price, and you have the total value that Steve Jobs’ contributed to society. It’s a huge number. Let’s give him a big share of it.

  3. says

    Unfortunately this is something that doesn’t surprise me at all.

    I don’t know that you can necessarily say that Steve Jobs “contributed to society”…it was probably more the software engineers as well as the leagues of programmers that made gesture based control possible.

    And I know for a FACT those people aren’t getting paid nearly as much as Jobs…did those people get a bonus when the iPhone 4 sold over 4 million units? Doubtful.

    I believe it is unreasonable as a CEO to take 10% of your profits. Do you not have workers under you, who are far more deserving?

    But when it comes down to it--the Rich will always feel no guilt lining their own pockets at the expense of those below them.

    This is a self-evident truth that has been true since the Greeks and Romans…and must be held close to heart, and kept aware of at all times.

  4. Robert Allen says

    By the way, I am a wage slave of the underpaid variety, so I have no ulterior motive here.

    Software programmers don’t get paid as much as the CEO because they don’t shoulder the same level of responsibility, and are not capable of affecting the bottom line like the CEO is. Big responsibility deserves big compensation. Finding a replacement for Steve Jobs is nearly impossible. If he dies, Apple will lose stock value big time. If one of Apple’s top programmers quits or dies, share price remains the same. That’s because investors recognize that Jobs is a determining factor in the ability of the company to make profits, while any individual worker is not.

    Employees, by definition, deserve to be paid their wage. If you don’t own a stake in a company, then you don’t “deserve” a share in the profits.

    The current system, although technically fair and based on mutual consent, does still tend to result in all the money being concentrated with the very rich, many of whom inherited it instead of earning it. And that’s where I have a problem. But what can we do? Legally prevent people from giving money to their children? I would say provide heavily subsidized college education to every citizen as a way to level the playing field. Beyond that, it’s up to you to find some way to make other people’s money become your money.

  5. says

    By using up the retirement money to stay afloat now we are only creating an even greater problem for the future.

  6. says

    Unfortunately it is not just the fact that the retirement age is being increased that is my main worry. My main concern as a 40 year old is that I am having to build for my future outside of what was the norm “pension schemes”, pension schemes have been floored for 15yrs or so, and I have had in my employment many post retirement age employees either because their pension was insufficient to cover living expenses, or as with many there pension funds were miss-managed and many lost their pension so have been forced to work past retirement in order to survive.
    I believe many people would like to work on into their retirement for a few hrs per week just to increase their quality of life; but many have to work full time and more just to survive.


  7. says

    We have the same problem here in the UK, Mano. Retirement age is set to rise yet again whilst at the same time unemployment is rising and the new coalition government have cut public spending drastically thereby reducing the workforce by up to 25%. The theory is that private enterprise will take the initiative and employ these people when they set up the services we are losing due to the cuts. It’s all very worrying.

  8. says

    I like the phrase “Pollyanna creep” -- it’s very apt!

    Australia has weathered the international storm a little better than most, but still there has been some significant manipulation of our unemployment figures -- here the number of hours per week that someone needs to have worked is very low which influences the figures significantly -- we talk about “underemployment” -- those that are working but don’t have enough hours to meet their costs.

  9. says

    I really don’t think there would be any issues about how much people made if companies were naturally allowed to fail when they made mistakes…

    Yes, failures create pain but if they fail naturally, there are others ready to come in and clean up the mess and hopefully grow something better out of it.

    When government props up certain industries or companies, they are gaming the system. Companies that should die don’t. And companies that would be created out of the failure never get created.

  10. says

    I really don’t think there would be any issues about how much people made if companies were naturally allowed to fail when they made mistakes…

    Yes, failures create pain but if they fail naturally, there are others ready to come in and clean up the mess and hopefully grow something better out of it.

    When government props up certain industries or companies, they are gaming the system. Companies that should die don’t. And companies that would be created out of the failure never get created.

  11. says

    Mano -- I completely agree with you about the government doing some Enron-style book barbecuing. With all the money the government is pumping into the economy, there’s absolutely no way that inflation is going to stay tame. I know that gas prices are much lower than they were in the spike two years ago, and the CPI shows very little inflation, but there’s something bubbling under the surface here. Everywhere, from parking tickets to milk to sandwiches all seem to cost a lot more than they used to. The government may be hiding inflation so that newspaper headlines can cheer people up, but the American public is still feeling the sting in their wallets!

  12. says

    I also agree with you on this. I would also like to add that in india corruption has reached the roots and only the government knows what staistics are REAL. No one knows how much data is being hidden, what is the real truth behind an issue. It’s a big fooling game.

  13. says

    I find myself agreeing with you in everything here. Having being witness of the recent manipulation of Temporary “Census” and “Stimulus” jobs to decrease the reported unemployment rate, I have no doubts it is and will continue to be an ongoing practice.

    There is nevertheless a point I would like to explore a little more: “Reagan inflated the size of the labor force by including the military in it, again effectively reducing the unemployment rate without any substantive gains.” I understand the reasoning behind the consideration of this act being a manipulation could be, that the military produces nothing,- which is arguable by the fact that security is a traded value in the business world and therefore considered a cost of doing business- but it is generally accepted around the world for a soldier “to be employed” or “have a job” which in turn allows him/her to actively participate in the economy. The CPI and the GDP indicators are greatly influenced by the military in many ways. In my humble opinion they should not be considered unemployed.

  14. says

    As if unemployment isn’t already bad enough, now to find out that the figures have been manipulated to distort and hide the real picture is really disturbing. And the catering to the large businesses with enormous bailouts, when as mentioned above, would have failed without the assistance, is enough to seriously turn the stomach of any small business owner.. especially when dealing with the looming fear that they will be forced to play a part in paying for that bailout. I can only imagine how appalled the founding fathers of this country would be to see how greed and ego have brought this country to near ruin. I say near because I am still optimistic by nature.

  15. says

    The disparity between the top 1%, top 10% and the lower tier has only increased since this was the topic. Especially the top 1%, whose wealth has gone up by BILLIONS. Adding to the creaking societal stresses as the tottering tower of debt readies itself for collapse.

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