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.

Calculating unemployment levels

In a previous post, I said that “One of the things that seems obvious to me but most people seem unaware of is that the US is a country in deep decline and if no corrective action is taken soon it will end up just like many other failed empire in history, collapsing from within due to a combination of hubris, arrogance, and greed.” Readers might have been excused for being somewhat skeptical since things don’t seem so dire and we hear upbeat reports about how things are getting better. In the next series of posts I will show how the real state of the economy is being kept hidden to make things look good, or at least not terrible.

In any democratic society, the most sensitive number politically is the level of unemployment. If it is high, then one has public unrest and strong dissatisfaction with the government. If it is low, then workers can bargain for better wages and benefits and so the business sector’s profits get reduced, which makes corporate CEOs and their shareholders unhappy. In oligarchic societies like the US, the needs of the corporate sector always win out so governments tend to pursue policies that prevent full employment while simultaneously taking steps to curb public unhappiness by either giving them some benefits temporarily to help them get used to the idea of not working or hiding from them how bad the situation is.

In the US it is the Bureau of Labor Statistics that keeps track of unemployment numbers. In the current recession, the ‘official’ unemployment level has reached close to 10% and is staying there despite stimulus packages and the like. This is high by historic US standards and it is surprising that it has not created as much unrest as one might expect. But what people may not know is that the ‘real’ rate of unemployment is much higher, maybe twice as much, and that the lower official figure is the result of a steady process of cooking the books over the past few decades.

The unemployment rate is calculated as the number of unemployed workers divided by the total labor force, and the resulting number is multiplied by 100 to get a percentage. (The definitions of employed, unemployed, and total labor force is given here.) By finding ways to make the numerator smaller and/or the denominator larger, one can make the rate smaller. To be counted among the unemployed, one has to meet fairly strict criteria:

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities:

  • Contacting: an employer directly or having a job interview; public or private employment agency; friends or relatives; a school or university employment center
  • Sending out resumes or filling out applications
  • Placing or answering advertisements
  • Checking union or professional registers
  • Some other means of active job search

Passive methods of job search do not have the potential to result in a job offer and therefore do not qualify as active job search methods. Examples of passive methods include attending a job training program or course, or merely reading about job openings that are posted in newspapers or on the Internet.

There are categories other than employed and unemployed. ‘Marginally attached’ workers are “persons without jobs who are not currently looking for work (and therefore are not counted as unemployed), but who nevertheless have demonstrated some degree of labor force attachment. Specifically, to be counted as “marginally attached to the labor force,” individuals must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work.”

‘Discouraged workers’ are “a subset of the marginally attached. Discouraged workers report they are not currently looking for work for one of four reasons:

  1. They believe no job is available to them in their line of work or area.
  2. They had previously been unable to find work.
  3. They lack the necessary schooling, training, skills, or experience.
  4. Employers think they are too young or too old, or they face some other type of discrimination.

Depending on which categories of workers you count as unemployed, there are six measures of unemployment:

  • U-1: Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
  • U-2: Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
  • U-3: Total unemployed persons, as a percent of the civilian labor force (this is the ‘official’ unemployment rate that the government and media publicize)
  • U-4: Total unemployed persons (i.e., U-3) plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
  • U-5: Total unemployed persons, plus discouraged workers (i.e., U-4) plus all other “marginally attached” workers, as a percent of the civilian labor force plus all “marginally attached” workers
  • U-6: Total unemployed persons, plus all “marginally attached” workers (i.e., U-5) plus all persons employed part time for economic reasons, as a percent of the civilian labor force plus all “marginally attached” workers

So if a member of the ‘officially’ unemployed gets so discouraged that he/she stops even looking for work (which is a bad thing), U-4 remains unchanged but the official unemployment rate U-3 actually goes down, which looks like a good thing. Similarly, if you are forced to work part-time as a greeter at Wal-Mart because you cannot get a full time job, you drop out of the U-3 category (again reducing the official unemployment rate) but the U-6 figure remains unchanged.

Looking only at the U-3 number makes things seem rosier than they really are.

Next: Cooking the books on the unemployed.

POST SCRIPT: Film review: Up in the Air

This film is really good. It stars George Clooney as someone whom companies hire to perform the distasteful task of firing their employees and getting them to accept the severance package. The film shows the varied reactions of people upon learning that despite having put in many years of faithful service, they are now being unceremoniously dumped by a total stranger. Their emotions range over sad and angry and humiliated and despair, the last one especially common among older workers who know that their chances of ever getting another job are slim to none.

Clooney is this generation’s Cary Grant, a good-looking charmer with a roguish twinkle in his eye who can make even an unsavory character appealing. In this film he plays someone who is really good at doing what should be a truly nasty soul-killing job and even takes pride in doing it well. Like a lot of us guys, he has set his heart on achieving some quite pointless goal in life, in his case to rack up 10 million frequent flyer miles, which he pursues with great dedication. And yet he manages to make this shallow person come off as sympathetic and even likable. Writer-director Jason Reitman seems to have a knack for pulling off this trick, having done it before with Thank You For Smoking, in which the main character is a shill for the tobacco industry.

The film’s examination of the essential rootlessness of Clooney’s character and the contrast with the strong ties in which the people he fires are enmeshed, is excellent. Although it is a serious film, it is also a funny one with great writing. It is well-worth seeing. Here’s the trailer: