In the previous two posts (here and here) I discussed how the government cooks the books, particularly with regard to unemployment, inflation, economic growth, and budget deficits, to give people a much rosier picture of the state of the economy than is the case. What is to be gained by this and who benefits?

In his article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper’s magazine, Kevin Phillips says:

[S]ince 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… 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.

What is the reality? Phillips says that “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.” (Note that Phillips was writing this in early 2008 just at the onset of the current recession when the ‘official’ unemployment rate was around 5% or half the current value. The real unemployment rate now is probably around 20%.)

Cooking the books to make things appear rosier is not done just for psychological reasons, to make people feel good about the state of the economy. While it does help the government politically if the public thinks that the economy is growing, inflation is low, and the government is living within its means, the main reason for cooking the books is that these numbers carry with them serious financial and budgetary implications.

Of them, the most important is the inflation rate. For one thing, social security benefits increases are tied to inflation rates. By making CPI rates seem low, the government can pay seniors less. Philips quotes economic analyst John Williams who says that “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.” So by keeping CPI numbers artificially low, the government saves money (which it then spends on wars and tax cuts for the rich) at the expense of poor seniors who are being gradually squeezed into greater poverty but may not understand why that is happening since their benefit payouts are supposed to be rising along with with the cost of living.

But in addition to that, inflation rates are closely tied to interest rates. By keeping interest rates low, the government and business can borrow money cheaply. Borrowing is the only way that American government can finance its operating deficits, continue to fund its endless expensive wars, and maintain the oligarchic looting that has enriched a few while impoverishing the many. Low interest rates were also the basis of the housing bubble. If official inflation rates rise to their real value, the edifice comes crashing down. The collapse of the subprime market was an indicator of the underlying fear that the inflation rate, and along with it interest rates, was going to rise. As Phillips says:

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, barrowing, 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.”

The only way that the US government can continue on its reckless path is if other entities are willing to loan it money by buying its securities. While it can use the social security trust fund to do so (because it controls it), it needs other nations and their sovereign funds to also buy them. In this, the US currently benefits from the dollar still being the world’s reserve currency. If other countries start to hold back from buying US treasury bonds, the government might have to lure them with higher interest rates. That would make budget deficits even worse and rapidly create problems with the ability to repay.

So where are we headed? Paul Craig Roberts, a former editor of the Wall Street Journal and an assistant secretary of the U.S. Treasury during the Reagan administration, says that the outlook is gloomy.

With the US bankrupting itself in wars, America’s largest creditor, China, has taken issue with America’s credit rating. The head of China’s largest credit rating agency declared: “The US is insolvent and faces bankruptcy as a pure debtor nation.”

On July 12, Niall Ferguson, an historian of empire, warned that the American empire could collapse suddenly from weakness brought on by its massive debts and that such a collapse could be closer than we think.

The sense of foreboding is widespread, spanning the ideological spectrum. David Stockman, budget director during the time that Ronald Reagan was indulging his supply-side fantasies, thinks the day of reckoning is nigh and that the present Republican leadership is captive to “the delusion that the economy will outgrow the deficit if plied with enough tax cuts… It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1 percent of Americans — paid mainly from the Wall Street casino — received two-thirds of the gain in national income, while the bottom 90 percent — mainly dependent on Main Street’s shrinking economy — got only 12 percent.”

Paul Krugman also sees disaster looming, saying, “I’m starting to have a sick feeling about prospects for American workers — but not, or not entirely, for the reasons you might think. Yes, growth is slowing, and the odds are that unemployment will rise, not fall, in the months ahead. That’s bad. But what’s worse is the growing evidence that our governing elite just doesn’t care — that a once-unthinkable level of economic distress is in the process of becoming the new normal.” (my italics)

With the oligarchy having its hands in the national till and looting it for their own benefit, I think collapse is inevitable. You can postpone the say of reckoning by cooking the books, but reality will eventually catch up with you. It is for all these reasons that I think the US is in serious trouble unless it changes course.

POST SCRIPT: The oligarchy’s solution to every problem

While the unemployment and CPI figures have been fiddled with to make them appear smaller (as I discussed in yesterday’s post), the number that measures the size of the economy called the Gross Domestic Product (GDP) has also been fiddled with to make it appear larger than it is and thus appearing to show robust growth.

Kevin Philips, in an article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper’s magazine describes the fiddles done with the GDP, which itself was adopted in 1991 when the previous measure of the economy the Gross National Product (GNP) became unpalatable due to rising international debt costs. One of the changes that made the GDP larger consisted of adding to it what is known as ‘imputed’ income to people’s actual income. Imputed income is what one is perceived to get because one is not directly paying for something. This includes “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.” In 2007, this phantom income added as much as 15% to the GDP.

One other major finagle occurred with Lyndon Johnson who was the first to create the ‘unified budget’ that added the surpluses in the social security account to the deficits in the government’s operating budget to make the latter seem smaller than they really were. That practice continues today. It was this disguise that enabled Ronald Reagan and George W. Bush and the Congresses of their time, aided and abetted by then Federal Reserve chair Alan Greenspan, to enact huge tax cuts for the rich.

The scam went like this. By creating a phony scare in the early 1980s (similar to the one we are seeing again now) that social security was going broke, they raised payroll taxes. Since there is a cap on the income that is subject to these taxes (in 2009 the cap was $106,800) most of the money in this trust fund comes from the poor and middle class, making it a regressive tax. This increase in payroll taxes resulted in huge surpluses in the social security current account that, because of the ‘unified’ budget, gave people the impression that there was plenty of money in the public treasury and hid the fact that the country was actually operating in the red. The government then rammed through tax cuts for the rich that used up this bogus ‘surplus’. So basically, the money that middle class and poor people were putting into their social security retirement trust fund was being used to provide huge tax cuts for the rich. This has to be one of the biggest swindles in American history. (See David Cay Johnson, Perfectly Legal: The covert system to rig our tax system to benefit the super rich – and cheat everybody else (2003), p. 123 for an excellent analysis on how this racket was perpetrated.)

This was a clear swindle knowingly perpetrated by the oligarchy. When it comes to fiddling the numbers on unemployment, CPI, and GDP, Phillips says, “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.” I am not as charitable as he in dismissing knowing cynical motives.

Phillips makes the correct point that the people who prepare government statistics are professionals who are careful, in their actual reports, to accurately explain what they are doing, at least in the footnotes, so that the reality is there for anyone willing to read carefully. But governments have realized that most reporters in the mainstream media are too lazy or stupid or ignorant or stressed for time to do this kind of careful reading and analysis and instead simply swallow the summaries, abstracts, and press releases put out by high-level government officials, thus allowing themselves to be manipulated. Reporters would do a much better job if they stopped trying to curry favor with high-level people and instead focused their efforts on reading official documents carefully and cultivating low and mid-level officials and whistle-blowers who can tell them exactly what is going on. The latter have less of an ideological or political ax to grind and thus are more likely to tell the unvarnished truth.

Public ignorance of the true state of the economy benefits the government. Phillips adds:

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 I 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 markers, and tamp down expensive cost-of-living increases for wages and pensions?

Phillips has to be given credit for warning us in early 2008, before the total collapse of the housing market, of the danger of mortgage debt. He was, however, wrong in predicting that official unemployment figures of 8 percent might make the electorate angry. We are now close to 10 percent with little signs of widespread outrage. This might change with time because the current recession has resulted in unemployment staying high for much longer than previous recessions. I am sure that all of us personally know people who have been laid off and are finding it hard to get work comparable to what they did before.

Next: What is gained by cooking the books?

POST SCRIPT: The Big Brother state

A truly disturbing post from Glenn Greenwald on the assault on our privacy by a government-private sector collaboration, done in order to circumvent laws. I will not excerpt it because you should really read the whole thing.

[UPDATE: Glenn Greenwald has posted an update that the claims of Project Vigilant are highly exaggerated and they may just be publicity seekers.]

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.

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