There appears to be an increasing distortion of economic data by the government to present an alternative reality of the current state of the economy. In particular, this blog discusses the massaging of inflation, GDP, unemployment and U.S. deficit statistics.
The idea for this blog came then I was reading a column by Rob Slee, a pioneer in the understanding of the capitalization and financial management of privately owned companies. In Rob’s most recent column, he discusses the increasing distortion and manipulation of economic data by the government to present an alternative reality of the current state of the economy. He focuses on the work done by John Williams, published through Williams’ ShadowStats newsletter – (www.shadowstats.com).
“… an electronic newsletter service that exposes and analyzes flaws in current U.S. government economic data and reporting, as well as in certain private-sector numbers, and provides an assessment of underlying economic and financial conditions, net of financial-market and political hype.”
Among other data, John Williams publishes his own unemployment, GDP, CPI and inflation data to better reflect reality. This may sound as if he is just playing another manipulation game, but he mostly uses the standard methodologies that the government used until the 1980s and 1990s, before much of the massaging and adjustments were made to bend economic data to political will. I’ll briefly describe some of Williams’ findings below.
Inflation and GDP
Williams argues that the government underreports inflation and unemployment, while overstating GDP. Williams contends that methodological shifts in government reporting have depressed reported inflation, meaning that the CPI is no longer a measure of the cost of living needed to maintain a constant standard of living. He calculates real inflation to be closer to 9%, compared to the government’s calculation of 1.4%.
Unfortunately, the government has an incentive to underreport official inflation, so as to cut annual cost-of-living adjustments to Social Security and other programs. One of the unintended consequences of massaging inflation data is to negatively impact those saving for retirement and those who have already retired. Whenever we calculate retirement benefits, income and investment goals, we use the CPI data to make adjustments to stay ahead of inflation. If real inflation is much higher, then we’re not going to meet our goals and it’s unlikely the government is going to be willing (or solvent) to bail us out.
Another knock-on effect was to create a false GDP figure. If you understate inflation, you overstate inflation-adjusted GDP growth. This can create an alternative reality, because we may actually be in a period of declining inflation-adjusted GDP, even though the government is telling us that GDP is increasing.
Given the importance of the consumer to the U.S. economy, the unemployment rate is a key statistic to follow. However, Williams argues that by changing the way unemployment is calculated, the government has given us a false impression of the real number of unemployed people in the U.S. In 1994, the government removed “long-term discouraged workers” from the calculation of unemployment. Today, the headline unemployment data we read about also fails to include “short-term discouraged workers.”
Note: A discouraged worker does not have a job. This is a person of legal employment age who is not actively seeking employment or who does not find employment after long-term unemployment. The government excludes them from the calculation of unemployment.
So, the unemployment data that we read about does not include all those people without a job who are not actively seeking employment, or those who are forced to work part-time because they cannot find full-time employment. Until 1994, unemployment data used to include all those who were unemployed, but now it only includes some of them.
If you were to calculate the U.S. government’s deficit according to GAAP, the same as publicly traded companies, the U.S. would have posted a $6.6 Trillion deficit in 2012. However, with a little massaging, the government showed a 2012 deficit of “only” $1.1 Trillion. ShadowStats publishes deficit data according to normal accounting principles.
Beware of statistics – we can make data tell us whatever story we’d like and it doesn’t help if those controlling the calculation methodologies have a political agenda to create misleading statistics. Many of these changes have occurred incrementally over the years and were implemented without consideration of the unintended consequences. Unfortunately, most people are now making uninformed decisions based upon statistics that they don’t understand. This takes it beyond Washington politics and has a very real impact on the life of the average consumer, which in turn is the key driver of U.S. economic growth.