The Monday Morning Economist
Independent Opinion - Unadorned

Is our government “cooking the books”?

The short answer is yes. There are two serious problems with our national bookkeeping. The unemployment rate and the consumer price index are being cooked.

The first problem, the seeming inaccuracy of the unemployment figures, can be traced to the Reagan administration. It was decided that unemployment figures were scary for the new administration so, in 1982, they created new constraints on who could be counted as unemployed. They dropped people who had not looked for a job in the last two weeks. They also dropped teenagers who had been employed but were now unemployed. By some estimates, the real unemployment rate is closer to 10% than it is to 5%.

Clues to the second problem, a strange sounding CPI, can be found on the official website of the Bureau of Labor and Statistics as pointed out by Walter "John" Williams; Shadow Governemnt Statistics, where there is a great deal of documentation explaining what they do and how they do it. You will find there, many discussions of some seemingly harmless data manipulations that have been incorporated into the calculation of the Consumer Price Index (CPI) over the years. The CPI is advertised to track the cost of a fixed “market basket” of items that people consume and report the change in the price of those items from year to year. It is commonly referred to as the Inflation Index.

As it turns out, the harmless data manipulations are the problem. The “market basket” is not fixed and does not contain the same items over time. In 1982, during the Reagan administration, things weren’t going too well as far as economic data was concerned. It was decided that things could be made to look better if inflation appeared to be more under control. So the things that were included in the calculation of the CPI were changed. Notably, the cost of renting a home replaced the cost of buying a home in the CPI. This is just the start of something larger. Since the Gross Domestic Product calculations are based, in part, on the CPI calculation, lower CPI resulting in a higher GDP, Reagan's reformulation of the CPI resulted in a falsely high report on GDP. The great Reagan economic expansion was based on cooking the books. Just like Enron.

It does not end with Reagan.

It gets worse. Under the G.H.W. Bush administration, Michael Boskin, chief economic advisor, and Alan Greenspan, Chairman of the Federal Reserve System, argued that the CPI overstated inflation. They argued three major things. One is that if an item becomes too expensive, people stop buying it and substitute something cheaper. Say if shoes got too expensive and you started wearing clogs, the price of shoes would be replaced in the CPI by the price of clogs. The Second is that if there is a lower priced outlet for goods and services, everyone will use it. So, everyone is assumed to shop at Wal-Mart and so the Wall-Mart price is what is in the CPI. Third, they argued that quality improvements should offset price increases. This means that if you pay more for a car with airbags, this is an improvement in quality and is worth more so should not be counted as inflation. Their thinking has incorporated into the CPI calculations over time. Each time the CPI comes out, it represents a different cheaper market basket.

But wait, there's more, to complement the theory that permanently substitutes items in the market basket when they become unaffordable, there is a system of weighting. Weighting means that the actual percentage that the price of an item has changed is not reported. Instead price changes are adjusted to have more or less impact on the total calculation of the price of the market basket. When prices of an item are going up, the weight of that item in the basket is decreased, on the theory that people will buy less of a thing that is becoming more expensive. And even more clever, the weight of items that are going down in price is increased to supposedly reflect that people will buy more of something that is going down in price. So if things that are increasing in price are discounted and the things that are going down are emphasized you can see that it is very hard to get the CPI to go up.

What we are measuring and publishing as if it were a Consumer Price Index is in fact better characterized as a measure of how people are currently spending money. If that is what you are measuring it is hard to see how the CPI will ever be a statistic that will alarm anyone because people will always be able to spend on something, even if they are living on dog food. I suppose if dog food gets to be too expensive they can live on air. Inflation problem solved at last.

So no wonder I can’t afford steak. The CPI is telling me I should be eating hamburger and that a new car costs $5,200 at Wall-Mart.

By their own admission, Boskin and Greenspan proposed this only in order to reduce the cost of government. If the CPI reported were less, never mind not accurate, it would allow the government to stiff variable price contractors and labor whose contracts were pegged to the CPI. It would also significantly reduce Social Security payments over time. By some estimates, Social Security payments are 40% lower than they would have been had the CPI not been “fine tuned“. Even more sinister is the fact that many companies use CPI data to calculate cost of living increases for employees. So, your paycheck might have been 40% more than it is now. You may thank Reagan, Bush, Clinton, Bush, Boskin and Greenspan.

Even as you read this, there are economists that still say the CPI overstates inflation and they are arguing that is should be abandoned for computations that show even lower inflation.

Statistics are a useful tool. They are also susceptible to abuse. The American people should demand better.

Continued…Why am I broke all the time?

What to do about this problem:

People in government need to resist the temptation to “look good”. In the cases of the incompetent, this is commonly not possible. We, the people, need to understand that the competent do not need to “cook the books”.

Restart the system of government accounting with today as the first day. Our history has been polluted with craven lies. Go forward with an honest accounting of the unemployed based on a simple question. Do you want a job? Go forward with the CPI with today’s “market basket” modified only if the polling on a particular item shows that people wouldn’t change their buying habits if they had more money. And drop that absurd “quality” “bias”. Today is the first day of the rest of our history.

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