Lies, Damn Lies and Government Inflation Statistics
Describing the decade that began in 2000 as the "naughties" or "oughties" offers a useful shorthand -- and particularly for people interested in discussing the U.S. economy's perilous dual pathway of rising commodity inflation coupled with financial assets deflation.
Ought and naught, of course, are two old-fashioned ways of saying "nothing" or "zero," appropriate for a painful decade that stretches from ought-one and ought-two to ought-nine.
But the term's negativism is also appropriate. As financial economists have begun to point out, between 2000 and mid-July 2008, the leading stock market yardstick, the Dow-Jones Industrial Average, dropped from a 2000 peak of 11,700 to a level 500-700 points lower. Moreover, allowing for eight years worth of inflation, by official data, the decline was nearer 25%, making the real return much worse than "naught." This is what people have to watch in a stagflationary economy, which the new Consumer Price Index numbers (June's one-month increase of 1.1 percent) have finally started to admit.
The possibility that inflation could even reach double digits should start to resolve today's central debate: whether this decade's unhappy U.S. economy is more like that of the depression 1930s or that of the stagflationary 1970s. Alas, there are elements of both.
To begin with, even the national media agree that home prices are in their biggest nationwide decline since the 1930s. Also, last month's slump in the Dow-Jones Industrial Average was the biggest June slide since the early depression year of 1930. And depending on who you talk to, the financial crisis is either the biggest since World War Two or the biggest since the 1930s.
Yet there is also escalating resemblance to the 1970s, when a global food and energy price surge followed the loose fiscal policy and boom of the Vietnam war era. No such trend existed in the 1930s. However, especially since 9/11 and then the invasion of Iraq, our decade has also seen has that kind of easy money and loose fiscal policy. As a result, global food and energy prices have been soaring.
The just-released inflation numbers suggest a gruesome possibility. Our own decade, like the years from 1966 to 1982, could see another severe economic downturn and stock market slump, but one partially camouflaged by fast-rising prices. Here is the precedent: between a Dow-Jones (intra-day) peak of 1000 in early 1966 and an August 1982 bottom of some 780, the Dow declined a nominal 22%. However, a truer calculation, adjusting for soaring inflation, put the real decline close to 70 percent -- a disguised disaster.
Could it happen again? Maybe. It is possible to imagine somewhat similar economic terrain. In 2010 or 2012, the Dow-Jones could easily be at 10,500 or 11,500, for a seemingly small ten-year or twelve year decline. But if simultaneous inflation has totaled some 30 percent, then the real decline would be 30-40% -- major league erosion, in other words.
And there is a worse possibility -- that the changed Consumer Price Index measurements in place since the 1990s have significantly underestimated inflation, and the true damage has already been much deeper. Why would Washington allow this, you might ask. The answer: that because a large chunk of the federal budget rises with inflation, the savings from understating it are enormous, however unfair to retirees and workers.
We are not talking small numbers. With global inflation heating up, the investment firm of Morgan Stanley recently noted that "The percentage of the world's population living under double-digit inflation is 42 percent. Six out of the ten most populous countries have inflation running at more than 10 percent."
Bill Gross of California-based PIMCO, the world's biggest bond manager, tells investors that interest rates on U.S. Treasury notes are inadequate. Inflation around the globe has averaged nearly 7 percent over the past decade, but the official U.S. inflation rate has averaged 2.6 percent. "Does it make any sense," says Gross, "that we have a 3 percent to 4 percent lower rate of inflation than the rest of the world?" And if Washington understates inflation by one percent, he adds, then gross domestic product has been overstated by that same amount. ("U.S. Inflation understated, Pimco's Gross says," MarketWatch, May 22, 2008)
Nor is Gross alone. In May, former Federal Reserve Chairman Paul Volcker told the Congressional Joint Economic Committee that "I think there's a lot more inflation than in those [CPI] figures." He said that the sharp run-up in housing before the recent implosion wasn't reflected in CPI data, adding that food and energy prices should not be excluded in gauging long-term trends. And when prices do go up, he said, government calculators are "much more inclined to say that there are improvements in quality" rather than an increase in inflation.
At Charles Schwab & Company, one of the nation's biggest money managers, chief economist Liz Ann Sonders wrote in June that "Over the past 30 years, major changes have been made to the calculation of the CPI due to "re-selection and reclassification of areas, items and outlets, [and] to the development of new systems for data collection and processing," according to the Bureau of Labor Statistics. If you eliminate those adjustments and calculate CPI as it would have been calculated in 1980, it would be nearly 12 percent today...No wonder clients constantly tell me they distrust government inflation data." ("Back to the 1970s?" Charles Schwab Investing Insights, June 19, 2008)
Cynics will point out that rigged data and sneaky book-keeping are par for the course in American finance. However, the accusations implicit in the Volcker, Gross and Sanders comments suggest a government scandal of the first magnitude. Maybe our presidential candidates should take a break from discussing how many troops to move from Iraq to Afghanistan or vice versa and start publicly discussing the extent to which a fundamental mismanagement of the U.S. economy rests on a framework of what can bluntly be described as lies, damn lies and statistics.
Author and commentator Kevin Phillips' most recent book is Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, published by Viking in April.
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I REMEMBER BOTH THE 30'S AND THE 70'S....................THE 30'S WERE THE WORST. HAD FAMILY WORKING IN THE CCC AND WPA.........WHO LATER, DUE TO THAT HELP, WENT ON TO BETTER AND BIGGER THINGS. IN THE 50'S THERE ALSO WAS A RECESSION AND MY HUSBAND LOST HIS JOB AND TOOK ONE AT HALF THE SALARY..........THE 70'S WERE NOT AS BAD AS EITHER OF THE PREVIOUS FOR US. WE MANAGED....WERE FRUGEL AND SAVING AND NOW RETIRED LIVING PRETTY WELL.........BUT WITH THE FORKING BUSH ECONOMY OUR LIFE SAVINGS ISN'T GOING AS FAR AND WE MUST AGAIN TIGHTEN OUR BELTS AND WATCH...........................
The preferred spelling is aughties rather than oughties although both are acceptable. They should put the adolescent Bush smirk on Mt. Rushmore to commemorate the debacle that is still unfolding.
I recently paid $35 for a 20-lb. bag of quality cat food that cost $23 a year ago. In my stupid way, I thought this was a 52% increase (12/23). I was concerned until I found out this was actually only 2.6% inflation.
Maybe what the govt. should do is to uncouple the cost of living increases in entitlement programs to the CPI figures and just vote an increase each year, depending on what Congress thinks it can afford. Then publish a REAL inflation number so we live more or less in reality. This approach would force Congress to publicly announce its preferences each year -- more war in Iraq, or a living stipend for the elderly? Cat food for seniors, or more wars of choice? I'd love to see them run that one by AARP.
Superbly put -- bravo, you -- and my experience of reality echoes yours. Most things I buy are up by 25-75 percent, since the biofuels boondoggle and frenzy of commodities speculation began.
Before concluding that inflation is underreported, one needs to pinpoint what is being alleged. Overall inflation? Ex volatile food and energy? Consumer prices? Producer prices?
Inflation is measured by determining the movement of the price of a basket of items on a month to month basis. Depending on the relevance of those items to what it is you actually buy, inflation can be deemed either very accurate or not.
Bill Gross' comment that interest rates on Treasury bills is inadequate is not necessarily a comment about inflation. He is a bond manager, and may feel that investment in these instruments, when compared to corporate and municipal bonds, is relatively less on a total return basis.
Also, to say that global inflation is not likely to be much higher than that in the US is to ask whether the calculation is weighted by population. If so, then, the extraordinarily high levels of inflation in China and the US would dwarf that of the US, thereby making our weighted average inflation rate much lower in comparison.
There is not sufficient information in this article to draw the conclusions suggested by the author.
I don't think Mr. Phillips is basing his article on the comments of the bond manager. His reference is to the pre-Clinton method of calculating inflation which was discontinued as part of a cost-saving approach to the entitlement programs, to limit CPI increases. And it isn't only about a "basket of goods." Greenspan also introduced the substitution principle (the elderly can eat dinner out of the same can as their cats when steak gets too expensive) and the hedonic improvement angle (a TV may cost a whole lot more now, but you enjoy that hi-def so much, what's the difference?) The point is that the system is gimmicked, a dry-lab experiment to produce a number that Congress can afford while still feeding the military monkey.
Hi, and thanks for your comment. I did not intend to intimate that the "basket of goods" was a complete explanation for the calculation of CPI, nor that the conclusion of the author was based in totality on Gross' comment.
My point is that, even in consideration of these issues, as well as Volker's comment with respect to underreporting, and productivity factors inherent in the calculation of both PPI and CPI, the conclusion of the author is not supported by the facts he presents.
The state and trend of the U.S. economy is many thousands of times more a threat to our security than any rag tag terrorist group. To begin with, at what point can we no longer tax or borrow enough to feed the massive military/industrial machine that purports to defend us? Simply put, with a shrinking economy, we have shrinking security, and not just at border crossings and shopping malls, but in our ability to project global influence.
So understating inflation, first undertaken by Reagan in an effort to make voodoo economics appear to be working, works against recognition of the truth that America has been in economic decline from the fiscal policies of the last three decades. Maybe it does not feel like decline to a 30 year old, but with some perspective about where we started, America's standard of living has declined by half. That means we can afford half the life style, half the infrastructure, half the medicine and half the defense that we once had. Somebody has been committing treason for money and their name is the GOP.
Hold on, I bet your solution is to vote for some one that wants to follow Hoover's same plan back in 1929. You ask, "at what point can we no longer tax or borrow enough...". right now, we are over taxed and we have over spent. So increasing taxes, increasing gov. entitlements, is something you should be completely against especially in this time of economic downturn.
Let's see, solutions are always better then complaints. Drill for oil, stop using food for energy (reason food cost have gone up), stop the flow of cheap labor that takes from the American worker, leave Iraq better then when we went in, for long term stability, maintain a strong military so we don't get put in the same situation, stop teaching the younger generations to celebrate our differences and start teaching the core values that made this country so great, stop believing that the constitution is a living document and get back to what it says, it is really rather straight forward (unless you need to explain what you mean by "is").
I'm angry too, I don't like what I see, but pushing this country farther down the slope that has been created is suicide.
Hoover's plan was to let the Great Depression play out as a natural economic cylical downturn. He was a social Darwinist. So, no, I don't recommend Hoover's non-solution.
Technically, we are not only not overtaxed, we are enjoying historically low taxes as a percent of income. The problem is, drum roll please, inflation. Borrowing to pay for a war is fundamentally inflationary. Now you can argue that taxation is more onerous than inflation, but you'd be wrong. Inflation due to government borrowing is just hiding taxation.
Solutions are better than complaints. But, unless we agree on what the problem is, the solution will not be forthcoming. I read and like some of your solutions, but lets recognize that our economy is the engine that drives the well being of every American, rich, poor and in between, and make an effort fo correct the directiion, which is definitely towards the toilet. Can we agree on that? If so, the discussion can turn to fundamentals, e.g., sharing productivity gains which will lift wages and grow the tax base.
what does drill for oil mean? does it mean letting oil companies lease land for pennies an acre and then pump out billions in crude? are you suggesting that giving away our oil to business is in our interest?
regarding food for energy, it seems to me that only a few years ago farmers were being forced off their land because prices were too low. they have found an emerging market for their products, and it is a good thing, much better than the government buying surplus food and then storing it, or destroying it. besides, i'd much rather make farmers in iowa and nebraska and california rich, than make another arab dictator rich!
no, the economic woes of this country are the result of a government asleep at the switch, a president too dumb for the job, worked like a puppet by a meglomaniacal vice president, and a military with more money and time than it knows what to do with. high prices flow from instability. what could be more destabilizing than one country attacking another half-way around the world for no reason?
it is said that we get the government we deserve. sadly, when we vote for a president that has trouble forming complete sentences, that has happened.
Now, how exactly do you define "overtaxed"? Cause the way that I'm seeing it, even the HIGHEST wage earner in the US is still paying less than 30%, assuming that they aren't using any loopholes. Compare that to the more than 90% under Eisenhower, and we were doing MUCH better then! Compare that to the 70% under Kennedy/Johnson, and we were doing better then than we were under Eisenhower. Compare BOTH of those to the bush/bush/raygun eras..... You will find that we are actually UNDER taxed at the upper income levels!
Regarding your opposition to tax increases... it depends on the tax. Take the estate tax, for example. It should be increased dramatically. One of the root causes of the problems that we are in has to do with the plutocracy. We have large numbers of shiftless frat-boy types that are two, three and more generations removed from the source of their money. And with their money comes their power. For the good of the country we should tax away their influence and their ability to cause harm. We'd level the playing field.
I'd favor no tax on the first 2 million (maybe twice that if there is a disabled son/daughter to consider) and 100% tax on the rest. Use the proceeds to provide funds for either small business start-ups or training for promising young people (with the rest going to pay down the national debt). No more Bush, Mellon/Scaife, or Walton heirs wreaking havoc on the rest of us, while simultaneously increasing the numbers of young entrepreneurs and professionals.
You can't just oppose tax increases across the board. Some tax increases would be a phenomenal boost to this country.
I agree with everything you say except the last line. While I do agree that the GOP is responsible for most of these get the Rich richer schemes we must never forget that we also have compliant Dems seated on the Hill also.
It would seem that the air or the water inside of the beltway is toxic to morals and decency and in turn makes a lawmaker only concerned with continuing the lifestyle of being wined and dined and treated like big-shot.
I know that I enjoy free tickets to the ball game when you company is so inclined. It is even better if I get the parking pass and free food and booze. Now make that your daily regiment. It is easy to see how being treated to the finest things in life could be corruptive. It doesn’t excuse it but it does explain it.
Now how do we fix this? It is not likely that the people that make the rules will ever pass more restrictive ones on themselves.
Yeah, the military industrial complex is a monster and must be slayed.
The failure of the US to in a timely fashion invest in green r&d, creating actual products of material value, and rather base its economy on cheap credit and speculation in greed is good, boom town mentality, military-industrial-petrochemical-pharmeceutical-financial institution welfare and entertainment consumer statism, the latter along with twenty dollar tax breaks being the opiate of the people, has it appears left the world in deep doo-doo. The voodoo doo-doo oily economics we're all addicted to.
Nicely put, we do live in a cult of celebrity.
I've been emailing various news outlets for years imploring them to report this story of fraudulent government statistics, but they just don't care.
Hey CNN Your Money / Issue #1.... got those emails? You're the Worst Financial Team on Television.
Good article....but no one is listening. The CPI Farce has been around for years but there is no organized outrage from the country. As you point out, it takes us back to a time where you cannot trust anything the government tells us. Whether it is weapons of mass destruction, imminent threat or axis of evil, or the CPI, unemployment rate and inflation rates, we have lost faith in our government to provide us with information. The current administration's penchant for secrecy and continued defiance of the rule of law.... and congress' inability to hold them accountable I bellieve have greatly contributed to the overall instablitiy of our financial markets currently...... and has contributed to the decline of our democracy as a whole. When the President comes out and addresses the nation and says "everything is fine" while the Fed Chairman is testifying that we have some real issues to contend with....what does that say to the rest of the world? This country is in for some tough times and we better elect a new administration that is up for the job.
Skindoggy
Nothing that man ever said came true! Bragging about the many new homeowners when he knew the economy took a downward turn. Then we have no recession. Then the manipulated inflation figures,
with energy and food left out instead of being included would well be in the double digits!
Food and gasoline prices aren't included in inflation numbers! The very things that working class people spend most their money on. Sounds like the sort of deception to be expected of an oligarchy. Oh, that's right. Republicans have been calling the shots for the past three decades. By the way, thank you for your wonderful books, Kevin Phillips.
CPI does include food and energy prices, John. They are sometimes removed for long range comparison purposes, as they are very volatile on a month to month basis, but the CPI number promulgated every month does include these items.
Actually, that's not entirely true. Food and energy prices are left off of the Core CPI, ostensibly because they are too volatile. However, they are ALSO not reported by the govt (or when they are it's buried in the back of the report!) during their comments about inflation. They use CORE CPI.
Further, since energy and food are no longer volatile, but simply INCREASING, perhaps it's LONG past time to actually go back and INCLUDE them in our standard numbers, shall we???
I would seriously wish to know if the CPI does or does not take energy and food costs into its calculations. With inflation reported to be at its highest in 17 years my government COLA went down. When I inquired about this ridiculous situation I was informed by my retirement organization that food and energy, 80% of my costs, were not included. What in the hell is the honest? From my standpoint the COLA should have doubled if it was acurately reflective of my cost of living.
Memo from whitehouse to financial and economic agencies:
'Have some fun with the numbers, steal from the poor and give to the rich, hide from damaging exposure by including as many reports and charts as possible, with multiple references, without getting pinned down with any one and have a nice day'!
Kevin Phillips has been predicting disaster for quite some time. He is right as usual. Lies, lies, damned lies. The people need to take control of the truth process. The government is not run for its own benefit or those of its cronies. A good house cleaning and a different method of campaign funding would be a start. A truth in government law would also help. Cooking the books to cheat pensioners on a fixed income or to fool worker will the false premise of adequate wages is simply a pack of lies. What kind of democracy is this?
All sound remedies you suggest, but for a government out for itself, its cronies and special interests - well, its the fox guarding the henhouse. What is the solution? Anyone? A government run by corporate interests has no interest in correcting itself. And all the meanwhile the electorate has grown flabby in mind and body on fast food and the junk media.
What kind of democracy is this? A democracy run by big business and K Street with only the illusion of 'for and by the people'.
Odd, it seems the more information we have the less we can do about any of it. Or perhaps that's just a coincidence.
Read "A People's History of the United States" by Howard Zinn. This country has always been like this; is, in fact, founded on fascist principles. The people who have benefited from the "Great American Experiment" have always been in the top 20%.
We have good rhetoric, and that has done some good in the world, overall...but if you look at the actual actions of the US and the various administrations that have headed it....you'll see that we have never, in fact, followed our own rhetoric.
"The economy is basically sound." --G.W. Bush
Translation= The economy is about to self destruct.
Apparently, it started in the early 90s under Clinton - with his inability to veto a republican congress bent on de-regulation. So this is no time to gloat or say I told you so (just inferring from your screen name).
You suffer an extreme case of short term memory loss.
Go back two terms to the wonderful days of the other memory problem guy, Reagan, and examine the nation destroying DE-REGULATION.
Every major problem we face is related to either:
1 De-regulation
2 Lack of oversight
3 Lack of accountibility, which brings us full circle to DE-REGULATION!
Oh, right..."Clinton did it too!" Puh-lease.
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