Listening In (the numbers behind the lies...how the US is fudging numbers)

[Roland99]

http://www.weedenco.com/welling/Downloads/2006/0804welling022106.pdf

A very dismal prospect. No question, this is the dismal end of the science— even for a dismal scientist! But the longer I’ve looked at the numbers and the statistical series as they’ve evolved over the decades, the more that I’ve started finding things in the numbers that most people do not see. One thing that you find when you look into all this is that the federal government is very honest in terms of disclosing what it does. It always footnotes the changes and provides all the fine details. Nonetheless, some of the changes are nothing short of remarkable and the pattern over time is what I call Pollyanna Creep—

...

What has happened over time is that the methodologies employed to create the widely followed series, such as what used to be called the GNP but is now widely followed as the GDP, the CPI, the employment numbers, all have had biases built into them that result in overstating economic growth and understating inflation— both of which are admirable political goals

...

Real unemployment right now—figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression—is running about 12%. Real CPI right now is running at about 8%. And the real GDP probably is in contraction. I venture that if you talked about those numbers now with the average person, they would say that they seem reasonable. If you tell them that people are playing with the official numbers, they say, “Yep, I figured that. There are no great surprises there.” I guess what I am saying is that my work shows that the economic perceptions of non-professionals actually have some real validity; there are in fact reasons for the disconnect between official statistics and what the populous is feeling.

...

One of the prime examples of how the system has really degenerated over time is the CPI. There was a very deliberate effort in the early 1990s under the auspices of Michael Boskin, who at the time was the head of the Council of Economic Advisors, in conjunction with Alan Greenspan, who, of course, was Fed Chairman, to “fix” the CPI. The story, very simply, was that CPI was supposedly overstating inflation. The pitch was that if people go out to shop and find that buying a steak is getting expensive, they buy hamburger instead. Therefore, their cost of living is really less than it would be if they always had to buy a fixed basket of goods, which is what the CPI was originally designed to measure. That was the whole purpose of the CPI, to measure the change in the cost of a fixed basket of goods over time. You’d have a steak, a loaf of bread, a gallon of milk, whatever. You’d price them out one year and then you’d price out exactly the same goods the next year. You’d look at the difference in the cost and that was your annual rate of inflation. It was a measure of how much the cost of a consistent and constant standard of living was going up. What Boskin and Greenspan argued was, “We should allow for substitution here because people can buy hamburger instead of steak, when steak goes up.” The problem is that if you allow substitutions, you aren’t measuring a constant standard of living. You’re measuring the cost of survival. You can keep substituting down and have people buy dog food instead of hamburger. It happens. But that’s not the original concept behind the CPI. The reason substitution of the items in the CPI basket became a hot topic in Washington at the time—and it was talked about very openly—was because the CPI was (and is) being used to adjust Social Security payments to compensate for increases in the cost of living, and tamping it down would hold down Uncle Sam’s outlays.

Williams later goes on to rail against Clinton for fudging unemployment numbers and later states he is a Republican by birth, a conservative, but that he's disgusted with both parties for creating and now ignoring this situation.

Very good read and there is MUCH more at the link. Get it while you can!


A Primer On Government Economic Reports (related article)
http://www.gillespieresearch.com/cgi-bin/bgn

Notice the links in the top-right:

Series Master Introduction Read.
1. Employment and Unemployment Reporting Read.
2. Federal Deficit Reality Read.
3. Consumer Price Index Read.
4. Gross Domestic Product Read.

[ozymandius]

1. So when a recession actually makes the news (2001), and when GDP is

reported at an anemic <2% - what are the real numbers?

This reminds me of a Martin Goldberg column from a few months back:

I must live on the most unlucky neighborhood in the US. The US released the unemployment number a couple of weeks ago which indicated that our national unemployment rate is a benign 0.2%, but nobody on my street has a job, except for the 10 people who are real estate brokers, agents, or mortgage loan originators. Oh that’s right; there are also 2 cooks and 5 waitresses. I believe that Europeans should try to look to the US business model and structure their economy in a similar manner, because as our economic statistics clearly show, we’re in the 7th year of controlled growth and no inflation. Europe fiddles but here in the US we are in a Goldilocks economy. If you want proof of our robust economy, just check out our economic statistics. President Jeb Bush is trying to lobby congress to pass a law to limit corporate income taxes to a rate of negative 2% of pro-forma earnings. Larry Kudlow has openly campaigned for this bill in his CNBC TV show. His rationale is that this law will boost the stock market because the more a company earns, the government’s negative tax becomes greater, so that there will be even more incentive for corporations to make more money, especially the pro forma kind. And of course the middle class and poor should welcome the chance to subsidize corporate America with the negative tax because (or course) what’s good for corporate America is good for America. The negative corporate tax rate will be made up for via more government debt from Asia as it seems as if there is still no end in site to the amount of money they will lend the US. Even though China has learned how to produce things of value over the last 10 years or so, as hard as they try, they just can’t crack America’s valuable talent in the area of consumption. For that, China and the rest of the world continues to be grateful. And let’s not forget that negative corporate taxes are good for the bottom line and the stock market where we all have our 401K’s that most Americans are so dependent upon.

http://www.financialsense.com/Market/goldberg/2005/0526.html

[Warpy]

2. Those aren't the only numbers being fudged

Consider the poverty line. A market basket of food is totaled up, and the government assumes a family of four spends a third of its budget on food. Right now, $6000 will feed that family for a year, to Uncle Sugar tells us the poverty line is $18,000 for a family of four.

Well, food has inflated relatively little compared to everything else, and that family now spends only a sixth of its income on food. That means the poverty line is six times the $6000 yearly food bill, or $36,000 for a family of four.

By defining poverty downward and by substituting items in that family food basket, the government is cheating poor people out of the services it mandates by law. Poverty has been effectively defined downward to destitution, a level where people can't feed themselves adequately, live in substandard housing, and do without medical care.

This is evil. There is no other word for what is being done to the people in this country and neither party seems to give a shit.

[Quequeg]

3. Public's views more accurate than the expert's

From the link which is in the first post:
http://www.weedenco.com/welling/Downloads/2006/0804welling022106.pdf

These overstatements have become such a serious problem that there is a little bit of a disconnect today between what a person on Main Street thinks is happening and the economic numbers you see coming out of the federal government.

If you go back, I'm guessing it was five to ten years ago, the Kaiser Foundation conducted a survey of the public's views on the levels of the CPI, unemployment, GDP growth and such, which was reported in the Washington Post. The gist of all the article was, "Ho,ho, ho, ho. Look how stupid the American people are. They don't realize that inflation is so low and that unemployment is so low."

But the joke was really on the guys doing the survey, because the average person has a pretty good sense of where prices and things are. If the numbers don't seem real to the man in the street, they probably aren't.

I heard George Will explain the discrepancy between the public opinion and the statistics by suggesting that Americans are spoiled, whiners who just don't realize how good they've got it.

But other pundits are just totally mystified about why the President is not getting more credit for delivering such a great economy. After all, unemployment is only 4.7%, core inflation is only 2.2%, and the GDP is growing strongly. Why don't Americans feel good about the economy? Such a mystery...

Then, the pundits say that Bush needs to go out and tell people how good things are.

[ticktockman]

4. Pollyanna Creep and how the US is fudging numbers

A very dismal prospect. No question, this is the dismal end of the science— even for a dismal scientist! But the longer I’ve looked at the numbers and the statistical series as they’ve evolved over the decades, the more that I’ve started finding things in the numbers that most people do not see. One thing that you find when you look into all this is that the federal government is very honest in terms of disclosing what it does. It always footnotes the changes and provides all the fine details. Nonetheless, some of the changes are nothing short of remarkable and the pattern over time is what I call Pollyanna Creep—

I've noticed the same thing. The federal government occasionally changes the methodology by which certain statistics are generated and, more often than not, those changes seem to "improve" the statistics in a manner that makes things look better. However, they do seem to be pretty good about documenting those changes. This makes sense as I think that the great majority of the government's analysts are honest, non-political people who take pride in their professions. However, the system is such that, when there is a choice between alternate methodologies, political influences can have an effect on which one is chosen. Also, such influences can effect what is included in the budget. A section on Generational Accounting was dropped from the budget by the Clinton administration and a study of the government's long-term liabilities, begun by treasury secretary Paul O'Neill, was dropped from the 2004 Budget shortly after O'Neill was fired from the Bush administration.

Regarding "Pollyanna Creep", I noticed that the long-run budget projections have greatly improved over the last three years. In the 2004 Budget, the 2080 deficit and debt were projected to be 33.5 and 466 percent of GDP, respectively. By the 2007 Budget, these projections had dropped to 13.7 and 177 percent of GDP, respectively. This sharp drop prompted me to compare projections from the past 7 Budgets. It seems that the improvement in the outlook over the past three years is due chiefly to the projection that receipts will rise to a historically high 22.4 percent of GDP by 2080. A secondary reason seems to be that recent budgets are projecting lower Medicare costs than the Trustees Reports on which they are based. This suggests to me that the 2004 Budget projections may turn out to be the more accurate. In any case, these topics are mentioned in points 10 and 13 listed at http://home.att.net/~rdavis2/pro2007.html . Following are all of the points listed:

1) The debt held by the public is projected to drop to 26.2% of GDP by 2020. It is then projected to climb, reaching 177.4% of GDP by 2080.

2) In 2004, receipts were 16.3% of GDP, their lowest relative level since 1959. They are projected to rise to 22.4% of GDP by 2080. This will be their highest level since at least 1940, surpassing their prior high of 20.9% of GDP reached in 1944 and 2000. Page 187 of the Analytical Perspectives states: "This increase reflects the higher marginal tax rates that people face as their real incomes rise".

3) Outlays are projected to drop from 20.1% of GDP in 2005 to 18.9% of GDP by 2010. They are then projected to rise to 36.1% of GDP by 2080. Of this 17.2% of GDP increase, 7.5% is Net Interest, 7.6% is Medicare, 2.2% is Social Security, and 1.8% is Medicaid. As a percentage of GDP, there is projected to be a drop of 1.4% in other mandatory spending and a drop of 0.5% in discretionary spending.

4) By 2080, the deficit is projected to rise to 13.7% of GDP and, as a result, the debt held by the public is projected to rise to 177% of GDP. However, these figures are less than half of the two-year-ago projections of 31.6 and 432 percent of GDP, respectively.

The remaining tables compare the projections from Clinton's final budget (2001) and all of Bush's budgets. They make evident the following:

5) Receipts projected for 2080 dropped from 20% of GDP in the 2001 Budget to 18.7% of GDP in the 2002 Budget. They were still projected to be a relatively low 19.3% of GDP in the 2004 Budget but then rose sharply to 22.4% of GDP by the 2007 Budget.

6) Outlays projected for 2080 rose from 31.7% of GDP in the 2001 Budget to 53.2% of GDP in the 2005 Budget. They then dropped sharply to 36.1% of GDP by the 2007 Budget.

7) Discretionary outlays are projected to stabilize at some percentage of GDP after 2020 by the Bush budgets. This percentage varies from a low of 5% of GDP in the 2002 Budget to a high of 6% of GDP in the 2004 Budget. The figures shown from the last Clinton Budget of 2001 assume that discretionary spending will just grow with population and inflation.

8) Mandatory outlays projected for 2080 dropped from 23.1% of GDP in the 2001 Budget to 19.9% of GDP in the 2002 Budget. This 3.2% of GDP drop was chiefly due to a 5.8% of GDP drop in projected Medicaid outlays. There was also a 3.7% increase in projected Medicare outlays and a 0.6% and 0.4% of GDP drop in Social Security and Other Mandatory outlays.

9) Mandatory outlays projected for 2080 then rose to 24.6% of GDP by the 2005 Budget. This 4.7% of GDP gain was chiefly due to a 3.9% of GDP gain in projected Medicare outlays. Most of this gain (3.2% of 3.9%) occurred in the 2005 Budget when the new Medicare prescription drug benefit was first included in the projections.

10) Mandatory outlays projected for 2080 then dropped to 21% of GDP by the 2007 Budget. This 3.6% of GDP drop was chiefly due to a 2.1% of GDP drop in projected Medicare outlays. The projections are now about 3% of GDP less than the 2005 Trustees Report on which they were based. More information on this difference can be found at <A HREF="promed07.html">promed07.html</A>.

11) Net interest outlays projected for 2080 rose sharply from 5.8% of GDP in the 2001 Budget to 23.9% of GDP in the 2004 Budget. Most of this 18.1% of GDP gain (15.8% of GDP) occurred in the 2004 Budget. The projections then dropped to 9.4% of GDP by the 2007 Budget.

12) The deficit projected for 2080 rose sharply from 11.7% of GDP in the 2001 Budget to 33.5% of GDP in the 2004 Budget and dropped sharply to 13.7% of GDP in the 2007 Budget. The following table shows the makeup of the 21.8% of GDP increase from 2001 to 2004 and the 19.8% of GDP drop from 2004 to 2007:

    COMPONENTS OF CHANGE IN DEFICIT PROJECTED FOR 2080

    Component of change   2001-04  2004-07
    --------------------- -------  -------
    Receipts.............   -0.7      3.1
    Discretionary Outlays   -3.2      0.4
    Mandatory Outlays....    0.3      1.8
    Net Interest.........  -18.1     14.5
    ---------------------  -----     ----
    Deficit change.......  -21.7     19.8

As can be seen, the largest component of the rise and fall in the projected deficit is Net Interest. This shows how a relatively small difference in annual receipts or outlays can cause a much larger difference in net interest. This is because net interest is based on the debt which is the accumulation of all past deficits.

13) The table above shows that the increase in projected receipts is the largest non-interest contributor to the drop in the deficit projected for 2080. On this topic, page 188 of the 2007 Analytical Perspectives states:

"Over the last 40 years, for example, receipts have averaged 18.2 percent of GDP. Tax receipts have risen above this ratio from time to time, most recently at the end of the 1990s, but those periods of high taxes have always been followed by tax changes that have restored the average tax ratio. Although such changes require legislation and so are not implied by current law, a plausible alternative is to hold the receipts ratio constant relative to GDP. In that case, the deficit rises somewhat faster than in the base assumptions."

The cause of the drop in projected Mandatory Outlays, the next largest non-interest contributor to the drop in the projected deficit, is discussed in point 10 above.

14) Similar to the deficit, the public debt projected for 2080 rose sharply from 112% of GDP in the 2001 Budget to 466% of GDP in the 2004 Budget. It then dropped sharply to 177% of GDP in the 2007 Budget.

[Greyhound]

5. Absolutely fascinating article, thank you for posting it.

It, unfortunately, verifies what many of us have been saying for years. I plan to use it in my job extensively.

[Greyhound]

6. Kicking to access link to this article.

I work on so many different systems that are locked down, I have a hard time accessing this truly amazing piece.