[R-G] [BillTottenWeblog] Behind the falsification of US economic data

Tue Jun 17 03:22:52 MDT 2008

by Peter Daniels

World Socialist Web Site www.wsws.org (June 02 2008)

In recent years, it has become increasingly clear to those who follow US
economic statistics that there is something dubious about the numbers
released by official government agencies and used to guide many aspects
of social and public policy.

The details and chronology of the corruption of economic data are
presented in a new book by Kevin Phillips, the political commentator and
former Republican Party adviser who has become something of a muckraking
critic of the "excesses" that he helped set in motion. The book is
entitled Bad Money: Reckless Finance, Failed Politics, and the Global
Crisis of American Capitalism. Phillips summarizes some of his main
conclusions in an article in the current issue of Harper's Magazine.

The article focuses primarily on three measures: the monthly Consumer
Price Index (CPI), the quarterly Gross Domestic Product (GDP), and the
monthly figure for the unemployment rate. Phillips convincingly
demonstrates that the real unemployment rate in the United States is
between nine and twelve percent, not the five percent or less that is
officially claimed. The real rate of inflation is not two or three
percent, but instead, between seven and ten percent. And real economic
growth has been about one percent, not the three to four percent
officially claimed during the most recent Wall Street and housing bubble
that has burst.

Phillips's background makes his statements all the more significant. He
was a prime strategist for Nixon's 1968 presidential campaign and one of
the main architects of the notorious "Southern strategy", through which
the old Republican Party of Wall Street and Main Street refashioned
itself with a right-wing populist appeal, stoking racial antagonisms
while above all capitalizing on the bankruptcy of American liberalism to
shift the political spectrum sharply to the right.

The corruption of official statistics is not the work of one
administration, and Phillips traces it back nearly fifty years. The
current occupant of the White House has, in fact, been somewhat less
active on this front than his predecessors.

Soon after John F Kennedy took office in 1961, Phillips points out, he
appointed a committee to recommend possible changes in the measurement
of official joblessness. What soon followed was the use of the category
of "discouraged workers" to exclude all those who had stopped looking
for jobs because they weren't available. Many who had lost employment in
basic industry, in a trend that was just beginning to pick up steam with
automation and the rise of global competitors in such industries as
steel and auto production, were no longer counted as unemployed.

During the administration of Lyndon Johnson, the federal government
began using the concept of a "unified budget" that combined Social
Security with other expenditures, thus allowing the current Social
Security surplus to disguise growing budget deficits.

As Phillips reports, Nixon tried to tackle the "problem" of statistics
in typically Nixonian fashion: he actually proposed that the Labor
Department simply publish whichever was the lower figure between
seasonally adjusted and unadjusted unemployment numbers. This was
apparently deemed too brazen an attempt at manipulation and was never
implemented.

Under Nixon's Federal Reserve chairman, Arthur Burns, however, the
concept of "core inflation" was devised. This became the means of
excluding certain areas like food and energy, on grounds of the
"volatility" of these sectors. The suggestion was that these prices
jumped and then sometimes fell, so that it was best to remove them from
the prices surveyed. In fact, food and energy together accounted for an
enormous portion of spending for most sections of the working class and,
as Phillips also explains, these two sectors are "now verging on another
1970s-style price surge". As of last January, Phillips writes, the price
of imported goods had increased 13.7 percent compared with a year
earlier, the biggest jump since these statistics began in 1982. Gasoline
prices, meanwhile, have soared by more than thirty percent since just
the beginning of this year.

The Reagan administration addressed itself to the pesky problem of
housing in the inflation index. An "Owner Equivalent Rent" measurement
was dreamed up for the purpose of artificially lowering the cost of
housing - from a purely abstract statistical standpoint. Under Reagan,
Phillips also points out, the armed forces began to be included in the
labor force and among the employed, thus reducing the unemployment rate,
even though these same members of the military would in many cases have
no employment in civilian life.

George H W Bush and his Council of Economic Advisers proposed the
recalculation of inflation statistics to give greater weight to the
service and retail sectors and, again, reduce the official rate of
inflation.

This change was actually implemented during the Clinton administration.
Clinton also carried out other changes, including a reduction in the
monthly household sampling from 60,000 to 50,000, a decrease that was
concentrated in the inner cities and had the effect of reducing official
jobless figures among African-Americans.

The Clinton years were an especially active time for imaginative
tinkering with economic data. Three other "adjustments" in the Consumer
Price Index were implemented under the Democratic administration:
product substitution, geometric weighting, and hedonic adjustment.

Product substitution means that, for example, if steak gets too
expensive, individuals substitute hamburger. Steak is simply removed
from the typical food basket even though it has been used in the past to
track price changes.

Geometric weighting is defined as lower weighting in the price index for
those goods and services that are rising most rapidly in cost, on the
assumption that they are consumed in lower quantities. This may of
course be true, but the aim is to reduce the inflation figure, covering
up the fact that some items are no longer affordable for tens of
millions of people.

Phillips is particularly scathing about "hedonic adjustment", also
implemented during Clinton's presidency. In this concept, the supposedly
improved quality of some products and services is translated into a
reduction in their effective cost. This is another obvious attempt to
reduce official inflation. "Reversing the theory, however, the declining
quality of goods or services should adjust effective prices and
therefore add to inflation", Phillips writes, "but that side of the
equation generally goes missing".

Phillips explains that every single one of the statistical revisions
implemented over the past two generations have become permanent. Once
initiated by a Democratic or Republican administration, they were
carried over to the Bureau of Labor Statistics and other agencies in
bipartisan fashion, no matter who the current occupant of the White
House was.

To all of the above should be added one other element, which Phillips
does not discuss, perhaps because it does not stem from the economic
data itself. That is the explosive growth of the US prison population,
which has soared over the last thirty years and now stands at 2.3
million, compared to an overall labor force of 153.1 million. This
situation, the outcome of the misnamed war on drugs and the overall
bipartisan law-and-order hysteria, keeps the official unemployment rate
artificially low. Between the army and the prison system, official
joblessness is reduced by perhaps two percent.

Phillips points out that all of the changes in economic recordkeeping
over the past fifty years were not the result of some grand conspiracy.
They certainly did not stem from a master plan hatched in the 1960s or
1970s, of course. This does not mean, however, that there is no logic to
these developments, no broader economic and political source.

The corruption of economic data corresponds to deepening contradictions
of US and world capitalism. These contradictions impelled the
bourgeoisie to abandon a general policy of social reform that had lasted
for more than three decades, and to embark on what has been termed a
"one-sided class war", in which the services of the pro-capitalist trade
unions were utilized to carry out an unprecedented transfer of wealth
from the working population to a tiny ruling elite.

There was a step-by-step logic to all of the measures that were taken to
misrepresent basic economic statistics. Big business could not have
carried out the policies it required without falsifying economic
reality. Even though daily life became increasingly difficult for huge
sections of the working class, it was necessary to divide and disorient,
to intimidate millions with the claim that "there is no alternative",
and that what Reagan referred to as the magic of the marketplace was
creating a veritable golden age from which everyone would benefit.

Some of the consequences of the falsification of data can be translated
into dollars and cents. If the CPI had not been systematically
understated, Phillips explains, Social Security checks would be seventy
percent greater than they currently are.

Beyond the direct impact on Social Security and other government
expenditures, an artificially low unemployment rate and poverty rate
(officially reported as twelve percent, but in fact at least twice that
figure) helped the financial and political establishment to reduce
living standards and social conditions. How many countless think tank
reports and magazine articles, trumpeted by Democratic and Republican
politicians and academic figures alike, took as the gospel truth that
the "Anglo-American" model of capitalism, compared to its more regulated
rivals in France and Germany, meant lower unemployment? This and similar
claims were based largely on lies.

American capitalism once prided itself on the accuracy of its economic
statistics. An alphabet soup of regulatory agencies carried out this
work. During the decades of the Cold War, the spokesmen for big business
always pointed to the mockery of economic data produced by the Stalinist
regimes as one more proof of the superiority of the profit system.
Today, however, the growing crisis is producing a historic reversal.
Where American capitalism once required accurate data, today it requires
lies.

Phillips's revelations share something with those of former White House
press secretary Scott McClellan. They are not exactly news, but they
represent a kind of barometer of the growing crisis that is forcing its
way into the open within official and semi-official circles.
_____

http://wsws.org/articles/2008/jun2008/data-j02.shtml

TO POST A COMMENT, OR TO READ COMMENTS POSTED BY OTHERS, please click
on the word "comment" highlighted at the end of the version of this
essay posted at http://billtotten.blogspot.com/