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Inside Liberty Watch Today - Feb. 27, 2006

Economist John Williams' website, www.shadowstats.com, delivers "analysis behind and beyond government economic reporting." Williams is an old hand at peeling away layers of spin and mathematical machinations to reveal kernels of economic reality, laying bear the government's phony economic numbers.

Williams makes a living following the arcane stats put out by the Bureau of Labor Statistics (BLS), converting the government's numbers into real numbers that businesses can use for forecasting and planning. It's not that the government is trying to be sneaky. "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," says Williams. "It always footnotes the changes and provides all the fine details."

So while Wall Street and Main Street alike believe that inflation and unemployment are low and GDP growth is robust, after Williams takes into account the manipulation of the numbers the economic picture is not so rosy. According to Williams: "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."

The rosy bias to the numbers started back in the days of Camelot with the Kennedy administration. The BLS created another category of unemployed workers, called "discouraged workers." These workers who had given up trying to find a job after a year were left off the unemployed rolls starting with the Clinton Administration according to Williams.

More overt manipulation of the numbers began with the first Bush administration. Bush Sr. was facing a tough reelection and wanted economic help. "What happened is that a senior Commerce Department official went to an old friend, a high-level executive in the computer industry, and said, ‘Gee, we've got to get the President re-elected. We want you to boost your sales reports to the Bureau of Economic Analysis,'" Williams says. "It spiked the GDP numbers. I knew people involved in getting it done, ones on the outside of the Bureau of Economic Analysis. And I've confirmed separately with people inside the Bureau of Economic Analysis that it happened."

In the early 1990's Michael Boskin put the Consumer Price Index (CPI) on the operating table. Boskin who was the head of the Council of Economic Advisors set out to fix CPI. The view at the time was the CPI overstated inflation because it measured a fixed basket of goods, but yet people made substitutions if the price of something in the basket increased in price. But, the problem is that if you allow substitutions, you aren't measuring a constant standard of living. The real reason substitution of the items in the CPI basket became a hot topic in Washington, Williams points out, 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."

This massaging down of the numbers over time makes for a huge cumulative effect. According to Williams, if the same CPI were used today as was used when Jimmy Carter was President, Social Security checks would be 70% higher.

The BLS also uses hedonic adjustments to fine-tune the CPI downward. For most any product the BLS number crunchers say the price really isn't going up, as long as the product has been improved in the interim, because you're getting greater benefit from it. Once they complete their hedonic adjustments, their CPI basket "price" might even have fallen, particularly for things like computers and other electronics, despite the price to consumers having increased.

The Clinton Administration really massaging the data, according to Williams. "Bob Reich, in his memoirs, wrote that they found in their polling that if you could overstate economic growth, understate inflation, tell people things were better than they really were, it could help you win in a tight election."

Williams believes that we are all living off the kindness of strangers given the yawning trade, budget and current account deficits. "The end result," Williams says, "when it does all come together, will be something akin to a hyperinflation, but at the same time you'll have also a very depressed economy. So there'll be an inflationary recession, which I think we're already beginning to get into, that possibly could evolve into a hyperinflationary depression, as much as I really hate to use that term."

Williams is no gold bug. But when the economic feces hits the fan; "As crazy as it sounds, I think the only thing they will be able to do is to go back on some kind of gold standard," he admits.

Williams told his interviewer that he is even squirreling away a few gold coins. Are you?

Doug French, Liberty Watch Columnist