John Williams: Believe Him or Not 

This Oakland economist believes the government's major economic indicators are lies. Most other economists think he's a crank. But then, most of them also thought the economy was healthy.

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And his work — meticulously detailed number-crunching and graphing out raw data examining changes to the method of collecting and assessing the data — all points to one grim conclusion: For decades, the economy has been much weaker than we've been led to believe, and the hole we're in now is deep indeed.

According to Williams, the picture of our national economic health is seriously distorted in three key areas: unemployment, inflation, and gross domestic product. The real numbers today, he argues, look like the 1930s. Although economists didn't start rigorously measuring numbers like unemployment until 1940, the best estimate of nonfarm unemployment during the Depression puts the peak at 34 percent. "We're not there at this point," Williams said. "But we're as bad as we've been post-World War II." But you wouldn't know that, he adds, from the official statistics.

Take unemployment, for example. According to Williams, the government has built a number of minor distortions into how the idle workforce is measured. The payroll survey, for example, depends on the sporadic self-reporting of large companies, and when Bureau of Labor Statistics beancounters realized that small businesses weren't being adequately taken into account, they just added another 100,000 jobs per month to correct for this.

Chart of U.S. Unemployment

But it's when the feds report the results of the payroll survey, Williams claims, that the major distortions show up. The number that gets all the headlines, the so-called U-3 Measure, is the number of utterly unemployed people. A broader measure of unemployment, which is called the U-6 Measure and includes part-time workers and "discouraged workers," or people who have recently stopped looking for work, usually puts unemployment at a little less than twice what we usually read about.

But Williams claims that even the broader measure is erroneous because sixteen years ago, the feds changed the definition of so-called discouraged workers. "Up through 1994, this was the definition of discouraged workers: You met all the other qualifications, but you haven't looked for work in the last four weeks," Williams said. "In '94, they changed the definition so that in order to be discouraged, you had to have not looked for work in the last four weeks, but you had to have worked in the last year. The result knocked several million people out of consideration. ... Those who hadn't looked for work in the last year just weren't counted." The result, he said, is an army of unemployed workers that the government simply redefined out of existence.

Williams' most controversial critique concerns inflation, expressed as the Consumer Price Index. The CPI is an index of commodities you need to buy in order to live the average American life: a gallon of gas, a slab of steak, etc. Once upon a time, measuring CPI was simple; you took the price from the year before of all the goods in the index, compared it to the price today, et voila. But in the 1980s, Alan Greenspan and others tweaked the model, adding an assumption known as "product substitution," i.e., that consumers would switch to cheaper but essentially equivalent goods if the price of any given commodity got too high.

Chart of U.S. Consumer Inflation (CPI)

"They said that if the price of steak went up too much, people would buy hamburger, and the cost of living would go down instead of up," Williams said. "But the CPI is designed to measure what you need to maintain a constant standard of living. It moved the measurement of CPI away from measuring a constant standard of living to something less than that." And Williams imputes a rather sinister motive behind the change: if you lower inflation with gimmicks, you can reduce everything from interest payments on the national debt to cost of living adjustment to Social Security payments. Suddenly, national leaders had a more transparent interest in arcane CPI minutiae.

This wasn't the only technical change to the CPI. Geometric weighting assumed that as prices of goods spike, consumers simply stop buying those goods as much, so the goods were given less importance in the index. The so-called hedonic adjustment assumes that as the quality of goods improves (computers get faster, etc.), the overall price in such goods effectively declines as well. Williams scoffs outright at this particular bit of gymnastics, arguing that economists have warped an apples-to-apples comparison with intangibles like "quality." He notes that for a time, this tweak even extended to MTBE gasoline additives, tamping down the rise in inflation with the notion that improved air quality could be expressed in terms of price. The net effect of this, he claims, is that the government's measure of inflation has steadily departed from reality. Here's how it's changed over time, according to Williams' numbers.

Williams' critique of how the Gross Domestic Product is measure is closely related to inflation. The GDP is defined as the value of all goods and services produced in any given period, less the rise in prices. But if the inflation rate is artificially lowered, then the GDP is artificially raised. "If you use a high rate of inflation, that will reduce the growth," Williams said. "If you use too low a rate, that will increase the growth. And to the extent that the CPI is overstated, there's a parallel there. I figure that economic growth is overstated by about 3 percent."

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