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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As for gas, that is included in the Consumer Price Index. But there's more than one CPI — the core and the overall index. If you look at the overall CPI, expenses such as food and energy are included, and by that measure inflation spiked to 5.5 percent as recently as 2008. But most of the time, the press reports the core CPI, because the feds use the core to determine monetary policy. And the core CPI is designed to measure the underlying structure of prices. Because a freeze in Florida could suddenly drive up the price of citrus or a refinery explosion could spike gas prices, they're considered too volatile to be an accurate gauge of what's happening to prices overall.

Williams doesn't buy any of that. In fact, he considers core inflation just another "nonsensical concept" that distorts reality once again. "While such information might be interesting over a short period of time when food and energy prices are particularly vulnerable in a given month, over the period of a year, food and energy prices cannot be ignored as part of meaningful consumer inflation," he wrote in an e-mail. "Even Fed Chairman Bernanke eats food and consumes energy."

His attitude toward hedonic adjustment is similarly withering: "If a computer now plays movies, then that should be handled as a new type of product and introduced as such. ... Instead, the government deems that a computer now is, say, 20 percent less expensive than it was before from a quality standpoint ... even though the retail sales price of the machine has not changed. ... I should be able to buy the same computer I did ten years ago for $100. To buy the same basics I need, to do the same work as I still do on the old machine, it still costs me $1,000 today. While some adjustments are proper, there are imbalances here that have been taken to extremes."

Such arguments leave Haver gritting her teeth as she struggles to find a constructive characterization of Williams. "On the Internet, there are people who want to believe the worst," she said. "And that's unfortunate. It's important that we have information about the economy that we can trust. And in Washington, we have all these nerds who are trained so hard to do their best to produce measures that really are accurate in terms of giving us a picture of what's going on in their country.


But not everyone is eager to dismiss Williams as a crank or a huckster. Kevin Phillips, for example, cited and endorsed his work in a particularly dire May 2008 Harpers piece. "Undermeasurement of inflation, in particular, hangs over our head like a guillotine," he wrote. "Our humbugged nation may truly regret losing sight of history, risk, and common sense."

Perhaps you may have heard of Phillips, a former NPR commentator. He's the author of The Emerging Republican Majority, the 1969 book that predicted that as Americans move from the industrial Northeast to Sun Belt suburbs, a massive ideological realignment would place conservatives in power for at least a generation. He is, in other words, the author of one of the most famous and deadly accurate predictions in American political science. His 2008 book, Bad Money, argued that a convergence of peak oil and unprecedented personal and mortgage debt was about to plunge the nation into a chasm.

If anything, Phillips was already late to that game. All throughout the middle of the last decade, a small number of analysts and hedge fund managers warned that the American economy was crippled with debt, that the housing market was going to tank, and we were all headed for a deep recession, only to be universally dismissed as nuts, "permabears," and professional pessimists.

One of this era's defining moments occurred on August 28, 2006, when stock broker and UC Berkeley alumnus Peter Schiff appeared on CNBC and proclaimed that by 2008, our addiction to debt-financed consumption and the collapse of the housing bubble would plunge the country into one of the deepest recessions it had ever seen. Squaring off against Schiff was none other than Art Laffer, former economic advisor to Ronald Reagan and the godfather of supply-side economics. "The United States economy had never been in better shape," assured Laffer, who even went so far as to bet Schiff a penny that the economy wouldn't crash. "I'll be you a lot more than a penny," Schiff retorted.

Perhaps the most prominent of these Jeremiahs was NYU economics professor and consultant Nouriel Roubini, who traveled around the country in 2006, warning of the coming collapse, only to be dubbed "Dr. Doom" by his condescending colleagues.

Even today, Roubini believes our pain is just beginning. According to Prajakta Bhide, a research analyst at his firm Roubini Global Economics, growth will stay flat at best for at least another year and we face a 20 percent chance of sliding into a second recession. "The growth numbers in 2009, how much of it is from private demand?" she said. "If you look at what is driving the numbers, the underlying fundamentals seem to be a lot weaker."

At first, the economy seems to be picking up, Bhide argues. Replenishing inventories gave the fourth quarter of 2009 a nice little boost, and the Census drive and a slight uptick in manufacturing will help with employment, but only a little, and only for the first six months of this year. But consumer spending is stuck at 1.7 percent, and consumption comprises 70 percent of the nation's economy. Meanwhile, the housing sector is a disaster; housing starts are still declining, and Bhide predicts that nationwide, real estate prices will still have to fall another 3 to 5 percent before they bottom out.

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