The Numbers Racket

As bad as many of the economic numbers are these days, is truth far worse? Are the numbers proffered by the government and batted around by financial analysts simply wrong?

In an article called "Numbers Racket" in the May 2008 issue of Harper's, Kevin Phillips, author of Bad Money, presents a blow-by-blow account of how, beginning with the Kennedy administration in 1961, Democratic and Republican administrations have jiggered economic indicators and other numbers to minimize the bad news that would otherwise have to be reported. Rising housing costs are excluded from inflation. Rising fuel costs are excluded from inflation. People who would like a job but who have given up looking for one are excluded from unemployment numbers.

What would a more accurate assessment of our economy look like? Phillips writes:

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession.

Certainly, at least to our household, inflation seems higher than the low numbers reported by the feds would suggest.

Bad data is deceptive, but it's pernicious in other ways, too. Artificially low numbers have led decision-makers to make bad decisions with far-reaching consequences. Phillips cites this example:

As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crises "can be directly traced back to the [1983] BLS decision to include the price of housing from the CPI. . . . With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates."

In economics, as in foreign policy, American are only too adept at spinning rose-colored fantasies, acting on them, and then blinking with the wonder of innocents at the mess that results.

You can find the article online here, but access is limited to subscribers. Of course, a subscription to Harper's has always been pretty affordable, inflation notwithstanding.