Hard numbers: The economy is worse than you know

I've been meaning to post this for a long time. Someone steered me to it last summer. (Was it classmate Tim Koranda, our co-poster here?) It's about a problem that has nothing to do with party politics because it spans 25 years of both parties' rule. I work with statistics all the time in my day job, and I know first-hand, if you adjust your strategies in response to bad data, you'll run your car right off the road. And that's what I see has happened and continues to happen here.

The problem is that for decades various administrations have repeatedly changed the definitions of vital economic statistics, so one percent of inflation today is nothing like one percent of inflation a generation ago. Same for unemployment statistics and many others. It's almost as if we had changed the definition of "miles per gallon" and then tried to compare current cars with the ones from 1980.

The writer who was brought to my attention is Kevin Phillips, in last April's Harper's magazine. The article was reprinted online in the Tampa Bay paper. (The original has been taken down from the paper's site; the link goes to Google's cache of it.)

Yes, Hell has frozen over. Yes, I'm quoting a Nixon speechwriter on a topic where the Clinton administration seems to have been the most egregious offender. The chart above is one example: the definition of inflation has been repeatedly changed. Remember the Clinton campaign's internal slogan "It's the economy, stupid"? This graph shows that they apparently really believed it, adjusting the definition of inflation so the apparent number stayed around 3%, though by 1983's definitions prices kept rising at a faster and faster rate. (Others did it before and after, too.)

One form of manipulation is product substitution: in the weekly consumer grocery basket, when flank steak became too expensive, they simply stopped counting it and substituted hamburger instead - the same as if we stopped counting Toyotas and substituted Yugos and then talked about prices as if they were the same.

Another is hedonic adjustment, which means they've fudged the real prices increases downward, because we supposedly enjoy today's products more than we enjoyed previous products. (But note, they didn't make the definition change retroactive: one writer noted that this fudging would have blown the roof off prices in the 1950s, when air conditioning and widespread car ownership changed life dramatically for many people.)

Another example, which I discovered 5 years ago, is the definition of unemployment, also covered in Phillips' article. Many of you know that when you give up and stop looking, they stop counting you even though you still don't have a job and would take one if you could get it; and even if you're still looking after 6 months, they stop counting you anyway. JFK's administration brought us that one.

And the "job creation" statistics only count the number of W-2's, without considering full-time or part-time. So if someone loses a full-time job with benefits and has to take three part-time jobs to get by (without benefits), the statistics you hear on the TV would report it as "The economy created two new jobs last month."

My Congressman's office called the Bureau of Labor Statistics and confirmed that for me.

One problem with this is that policymakers don't take the fudging into account when they decide whether action is needed. They have rules like "if inflation is above 5%, do X." Look at the chart above and you'll see how cloudy their windshield has been.

Remember, I'm not saying this to attack any particular party - it's been happening through many different administrations. I'm saying that until we remove the fudging - or modify the policy guidelines - we have no hope at all of making effective decisions. And the economy's not going to get better.