Of course, that is THE question. The GDP numbers, inflation numbers, productivity numbers, unemployment numbers are all tinkered with so much that it doesn't make any sense any more. The only number that matters is how many people are unemployed -- REALLY unemployed, that is (the government statistics don't count people who are unemployed for more than a year, so that in a long spell where people keep losing jobs, REAL unemployment may be 15-20 percent while the government statistics might show only 5 or 6 percent). Read on...
The following is one such very well-written article called 'Financial Storms
- Statistical Wizardry and Manipulation' from Financial Sense Online, at
financialsense.com
The economic miracle which Wall Street and Washington herald to investors
around the globe is a by-product of statistical wizardry. It has do with the
way government statisticians measure the new economy. The most important
figure is GDP. This is the figure that has captured the imagination of
investors and headlines around the globe. Economic growth rates over the
last few years have been short of being miraculous. They have averaged above
4% for the last few years and above 5 and 8% during the last half of 1999.
During this year they are running over 5% despite repeated interest rate
increases by the Fed.
Gross Domestic Product
(Percentage Change in Real U.S. GDP)
1999 2000
1998 1999 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr
4.4% 4.2% 3.5% 2.5% 5.7% 8.3% 4.8% 5.6%
Source: Department of Commerce: Survey of Current Business
Element #1 GDP Deflator Dynamics
This high level of economic growth is a product of unique statistical
factors, which diverge from norms practiced by other nations. The first
element is the GDP Deflator, which has been conveniently lower, adding to
GDP growth. To get a true picture of economic growth, which is the sum of
the nation's economic activities, it is necessary to back out the effects of
inflation. By backing out the impact of inflation, you arrive at the true
level of economic activity. The lower the deflator, the less that is
subtracted from the actual economic numbers. The GDP deflator has been
averaging in the low 2% range for much of this decade. As the table below
indicates, everything from housing prices, food, utilities, medical costs,
gasoline, and retail goods have been rising at much higher rates. By
understating inflation, government statisticians have been overstating GDP
growth.
Many have questioned our inflation rates and how they are measured.
Recently, the Bureau of Labor Statistics has admitted that consumer
inflation has been slightly higher than officially reported. The Bureau
attributes the lower inflation numbers to a "calculating glitch" and will be
revising the CPI upward. The revision could boost consumer inflation rates
by as much as 0.3% for the past 12 months. (iii)
For the 12-month period ending last month, consumer prices rose 3.4%, while
the core CPI, which excludes energy and food items, rose 2.5%. Because of
these lower reported inflation rates, the government has benefited by paying
lower cost-of-living adjustments on social security and government pensions.
Our government has also been the beneficiary of lower interest costs,
especially on it's inflation-adjusted bonds known as TIPS. The soon to be
announced higher inflation news is unlikely to be welcomed by the Fed or the
financial markets. Higher inflation will mean higher interest rates and
trouble for the stock market.
Element #2 Hypothetical Hocus-Pocus
The next GDP manipulation takes place through a measure called the Hedonic
Price Index. This is a statistical maneuver employed by government
statisticians to measure computer output and investment. It is meant to
capture the increase of computer power in terms of speed and memory. The
government takes the actual increase in spending on computer investment and
applies a statistical wand which changes the actual number into a higher
number reflecting the hypothetical benefits of soaring computer power.
Like corporations, which keep two sets of books, one for financial reporting
and another set of books for taxes, the government also keeps two different
sets of books. One set is the actual dollars spent on the output of goods
and services and the other set is called chained dollars, which is derived
after various statistical manipulations have been applied to the actual
numbers. As this table shows, actual computer spending in actual dollars
went from $86.3 billion during the fourth quarter of 1998 to $114.2 billion
in the second quarter of this year. This represented an increase of $28
billion in actual dollars being spent during the last six quarters. (iv)
Investment in Computers & Peripheral Equipment
(Billions of Dollars)
1998 1999 2000
4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr
Actual
Dollars 86.3 88.1 92.8 97.6 98.9 104.3 114.2
Chained
Dollars 171.3 186.1 208.5 230.9 243.9 264.1 298.5
Source: Department of Commerce: Survey of Current Business
However, after applying the hedonic deflator, that actual number is changed
into $127 billion in chained dollars for the same six quarters. This
technique magnifies the actual contribution of computer investment to GDP
growth. This manipulated rise in GDP growth doesn't reflect actual increases
to GDP growth. Instead, it reflects the increase in computer power that
businesses are getting for their money. As the power of computers increases,
so does the impact of the hedonic deflator. Effectually, this creates a
statistical mirage, which magnifies modest sums of money spent in actual
dollars into giant sums in chain-weighted dollars.
Element #3 Software Shenanigans
Another element of statistical manipulation greatly magnifies the economic
growth contribution of the technology sector. This new contrivance happened
last year when government statisticians changed accounting procedures for
booking computer software. Formerly, spending on software was considered to
be a business expense. This acted to reduce corporate profits since expenses
are subtracted from revenues. Business expense normally doesn't enter into
GDP accounts. By changing expenditures for software from an expense to an
investment, it is now added to GDP. This accomplishes two objectives. It
increases GDP growth and it serves to increase corporate profits and
government tax revenues since software can now be capitalized instead of
expensed, thereby reducing profits.
Investment in Software
(Billions of Chained 1996 Dollars)
1998 1999 2000
4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr
Software 167.3 173.3 181.1 192.5 205.3 215.0 227.5
Source: Department of Commerce: Survey of Current Business
Software spending has been running above $200 billion per year. The
combination of inflating the dollars spent on computers, and including
software spending as a capital asset, has artificially inflated GDP by a sum
of over $500 billion. These statistical manipulations accounted for 32% of
the reported GDP growth.
Over-stating U.S. Productivity
Accounting gimmicks also overstate U.S. productivity figures. Productivity
is simply the increase in total output as measured by GDP, divided by the
increase in total hours of labor used to create that output. Recently, those
numbers have been remarkable. Tinkering with the GDP Deflator, and adding
the Hedonic Deflator have artificially enhanced the actual GDP numbers. The
larger the GDP number in relation to the total hours of labor, the higher
the rate of productivity.
Exposing The Statistical Mirage
The results of these measures have produced an awe-inspiring statistical
mirage that has camouflaged the inherent weaknesses and vulnerability of the
U.S. economy. This unique way in which the U.S. measures and accounts for
its GDP and productivity has captured the attention of international
organizations such as the OECD. Other well-known writers from the Austrian
school like Dr. Kurt Richeb�cher, and financial writer James Grant, a
columnist for the Financial Times, have called attention to these
statistical fallacies.
Writers in the mainstream press have attacked these truth-tellers. The
mainstream press argues that increases in DRAM, hard drive capacity, and
such things as DVDs, although not costing more today, add additional value
to a computer that is not captured in its price. Nobody would argue that
today's computer is faster and more powerful than the computers built back
in 1996. However, computers have become a commodity that is subject to
intense price competition. The price of computers has fallen as production
has ramped up and competition has decreased their price as with any other
commodity.
Hypothetical Results Creating False Weather Patterns
What matters most is actual dollars spent � not hypothetical dollars
produced. This statistical manipulation allows the U.S. to overstate
economic growth and productivity, which gives way to the mythical concept of
the "New Era" so widely promulgated on Wall Street and in Washington. These
manipulations make our economy appear to be more robust than it actually is.
It also makes comparisons to other economies difficult. The rest of the
world uses apples accounting while we use oranges. It also serves to
misallocate capital. Money gravitates to areas where it is most productive.
The higher U.S. GDP growth and productivity figures along with above normal
returns in our stock market have acted as a magnet for capital from around
the globe. It has enabled the U.S. to finance its burgeoning trade deficits.
- end of article from Financial Sense Online |
