Jim welcomes back John Williams from Shadow Government Statistics. John believes the real unemployment rate is 22%, not 8.1%, which is why it still feels like a recession. He also calculates the CPI at 6%, not 2.8%, and explains how the government manipulates the rate of inflation. Lastly, John believes the US is still on track for hyperinflation in 2014 as we near the coming fiscal cliff. Listen to the interview.
John received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies. Formally known as Walter J. Williams, his friends call him John. For nearly 30 years, John has been a private consulting economist and, out of necessity, had to become a specialist in government economic reporting.
JIM: Joining me on the program today is John Williams of Shadow Government Statistics.
And John, before we get into a real big issue thats going to hit the economy January 2013, I want to talk about the front page of your website. And you have two graphs that are available publicly and one is the unemployment rate where you have U3, U6 and then SGS, which is your own. Lets talk about those numbers, what they mean for our listeners and the differences between them. [1:11]
JOHN: Sure. Ive been a consulting economist for 30 years. What Ive found over the decades is that the governments reporting has moved further and further away from common experience, and really, the average guy has got a pretty good sense of whats going on. If you feel the economy is not as strong as the government is saying or that inflation might be higher than what theyre reporting, youre most likely right because youre dealing with the real world.
The numbers use to deal much closer to real world experience.
And with the unemployment number, if you, lets say, went around the entire country and asked everyone whether he or she was unemployed, youd get an immediate answer. Most people have a pretty strong opinion as to whats up, they have a job; they know whats going on. But if you put all those numbers together, youd come up with a much higher unemployment rate than the government reports, or at least the headline government number to date. So thats all due to definition.
In order to be counted in the headline unemployment rate and keep in mind, the government actually publishes six levels of unemployment. The third level they call U3 is the headline number you have to obviously be out of work and willing and able to take a job, but you have to have actively looked for work in the last four weeks. There are people whove stopped looking for work after a period of time when there are just no jobs to be had, yet theyd take a job if it were available, and they otherwise consider themselves unemployed. They want a job; they are willing and able to work. And again, theyd take it as soon as it was offered. If you haven't been looking in the last four weeks, the government will count you as a discouraged worker so long as you've looked for work in the last year.
If you haven't actively looked for work in the last year, they dont count you at all.
Before 1994, anybody who was a discouraged worker, irrespective of the period of time, was counted as a discouraged worker. So that where you have the U3 unemployment rate at, I believe its 8.2% in March, the governments broadest number U6 (which includes what I call the short term discouraged workers, those who have given up looking for work, but not for more than a year) and also includes people who work part-time for economic reasons (they cant get a full-time job, they want a full-time job but you know, no full-time job is available) thats running up somewhat over 14%.
And what I do is I add to that my estimate of the longer term discouraged workers those who have been discouraged more than a year. That puts you up over 22%.
What happens here is the people who are unemployed roll out of the U3 level; they become discouraged because there are no jobs to be had, and so they go into the U6 level.
And after a year, they roll out of the U6 level in terms of going into another world that the government does not count. I still estimate them, so my number is broader than the governments number. So when you see the unemployment rate dropping, yet the broader measures are rising or staying at near historic levels, you do not have an economic recovery and thats what were showing. [4:26]
JIM: And John, if we go back to the beginning of the year when we were closer to 9% and we've seen or lets say the fourth quarter of last year and weve seen it steadily come down. But its been my understanding that the decline in that unemployment rate (the U3) that the government reports, a lot of it is discouraged workers that are no longer counted, number one. And number two, correct me if Im wrong, but isnt there also a category, lets say Im unemployed and I get unemployment benefits for 99 weeks or whatever the timeframe is, once those 99 weeks end, arent I technically considered employed? [5:06]
JOHN: No. To be employed you have to have a job. What they call the Household Survey where they count the unemployed, they actually go around and survey 60,000 households or so each month. And they have a survey questionnaire that they use for determining whether people are employed or how many people in the household are unemployed or employed, but they dont count the receipt of unemployment benefits as a factor in being defined as unemployed. So its separate from the jobless claims, and such now the fact that the jobless claims have come down some recently does not mean things are getting better.
What you have to keep in mind is that we have been in the most severe and most protracted economic downturn seen since the Great Depression. And this has been the economy began to collapse in, certainly by the end of 2007 and I mean collapse; we had a sharp decline in economic activity. And right now we are seeing nothing but stagnation or bottom bouncing at a low level of activity. So what might have been historic norms, when you were looking at much smaller recessions, dont apply here. You have people who have been laid off, businesses that have cut to the bone wherever they can and the fact that you dont have quite as many layoffs as you had doesn't mean things are getting better. It just means that you have fewer people to lay off.
There are two sides to that: the one side is the jobless claims; the other side is the hiring. There are no good measures of that, but the Conference Board puts out a help-wanted index. It used to be with newspapers which were a that was a very reliable, good indicator over time. The internet has taken over in that area and now they have what they call an online help-wanted advertising. Its not as good a quality; it doesn't have a history that the newspapers did. The most recent numbers, even though they are up overall, the number I would look at there is the new ads for advertising for hiring people. That actually declined in the last month and thats not a good indicator. Everything we're looking at here suggests we're not seeing an economic recovery and thats tied largely to inflation. The inflation has created an illusion here with some of the statistics. [7:26]
JIM: John, do you think this is one of the reasons when they keep doing survey after survey and I think they just did one recently where over 80% of the country still feel we're in a depression is these numbers that youre reporting, which are over 20%, are probably more reflective of whats actually going on in the economy? [7:47]
JOHN: I believe so. Again, the average person has a pretty good sense of whats going on. And if they look globally and they know things are not doing well, they will tend to extrapolate that into a national level. They hear the governments numbers, but they tend to disbelieve them and theres good reason for that. The governments numbers dont reflect whats going on. Its a matter of how they define it. They put in happy definitions that tend to give them a better economic result with lower inflation rates. [8:16]
JIM: Lets go on to the second graph that you have on the front of your website which is the alternative inflation rate, and they are both tracking from what the government reports, which is CPI-U, and then you have your measure. And your measure is probably closer to around 6% right now. It has been coming down so that might line up with Bernankes comment that the inflation pressures have gotten a little better, but theyre still at 6%. When you consider that people are getting 2% on a 10-year Treasury note, when the real inflation rate is 6%!
So lets talk about the difference between your numbers and lets say the numbers that are reported every month by the government. [8:57]
JOHN: Sure. With the CPI, the Consumer Price Index the governments broad measure of inflation, there you have something that is much more egregious, and really, sinister as far as Im concerned in terms of what the government has done. You have to go back to the days of Mr. Greenspan in the early nineties, and Michael Boskin, whos then the chair of the Council of Economic Advisors. They were beginning to protest that the Consumer Price Index overstated inflation. And oh, well, maybe we could correct that and get a lower inflation rate. That would help us reduce the deficit because it would reduce the cost-of-living adjustments for Social Security and such. Well, thats something youre seeing politicians playing with academic economists; in theory, it should have no relationship to the way people look at things. Again, its a matter of definition.
The average person when he thinks of inflation, at least what he thinks the government is reporting, he assumes that it reflects out-of-pocket expenditures and it reflects the inflation that youd need to match if you wanted to maintain a constant standard of living if you were using the inflation measure to target your wage or salary or if your wages or salary are automatically adjusted by that or your pension or Social Security payments are adjusted by that. Or, if you are using that to set a downside limit to your investment target, you certainly want to beat inflation when youre investing your funds. Thats not going to help you much if you cant stay ahead of inflation.
So if the government is giving you too low of an inflation rate which they are, and Ill explain why youre really being cheated on a number of fronts and the government is not being honest putting that forward because they are using it to cut entitlement payments. (Theyre trying to advance that further in terms of forthcoming budget deficit cuts with an even worse consumer price measure in terms of its significance.)
But whats happened here? Go back in time to when this was used first in the cost of living adjustments in the auto union contracts. What they measured is what they called a fixed basket of goods. Theyd take for example, lets say theyd measure the price of a pound of beef or a gallon of gas or a loaf of bread, theyd price them out in current prices, and the next year theyd price out that same basket of goods. And whatever the change was in the cost of that basket of goods, thats effectively how much your income had to go up in order to maintain a constant standard of living.
Now, getting back to Messrs. Boskin and Greenspan, if you ask Mr. Greenspan: What do you mean the CPI overstates inflation? His response was, well, lets say the price of steak goes up, people are going to buy more hamburger and they buy more hamburger, their cost of living is going to go down. So really the CPI is overstated.
And Boskin would use the same example, only he would use people buying chicken instead of steak. Well, depending on how you define cost of living, if you use their definition, that is a cost of living but its not the cost of living of maintaining a constant standard of living. The government redefined it to make it maintaining a constant level of satisfaction, where youd get to trade off dollars against your level of satisfaction. So if steak becomes too expensive and you dont have the money to pay for it, youre going to be satisfied buying hamburger instead of starving. Thats not what the average guys looking at or expecting here.
The other thing they did is they introduced hedonic adjustments, which are quality adjustments. Quality adjustments are legitimate. Lets say the surveyors for the Bureau of Labor Statistics, who go out each month and measure prices at all sorts of different locations, all sorts of different goods, lets say the price of an 8 ounce candy bar; and the next month they go to price it and the package is the same but its a 6 ounce candy bar. They will pick that up; they look for it and they will mathematically adjust for that, so that youll actually see inflation because youre getting less candy bar for the money.
They then look at what they started introducing in the 1980s with these hedonic adjustments that would make quality adjustments to goods. They would have econometric models that would estimate quality improvements that you could not directly measure. And if you cant directly measure it, the guy whos spending his money isnt looking at that as an out-of-pocket expense.
An old example was when the government mandated change in gasoline prices; they mandated a reformulation of gasoline to help the quality of air that came out of exhaust pipes. The effect was that it added 10 cents per gallon to the cost of gasoline; that was a big percentage back in those days. They didnt count that in the CPI because it was not a quality improvement that the average person would look at or quantify in their out-of-pocket expense measure. The guy pumping his car full of gas is moaning and groaning that hes paying an extra 10 cents per gallon, he isn't thinking Im spending 10 cents a gallon here to make the air better. [14:26]
But getting into a little more nebulous area, they have hedonic adjustments for all sorts of things, including college textbooks. Now, one of the factors that goes into how the computer model will quality adjust the books is whether the books have color pictures in them. This is textbooks. Now, the average student, unless hes an art student, most likely does not care much whether hes got black or white or color photographs in the textbook. His concern is how much am I out of pocket for my textbooks this semester. And the cost of the increased books gets mathematically shifted to reflect these nebulous measures.
The effect is and theres been some press on this recently. The government puts out the headline numbers, the Consumer Price Index All Urban Consumers, thats the CPI-U. They also have the CPI-W which is for wage earners; its more of a blue-collar measure. Its one that they use for adjusting Social Security payments et cetera. It tracks very closely to the CPI-U. But the Bureau of Labor Statistics said, oh my goodness, in that we have such a perfect measure now with all these adjustments and this is really a Rube Goldberg index because theyve done things to this that really make no sense. Theyve just tried to bring down the reported level of inflation as much as they could. They said, oh, if only we could take these back in time and restate history. Well, they did. They created another index called the CPI-URS (for research study). And so they take that back in time and they say, well, we've compared those two going back in time and the average difference per year is only half a percent.
Well, thats accurate to a certain extent. What that half a percent reflects in a period of time before 2000 when the bigger changes were made, thats the incremental reduction each year, roughly, as a result of all these methodological changes. The problem is if youre looking at it going back in time, you can say thats half a percent a year, but coming forward in time its cumulative. And coming forward in time, starting back in 1980 you see a difference of roughly 5 percentage points; in other words, 2 percentage points on top of that in areas that the Bureau of Labor Statistics doesn't consider methodological.
But the effect is order of magnitude 7 percentage points that theyre now understating the inflation if you base on the 1980 methodology. If you base it on the 1990 methodology, its around 3%, which gets you up into the 6-plus percent range right now. So what I do with my estimates is I estimate what the current inflation would be if these changes had not been made using what the governments published as the effects of the change. I have an additive system. I add back in the amount the government has said its taken out. So that with inflation somewhere you can argue certain elements of it, but you know, running somewhere between 6 and 10 percent right now, nobody is staying ahead of inflation with anything thats available in the domestic financial markets thats reasonably safe, except for something like gold. I mean, over time, gold picks up the actual inflation.
In fact, if you go back to 1933 when Roosevelt abandoned the gold standard, since then the purchasing power of the dollar has dropped about 98 percent. Thats been fully covered by gold. And gold has actually covered more than the drop in the purchasing power based on the CPI-U if you look at my estimated adjusted work and try it out on the markets. [18:31]
JIM: John, a final question if I may. Come January 1st of next year, theyre calling it a fiscal cliff. We have the 1.2 trillion dollars of budget cuts that was agreed to last August when we had the debt-ceiling debate. And then on top of that we have the repeal of the Bush tax cuts, you have the repeal unless extended of the Social Security tax cuts; you have a 1.2% tax increase coming from the phasing out of itemized deductions for people in the certain income group; you have a 0.9% additional Medicare. So if youre making 250, you could find yourself in a 45 percent tax bracket. Then you have the 3.8 percent additional tax on investment income capital from interest, dividends, pensions to annuity payments and real estate.
With the economy growing anemically at best, even if you want to take the governments numbers at face value, at 2.2 percent, and given the fact that we're in an election year where theres no stomach in Congress to do any budget cutting, I mean, heck, the president cant even get his own budget voted on by his own party. We haven't had a budget in this country for over three years. Whats going to happen? I mean these guys have got to know, you cannot raise taxes 45 percent and cut 1.2 trillion from the budget and you think youre going to have a booming economy. [20:05]
JOHN: Well, no chance of a booming economy. The deficit reduction is a fraud and the higher taxes will hammer the economy deeper in the ground. What can I tell you? Right now, disposable income, which is basically take home pay (after tax), adjusted for the governments inflation is not growing. You cant have any growth in the economy unless you've got real growth in income. The only way that consumption can grow faster than income is when you have debt expansion, and you dont have either because of the debt crisis and the ongoing solvency issues of the banking system.
So you take a system that at best is showing flat disposable income, take the gimmicks out of it and youre probably dropping 5 to 10 percent per year with disposable income after inflation adjustments. The taxes just make that worse. And again, that will severely hurt economic activity. In terms of the budget deficit, these guys are fraudsters. What can I tell you? You have a circumstance here where their budget deficit that theyre cutting is spaced out over 10 years; most of it is cutting the pace of increase in the deficit. Theyre not really cutting the deficit per se.
All the budget projections are based on presumptions of 2 to 3 percent growth in the economy. Were not going to have that. We dont have that now. And with the weaker economy, youll end up with a much bigger budget deficit.
If you put in realistic projections of economic growth, that would more than offset this purported declines in the deficit. The deficit circumstance theyre not doing anything serious here. Nothing is going on that will address the governments long term solvency issues without a major change in political Washington. That may happen with the election, but its certainly not in place at the moment.
I dont mean to sound like Im getting upset here, but I really am upset with these guys. Where we are is a place we never should have gotten to, and the people in Washington know that and theyve know where we've been going a long time; theyve been playing politics with it. [22:19]
JIM: Ive always marveled, John, when you look at Washington, they count a budget cut lets say Im going to increase spending by 8 percent but Im going to scale it back to 4 percent increase. They call that a budget cut. I mean look at the way the president has gone after Paul Ryan whos not going to cut education spending. But if you listen to the president, we're going to throw students out of the universities. I mean do you think they think were really stupid? [22:49]
JOHN: Yes. Absolutely. Theyve thought that for a long time. And to a certain extent its proven to be accurate with some of the voters. This is going to be a very interesting election year because the voting populace is not too happy with whats happening with the economy; the average guy is feeling some financial pain and that usually leads to a change. But you need a real change here. You need someone in Washington actually addressing the problems and I just dont see that happening, which leads to further disaster down the road and not too far down the road. [23:47]
JIM: Yeah. I would say just looking at the numbers and the way that theyre growing that inflation scenario, I think, correct me, isnt it still 2014? [23:35]
JOHN: 2014 I believe we will be in a hyperinflation. Yes. [23:38]
JOHN: All right. Well, listen, John, as always, I want to thank you for joining us on the program. And if youre listening to this and you really want to understand why maybe what you hear on television doesn't line up with what you see in reality, I highly recommend you go to Johns website even better, get his newsletter because John breaks out all these numbers and you get the real facts.
The website is called www.shadowstats.com. Thats all one word. And we've been speaking with its proprietor John Williams.
John, thanks for coming on the program. [24:09]
JOHN: Thanks so much for having me, Jim. [24:11]
Reprinted with permission from Financial Sense.
May 16, 2012
Copyright © 2012 Financial Sense