Shadow Government Statistics - Is the government manipulating numbers to make the economy look better than it really is?

by Xin Lu on 22 September 2008 26 comments

About a year ago I wrote an article about the Consumer Price Index that made some friends say that I am a conspiracy theorist, but apparently I am not alone in believing that the government reports statistics that are far from reality.  John Williams is an Oakland based economist who has been running the website Shadow Government Statistics for more than five years, and he reports an alternate set of economic indicators based on his research.  He believes that the government has been painting a rosy picture of the economy for many years, and his set of numbers are quite alarming if you believe it.

On this summary page of John Williams' alternate data , he reports that the actual consumer inflation is more than 13% in the past year, which is more than double of the official CPI released by the government.  The way he calculates this number is using the methodology of calculating the Consumer Price Index (CPI) in 1980. One key change in the calculation of the CPI since then was that former Federal Reserve Chairman Alan Greenspan started calculating inflation based on substitute goods.  Greenspan basically stated that if one good went up in price, then consumers would buy a substitute that is cheaper.  So since then the CPI no longer measures the price change of constant individual goods, instead, we have measurements of prices of substitutes.  This artificially brings the inflation rate down since instead of measuring the price of increase on steak, the government could say that consumers could buy ground beef instead. Additionally, the "core" CPI rate reported now does not include the increases on food and energy, but those things are probably the items most consumed by normal people and I do not understand why they would not be considered "core".  Personally, I find that the 13% figure is more believable because the cost for goods necessary for living have increased quite a bit in the past couple years.

Another number of concern is that according to John Williams, the actual unemployment rate in the United States is about 15%, and that's 2.5 times of the official number of 6.1% in August.  The reason Williams' number is so high is that he includes a large group of people labeled as "discouraged workers" in his count.  Discouraged workers are defined as people who have given up in looking for work. Since they are not considered to be part of the labor force so they do not count towards the unemployment rate.  Even so, this group of able bodied adults have been tracked by the Bureau of Labor Statistics until 1994 when the Clinton administration decided to track only the group of workers who have been looking for work for less than a year.  Those who gave up more than a year ago are no longer counted and that is why Williams' count of these "hidden unemployed" is much higher than what is officially reported. Granted, some of these "discouraged workers" choose not to find employment, but technically they should be included in the official unemployment rate.

Williams also publishes what he believes the money supply, gross domestic product, and the value of the dollar actually is. According to him America has been in a recession for more than two years and the actualy money supply is more than twice of the official reported numbers.  He has termed the manipulation of these statistics as "Pollyanna Creep" after the attitude of the fictional character Pollyanna Whittler who plays a "Glad Game" to be optimistic about every single situation.

Of course, anyone could manipulate statistics to achieve an agenda so we should take all of these reports with a grain of salt.  I think ultimately it is up to us to recognize the reality around us. I know that my living expenses went up by more than 10% in the past year and I know that the unemployment rate amongst my friends and family is about 10%.  Also I do not believe that the economy has grown at all this year.  All of these things are anecdotal, but they are more real to me than the government's sunny numbers.  It is easy and reassuring to read optimistic statistics, but in order to protect yourself you must be aware of what is really happening around you.  As Fox Mulder would say, "the truth is out there".

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Guest's picture
moneyclip

The question is how do you prove any of this? I mean, obviously there's data out there and it can be manipulated. But how do you go about proving that data in a verifiable way? Certainly not using anecdotal evidence like your daily experience to judge how well the US economy is floating along.

Is there not an independent non-profit source for data on the US economy that isn't using a bias to promote an agenda?

Paul Michael's picture

stagflation is coming, and coming soon. The government is trying to control consumer panic, but at the end of the day we're heading towards a financial disaster of Biblical proportions. Hold onto your hats, this is going to be a bumpy ride.

Guest's picture
Raven

It is refreshing to read an honest appraisal of what is really happening to the US Economy and how the US Government is covering it's butt. You'd never hear this from mainstream news sources, but the alternative press has been on this story for years. The bailout of Freddie and Fannie is another feeble attempt to stave off the inevitable.

Grapes of Wrath x 1,000,000

Raven
-Australia

Guest's picture
Keith

Or as Samuel Clemens said:
Lies, damn lies, and statistics...

Guest's picture
Guest

How about we all get a do-over and everyone in the world gets a house, food and equal rights. Maybe then I will start caring. :)

Guest's picture
Guest

Heck yes, couldn't agree more.

Guest's picture
Kellye

"The question is how do you prove any of this? I mean, obviously there's data out there and it can be manipulated. But how do you go about proving that data in a verifiable way?"

Ironic. That's the exact same question Winston Smith asks in Orwell's novel 1984.

Guest's picture
Colin

Regarding comment #1: I don't care.

I don't care if you can prove the numbers or not. Bush's administration gives me little reason to believe them on anything. All I know is nothing I buy or use has gone down in price.

Besides, 68.3% of statistics are made up on the spot so I never really believe them unless I have the raw data for myself to draw my own conclusions.

Guest's picture

Wow. I real eye opener. While these stats seem frightening, the market and your money still trade on CPI and PPI or other data. As long as they are the numbers that helps value the stock market, we may not need to pull our hair out (yet).

-Cheaplee

Guest's picture

It's interesting that you should bring up the hamburger/steak substitution example. According to the US Department of Labor's "Common Misconceptions About the Consumer Price Index", this is not entirely true. Although they do use substitution, hamburger and steak meat fall into two separate Consumer Price Index item categories, and therefore hamburger meat would not be considered a low-grade substitute for steak, but a different item altogether. Instead, the piece states that substitution would assume that consumers would purchase a lower cost steak such as flank steak when prices rise, while opting for a higher cost cut like fillet mignon when prices decrease.

Now, whether or not we can be certain that this information hasn't also been manipulated is another question.

One of my biggest problems with the CPI is the idea of "rental equivalence", which "measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes." Huh?

Guest's picture
cwaltz

Hmmmmmmmmmmm. The basket of goods used to calculate inflation, I thought didn't contain foodstuffs because of their supposed volatility(same with oil). Then again, I have never found the core inflation rate particularly helpful, not when it discounts everyday stuff and relies on a basket comprised of DVD players and microwave ovens. If you pay any attention to stuff like articles on increasing costs in education, health care, go grocery shopping or do any number of these things it would be shocking if you didn't believe the numbers were being massaged.

Guest's picture
Wilson

It's a given that the government lies. It seems that the goal is to loot the USA and transfer wealth to other countries. The theory that McCain is a Manchurian candidate may have merit...

Guest's picture
Kelja

McCain the Manchurian candidate? Interesting.

And what then is Obama?

The Messiah?

Andrea Karim's picture

I like to think of him as Mr. Sexy Preznit, but that might be just me.

Xin, I'm hoping you're going to write more about this - this is fascinating.

Guest's picture

In the UK they change the way that jobless numbers are counted every year!

In the country where every TV phone poll is rigged, how can you expect the government to do otherwise?

Guest's picture
Dante311

This is a very interesting article! In my opinion, I think this is just another example of why we as citizens need to think through the numbers that are fed to us and not just take them at their face value. Almost any organization putting out a set of statistics has some sort of agenda and this will surely influence their results.

Guest's picture
RJPS

I have spent some time with government statistics (as a user and, for one summer, as an intern at a statistical agency).

On "core" CPI: The idea of core CPI is to estimate the underlying "trend" in inflation, leaving off the more volatile parts. This is supposed to be helpful in seeing where inflation might be headed in the future (assuming that the trend changes slowly and the volatile parts are harder to predict), but not for dealing with people's costs of daily living (that is why Social Security is adjusted according to the overall CPI). Whether this is actually a useful predictor is debatable (there are papers by economists comparing it to other measures), but its existence is not a conspiracy.

As for changing methodology: All of the measures do change methodolgy from time to time. What most will then do is provide a series going back in time to show you what would have been measured using the new methodology. Of course, newspapers wouldn't report that, but it is usually out there (that keeps economic researchers happy). One series for which this is NOT done is CPI - because it has already been used to adjust benefits payments, and presenting revised estimates would confuse people.

In general, I have a lot of respect for the government statistical system. They try very hard to keep themselves separate from political pressures -- for example, they set their schedule of news releases far in advance according to a predictable plan (for example, employment numbers come out on the first Friday of the month unless that is a holiday), so that the timing of news releases can't be manipulated. My experience within the system was years ago, so I can't vouch for Bush-related pressures, but I do trust them.

However, there is an important place for skepticism that you didn't metion: These numbers are estimates. As you may recall from a statistics class, all estimates have standard errors and confidence intervals. These estimates do, too (and many are published!). Some are also based on incomplete information - this is why you will see revised numbers for GDP; they incorporate new information. Sadly, newspapers seem to take these numbers as True, when there are really just estimates.

Hope that helps.

Guest's picture
Lucille

Of course these numbers are fudged. Back in 2002-2003 there was a major problem with unemployment and underemployment. But because people were only tracked for that window they were on unemployment they were no longer a statistic after a while.

I knew so many people with technology degrees working crappy manufacturing jobs, Home Depot or wherever they could get anything no matter how drastic the pay cut. Underemployment isn't tracked and I still know a few people who were never able to get back into their field or at the same rate of pay.

What really throws everything into a horrible state is the drastic increases in the price of food and gas. You have to buy them to some extent. Most people have not had wage improvements in the last 8 years unless they moved up the job ladder. Housing here doubled, food and gas have doubled. Wages are pretty much the same.

Maybe I am just in a really pessimistic mood because I was watching the Congressional hearings on the impending economic bailout for the banks. The commentary that even after we give our last penny to these banks it might not work was not comforting.

Guest's picture
Debbie M

I always thought the substitutions were for like things. For example if beef goes up, people switch to chicken (not cheaper beef). It's meant to include the flexibility that real human beings have, and I don't think that's out of line.

And they leave out food and oil not because they aren't important but because they are highly volatile and would obscure what's really going on. It's only now that both those categories are clearly going up and going up substantially that the numbers feel fudged. Certainly they are much less helpful than they are when the food and oil price changes are more random or cyclical.

It's not true that all prices have gone up, however. Computers, TVs, and other electronics have gone down (and they're better, too). Long distance is a whole different animal than it was a generation ago. The housing bubble is deflating. There are cheaper ways to rent movies than there used to be. My property taxes actually went down this year. (And income taxes are still relatively low compared to the last few decades.)

My worries are 1) that oil is getting more scarce which will keep that price, and thus most other prices, going up indefinitely and 2) that government bailouts will cause many more problems than they solve (though I feel quite ignorant about this issue and still hope I am wrong).

**

I've never been thrilled with the unemployment numbers. Still, when they go up, it usually does mean that more people are out of jobs than were before.

Guest's picture
amanda

FOX MULDER! a happy part of this drowning country!

Guest's picture
Jordan

Thank you for touching on this subject. For those of you want some quick info go to You Tube and do a search for 'shadow government' 'market crash' or 'ron paul economy'.

See if you need more proof or if you connect the dots yourself.

Guest's picture
Sarah

Easy credit hides the fact that prices are rising faster than my salary. I experienced a rude awakening when I finally noticed that the same standard of living I have had for years was piling up unsustainable debt. That's the reason I turned to financial blogs like Wise Bread.

Medical expenses not withstanding, I do my best to pay as I go, but the debt is still there (although slowly shrinking), and I use that as my personal barometer for inflation. Inflation is much worse than than the government reports.

I judge the economy by counting the empty stores for rent that I pass while I'm driving. Another one bit the dust yesterday. Small businesses are an endangered species, and with the upheaval in the financial sector, unemployment has got to be pretty damn bad.

I don't need the government to tell me how the economy is, I live it every day.

Guest's picture
Jim

They make the claim that the government fudged the numbers in 1994 to overstate employment thereafter. You can review the labor pool numbers on BLS and test that theory.
If there was a big change in 1994 that impacted how we calculate unemployment then we'd see that reflected in the % of the population that participates in the labor pool. If you are in the labor pool then you're either unemployed or employed. So allegedly hidden unemployed people would not be in the labor pool and if that group increased then we'd see a change in the % of the population in the labor pool. But the civilian participation in the labor pool has not changed more than 1% in the past 20 years and there was not significant change around 1994. From around 1988 to 2008 the % of the population in the labor pool bounced between 66% and 67%. If the government had radically changed the # of people they count as unemployed then those people would drop into the group of people who do not participate in employment. That did not happen.

Jim

Guest's picture
Guest

I have never really bought into conspiracy stuff but www.shadowstats.com and www.austrianenginomics.com opened my eyes a bit in some areas. So I began digging myself. Most of there numbers are, for the most part, are fairly close to reality. Mainly in the area of the governments debts and obligations.

For example check out http://www.fms.treas.gov/fr/03frusg/03frusg.pdf and you will see some real eye openers. And that was 2003.

I believe that fanny, freddy, and the other bank troubles are revealing a over all, larger, problem. And that problem is Debt. both public and private. These debt issue go back a long ways but have key events that have led us to this point.
well I got to go play with my kids... maybe I will post more later.

Guest's picture
Dave

Overall, government stats and methodologies have been questioned for quite a few years. I'll admit that I'm on the skeptical side when it comes to their "changes" and "adjustments" - I mean a rent "substitute" for home prices, like you can buy and sell your home and jump in & out of apartments at will without any significant costs!

You don't have to be very old to notice that the CPI was the standard and that core was added as a side note, now only the Core is quoted in the media and you have to search for the overall number. So far nobody has mentioned the "adjustments" for improvements in items - a new car is safer than previous models, a new computer faster and a new TV has a better picture and sound. These advances are adjusted for by taking the current cost and discounting it for the improvement over the earlier item, i.e. a new $30,000 car with air bags is valued at $26,000 compared to a $27,000 car last year without air bags, the computer is $1,500 vs $1,000 but twice as fast so for infaltion purposes it's valued at $750... So even though the price you pay actually went up, for determining inflation they have "decreased". I understand how this has some validity but at the same time not reporting the unadjusted number is bogus as well.

They want a good consumer mentality, not a well informed population base - I mean look at basic financial education today!
People think Clinton had a surplus - only if you use all sources of income, including excess social security, and used only on budget expenses, no off budget, extraordiary items or debt repayment. To be fair it's far worse now.

P.S. I'm a banker and the Federal Governement couldn't get a real loan for anything at this point or in the last 20 years. If you changed the name and took its balance sheet and income statement, with the amounts changed from trillions & billions to millions & humdreds of thousands you couldn't get it a loan for your life. And we're surpised the "subprime" mess came about regardless of which party you blame.

Guest's picture
Guest

This economy will continue to be propped up until republicans win enough elections to restore the balance of power, then the props will be allowed to fall and the democrats and the liberal media will all be standing around the rubble pointing at the republicans standing in the midst of it.