ironweed
02-24-2006, 05:34 PM
I thought this was an excellent, if depressing, article discussing the chicanery involved in deriving US economic statistics. And the interviewee doesn't seem like some sort of conspiracy theory alarmist, either.
Link to PDF file (http://www.weedenco.com/welling/Downloads/2006/0804welling022106.pdf)
Can you give me a specific example of what you’re talking about
when you refer to systemic manipulations?
One of the prime examples of how the system has really degenerated
over time is the CPI. There was a very deliberate effort in the early
1990s under the auspices of Michael Boskin, who at the time was the
head of the Council of Economic Advisors, in conjunction with Alan
Greenspan, who, of course, was Fed Chairman, to “fix” the CPI. The
story, very simply, was that CPI was supposedly overstating inflation.
The pitch was that if people go out to shop and find that buying a steak
is getting expensive, they buy hamburger instead. Therefore, their cost
of living is really less than it would be if they always had to buy a fixed
basket of goods, which is what the CPI was originally designed to measure.
That was the whole purpose of the CPI, to measure the change in
the cost of a fixed basket of goods over time. You’d have a steak, a loaf of
bread, a gallon of milk, whatever. You’d price them out one year and
then you’d price out exactly the same goods the next year. You’d look at
the difference in the cost and that was your annual rate of inflation. It
was a measure of how much the cost of a consistent and constant standard
of living was going up. What Boskin and Greenspan argued was,
“We should allow for substitution here because people can buy hamburger
instead of steak, when steak goes up.” The problem is that if you
allow substitutions, you aren’t measuring a constant standard of living.
You’re measuring the cost of survival. You can keep substituting down
and have people buy dog food instead of hamburger. It happens. But
that’s not the original concept behind the CPI. The reason substitution
of the items in the CPI basket became a hot topic in Washington at the
time—and it was talked about very openly—was because the CPI was (and
is) being used to adjust Social Security payments to compensate for
increases in the cost of living, and tamping it down would hold down
Uncle Sam’s outlays.
How much difference does all this make, in dollars?
Well, if you look at 2005, the official deficit was reported at around
$319 billion. Using generally accepted accounting principles, the 2005
Financial Report of the U.S. Government published by the U.S.
Treasury, showed a deficit of $760 billion. That’s without considering
Social Security and Medicare. However, in the 2004 report’s management
discussion and analysis section, the Bush II Administration basically
said, “Hey, guys, you’d better be aware of how these numbers
work.” Where the official federal deficit in 2004 was reported at about
$412 billion, and the GAAP-based deficit was around $616 billion, they
said that if you added in the net present value of the underfunding of
Social Security and Medicare, the one-year deficit in 2004 was $11.1
trillion. That’s trillion, not billion. That amounted to almost 100% of
GDP at the time. Now, that $11 trillion included a one-time spike of
about $8 trillion, to account for what Congress and the President did in
setting up the Medicare drug benefit without funding it going forward.
But you can see that if you back out that one-time charge, that on a
GAAP basis, accounting for Social Security and Medicare, in 2003 the
deficit was around $3.7 trillion; in 2004 it was $3.4 trillion; and in 2005
it was $3.5 trillion. We’ve had three years in a row here where the GAAP
deficit has been basically $3.5 trillion. So the deficit and the total obligations
of the federal government are increasing by roughly the amount of
GDP every three years. In fact, the fiscal 2005 statement shows that
total federal obligations at the end September were $51 trillion; over
four times the level of GDP. It is unprecedented for a major country to
have its actual obligations so far out of whack.
That’s some whopping credit card bill.
It’s beyond control. Keep in mind that 2005’s $3.5 trillion GAAP deficit
is roughly 10 times bigger than the “official” deficit. But that is the size
of the shortfall. Even if you were to raise personal income taxes to 100%,
take all of everyone’s salaries, and put all those funds into a pot against
this deficit, you’d still have a deficit. (If you also threw in corporate
taxes, you actually might get it a little bit to the plus side.) But we are at a
point where we cannot cover the deficit by raising taxes. So what are we
doing? We are lowering taxes to try to stimulate the economy. People
are talking about new big spending programs going forward. Yet you’d
have to cut back Social Security and Medicare drastically here, beyond
anything that I can imagine is politically feasible, to bring things into
balance. Of course, there is no way you can tax all of people’s income.
And I think it’s a political impossibility to eliminate Social Security and
Medicare, or a goodly portion of it. But that is the political situation
we’re faced with right now. This is why I really refuse to align myself
with any of these jokers down in Washington (to use as sensitive, or as
gentle a term as I can for them). Those people have a thinking horizon,
a planning horizon, of the next election.
Link to PDF file (http://www.weedenco.com/welling/Downloads/2006/0804welling022106.pdf)
Can you give me a specific example of what you’re talking about
when you refer to systemic manipulations?
One of the prime examples of how the system has really degenerated
over time is the CPI. There was a very deliberate effort in the early
1990s under the auspices of Michael Boskin, who at the time was the
head of the Council of Economic Advisors, in conjunction with Alan
Greenspan, who, of course, was Fed Chairman, to “fix” the CPI. The
story, very simply, was that CPI was supposedly overstating inflation.
The pitch was that if people go out to shop and find that buying a steak
is getting expensive, they buy hamburger instead. Therefore, their cost
of living is really less than it would be if they always had to buy a fixed
basket of goods, which is what the CPI was originally designed to measure.
That was the whole purpose of the CPI, to measure the change in
the cost of a fixed basket of goods over time. You’d have a steak, a loaf of
bread, a gallon of milk, whatever. You’d price them out one year and
then you’d price out exactly the same goods the next year. You’d look at
the difference in the cost and that was your annual rate of inflation. It
was a measure of how much the cost of a consistent and constant standard
of living was going up. What Boskin and Greenspan argued was,
“We should allow for substitution here because people can buy hamburger
instead of steak, when steak goes up.” The problem is that if you
allow substitutions, you aren’t measuring a constant standard of living.
You’re measuring the cost of survival. You can keep substituting down
and have people buy dog food instead of hamburger. It happens. But
that’s not the original concept behind the CPI. The reason substitution
of the items in the CPI basket became a hot topic in Washington at the
time—and it was talked about very openly—was because the CPI was (and
is) being used to adjust Social Security payments to compensate for
increases in the cost of living, and tamping it down would hold down
Uncle Sam’s outlays.
How much difference does all this make, in dollars?
Well, if you look at 2005, the official deficit was reported at around
$319 billion. Using generally accepted accounting principles, the 2005
Financial Report of the U.S. Government published by the U.S.
Treasury, showed a deficit of $760 billion. That’s without considering
Social Security and Medicare. However, in the 2004 report’s management
discussion and analysis section, the Bush II Administration basically
said, “Hey, guys, you’d better be aware of how these numbers
work.” Where the official federal deficit in 2004 was reported at about
$412 billion, and the GAAP-based deficit was around $616 billion, they
said that if you added in the net present value of the underfunding of
Social Security and Medicare, the one-year deficit in 2004 was $11.1
trillion. That’s trillion, not billion. That amounted to almost 100% of
GDP at the time. Now, that $11 trillion included a one-time spike of
about $8 trillion, to account for what Congress and the President did in
setting up the Medicare drug benefit without funding it going forward.
But you can see that if you back out that one-time charge, that on a
GAAP basis, accounting for Social Security and Medicare, in 2003 the
deficit was around $3.7 trillion; in 2004 it was $3.4 trillion; and in 2005
it was $3.5 trillion. We’ve had three years in a row here where the GAAP
deficit has been basically $3.5 trillion. So the deficit and the total obligations
of the federal government are increasing by roughly the amount of
GDP every three years. In fact, the fiscal 2005 statement shows that
total federal obligations at the end September were $51 trillion; over
four times the level of GDP. It is unprecedented for a major country to
have its actual obligations so far out of whack.
That’s some whopping credit card bill.
It’s beyond control. Keep in mind that 2005’s $3.5 trillion GAAP deficit
is roughly 10 times bigger than the “official” deficit. But that is the size
of the shortfall. Even if you were to raise personal income taxes to 100%,
take all of everyone’s salaries, and put all those funds into a pot against
this deficit, you’d still have a deficit. (If you also threw in corporate
taxes, you actually might get it a little bit to the plus side.) But we are at a
point where we cannot cover the deficit by raising taxes. So what are we
doing? We are lowering taxes to try to stimulate the economy. People
are talking about new big spending programs going forward. Yet you’d
have to cut back Social Security and Medicare drastically here, beyond
anything that I can imagine is politically feasible, to bring things into
balance. Of course, there is no way you can tax all of people’s income.
And I think it’s a political impossibility to eliminate Social Security and
Medicare, or a goodly portion of it. But that is the political situation
we’re faced with right now. This is why I really refuse to align myself
with any of these jokers down in Washington (to use as sensitive, or as
gentle a term as I can for them). Those people have a thinking horizon,
a planning horizon, of the next election.