"Do not arouse the wrath of the Great and Powerful Oz! Come back tomorrow!"
Dorothy: "Who are you?"
Dr. Marvel stuttering: "Well, I - I - I am the Great and Powerful, Wizard of Oz."
"You are? I don't believe you!"
He replies: "No, it's true. There's no other Wizard except me."
"Oh, you're a very bad man!" says Dorothy.
"Oh, no, my dear. I'm a very good man. I'm just a very bad Wizard."
Like Dr. Marvel, the Bush Administration used the
illusion of the threat of “weapons of mass destruction” from Saddam Hussein to gain public support for the invasion of Iraq. Not a day went by (during the build up to the war) without a metaphorical mushroom cloud springing up somewhere ( usually on Fox News).
Likewise, the use of deceptive statistics, the WMD of politics, is being used in much the same way to convince the American public that, in the words of Dr Paul B Ferrel, of the Wall Street Jounal " the U.S. economy is stronger, fairer, more productive, more dominant, and ultimately, richer with opportunity than it really is." That is also the premise of Kevin Phillips new book: "Bad Money: Reckless Finance, Failed Politics & the Crisis of American Capitalism."
Kevin Phillips, as you may recall , was a key member of the Nixon administration and an old school conservative. He is the, some say creator, some say advocate, of Nixon’s much maligned Southern Strategy. Dissatisfied with subsequent Republicans since Nixon and policies of, in his words, “radical conservatives”, Phillips has been telling “truth to power” on television, radio and in print since the Reagan administration.
The Dirty Little Secret
In the book, Phillips reveals the dirty little secret of the Beltway, namely, that “statistical corruption” has tainted the measures that shape the public perception and government policy in regard to the economy. In particular, three key numbers; the CPI, GDP and Unemployment Statistics are routinely manipulated by those in power to prove that the policies and politics of the current occupant of the White House are best for the American economy.
Phillips shows that using our current economic state as and example, the actual “ inflation rate is as high as 7% or even 10%; unemployment near 9% as high as 12. Economic growth since the recession of 2001 has been mediocre, despite the surge in wealth and incomes of the super rich largely due to tax cuts, we are now falling back into recession. "
Phillips analyses the beltway statistical shell game and frequent cover-ups since and concludes that while there was no "grand conspiracy” the reasons for the deceptions are much less ominous, just “accumulating opportunisms” or simply put , plain old greed.
Statistical Corruption as a Political Tool
Examples of statistical corruption abound in the daily barrage of upbeat rhetoric from the White House. Each economic policy speech, press release and talking point fed to conservative media outlets are full of fallacious economic claims “backed” by the corrupt statistical data. Not surprisingly, the “data” is used by the Republicans to paint a rosy economic picture of a less than rosy economic reality.
In a speech to the Economic Club of New York in March, President Bush proudly proclaimed that “Americans can be confident about our economic growth.” He went on to give the usual litany of benchmarks of his success, low inflation, low unemployment and good economic growth. For those reasons Bush said he was optimistic because the economy’s “foundation is solid” as measured by employment, wages, productivity, exports and amazingly, the federal deficit.
As noted by a correspondent from the Wall Street Journal in attendance “He was wrong on every count. On some, he has been wrong for quite a while.” The New York Times went further: “Mr. Bush went on to paint a false picture of the economy. He dismissed virtually every proposal Congress is working on to alleviate the mortgage crisis, sticking to his administration’s inadequate ideas."
Why would he do that? With the plethora of serious, serious problems, stagnant credit markets, billions in impending mortgage defaults, bank solvency issues , a collapsing dollar one would think that a little truth telling and soul searching would be in order. No, rather Bush said that a major source of uncertainty today is " not liquidity, not oil prices and not the mortgage crisis, no… in his view it is whether his tax cuts, scheduled to expire in 2010, would be extended ."
Tweaking Unemployment Statistics
In the same speech Mr. Bush also talked approvingly of the recent unemployment rate of 4.8 percent. In his words “A low rate is good news because it indicates a robust job market”. Well, not really.
Actual unemployment numbers are much, much higher. Unemployment numbers have, since the Kennedy years,shed this group or that group to shore up the overall number. Discouraged workers, part time workers and seasonal workers were all placed in special categories or just not counted in the unemployment statistics.
In this arena, President Nixon led the way when ordered the Labor Dept to publish only the lowest of the seasonally adjusted unemployment rate estimates and the overall un-adjusted rate.
Taking a cue from Nixon, Reagan did it another way, he simply categorized military personnel as "employed" instead of "outside the labor force" as they had been since the government began tracking unemployment, instantly adding 2 million workers to the labor force.
"Mr. Bush boasted about 52 consecutive months of job growth during his presidency. What matters is the magnitude of growth, not ticks on a calendar. The economic expansion under Mr. Bush — which it is safe to assume is now over — produced job growth of 4.2 percent. That is the worst performance over a business cycle since the government started keeping track in 1945." NYT
Phillips elaborates in a recent Harper's Magazine article: Numbers Racket: Why the economy is worse than we know: "Based on the criteria in place just a quarter century ago, today's U.S. unemployment rate is somewhere between 9% and 12%;
"The unemployment rate ticked down last month because hundreds of thousands of people dropped out of the work force altogether. Worse, long-term unemployment, of six months or more, hit 17.5 percent. We’d expect that in the depths of a recession. It is unprecedented at the onset of one." NYT
Tweaking The Inflation Measurement
“Core inflation remains low, and that’s good news. " GW Bush May 2008
The current measure for inflation in use today was adopted during the Nixon Administration, who separated "core" inflation rate from the headline making CPI inflation rate. So what exactly is core inflation? Core inflation is defined by the Federal Reserve as a measure of aggregate price growth and excludes food and energy. Analysis by Fed economists indicates that the core inflation measure is no better than a moving average of the Consumer Price Index as a predictor of inflation.
As noted, core inflation conveniently excludes food and energy prices, that at the time Nixon directed the change, were skyrocketing due to the OPEC Oil Embargo. This was done with the rationale that energy will impact the core rate in a broader measure giving a " truer picture "of inflation. Obviously then, the concept of core inflation is used mostly for political purposes, politicians can , using April 2008 numbers as an example, rightly claim “core inflation is low” while gasoline prices are up more than 30% from a year ago and food prices have risen at least 5% since January.
The Politics of the Inflation Measurement
The politics of the inflation measurement were ably 
demonstrated by the ineptitude of the Carter Administration. Carter’s economists often went by the CPI as a truer measure of inflation, and the Federal Reserve Chairman Volker adjusted interest rates accordingly.
Carter was bludgeoned over the head with the numbers,( for telling the truth), and the resultant interest rates during the 1980 presidential campaign by Ronald Reagan. After being elected Reagan promptly used the core inflation rate as the yardstick for his administration. No fool was he, Mr. Reagan.
Reagan further cooked the books by substituted housing prices with "owner equivalent rent" in calculation of CPI, masking high housing prices and further improving his administrations statistical performance on both counts. Throw a few tax cuts on the fire, a newly robust employment statistic and a artificially high growth rate (explained below) and suddenly, the myth of the Reagan economic “miracle” was born.
Economic Growth Measurements and Inflation
The impact of the CPI / Core Inflation debate is explained by Michel Pento, Senior Market Strategist for Delta Global Advisors : “One of the reasons it is imperative to accurately calculate inflation is that you need a true reading on price increases in order to get a true reading on economic growth. If we used an accurate inflation rate to deflate nominal G.D.P. it would have certainly settled the argument last fall as to whether or not the economy is in recession.”
Many economists have long maintained that the actual inflation rate is as high as 7% or even as high as 10%. Compare that to the bits of spin Washington routinely feeds the press and public about the Bush economic record: Unemployment 5%, inflation 2% and long-term growth at 3%-4% (actually more like 1%).
Yet Washington continues to claim, here for the month of April , that "inflation was fairly mild last month."
Why Inflation Is Important
Why inflation is critically important measurement is further explained by Mr Pento: “Most investors are bound by official government data, I thought it would be worthwhile to use the Consumer Price Index to derive real G.D.P. rather than the chain type price index -- which is an even more tortured inflation measurement than the C.P.I.” According to Pento, the C.P.I. is a “better estimate of inflation than the chain type price index because the chain type index allows substitution between categories, while the C.P.I. is limited to substitution within a specific category.” Note the word substitution.
Consider the absolutely incredible ( meaning in this case unbelievable) April 2008 on numbers. They were the result of a seasonal adjustment that removed much of the impact of the increased in gasoline prices. Think about that for a minute, the inflation report did not include the effects gasoline prices!
In addition, the report claimed that consumer's energy costs were unchanged while the actual price of crude oil rose about 12.5% and gas prices rose 11% during the same period in question! Try “seasonally adjusting” the income you report to the IRS and see what happens.
800 Pound Gorillas and T Bills
Inflation is the proverbial 800 pound gorilla, the number most feared by Washington. It impacts interest rates, the measurement of economic growth and ultimately the unemployment rate. Therefore it is politically advantageous to understate inflation. Not only does it inflate growth statistics, as Phillips points out " it keeps interest rates artificially low and Wall Street and the rich benefit from perpetuating the perception of stability. They (the rich) get richer hiding under 'statistical camouflage, particularly in the area of inflation."
"Were mainstream interest rates to jump into the 7% to 9% range -- which could happen if inflation were to spur new concern -- both Washington and Wall Street could be walking on quicksand," warns Phillips. "The make-believe economy of the past decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy."
The bogus inflation numbers "hangs over our heads like a guillotine," says Phillips. If Washington reported the true inflation rate "it would send interest rates climbing and thereby would endanger the viability of the massive buildup of public and private debt that props up the American Economy."
Who Let This Happen?
We, meaning the public, have some culpability here; we let ourselves be conned.
But why? In life and finance no one wants to look mortality in the face. Phillips explains, "The rising cost of pensions, benefits, and interest payments -- all indexed or related to inflation -- could join the cost of financial bailouts to overwhelm the federal budget." It’s losing scenario, "as inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering."
The Real Winners
So who really "profits from the low-growth U.S. economy hidden under statistical camouflage?" Phillips asks rhetorically. Certainly not the masses, not you and me. "Might it be Washington politicos and affluent elite, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?" ask Phillips. Yes, Kevin I think that is correct.
Historians have warned us that “great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out."
Its not to late.
"The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, and more selfish than bureaucracy." Abraham Lincoln
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Paul B. Farrel WSJ Market Watch Megabubble waiting for new president in 2009
- Micheal Pento , Getting Real With GDP Huffington Post
- Kevin Phillips Harper's Magazine , February 2008: Numbers Racket: Why the economy is worse than we know.
- Kevin Phillips:Bad Money: Reckless Finance, Failed Politics & the Crisis of American Capitalism
- New York Bank of The Federal Reserve : CPI and Core Inflation
- Wikipedia
posted by MRFred 
As if we don't have enough to worry about, according to some economists, there is a "mega bubble" awaiting the new Administration. Megabubble? Yep, megabubble, an economy based on statistical deception. To be honest I never heard of a "megebubble " until I read an article about economics statistics of all things. As it turns out, cooking the books isn't the exclusive domain of Enron or Martha Stuarts neighbors.
