Pollyanna Creep: Economy Worse Than We Know
Jul 11th, 2008 by Dave
A fellow value investor brought a remarkable article to my attention: Hard numbers: The economy is worse than you know by Kevin Phillips of Harper’s Magazine.
Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured.
Political pressure to show positive numbers on the economy has tainted:
• Consumer Price Index (CPI), the main inflation indicator
• Gross Domestic Product (GDP), the growth indicator;
• Unemployment figure, the most relevant indicator for most of us
The author alleges that over past five years there were pretty significant differences between actual and reported numbers:
Unemployment should be at 8% (instead of the 5% reported)
Inflation should be 5% (2% reported)
Average Annual Growth is a miniscule 1% (3-4% reported)
According to the author, the deception is due to “no grand conspiracy, just accumulating opportunisms.”
Why are these numbers significant? Well the growth in entitlements is tied to inflation; entitlements (such as social security) are a huge part of the annual federal budget, and automatic increases in entitlements (inflation indexing of entitlements) are a huge part of year to year increases in the budget. Debt service (interest payments on US borrowings) are another huge part of the federal budget; when inflation is high, debt holders demand higher interest rates to compensate for losses in their purchasing power. If inflation is misreported, social security recipients and bondholders receive less than they should, and their losses are to the advantage of the federal budget.
The other part of this is consumer sentiment which drives some 70% of the domestic economy. When consumers feel good about the economy they spend on goods and services. One of the greatest fears of incumbent presidents is that consumer concerns about the economy - about jobs or high prices - will shut down spending as they save more in anticipation of hard times ahead. So presidents do everything in their power to keep consumers feeling good about the economy; so much so that we’ve long since kept the Federal Reserve system (somewhat) independent from the administration because otherwise there would be too much temptation to tinker with the economy for political purposes (easy money aka keeping interest rates low drives consumer spending).