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How the Government Lies with Statistics
Although there are countless cases of government lies and cover-ups, they're usually singular instances. They happen regularly of course, but they're still separate events - separate lies. There is however one government lie that is pervasive and systemic - government statistics. Without further ado, let's begin!
Government lies with... Inflation!
There are three ways in which the government lies (manipulates) when reporting the rate of inflation.
No. 1 - Hedonics
Hedonics is the peculiar idea that rather than measuring the actual price of things, which is what various inflation indices are supposed to do, and certainly what people think they do. Rather than measuring actual prices, hedonics justifies measuring imaginary, implied prices.
For example, if in year 1 the cheapest T.V. in store cost $300, and had a 27" display, the inflation statistics count that as $300.
If in year 2 the cheapest T.V. also costs $300, but this time has a larger 29" display, then Lo and Behold, the price counted in the statistics is reduced to, say, $250. In other words, although the price has not changed, the inflation statistics now report deflation for that good, which will of course bring down the average of the inflation index.
You see, since the T.V. in year 2 is bigger, it is assumed that you derive greater pleasure from it (hence hedonics, from the Greek hedon - pleasure). Since you're getting greater value from a product of the same price, the inflation statistics reduce the price you paid.
Now this is asinine for at least two reasons. Number one, the transacted amount was in fact $300, and regardless of how much pleasure you may derive from that T.V., the fact is that you paid $300 for it, If you had less money, you wouldn't be able to afford it.
When in business accountants stop reporting actual numbers, and instead report imaginary ones, it's rightly called fraud. When government lies by providing statisticians with ideological cover from court economists, it's called statistics. The job of the statistician should be to collect and present data - not process it into lies.
Secondly, people do not actually derive greater pleasure from better things; at least not for long. Psychologically, it seems that people take their current conditions for granted quite quickly. If people remained permanently happy from every accumulated minor and major improvement to their living conditions, they would now be in a permanent state of elation. However, this is demonstrably not the case.
No. 2 - Substitution
Any good deemed 'volatile' is removed from the basket of goods, and replaced with another.
For example, if the price of canned Salmon goes up by 20% in one year, then it is assumed that rather than pay the higher price of Salmon, people will substitute for canned Tuna instead, which may have risen by only 5%.
After all of this statistical butchering, we are left not with a price index, but with a survival index. Just look at the graph below, obtained from shadowstats.com, which shows the rate of inflation as calculated today, and then based on the government's own methodology from the 80's.
See that divergence starting in the early 80's and widening until now?
What's more likely, that the government was systematically over-estimating the rate of inflation for decades, or that they have been slowly and carefully manipulating the way the data is processed in such a way as to under-report inflation rates?
But we're not done yet.
No. 3 - Weighting
We all allocate funds in a certain proportion. It makes sense that the inflation index not just calculate the rising price of goods, but reflect properly the magnitude of our expenditure on those goods and services. Makes sense, right?
Not when the government implements it. Here's what actually happens:
The statisticians determine that healthcare and education costs rise very much every year. They then determine that the average American spends, say, 15% of their income every year on healthcare. Rather than leaving the weighting intact, they reduce it, dividing it by 100 and then multiplying the rate of inflation in healthcare costs by 0.075, rather than 0.15 (in this example halving it).
The result is that all of those sectors of the economy that are particularly affected by inflation, are all under-valued in the inflation statistics.
Oh, and did I mention that the core inflation rate doesn't count the price of rather important things, like fuel or food? Next time they tell you the rate of inflation, pay attention to which one they're giving you. And then add a few percentage points for good measure.
So just how bad is the inflation rate?
If we use the 1980's methodology, then right now, the rate of inflation is averaging at around 10%. It has been for a few years now. But what does this really mean?
Inflation is a cumulative process. Using the following simple formula, we can work out how much currency is worth in real terms at the end of an inflationary period.
$100/(inflation^years)). If the rate of inflation is 10%, you substitute 1.1. ^ means "to the power of".
So what does this mean? If in year 1 the rate of inflation is 10%, then at the end of the year, $100 will only be worth $91. (Because $100/1.1^1)
If in year 2, the rate of inflation remains at 10%, then by the end of year 2 the original $100 are now worth $82.6.
At the present rate of inflation, in 10 years, $100 will be worth just over $38 in present terms. In other words, almost two thirds of the value of the dollar will be gone.
Government lies with... GDP!
GDP and CPI are the biggest and most important (in the popular mind) statistics you can get about a country. You'll see in a moment why I started with inflation. But first...
No. 1 - Imputation
Here's the Bureau of Economic Analysis's own explanation for why they add imputation to GDP. I'm going to address the housing imputations, which account for around $1 trillion of the GDP statistic.
Apparently, whenever someone owns their own home, the government imputes the value of that home in terms of what that home would fetch when rented, and adds that number to the GDP.
Why is this retarded? Because:
1. The homeowner likely has a mortgage on their home, and they're paying a lot more to the bank than they would be getting in rent, courtesy of the housing bubble. Assuming that they're getting a positive imputation based solely on their ownership of the house is asinine, but sure boosts those GDP numbers during housing bubbles!
Here's what GDP probably looks like without all of the manipulations, thanks again to shadowstats.com.
Notice how the U.S. has basically been in a recession since late 2000? That's because bubbles are mis-allocations of scarce resources, and actually reduce real wealth. If you ever see statistics that show a bubble contributing to economic growth, you can know immediately that they're improperly calculated.
2. Even if the homeowner owns that house outright, where should the imputation be counted? It's not part of consumption, since the imputed wealth doesn't actually exist. If it did, it would be double counting whenever that person consumed or invested in anything. Nor is it a part of investment, as I will explain below. Government spending, exports, and imports obviously don't fit either.
No. 2 - Housing counted as an investment
A very important component of GDP, in fact the one that fluctuates the most during times of economic uncertainty, is investment. When government lies by treating housing as an investment, they're grossly inflating the apparent investment component of GDP.
Any investor, analyst, or economist with any sense and understanding of the real world (Keynesians don't get to be a part of this group), will tell you that housing is a consumption good, albeit a very long-term one.
In any reasonable economic model that doesn't revolve around bubbles and a constantly debased currency, housing prices should not be rising much, if at all. If anything, as a house is used up, its value should drop, until investment in the house in the form of new additions or repairs and maintenance is done. Obvious exceptions include owning a house in a particularly lucrative spot that is undergoing development.
The people who treated housing as an investment ended up getting one hell of a reality check in 2007-8. An income-generating business is an investment. A house is shelter.
No. 3 - Debt
Debt plays no role in GDP that I know of.
That means whenever people go out and re-mortgage their house to buy themselves cars and flat-screen TVs, that's counted as positive economic growth. Obviously this is neither growth, nor is there anything positive about it. All they're doing is boosting short-term GDP at the expense of future GDP.
You know, the future? That elusive time, far, far away, when those debts will actually have to be paid back.
No. 4 - The GDP deflator
Now here's why I started with inflation. Since the gap between the reported inflation rates, and what are probably the real inflation rates, are as of late over 5%, what kind of an effect does that have on GDP?
You see, when real GDP is calculated from nominal GDP, the inflation index or GDP deflator is used to figure out how much the economy actually grew.
If an imaginary island produces 10 bananas a year and nothing else, and values each banana at $1, then its GDP is $10. If the next year the island continues to produce 10 bananas, but some unscrupulous counterfeiters devalued the currency so that each banana now costs $2, then nominal GDP would show an economic growth of 100%, with the new GDP at $20.
Of course, the economy didn't actually grow. It's producing the same bananas as before, and in the same quantity. So the role of the GDP deflator is to take away the inflation rate, and show us what the real economic growth was.
And here's where the real kicker lies: when CPI shows us an inflation rate of 2%, and GDP nominally rose by 3%, then real growth was 1%.
If however GDP nominally rose by 3%, but the real, un-fudged inflation rate is more like 8%, then you're in the middle of a major recession!
And there you have it. That your government lies to you shouldn't surprise anyone, but for some reason it still does.
I think the skill with which the U.S. government lies and manipulates its statistics probably makes the Chinese red with envy (see what I did there?).