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How it's Rigged
- The Economy
Tim Picciott
CFP® CRPC®
How the Government Distorts the
Unemployment Rate
Like most things in government, there is always more than meets the eye when it
comes to government statistics. When we hear people talk about how great
Obama has been for the economy, it is usually because of the following reasons:
I'm not going to tackle all the issues in this piece, but the rst issue I want to
address is the unemployment rate. When Obama rst took of ce, the
unemployment was in double digits, and now eight years later (March 7th, 2017)
we nd ourselves sitting at 4.8%. Pretty hard to argue with those numbers or is
it?
Like most things in politics, there is usually more behind the numbers than what
initially meets the eye.
How the Government Distorts the Unemployment Rate
How the Government Distorts the
Unemployment Rate
Source: Bureau of Labor Statistics
When looking at a chart of the unemployment rate for the past ten years, it seems
like we’re doing pretty good. The headline unemployment number; the number
you see reported on websites, newspapers, and TV is also known by economists
as the U-3 rate.
The U-3 rate gives a very narrow de nition of unemployment, and its calculation
methodologies have dramatically changed throughout the years.
Did you know that once you’ve been unemployed for more than one year, you
don’t count as being unemployed anymore?
That’s right; you can be unemployed and not adversely affect the unemployment
rate! If you have not looked for work the previous four weeks for any reason, you
will also not be counted as being unemployed.
How the Government Distorts the Unemployment Rate
How the Government Distorts the
Unemployment Rate
So if you’ve been looking for a job for months and can’t nd anything meaningful
and you become discouraged, you can now nd yourself counted in the U-6 rate.
If this persists for more than one year, you will fall of this measure of
unemployment as well.
Now, let’s look at one of most extreme scenarios of how the unemployment rate is
misleading.
Let’s say George used to be an engineer making $125,000 and George was laid
off. After not being able to nd work, George is now forced to take a job as a
waiter and another as a bartender. Even if George is now making a fraction of
what he used to make; he now has a positive impact on the unemployment rate!
Despite the fact George is considerably worse off, his misery now counts as two
jobs for the Obama economy.
How the Government Distorts the Unemployment Rate
How the Government Distorts the
Unemployment Rate
Once you look at what’s beneath the numbers, alarming trends are glaringly
obvious. George’s example is not an isolated case, as time after time you see the
hospitality sector and part time jobs as one of the brightest areas of the jobs
report. Government and healthcare also typically account for a relatively large
percentage of net job gains. Not to knock on anyone’s situation, but how many
college educated waiters and waitresses can this stagnant economy support?
Source: Shadowstats.com
My favorite source for reliable economic information is www.shadowstats.com .
They publish information on unemployment, in ation, money supply, etc. What
makes their site unique is that they not only include the headline numbers but
also include prior methodologies for how the government used to collect
statistics.
For example, when they calculate inflation, they will not only give you the inflation
rate for today; but what the rate would be today using 1980’s and 1990’s
calculation methodologies.
How the Government Distorts the Unemployment Rate
How the Government Distorts the
Unemployment Rate
When we look at Graph 2, we can see that once you count the long term
discouraged and those who are underemployed, you get an unemployment rate
that is hovering around 23%. On an absolute basis, this would imply the average
worker is worst off today than they were before the recession started. I’ve always
contended that if things were as rosy as we’ve been led to believe, then how
come the FED can’t raise interest rates?
Graph 3 just inverts the scale, whereby the unemployment rate (as calculated by
shadow stats) increases as you go further down the axis.
How the Government Distorts the Unemployment Rate
How the Government Distorts the
Unemployment Rate
The last measure of unemployment, I would like to discuss is the labor force
participation rate. When workers who become long-term unemployed fall off the
voter rolls, unfortunately for the government they don’t just disappear. They
show up in something known as the labor force participation rate. This rate
demonstrates the percentage of able-bodied Americans who aren’t in jail and
who have jobs.
If we take a look at the graph below, we can see that this rate has been
plummeting the past two decades and is nothing to celebrate.
Source: Shadowstats.com
I hope you now have a better understanding of how the unemployment is rigged.
You also have another reason why the FED has been looking for every excuse in
the book to not raise interest rates.
How the Government Distorts the Unemployment Rate
How the Inflation Rate is Rigged
For the next segment, we will be discussion the Inflation rate.
Source: Bureau of Labor Statistics
The above chart depicts in ation as measured by the CPI-U from the Bureau of
Labor Statistics. This rate may be manipulated as well, anyone who has ever been
to the grocery store can probably tell you that as well. As of this writing (March
7th, 2017), the year over year CPI-U currently stands at 2.5%
How the Inflation Rate is Rigged
How the Inflation Rate is Rigged
One thing many of you may not realize is that the government changes their
methodologies about how they calculate these numbers. I’m not going to get
into exactly how they did this but if we take a look at what current in ation is but
using a 1990 methodology we get quite the different story.
Applying 1990 in ation calculations to today’s raw data would place the current
inflation rate at 6%!
Things get even bleaker once we apply the 1980’s methodologies to today’s raw
data as seen below.
How the Inflation Rate is Rigged
How the Inflation Rate is Rigged
Using a 1980’s methodology it would insinuate that the true in ation rate was
just a few ticks above 10%.
Another way the government distorts the data is by their usage of substitutions
or Chained CPI.
Below is excerpt taken from Investopedia.
Source: http://www.investopedia.com/terms/c/chain-linked-cpi.asp
So if Mrs Smith still spends $20/ month on Beef and Chicken but now because
she buys more Chicken and less beef, the net result of Mrs Smith’s in ation could
be ZERO!
In ation can also come in the form of smaller bottles and packaging, lower quality
ingredients, etc.
How the Inflation Rate is Rigged
How the GDP is rigged
It is true that many of the things we buy today are cheaper, they tend to be luxury
goods like TV’s, phones, computers, etc. When it comes to things people need
such as food and energy (which aren’t counted in CPI by the way), or Text books,
or college costs or housing costs the average American is struggling to get by.
I think we’ve also seen in ation in many nancial assets which have by and large
bene ted the very same 1% the former president likes to rail against. Since most
American’s don’t own stocks and have seen their wages stagnate the past two
decades inflation is devastating the middle class.
Imagine the retiree who lives off $30k per year. If the price of everything they
buy goes up 5% then every 14.4 years their cost of living doubles! If the rate is
closer to 10% then their cost of living would double every 7.2 years!
The next part we will tackle is the manipulation of the nation's GDP.
The rst issue I want to address is the fact that when the GDP increases, it
generally means people are spending more money.
How the Inflation Rate is Rigged
How the GDP is Rigged
The past few years Americans have spent more money on Health Care, Food,
regulations, bombs, and taxes just to name a few. I’d argue that the average
American is not better off for having the cost of their: Children’s college go up,
their health care costs going up, funding more bombings of brown people in the
middle east, or spending more on taxes. These are all drains on productivity and
take capital that could’ve been deployed in the real economy productively and
force us to fund bigger liabilities just to survive.
The other issue that is usually ignored is the pace at which we need to accumulate
debt just to add to GDP.
If we look at the graph above we can see that until 2009 the GDP was growing
faster than the debt. Since 2009 it’s more than $1 of debt to raise the GDP $1.
Any business that lets say took $2 to earn $1 would not stay in business very
long.
Although this is not comparing apples to apples, the chart from Zerohedge below
shows it took $10 in total new debt added to the economy (so not just
government debt) to produce a $1 increase in GDP!
How the GDP is Rigged
How the GDP is Rigged
Again, if anyone were running a business this way, they would nd themselves on
the wrong end of the labor force participation rate we discussed in part 1.
If we look back to part two of the series on in ation it will bring to light another
key distortion in the GDP data. Since the in ation rate is arti cially kept down
through various methods Real GDP growth usually takes the Percentage
increase in GDP and subtracts the in ation rate to give you a more accurate GDP
number. The data from the World Bank below shows a current deflator of 1%.
How the GDP is Rigged
How the GDP is Rigged
Source: World Bank
This means if we take the current (March 7th, 2017) GDP increase of 2.1% and
subtract 1% which is the deflator we get a Real GDP of: 1.1% (See figure above).
Imagine if in ation was admitted to be only 3%. Now instead of having GDP
growth we would actually see GDP shrinking and as we all know if you aren’t
growing your dying. Now imagine a scenario where in ation was actually 5% or
8%.
How the GDP is Rigged
How the GDP is Rigged
If we take a look at how www.shadowstats.com calculates in ation and how they
overlay their calculation with the governments GDP data we get a much less rosy
picture than what is currently being presented.
This would suggest that we have been in recession since early 2014.
When looking at GDP in a vacuum it is easy to get optimistic about the absolute
number. However when we dig beneath the surface you can easily see how we’re
not told the entire story.
At the end of the day, the GDP is an antiquated measurement for the true health
of an economy.
I would rather use a gure that takes into account Debt or uses Key Performance
Indicators that actually matter to the average person.
How the GDP is Rigged
How the GDP is Rigged
These may include: Median 401(k) balance for retirees, or networth or those
who have 6 months of savings… or any savings. If the .01% get all the spoils
while the average American slowly slips into despondency then we can expect a
Brexit style revolution here.
My only fear is that those who have created the crisis (The FED and Politicians)
will be the same ones who offer the solution. We know big government and
de cit spending is like trying and anchor around the economy but that doesn’t
mean we can’t expect the same response from the FED which is hitting CTRL P
(print) down over at Constitution Ave ( FED HQ’s).
Cheers,
Tim Picciott CFP® CRPC®
A.K.A The Libertarian Advisor
How the GDP is Rigged