By Robert Hardaway
September 22, 2007In 1983 the Bureau of Labor Statistics was faced with an awkward dilemma. If it continued to include the cost of housing in the Consumer Price Index, the CPI would reflect an inflation rate of 15 percent, thereby making the country's economy look like a banana republic's. Worse, since investors and bond traders have historically demanded a 2 percent real return after inflation, that would mean that bond and money market yields could climb as high as 17 percent. The BLS solution was as simple as it was shocking: Exclude the cost of housing as a component in the CPI, and substitute a so-called "Owner Equivalent Rent" component based on what a homeowner might rent his house for.
Let's see, the data previously used doesn't give good results -- so, create a new data element that does. If that isn't cooking the books, what is?While the BLS was correct in assuming that this statistical ruse would fool the average citizen into believing that inflation was only 2 percent (and therefore be willing to accept a meager 4 percent return on his bank savings), what is remarkable is that the ruse also fooled the bond traders, and apparently continues to do so, ...
The current subprime credit crisis can be directly traced back to the BLS decision to exclude the price of housing from the CPI. It is now clear that the "benign" inflation figures reported over the past 10 years* in no way reflected the skyrocketing rise in home prices, with states like California experiencing annual home price increases of as much as 30 percent annually. With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectation of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the "teaser" rates that quickly escalated to unaffordable levels. As long as home prices continued to skyrocket, buyers could refinance based on the increased value of their equity as collateral, but once home prices stabilized and even declined, many families were forced into foreclosure.
This is a classical 'bubble' in the economy such as the 1624 Dutch tulip blub bubble.Houses are today's tulip bulbs, and in California they are the equivalent of the 3,000-guilder tulip bulb. But instead of letting the bubble play itself out in order to create conditions for long-term economic stability, the Fed, under extreme political pressure from the power brokers and banks, seems determined to keep the bubble from bursting for as long as possible by continuing to lower interest rates and flood the market with liquidity, much as the Dutch banks did in 1624 to keep up the price of tulip bulbs. Such a shortsighted strategy not only will keep the price of homes beyond the reach of the average American, but will make the final and inevitable collapse that much more horrendous.
But who was in charge in 1983? That dear father figure so beloved by the conservatives, R.R., eh?
*Yes, it was just the last 10 years that the inflation in home
prices was concealed. Prior to that it was the general real estate bubble (the S&L collapse) and the 'dot com' bubble which were concealed.
I have long thought that the three witches who open Shakespeare's Macbeth
are really professional economists.
But the real blast comes when one remembers that this BLS also reports the U.S. Unemployment Rate. It always puts the sad-sack European socialist nations to shame. Could that also be a cooking of the books?http://www.bls.gov/cps/cps_htgm.htm
Read it and weep!What are the basic concepts of employment and unemployment - according to the BLS?The basic concepts involved in identifying the employed and unemployed are quite simple:
- People with jobs are employed.
- People who are
are unemployed. All three conditions must be met.
- looking for jobs,
- and available for work
- People who are neither employed nor unemployed are not in the labor force.
(conducted by the co-conspirator Bureau of the Census) is designed so that each person age 16 and over who is not in an institution such as a prison or mental hospital or on active duty in the Armed Forces is counted and classified in only one group. The sum of the employed and the unemployed constitutes the civilian labor force. Persons not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years of age and over. Under these concepts, most people are quite easily classified.Who is counted as employed? Not all of the wide range of job situations in the American economy fit neatly into a given category. For example, people are considered employed if they did any work at all for pay or profit during the survey week. This includes all part-time and temporary work, as well as regular full-time year-round employment. Persons also are counted as employed if they have a job at which they did not work during the survey week because they were:
These persons are counted among the employed and tabulated separately as "with a job but not at work," because they have a specific job to which they will return.
- On vacation;
- Experiencing child-care problems;
- Taking care of some other family or personal obligation;
- On maternity or paternity leave;
- Involved in an industrial dispute; or
- Prevented from working by bad weather.
Indeed! Very hard to be counted as 'unemployed' ; very easy to be counted as 'employed' ; but easiest of all to be counted as not in the 'workforce' at all. And to be selected for the survey -- such statistical magic.
And it goes on; one needs to read the whole fantasy.
BTW: Robert Hardaway is professor of law at the University of Denver Sturm College of Law and the author of 14 books on law and public policy.