US Gov Agency cooks books on inflation - creates Housing Bubble

[Coconut Kid]

http://www.rockymountainnews.com/drmn/other_business/article/0,2777,DRMN_23916_5704327,00.html

By Robert Hardaway
September 22, 2007

In 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
  • jobless,
  • looking for jobs,
  • and available for work
  are unemployed. All three conditions must be met.
• People who are neither employed nor unemployed are not in the labor force.

The survey (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:

• On vacation;
• Ill;
• 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.

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.

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.

[Coconut Kid]

Please remind me, when did the housing bubble burst?

And no one saw it coming?

BTW, the Rocky Mountain News has gone out of business - after over a hundred years.

 

[Mr.Eastwood]

Shame on you for trying to pin what has happened on one person. I see bias coming through, which is not a pretty shade of any color. Tsk tsk ...

That's like saying it's all Alan Greenspan's fault for artificially keeping interest rates low, or Jimmy Carter's fault for the CRA (Community Reinvestment Act) which forced banks to make loans to people of questionable financial stability, or any number of people who helped set these pins up to get knocked down by poor hindsight. Many people had their hand in this cookie jar, and it's a shame you only want to punish one of them.

[Coconut Kid]

Shame on you for trying to pin what has happened on one person. ... Tsk tsk ...

In one sentence I allude to a hero of the Republican Party, and you select that sentence alone to which to respond.

Strike that sentence. Now what do you have to say?

[Mr.Eastwood]

If I'm responding to the article, I think he has uncovered another detail to which may have led to our current situation, but I don't buy that it started in 1983 and only in that year. Like I said before, It's my opinion, and one that I think rightly fits, that many people helped make this mess. These people did so over the years. Reagan helped, yes. So did Greenspan, Carter, Clinton, Both Bushes, etc. I'm sure there are lawyers and judges in the mix as well as State and Federal employees too.

As for your post, I liked what I read, except for the part on which I chose to respond 
I think it would be better to find a more accurate way to judge who is employed/unemployed and so forth. I know the current way we do it, our unemployment level is much higher because it doesn't count certain people; I'm thinking it's people who have quit looking for jobs or have used up their unemployment/welfare and still haven't found work, to name a few ways.

[Coconut Kid]

I suggest that Hardaway points out not just one more in a long inventory of events chained together which brought about a major economic dislocation; rather he highlights a tipping point event that allowed that chain of additional events to be constructed.

If the BLS had not made the choice it did about the housing component of the CPI, everyone in sight would have alerted to the "bubble" problem. That choice was a classic example of rejecting a statistic which does not fit the preconceived notion and instead constructing a new statistic which does.

The examination of the arbitrary BLS change in the CPI (and it has not been the only one) draws one's attention the methods BLS uses -- especially the computation of the unemployment rate.

The current system of reporting the unemployment rate in the US is simply an officially sanctioned lie.

The public lives in a fantasy world concerning the employment situation. There are hundreds of thousands of people working full-time in the "underground" economy (an equivalent of a "black market") and in criminal enterprise. This came clearly to light when hurricane 'Katrina' completely disrupted New Orleans. There has been no wide-spread publication of what has been revealed about the underside and not admitted parts of the society that existed there before.

I posit that the American public would be outraged if the real picture of the US economy vs employment were published.

[dierighty]

Mr. Hardaway brings up an interesting event that occured in history. Unfortunately he doesn't mention any of the policy makers involved.
A paper on the BLS website 'Treatment of Owner-Occupied Housing in the CPI' written by the BLS for a presentation in 2005 discusses this event. In section 2 of the paper it lays out the timeline of changes to the CPI's estimation of housing costs. The debate over how the CPI should estimate housing costs has been ongoing since the CPI's creation and has been discussed in the Nixon, Carter, Reagan administrations and the US House & Senate. The CPI is a political battleground because of how its used. It determines collective bargaining agreements(labor interest), government entitlement payments(social security), and setting tax brackets. The pre-1983 CPI's "user cost" approach was causing government expenses to rise rapidly, while a switch to a "rent equivalence" CPI would cut government expenses. So the BLS paper provides a different motivation for the changing of the CPI in 1983, and that the executive and legislative branches were also involved.

[Coconut Kid]

@ dierightly,

I thank you most sincerely for the clarification. I hope to be able soon to read that paper.

My immediate reaction is that I did not intend to imply that the BLS is/was independent of the executive branch nor that the legislative branch was ignorant of the implications of the decision. My May 22nd post was intended as a criticism of the entire government, not just the specific, tiny unit.

Perhaps you are more skilled in searching out such things, but has there been any serious media exposure of the debates about how the BLS operates? Is this not a "political battlegound" which is not revealed to the public?

It seems that "bi-partianship" works very well in the back-rooms where cutting the government expenses reported to the public have the mutual benefit of easing re-election efforts.

Not to divert the discussion, but this is very much like Lyndon B. Johnson's horrible accounting change shoved down the throat of a supine Congress. To conceal the cost of the Vietnam War, he moved the income from the "Trust Fund Taxes" (Social Security) from a separate trust fund section of the government accounting system to the general account system -- so that the surplus income from the Social Security Tax concealed the deficit spending on the war.

LBJ's chickens are coming home to roost. Joining them are all the statistical chickens from the BLS. I find it interesting that all these figurative chickens are bi-partisan.

I may be mistaken, but it seems that you describe is simply an elaborate rationale for yet another way to "cook the government books". The CEO and the board of directors all argued, but finally agreed -- and kept on drawing their hyper-inflated salaries. Meanwhile the stock/stake-holders were mystified. Boom & bust - my ass.

I still hold that there are identifiable points on the time line when key/tipping point decisions were made -- no matter how many players were involved. I don't let the Congress off the hook in any of it. Indeed, they mostly did more harm than the executive, if by inaction if not otherwise.

[dierighty]

I wanted to find the history of the CPI and the BLS and could not find anything in great detail. Frustrated after stumbling around the Bureau of Labor Statistics website I found that paper which described the situation from a different perspective. Here's a foot note from that paper(why is this note included?):

"The basis of this history was an attachment to a December 1985 letter to Mr William P Butz, Associate Director for Demographic Fields, Bureau of the Census. The author of the attachment is unknown."

What I still don't understand is why did the people at the BLS change the CPI, I see why other people would want them to change it or keep it the same. The Burea of Labor Statistics mission statement seems especially comical after these posts:

"With the strongest commitment to integrity and objectivity, the BLS will be premier among statistical agencies, producing impartial, timely, and accurate data relevant to the needs of our users and to the social and economic conditions of our Nation, its workers, and their families."

[Coconut Kid]

... What I still don't understand is why did the people at the BLS change the CPI, I see why other people would want them to change it or keep it the same. ...

I speculate that it is largely a matter of the technology of surveys to obtain data which can be statistically extended from that relatively tiny survey to the total population. There is the additional factor of the "stakeholder" culture at the Bureau of the Census and BLS. It seems the place could not function without an unending series of "conferences" involving anyone and everyone who has any kind of interest in statistics.

I "googled" William P. Butz. The interview at www.census.gov/prod/2003pubs/oh-butz.pdf is dry as dust but helpful. The rest of the "google" list indicates that Butz is a powerhouse in the field of demographics.

The major point I picked up is that statisticians can get the harness wrapped around the axle too easily. Frankly, I did not do well in my college statistics course. But I did learn that one can wander down a blind alley and wake to wonder why the world doesn't match your carefully drawn picture.

sad !

"With the strongest commitment to integrity and objectivity, the BLS will be premier among statistical agencies, producing impartial, timely, and accurate data relevant to the needs of our users and to the social and economic conditions of our Nation, its workers, and their families."

When all the users get to put their oar in the water, who in the BLS, the Census Bureau or the Department of Commerce can "impartially" decide whom amongst them are wingnuts?