All Of The Government's Important Economic Data Are Fraudulent -- Part I

Perhaps the most painful aspect about reading (or watching) debates about economic policy is that everyone cites government economic data that are completely unsuited and useless for the purpose cited.  I'm not talking here about obscure data; I'm talking about the main and most widely cited and used data, about which the ignorance of just about everyone is appalling.​

In fact I assert that the principal government economic data are uniformly fraudulent.  And not in little ways; rather, in fundamental ways that go to the heart of how the data are designed to be used and how they are used.   Now, I am not accusing the United States government of systematically falsifying or putting out inaccurate data, the way, for example, Argentina puts out inflation data that everyone knows are completely made up.  ​But what our government does is just as bad or worse.  Our government issues data in categories that are defined in ways to that are designed to and do deceive the people.  And the deception is always of the same sort, namely, making bigger government appear more desirable in order to achieve the support of the people for that end.

This proposition is decidedly true with respect to the three categories of economic data that are the most important in terms of their use in the argument over economic policy.  Those categories are:  (1) GDP, (2) the rate of poverty, and (3) the cost of obligations to retirees for pensions and health care.​

Today I will start with GDP, the principal measure of the overall size of the economy, and of whether the economy is growing or shrinking and by how much.  ​There is a fundamental problem with the compilation of GDP data, which is that government spending on goods, services and salaries is added into GDP dollar for dollar.  This fact makes the GDP data completely useless in a debate over whether government spending should be increased or cut.  Of course, that is the principal use to which GDP data are generally put.

The portion of the GDP that comes from the private economy is based on the assumption that voluntariness and markets mean that transactions of equal dollar value should be given equal weight.  That assumption does not apply to government spending.  How should the value of government spending be measured?   The assumption used is that a dollar of government spending gets added to GDP as if it were completely equal to a dollar of private spending.  When the government was a small percentage of the economy, and the government thought that thrift was a virtue, this assumption may have been as good as any other.  ​

But as soon as you count every dollar of government spending at full value, you can immediately see that pure wasted spending counts to "increase" GDP just as much as the very most necessary expenditure.  Suppose you pay someone to dig holes and fill them in (an example actually extensively discussed in Keynes' General Theory).  At the end of a year he has produced exactly nothing -- but the GDP numbers add in an amount equal to whatever the government paid him.  If the government pays every one of 300 million Americans $50,000 each to dig holes and fill them in all year, they have produced absolutely nothing by the end of the year, and the government records a GDP of $15 trillion.  If the government doubles everyone's salary to $100,000, then it just doubled the GDP to $30 trillion, even though they are all starving (because they were too busy digging holes to produce any food).

These are extreme examples, but we live in a time when the acceptance of the GDP numbers as measuring real changes in the economy is so great that the government can completely just pass out hundreds of billions of dollars of totally wasted spending to its friends, cronies and supporters, and count that as a dollar for dollar increase in GDP.   Yes, I am talking about the so-called "stimulus."  And they get virtually no push-back from the media, including most of the conservative media.  And the "stimulus" is just a small part of it.  How about "green" energy spending, specifically designed and intended to impoverish the people by preventing them from using cheaper energy and driving up the cost of electricity and driving.  Yes, that kind of destructive spending also is measured as increasing GDP dollar for dollar.​

And of course, it works the same way when there is any proposal to cut spending.  Under GDP accounting, cuts in government spending, no matter how wasteful that spending, are recorded as reducing GDP dollar for dollar.  Thus here we have President Obama a few days ago opposing the upcoming spending cuts:​

"Our top priority must be to do everything we can to grow the economy and create good, middle-class jobs," Obama said during remarks at the White House, standing alongside a group of emergency responders. "That's why it's so troubling that just 10 days from now, Congress might allow a series of automatic, severe budget cuts to take place that will do the exact opposite."

Thus, you can't ever cut any government spending, because that will shrink the economy.  Under this logic, we just head inexorably for a world where the economy is 100% government.  North Korea!​

​Over the next couple of days I'll consider poverty and pension accounting.

Climateers Making Fools Of Themselves

There's a great round-up today on the web site called RealScience (written by Steven Goddard) titled Settled Science Update:  Global Warming Means More Snow, Less Snow, Record Snow And No Snow.​

Back in the heyday of the global warming scare, many warmists made the obvious prediction that warming would mean less snow.  Many of them went even further and predicted the disappearance of meaningful snowfall in places like England within not many years.  Then, of course, the last few years have seen above normal and even record snowfall in these very places.  Obviously, that must be caused by global warming too!  If you think I must be kidding, I followed some of the links at Goddard's site to come up with a few of the best quotes.

From Charles Onians in the Independent, March 20, 2000:​

Britain's winter ends tomorrow with further indications of a striking environmental change: snow is starting to disappear from our lives. . . . .Global warming, the heating of the atmosphere by increased amounts of industrial gases, is now accepted as a reality by the international community. . . . .  However, the warming is so far manifesting itself more in winters which are less cold than in much hotter summers. According to Dr David Viner, a senior research scientist at the climatic research unit (CRU) of the University of East Anglia, within a few years winter snowfall will become "a very rare and exciting event.  Children just aren't going to know what snow is," he said.

CRU, of course, is not nowhere in the climate wars, but rather home of Hockey Team leader Phil Jones, the CRU temperature series, and the Climategate e-mails.​

Well, it seems that recent winters have turned out to be unusually cold and snowy in England and, for that matter, over the Eurasian continent.  To find the explanation, you'll have to go to Clive Cookson in FT Magazine on January 20, 2012, summarizing a recent scholarly article in Environmental Research Letters by lead author Judah Cohen and others.   ​

The past two decades have seen strong warming during the summer and early autumn over the Arctic, which has caused unprecedented melting of sea ice. The result is more moisture in the atmosphere, which, in turn, results in increased precipitation over the northern Eurasian continent . . .  [A]verage October snow cover over Eurasia – and particularly Siberia – has grown since 1988. . . .  The effect of increased autumn snow cover is to intensify the seasonal cooling of the Eurasian continent and strengthen the area of high pressure that forms over Siberia in the winter. As a result the Arctic Oscillation, the atmospheric pressure pattern in the mid-to-high latitudes, is more likely to be in the “negative phase” that feeds cold polar air across the eastern half of the US and northern Europe.  “In my mind there is no doubt that the globe is getting warmer,” says Judah Cohen, lead author of the paper.

Got that?  Don't you see how obvious it is that warmer temperatures mean more snow, rather than less snow?​  I wonder if anybody has told Viner or Jones.  Or for that matter our president, who still doesn't know that the climate campaign has collapsed into foolishness and thinks that he has the power to control the weather by pricing the poor out of the energy market.

The Handout Society As Electoral Strategy

During the recent 2012 election campaign, Mitt Romney was rightly criticized for saying that the 47% of the population then receiving some form of government handout or other would "vote for the president no matter what . . .[and] believe that they are victims."  That statement was clearly confused; far from every one of the 47% who were getting some form of government benefit voted for Obama,, and some of the 47% were among Romney's core constituents.

But on the other hand, the ongoing increase in the number of benefit recipients has to be good for the party promising to continue and increase the benefits.  Since only about 5 million votes separated the candidates by the time all were counted, could the increase in numbers receiving benefits have had something to do with the outcome?

It turns out that the number of benefit recipients in many categories exploded during Obama's first term.  This is particularly notable since the recession officially ended in June 2009, shortly after Obama took office.  Shouldn't the number of benefit recipients have started to go down after that?  But consider what happened in various benefit categories:

Food Stamps.  Now officially known as the Supplemental Nutrition Assistance Program ("SNAP"), this program completely exploded during Obama's first term.  Here is a chart going back to 1975.

The number of recipients had actually gone down during Clinton's second term from around 27 million to 17 million, and then crept back up to about 28 million at the end of the GW Bush administration in 2008.  And then the numbers took off, reaching about 47.7 million by the end of 2012, an increase of almost 20 million in four years to a level far above any precedents.

Why did this happen during a recovery?  Well, one key reason (via CNN) is that the government undertook an advertising program to get people to sign up!  By the way, don't just blame Obama -- it started under W.  But it's hard not to conclude from the chart above that Obama and his team fully realized the electoral benefits of maximizing this giveaway.  It only took about a quarter of those 20 million incremental food stamp recipients in Obama's first 4 years to provide his entire margin of victory.

Are you wondering how so many people are even eligible for food stamps?  It doesn't hurt that lots of things don't count against eligibility, no matter how great their amount.  Exhibit A is equity in a home, and Exhibit B is retirement accounts such as 401(k)s.  You can easily have many millions of dollars in assets and still qualify for food stamps.  As USDA under secretary Kevin Concannon says in the CNN article linked above, "Research has shown that many people -- particularly underserved seniors, working poor, and legal immigrants -- do not understand the requirements of the program."  Or in other words, lots of relatively affluent retired people foolishly thought that if you had half a million dollars of equity in your house and another half a million in retirement accounts, you couldn't possibly be eligible for food stamps; but now that they have been educated by the ads, they feel like dupes for not having signed up earlier.  And how about that other downtrodden category, graduate students?  Yes, another rapidly growing segment of the program; Concannon refers to them as the "working poor."

Disability.  According to figures from the Social Security Administration reported by Investors Business Daily, the number of people added to the Federal disability rolls during Obama's first term (through April 2012) was 5.4 million.  Although the number of disability recipients also increased under both Bushes and under Clinton, IBD reports that the number of applications in 2011 was up 24% compared with 2008.  With food stamps, at least a lot of people eventually get off.  But as IBD reports,

The problem is that few people who get on disability will ever participate in the labor force again. In fact, the vast bulk of those who exit Social Security Disability Insurance do so either because they hit retirement age or died.

Obamaphones.   A viral youtube video late in the campaign had a screaming Obama supporter bragging about her free "Obamaphone" available to all welfare recipients.  Snopes took apart the underlying facts, finding the worst allegations partly true and partly false.  Turns out that the program started as something called "Lifeline" back in the Reagan administration, well before cell phones, to give poor people some access to phone service for emergencies.  Who could be against that?  Best part about it was that it was funded by so-called "universal access fees" paid by incumbent service providers -- a nice off-budget slush fund available when needed for vote buying.  Otherwise known as an irresistible temptation to electoral corruption.  Like the other programs above, it crept up little by little under succeeding presidents, barely noticed, and then exploded under Obama.  According to Snopes, the number of people with "Lifeline" phones grew from 7.1 million in 2008 to 12.5 million in 2012.   There you have yet another incremental 5 million potential votes!  These people weren't taking any chances.

The basic problem here is that all of these things are one form or another of Ponzi schemes.  Will it take an another 30 million or so incremental handout recipients to secure the next election?  How about the one after that?  This can't go on for very long, but it sure can do a lot of damage. 

The Level Of Economic Ignorance Is Just Not Possible

It takes a relatively small amount of looking around and following economic statistics to figure out what works and what doesn't.  Sadly, almost no one is willing to do it, and our politicians display a level of willful ignorance that just doesn't seem possible.

A few examples.  The United States is deep into the most aggressive program of "stimulus" ever undertaken, with fiscal deficits in the range of $1 trillion per year for four years running.  So the economy must be taking off?  Well, actually, after many months of the most sluggish "recovery" anyone can remember, the economy just declined by 0.1% in the 4th quarter of 2012.  And the government shows every intention of continuing and even accelerating its war on productive economic activity:  Obamacare implementation, massive subsidies to uneconomic ("green") energy, intentional efforts by EPA and others to raise energy prices, increase in minimum wage, endless shakedowns of financial institutions, etc., etc. 

How is it going in the heartland of the high tax high spend economic model, the eurozone?  Even worse, of course!  GDP just shrank by 0.6% in the fourth quarter of 2012.   So that huge spending for bailouts of Greece and Spain didn't "stimulate" anything?  Guess not.

Then of course there's Japan:  20 years of "stimulus" and economic stagnation.  Debt now exceed 200% of GDP.   And what do they have to show for it?  Fourth quarter 2012 results:  down 0.4%.  It's not working there either.  Well, Japan has just brought back it's former Prime Minister, Shinzo Abe, with a fresh, new program for getting out of the economic morass:

Prime Minister Shinzo Abe, who took office in late December, is championing aggressive spending and monetary stimulus to help get growth back on track.

As I say, it's just not possible to have this level of economic ignorance.

Here in the U.S., there is now a glimmer of hope that we might get some very modest decreases in government spending by the mechanism of the "sequester," already baked into existing law.  Here is the near-hysterical reaction to that from the New York Times:

The sequester will not stop to contemplate whether these are the right programs to cut; it is entirely indiscriminate, slashing programs whether they are bloated or essential. . . .   These cuts, which will cost the economy more than one million jobs over the next two years, are the direct result of the Republican demand in 2011 to shrink the government at any cost, under threat of a default on the nation’s debt. . . . But the government spending they disdain is not an abstract concept. In a few days, the cuts will begin affecting American life and security in significant ways. . . .  Congressional budget experts say they have little doubt that the size and pervasive nature of the sequester will inflict widespread pain.

I've got news for them.  The way that the United States can start adding large numbers of real, productive, private sector jobs is to cut government spending.  You just need to compare the places that are languishing (Eurozone, Japan) to those that are doing well (e.g., Canada, and within the U.S. Texas and Florida) to learn the right prescription.  And you definitely have to learn not to listen to the editors of the New York Times.

The SOTU: More Of The Same For The Next Four Years

I don't know about you, but I'm not willing to waste my valuable time listening to the president blather on in the State of the Union address.  However, I did get a print-out of the text today in order to compile a list of some of the most uninformed and destructive things to come out of his mouth.  Starting from the beginning:

[Referring to the upcoming "sequester"]: "These sudden, harsh, arbitrary cuts . . . would certainly slow our recovery, and cost us hundreds of thousands of jobs. . . .  Most Americans -- Democrats, Republicans, and Independents -- understand that we can't just cut our way to prosperity."

Well, I think that anyone who knows anything about this subject understands that cutting the government is precisely the way to get to prosperity.  Where does this ignorance come from?  If you follow economic statistics at all, the first thing you have to know is that there is a hugely tight relationship between smaller government and economic success, and that massive cuts in government spending lead promptly to improved economic performance, with the very biggest cuts setting off booms.  Examples:  United States after World War II (60%+ cut in government spending in less than two years set off the post-war boom); Canada (how could Obama not know about our next-door neighbor?) cut Federal spending from 25% of GDP in 1985 to 16% in 2012, leading to greatly improved economic performance, debt declining as a percent of GDP, and recurring budget surpluses; Sweden (!) turned around badly declining economic performance by cutting government spending from 68% of GDP in 1993 to 49% in 2011 -- still too high, but enough of a decline to get the economy growing at least some; Latvia cut its government spending by 16% of GDP after the financial crisis hit in 2009, and promptly saw strong economic growth resume.  I could go on, but you get the point.

"But for the sake of our children and our future, we must do more to combat climate change. . . .  Last year, wind energy added nearly half of all new power capacity in America.  So let's generate even more.  Solar energy gets cheaper by the year -- so let's drive costs down even further."

Whatever you may think about whether fossil fuel usage is heating up the world, there's no getting around the fact that the U.S. can't fix this by putting up some windmills and solar panels while China builds a new coal plant every week.  All that can be accomplished by these initiatives are (1) waste huge amounts of taxpayer money, (2) drive up the cost of energy for U.S. citizens, and (3) make green energy crony capitalists rich.  I guess (3) must be the real point.  What I just can't understand is how Obama doesn't realize that making energy more expensive and wasting taxpayer money are forms of making the people poorer.  How can that be a good thing?

"Through tax credits, grants, and better loans, we have made college more affordable for millions of students and families over the last few years."

Obama still has not figured out that the wide availability of Federally-backed student loans has driven up the cost of college and saddled an entire generation of young people with hopeless amounts of debt that will seriously destroy their lives.  Embarrassing.

Tonight, let's declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour."

Well, if that makes sense, why shouldn't "we" just declare that everyone should be rich and raise the minimum wage to $1000 per hour? 

The overall conclusion is that the chief executive of our government doesn't know the basic information that he needs to do his job.  Well, it's just four more years.

The Mayoral Candidates Are In For A Rude Surprise

Yesterday Christine Quinn -- Speaker of the City Council and a leading contender to be the next mayor -- delivered a "State of the City" speech.  I don't find a transcript anywhere, but the Gothamist web site has one of the more detailed accounts, as well as a link to a video if you want to watch the whole thing, and also another link to a report issued at the same time by Ms. Quinn titled "The Middle Class Squeeze."

A fair summary of Ms. Quinn's speech is that the City must "help" the middle class by passing out one after another of various grants, subsidies, tax breaks, handouts, free stuff and other goodies and graft from our benevolent masters.  Front and center was her proposal to have the City finance the building of 40,000 new "middle income" apartments per year for the next decade.  Next in significance was her proposal for tax breaks for landlords who make their apartments "affordable" for middle income families.  For both these purposes, middle income is defined as going well above $100,000 per year.

Completely lacking from the speech was any recognition that these kinds of proposals have a cost, and that the payment of the cost must inevitably come primarily from the very "middle income" people who are supposed to benefit.  It is not possible for anything close to a majority of them to come out ahead -- the programs are just transfers from most of them to a small minority of the politically connected.  Of course, a prime idea behind these sorts of programs is to keep the cost as opaque as possible so that no one can figure out that they are getting screwed.  But to take just the top example, the 40,000 units of middle income housing per year is completely unachievable; a realistic number might be around 10,000.  After ten years of that, you'd have 100,000 units that might house about 3 - 5% of the population.  If you assume that the "middle class" is half the population, that leaves 45% that get nothing from this program and must pay.

Of course, the other leading candidates for the Democratic party nomination immediately came out criticizing Quinn for not proposing enough handouts and subsidies.  Hey, this is New York.

But don't worry, because there is a very nasty surprise coming down the road for whoever is the next mayor, in the form of vastly increased pension contributions.  The state legislature has passed one pension sweetener after another over the past 20 years for the municipal unions, the cost of which has been largely hidden by adoption of deceptive 8% returns assumptions by the pension plans.  Failure to meet those return assumptions has led the City's annual contributions to the pension plans to go from about $1 billion per year in 2002 to $8.4 billion in 2012.  That number may hold for a while given good stock market performance in the past 12 months, but the chance of achieving 8% annual returns indefinitely is about nil.  So the $8.4 billion per year could easily shoot upwards by multiple billions during the next mayor's term.  That will wipe any new spending initiatives right off the agenda.

I don't think that any of the Democratic candidates for mayor understands the pension plans well enough to know what is coming.  (One of the Republican candidates, Joe Lhota, probably does.  He may even have a chance to win!)

Meanwhile, there is another obvious way to benefit the middle class far more than the subsidy/handout/tax break/free stuff model of Quinn and her compatriots.  And that is, lower costs for everyone, by some combination of reducing taxes and reducing the restrictions on building that limit the supply of housing in New York.  Even as that would benefit the middle class far more, it would also have far less opportunity for graft for the politicians.  This is not a model that Democratic politicians in New York find acceptable.