ShadowStats’ John Williams to Moneynews: Government Economic Data Don’t Match Public Perceptions

Wednesday, 10 Apr 2013 07:26 AM

By Glenn J. Kalinoski and David Nelson

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John Williams has reached a conclusion after more than 30 years as a consulting economist: Public perceptions of what was happening were much worse in terms of the economy and inflation than what was coming out of the federal government.

“Looking at the details [and] looking at the history of the numbers, what was evident is that you had a series of methodological changes that have been made by the government over time that have put upside bias into the economic statistics and downside by the inflation reporting,” Williams told Newsmax TV in an exclusive interview.

When asked about the origins of the government compromising the data, Williams mentioned one name: Alan Greenspan. Williams, who runs the web site ShadowStats.com, said in the 1990s, the former Federal Reserve chairman, among others, started talking about how the consumer price index (CPI) overstated inflation.

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Editor's Note: A full, unedited version of this interview is available exclusively to Financial Braintrust Alliance subscribers. Visit www.fbtalliance.com for more information and to sign up.

The CPI measures changes in the price level of consumer goods and services purchased by households. The CPI is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."

“[They said] if only we could get a more accurate number that reduced the inflation rate, that would help balance the budget deficit because it meant that the cost of living adjustments, for example, for Social Security, would be less and changes were made.”

This is where Williams begins asking questions.

“If you asked them what’s wrong here? Why is the CPI overstating inflation? The response would be … along the lines of, ‘If steak gets too expensive people buy more hamburger. If they are buying more hamburger, then their cost of living is less, but that’s not measured by the CPI.’ That’s not how the CPI was defined," he said.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

"There are all sorts of ways that you can define inflation, but if you are defining inflation so that if steak goes up people are buying hamburger instead of having to pay for steak, that’s no longer measuring a constant standard of living and it made a significant difference in the way the CPI was calculated.”

Williams also mentioned the implementation in the ’80s of something called the Hedonic Quality Adjustment.

“They used computer models to guess at how prices were being affected by … putting a digital readout on a washing machine instead of a mechanical readout,” Williams said.

“They never made quality adjustments for the fact that a machine made 30 years ago lasted 30 years and that a machine made today lasts for only 10 years.”

The way inflation data is calculated directly impacts government reports on gross domestic product (GDP), he said.

“[GDP is] reported on an inflation-adjusted basis, and that makes some sense because if you are trying to see how the economy is going, you really don’t want to be measuring ... the economy was up by 5 percent, but that’s because prices were 5 percent higher, Williams said.

“They estimate inflation and they take it out of the GDP numbers. You use a different inflation measure with [GDP] and it’s largely in the Hedonic Quality Area. If you correct for the changes that have been made there, it changes the whole economic reporting and it turns the economy upside down.”

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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