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Pollyanna Creep

Once in a while, I’ll refer to individuals who are overly-optimistic as Pollyannas. The term comes from the 1913 children’s novel Pollyanna, which is about a young girl of the same disposition. You’ll know them when you meet them. Their favorite song is Bobby McFerrin’s “Don’t Worry, Be Happen.” In case you’re still a little hazy about the concept, here’s a good example of a Pollyanna in action. Just last week, when all hell was breaking loose on Wall Street, there was a comment on a Chicago Tribune piece which basically said, “Don’t worry, this will pass, it’s all just part of a cycle, the U.S. economy will soon recover and boom again, yada, yada, yada…” Which sounds great— if you believe in a financial system that is devoid of evolution (or de-evolution, for that matter.)

Now, there are some who believe that the U.S. government suffers from something called “Pollyanna creep.” Richard Siklos of The Globe and Mail (Canada) wrote last week:

That’s the dark thinking behind what is known as “Pollyanna creep,” a phrase coined by an economist named John Williams. Mr. Williams, who lives in California, runs a website called Shadowstats.com that trades in the idea that some key U.S. government statistics have become so optimistically misleading as to become essentially useless…

Over the past few years, some of Mr. Williams’ views on economic indicators - the consumer price index in particular - have been echoed by more well-known investment community figures such as bond investor Bill Gross, strategist Stephen Roach, and James Grant. “The numbers are misleading, and Wall Street uses the numbers to help sell their products,” says Mr. Williams, whose chief bugaboos include GDP and unemployment rates.

“Recently, I’d contend that what we’ve been getting is absolutely junk on the GDP,” he adds, despite recent official figures that GDP grew 3.3 per cent in the second quarter, after a small increase the previous quarter. “There’s no question that we’re in a recession, and probably have been in one since the last quarter of 2006. It didn’t start with the housing mortgage crisis.”

According to Mr. Williams, all the big measures have had their methodologies revised over the past few decades to paint the U.S. economy in the best possible light - and this has occurred regardless of which party was in the White House. However, he says, changes in methodology were always spelled out at the time - with rationales for doing so - so it’s not as though this has gone on in the dark of night.

Williams isn’t coming way out of left-field with his allegations. Back on June 9 Elizabeth MacDonald of FOX Business talked about a new book by Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, and wrote:

Monkeying around with government data started in the early ‘60s, Phillips says, during the John F. Kennedy administration. It appointed a committee to weigh changes to unemployment data, at a time when unemployment was soaring.

Out-of-work Americans who had quit searching for jobs–even if this was because none could be found–were then labeled “discouraged workers” and excluded from the ranks of the unemployed, though they were previously classified as such, Phillips notes.

In fiscal year 1969, the Johnson administration, with Congress’s blessing, orchestrated a “unified budget” that chucked in taxpayers’ Social Security funds with the rest of the federal budget, a change that let the government get its mitts on taxpayer Social Security funds for the very first time to use for all sorts of spending programs, including pork barrel projects.

The move, though, masked emerging deficits in Social Security funds, as taxpayer funds that were drawn down were replaced with treasury bonds, essentially more government debt.

Next, President Richard Nixon asked his Federal Reserve chairman Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation, Phillips says.

This new-fangled “core inflation” would simply knock out, due to nettlesome “volatility,” nettlesome food and energy prices. The new number could be shouted from the hilltops and blasted through newspaper headlines whenever the true CPI number was terrifying. It’s a number the markets are still too obsessed with today, though some seem to be surfacing out of this delusion…

I do go on. Let me continue with the cooked government data story.

In 1983, Phillips says the Reagan administration monkeyed around even more with inflation data, when the Bureau of Labor Statistics (BLS) decided that housing, too, was overstating CPI.

So, the BLS swapped in what it calls an “owner equivalent rent” measurement, what homeowners would pay to live in their homes if they were renters. But that number likely understated housing costs as it is based on overall rent, which stayed flat in most of the country during the housing bubble.

So, the government has cooked up its own housing inflation number that likely understates home prices, Phillips argues, and in turn has understated housing inflation during the recent housing boom by three to four percentage points.

Moreover, Phillips says in the 1990s, the CPI has been subjected to three other adjustments, all delivering a downward bias and all dubious:

*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;
*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption
*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.

Pollyanna creep in the inflation data continued under the Bush administration. In 2006 it stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus from bank credit activity, Phillips says.

Under the Clintons, Phillips says, the nation’s employment figures were massaged and kneaded too.

In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of what it called “discouraged workers” who had been seeking work for less than a year, Phillips says. The longer-term “discouraged”-some 4m U.S. adults who simply are not working-fell out of the main monthly tally. Some now call them the “hidden unemployed.”

The Clinton administration also dropped the number of households sampled for the data, from 60,000 to 50,000, making the number more rickety.

But a disproportionate number of the dropped households were in the inner cities. So, along with a new adjustment formula that is believed to also have cut black unemployment estimates, poverty figures get to look a lot less worse, Phillips says.

So remember this. The next time you hear some economic numbers that seem too good to be true, that might very well just be the case. And as for Pollyanna? Depending on which version of the story you happen to be reading, in the end Pollyanna is paralyzed either from being hit by a car or falling off a roof.

Sources:

“Lies, damned lies and overly optimistic statistics”
Richard Siklos
The Globe and Mail (Canada), September 22, 2008

“Does the Government Manipulate Economic Data?”
Elizabeth MacDonald
FOX Business, June 9, 2008