Podcast

ShadowStats' John Williams Explains Why It's All Been Downhill Since 1973

Wednesday, March 2, 2011, 10:53 PM

"If you look at the government’s latest statistics - the poverty survey of 2009, which is the most recent release, with average and median household income adjusted for inflation (and they use a really gimmick low inflation rate with that one) - it shows that not only has household income been falling the last year or two, but it’s below its near-term peak before the 2001 recession. Household income has not recovered above that, and if you use the CPI-U (the usual inflation rate to deflate that by instead of the gimmick one) it shows that household income today is below where it was in 1973. Again, the average household has not been able to keep up here. If income growth is not keeping ahead of inflation, very simply you can’t have consumption growing faster than inflation on a sustainable basis."

Government statistics guru John Williams believes the most important economic indicators used by our political leaders in their decison-making - the Consumer Price Index, the unemployment rate, the Gross Domestic Product - are deeply flawed in how they're calculated. Whether these flaws result from letting theory trump reality or by machinating politicians, the result is the same: We are fooling ourselves at our peril. We have been understating the risks we face - which is why we are working harder for less today than the previous generation, and why our economy is not only not in "recovery" - but on the precipice of crisis.

Click the play button below to listen to Part 1 of Chris' interview with John Williams (runtime 37m:40s):

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In this podcast, John and Chris outline how:


The key approaches to calculting inflation are especially convoluted, especially the practice of applying hedonics. If we instead calculate inflation according the formula used in 1980, we would see a number closer to 8%+ vs today's 1.5% rate.

  • Similarly with unemployment, John calculates the true rate in the country today is 22% (vs the reported 9%).
  • In sum, he sees the United States suffering from structural issues that are extremely hard to address - and impossible if we continue to let fantasy data be our guide. Our circumstances are not sustainable, and, in his eyes, have us on an inexorable path to higher inflation - and likely hyperinflation.

Part 2 of this interview is available to enrolled users (paid enrollment required) and focuses on the main drivers behind John's inflationary predictions, how he sees events unfolding and on what timeline, and what individuals can do today to protect themselves from such an outcome. If you are not an enrolled member, enroll today to access Part 2.


Walter J. "John" Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth's Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.



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7 Comments

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 2368
Thanks John and Chris.

I am always grateful that there are people of good will who are more intelligent than me.

If we drill down into the rationale behind this obfuscation I see Oil.

Things happen because of energy. It is energy that turns the wheels of civilisation, not money. With energy access getting harder, rather than easier, the economy winds down and then the High Priests have to resort to more and more elaborate proclamations and incantations to keep the masses quite.

What will be tried next? A sexual scandal? That will work. Nah...... It has been tried before by Wee Willie Clinton.

Still it might work again. We must get Ben Bo to co-opperate. Any offers Ladies? Not even for a wheelbarrow load of freshly minted $1million notes?

Dragline's picture
Dragline
Status: Bronze Member (Offline)
Joined: Sep 10 2008
Posts: 54
Another great piece of work and a suggestion

Man, these interviews are always just fabulous.  Thanks so much for doing them.  You always ask great questions.

Someone you might want to put on your list is Ted Fishman, who wrote a recent book about the impact of aging societies worldwide called "Shock of Gray".  Here's a little article about it:

http://www.nytimes.com/2010/11/28/books/review/Harney-t.html

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 3412
RE: Another great piece of work and a suggestion

Dragline wrote:

Man, these interviews are always just fabulous.  Thanks so much for doing them.  You always ask great questions.

Someone you might want to put on your list is Ted Fishman, who wrote a recent book about the impact of aging societies worldwide called "Shock of Gray".  Here's a little article about it:

http://www.nytimes.com/2010/11/28/books/review/Harney-t.html

Thank you.

I would note in response to your other comment on self-protection coupled to the link above that one of the correlates for crime happens to be the age of the population.  In general, younger = feistier = more crime.

The observatio that crime peaked and then ebbed with the boomers is no coincidence.  

jerryr's picture
jerryr
Status: Bronze Member (Offline)
Joined: Oct 31 2008
Posts: 97
How big are the errors in the CPI?

In the transcript of the interview, John Williams explains that his alternative measure of inflation is based on adjustments derived from the government's own estimates of the effects of adjustments such as geometric weighting for substitutions effects, hedonic adjustments, and owner equivalent rent as a proxy for housing costs.  Thus, Williams calculates his shadow inflation index by simply adding a constant to the government-published figures:

John Williams: [....] But if using the CPI the way it was before these games, you look at the changes made since 1990—and I look at it pretty much on an additive basis, based on the government's estimates of what these different changes have added or subtracted to the reported CPI inflation where right now the CPI year-over-year is showing one and a half percent inflation. If you went back to the way it was calculated in 1990, you would be up to something close to five percent; and if you went back to the way it was calculated in 1980, you would be looking at something up in the area of eight or nine percent.

Chris Martenson:  Eight or nine percent. That is a full six and half to seven and a half percent higher than what we are being told it is right now.

John Williams: Right. The difference between my numbers and the government’s numbers, basically, is what is being lost in measuring the cost-of-living and maintaining a constant standard of living.

The problem is, regardless of what BLS statisticians might have said in the past, in 2008 the BLS published a rebuttal  claiming that the effects are much smaller!   To his credit, Williams published a link to the BLS article at his website.  Here's what the BLS economists had to say in response to Williams:

http://www.bls.gov/opub/mlr/2008/08/art1full.pdf

One widely cited alternative index is based on an estimate that changes to the CPI since 1983 have lowered its growth rate by at least 7 percentage points per year. The use of the geometric mean alone is stated to have lowered the CPI growth rate by 3 percentage points, and other BLS changes, such as the use of hedonic models and OER, supposedly have lowered the growth rate by an additional 4 percentage points.

Each of these estimates of the impact of BLS changes is inconsistent with the empirical evidence. As noted earlier, the BLS has computed indexes showing that the use of the geometric mean formula has reduced the growth rate of the geometric mean of the CPI by only -0.28 percentage point per year, not 3 percentage points. Also discussed earlier, BLS analyses have shown that if the implementation of hedonic adjustment models since 1999 has had any net downward effect, it is very small. Hedonic adjustment models implemented subsequent to 1983, but prior to 1999, have almost certainly had an upward effect. Among the methodological changes examined in this article, that leaves only the shift to rental equivalence, and it is entirely implausible that its impact could be as large as 4 percentage points per year. Ear- lier, it was shown that from 1983 to 2007 the CPI for OER rose faster than an alternative index that, like the pre–1983 BLS homeownership index, is based on both house prices and interest rates. Another piece of evidence comes from an analysis published in the Monthly Labor Review in 1999 in which BLS economists Kenneth J. Stewart and Stephen Reed compared the historical published CPI-U with an index created in accordance with current BLS methodologies. For the years 1978–82, a period that witnessed very rapid increases in both house prices and interest rates, Stewart and Reed estimated that the use of rental equivalence would have had an average annual impact on the CPI-U of only –0.86 percentage point. Moreover, with house prices now declining in many parts of the country, one would expect that if the BLS were using the pre-1983 homeownership method, it would yield a lower, not higher, current measure of shelter inflation.

So the BLS economists are arguing that the effects of the methodologies in question totals to about 1.14%, not 7%.  Now, I'm not saying I know exactly what the truth is here, but Williams can't point to the government as the source of his adjustments.  Williams more or less admits as much -- in his response to the BLS article, he says:

http://www.shadowstats.com/article/special-comment 

These issues will be fully explored and discussed in the upcoming academic study, including a careful analysis of inflation reflected in raw price data for various periods, versus the various CPI measures.

This promised study hasn't yet materialized, but another interesting data point is a survey conducted by George G. Paulos of Freebuck.com.  His study looked at the change of prices of 48 consumer products over the interval from 1968 to 2004.  His conclusion was that the BLS understated the rate of inflation by about 1% annually, which is remarkably close to the BLS' own figure of a 1.14% differential due to their statistical adjustments. However, Paulos makes the point that even a small annual differential can accumulate in a big way over time.

http://www.gold-eagle.com/editorials_04/paulos090904.html

The government CPI (Consumer Price Index) numbers may understate the true annual inflation rate by over 1% over the long term. Because of compounding, a relatively small difference in the annual inflation rate can magnify prices greatly over long time periods. The CPI is a critical number that is used to calibrate a plethora of payment systems including Social Security, labor contracts, inflation-adjusted bonds, and general interest rates. Distortions in this number can cause major long-term dislocations and economic inefficiencies. The same methodology used by the CPI is also used to calculate real inflation-adjusted GDP which is commonly used to make important policy decisions. Understating the CPI results in overstating GDP and can lead to poor decision making throughout the economy.

To me, the most alarming aspect is that the government may be inventing new ways to distort the CPI index, and that the divergence between the index and reality may be growing as we speak.  Chris' discovery of the substantial under-weighting of health care is an example of something that Williams missed.  Another point that Chris has made, is that commodity price inflation seems to be leading the way at this time.  Raw commodities may make up only a small percentage of the costs of many consumer items at the grocery store or at the mall, but the producers of products like that may be seeing their margins squeezed.  Thus, the commodity price increases may be a leading indicator of much worse problems to come.  Also, people on the lower end of the global socio-economic scale spend much higher portions of their incomes on food and fuel in commodity form, so they see the worst effects.

guardia's picture
guardia
Status: Platinum Member (Offline)
Joined: Jul 26 2009
Posts: 592
RE: Another great piece of work and a suggestion

cmartenson wrote:

I would note in response to your other comment on self-protection coupled to the link above that one of the correlates for crime happens to be the age of the population.  In general, younger = feistier = more crime.

The observatio that crime peaked and then ebbed with the boomers is no coincidence.  

Yeah, good old Japan. I'm counting on that here Wink

Samuel

KugsCheese's picture
KugsCheese
Status: Platinum Member (Offline)
Joined: Jan 2 2010
Posts: 657
Farm versus City Umemployed?

Is Mr. Williams saying it is better to be an unemployed farmer versus an unemployed office worker?  Why should this make a difference?  Unemployed is unemployed, no?

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