The Great American Economy? Take a Closer Look

Our country is in a deep hole. As usual, Congressman Ron Paul sums up the situation succinctly. 

The national debt now stands in excess of $9 trillion, more than $30,000 per person. The total future debt obligations of the United States, including entitlements, are estimated at $59 trillion, which equates to over $500,000 per household. Social Security and Medicare will likely consume the entire federal budget by 2040, threatening the average American with an impossible tax burden. For over 30 years, I have been urging all Americans to educate themselves about monetary policy in order to better understand how a small group of unelected individuals at the Fed and the Treasury Department wield tremendous power over our lives.

The politicians who run this country do not want the general public to know how bad the situation truly is. Therefore, governmental agencies spin all data in the most positive way to keep the masses in the dark. The massive corporations that contribute millions to these politicians, cook their books, take huge risks and then beg for the government to bail them out when their bets blow up. Meanwhile, the average American doesn’t question the information their government and corporations feed them - living a life of self imposed delusion.  

There are many people who believe there is a governmental conspiracy to systematically fake the numbers regarding our economy. I do not believe that is true. Our government is the biggest bureaucracy in the world. Bureaucracies are run by bureaucrats that want to retain their positions. These bureaucrats try to please their masters. This leads them to tweak every process trying to “improve” the output. The tweaking always makes the figures slightly more positive. After many years, the continuous positive tweaking of the numbers has led to monthly figures that are at best misleading and at worst completely false. This is why we have such disconnect between the economic figures put out by the government and how people feel about their personal situation.

The number of Americans who believe the country is moving in the wrong direction has risen sharply, to nearly eight in ten, amid soaring food and gas prices, falling home values and unending war. Just 17 percent say the country is going in the right direction, according to an AP-Ipsos poll. The AP announcement of these results hits at the heart of the problem.

The survey reinforces the notion that consumers are particularly gloomy — possibly more than economic statistics justify. Despite record energy costs, slumping stock prices and the housing and credit crunch, reports show the economy to be still growing, if slowly. Inflation and interest rates remain at relatively tame levels. And the unemployment rate is lower than it was during the past two recessions, in 1990 and 2001.

Tom Raum, the AP writer, is unaware that those economic statistics have been positively skewed over time. Therefore, he doesn’t connect the numbers to American’s gloom.

I hear pundits like Larry Kudlow expound on the great American economy. They reference how bad it was in 1980 compared to today. In 1980 inflation was out of control after years of fiscal mismanagement and loose Federal Reserve policies. It took Paul Volker raising rates to almost 20% to kill inflation. When the pundits compare the CPI that is published today to the CPI in the past, it is an apples to oranges comparison. For a true comparison, you must add 7% to whatever the government publishes. If the American public thought that inflation was running at a rate above 11%, there would be an outcry for wage increases above the current 3% average.

click to enlarge images

The implications of this discrepancy explain why people don’t feel like they are getting ahead. The average American is paying in excess of 11% for the items they need to buy, while their wages go up by 3% or 4%. No wonder they feel that they are falling behind. They are! The adjustments to CPI over the years have had the effect of reducing social security payments.

John Williams, who has done the groundwork on these adjustments, comes to the conclusion that

...the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval.

We have Alan Greenspan and Michael Boskin to thank for the most recent “improvement” to the data.

Their adjustments to CPI are best summed up again by John Williams:

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

Does the 11.6% inflation rate seem crazy? If so, then the government has successfully pulled the wool over your eyes. Examine the chart below carefully. The government is telling you that your costs have increased less than 30% in the last 8 years. A barrel of oil has gone up almost 500%, a gallon of gas over 200%, and corn and wheat almost 300%. Home prices were up 60%. So, in the real world prices are 8 to 10 times higher than what the government is telling you. The average American is clearly falling behind.

The true misery index (unemployment rate + inflation rate) is near the all-time high. This explains why the University of Michigan sentiment index was the lowest since 1980 in June. 

A 72 year old, risk averse, grandmother, with a husband in a nursing home and $100,000 in her IRA is now only able to get 2% in CDs or a money market fund. She is paying 10% to 20% more for food, energy, and health care. The most susceptible Americans, our senior citizens, are being sacrificed to benefit the huge banks who loaned money to people who could never pay them back, and now need to be saved.

Ben Bernanke and the Fed have chosen to throw the savers under the bus to prop up banks that are essentially bankrupt. Not surprising, considering the Federal Reserve is essentially owned by the banks they are propping up. 

The misleading CPI figures contribute to the false readings on GDP. I have heard numerous talking heads over the last month say that we aren’t in a recession because GDP has not gone negative. The GDP numbers are adjusted for inflation. If we are underestimating true inflation by 7%, then GDP is systematically overstated. When adjusted for the true CPI, our economy has been in a recession for most of the last 8 years. No wonder that Americans are in such a bad mood. Maybe if we had used the $700 billion that have been poured into the “War on Terror” for productive initiatives in the United States, we wouldn’t have had such lethargic growth. 

In America, anyone can become rich. This is a hallmark of capitalism. The reason the vast majority of people don’t feel like they are getting ahead is because they aren’t.

According to Jim Jubak,

Incomes are a lot less equal than they used to be. In 1979, for example, the top 1% of earners had an income 9.4 times that of the average person in the bottom 90%, according to the Economic Policy Institute. By 2006, that ratio had climbed to almost 20-to-1.

This is the classic rich getting richer and poor getting poorer story. Real average weekly earnings for all Americans over the last four decades has been cut in half due to the persistent year after year inflation. Workers no longer can rely on unions to fight for wage increases. Employers have the leverage to keep wages low, while everyday costs rise. 

Again, the serial cheerleaders like Larry Kudlow and Ben Stein are on TV every day saying that the economy is not bad because the unemployment rate is only 5.7%. How could we have a recession with the unemployment rate at 5.7%? We can have a recession, because the unemployment rate is not really 5.7%. The government only reports the U3 rate, which is of course the lowest level. If you use the U6 rate, unemployment is currently 9%. U6 includes discouraged and marginally attached workers. Only our government would exclude people who want a job, but are discouraged because they can’t get one.

According to John Williams,

Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year.

When you include these workers, the unemployment rate is in the range of 13% today, on par with the levels of the early 1980’s.

The world breathlessly awaits the monthly figures on job gains or losses provided by the Bureau of Labor Statistics. There is usually a huge move in the stock market based upon these numbers. The fact is that they are not accurate within hundreds of thousands. They are a pure guess based upon models developed by these government bureaucrats. It takes up to two years before the figures are relatively accurate.

Early in the Bush administration the BLS decided to make the monthly figures more “accurate” by making a birth/death adjustment to the reported figures. Amazingly, the adjustment makes the jobs picture more positive. This adjustment was supposed to take into account all the jobs created by small businesses that didn’t make it into their monthly survey. Over a long period of time, this adjustment may make sense, but on a monthly basis at turning points in the economy is wildly wrong, like now.  In the midst of an implosion in the housing market and a meltdown of the financial system, the BLS is telling the American public that we have added 115,000 construction jobs and 23,000 financial services jobs in the last three months. If you believe this, I have some beachfront property in Baghdad I’d like to sell you.

After all the slicing, dicing and manipulation of the data, the true picture is in the chart below. The disconnect, that the mainstream media is reporting regarding people’s mood about the economy is not a disconnect at all. Using the true figures, things are as bad as they were in 1980. The major difference is that the government and consumers now have massive amounts of debt to finance. If the Federal Reserve were to increase rates to where they should be, the whole Ponzi scheme would collapse. So, they keep rates at 2% and try to convince the unknowing masses that everything is just fine. 

The only way to change what is going on in this country is to view everything that the government reports with a skeptical eye. Dig into the details to seek the truth. Listen to people who are willing to pull back the curtain and reveal that the Wizard of Oz is just a bumbling fool.

Read the views of David Walker, Pete Peterson, John Mauldin, Barry Ritholtz, and Ron Paul to get the straight scoop on the economic situation of this country. Burying your head in the sand is not an alternative. As usual, Ron Paul sums up the situation as well as anyone. 

America became the greatest, most prosperous nation in history through low taxes, constitutionally limited government, personal freedom and a belief in sound money. Deficits have exploded, entitlements are out of control and our personal liberties are threatened like never before. The "solutions" proposed so far--stimulus packages, bailouts and interest rate cuts--just amount to printing more money, which will lead to greater currency devaluation, contribute to the rising costs of living, and further squeeze the middle class and our senior citizens.

Regarding the homeowner bailout bill (That was written by Bank of America) that George Bush signed into law last week, Ron’s views are dead on.

The solution is for government to stop micromanaging the economy and let the market adjust, as painful as that will be for some. We should not force taxpayers, including renters and more frugal homeowners, to switch places with the speculators and take on those same risks that bankrupted them. It is a terrible idea to spread the financial crisis any wider or deeper than it already is, and to prolong the agony years into the future. Socializing the losses now will only create more unintended consequences that will give new excuses for further government interventions in the future. This is how government grows – by claiming to correct the mistakes it earlier created, all the while constantly shaking down the taxpayer. The market needs a chance to correct itself, and Congress needs to avoid making the situation worse by pretending to ride to the rescue.

Comments

[investor88]

So the state of affairs in the US and its consequences for the world economy is worse than we are led to think. Appreciate the research that goes into backing up the conclusions. Looks like it may take years to get out of this economic rut although for astute traders there are always opportunities from time to time. Some experts say Dow could drop another 20% to 30% from here in the next 2 years; with the data presented herein this is a distinct possibility though not a certainty. The US and world economy is very resilient but this hole in the US seems quite deep this time, will take longer than usual to get through; more like a U shaped recovery than V, and then in terms of years rather than quarters.

[robert99]

Excellent, excellent article - but don't forget Mish Shedlock in your group of those who tell it like it is regarding the economy.

[Just a Hick]

What is the SGS alternate(What does SGS stand for?) and where do you get these figures?
Can you give a web site link to SGS data?

[otbricki]

This seems very far-fetched to me. According to the deflator graph my real wages have been cut in half since 1996. My average absolute wages have not changed much since that date as my career has kind of peaked as I have approached age 60. But my lifestyle has not changed at all, and in fact I have much less debt than I did in 1996 since my mortgage is nearing end-of-life. When my last child graduates from college this year I expect to be completely debt free.

My personal experience is far more in line with the government numbers than these doomsday numbers.

Another concept that I have having trouble with is the idea that we have to greatly reduce the size of government and remove any concepts of socialization of incomes across the economy to achieve economic stability. That in fact is clearly counter to recent experience. What is necessary is sound policies such as not spending wildly more money than is taken in via taxes. The penchant for republican administrations to reduce taxes and at the same time spend without restraint is insane. The Clinton administration got it right; they were able to achieve fiscal sanity by controlling spending and implementation of a tax policy that matched the spending policies.

The key thing that seems to be missed by Republicans is that in the long run your taxes exactly match what government spends.

Now I am very sympathetic to libertarian ideals; clearly personal freedom is enhanced as the tax burden declines. But as this article notes we have a situation where wealth is accumulating dangerously in the hands of the few. I have heard no solution to this issue that does not involve some form of socialization.

[dg arc]

someone once said 'if my mother told me that she loves me, and it was a matter of finance, I would check it out'
I have no way of checking out your numbers but I reckon you are in the right ball park - appreciate sharing your info.

[JGQ]

SGS stands for Shadow Government Statistics. John Williams, who runs the site is a skeptic who cuts through all the government deception. Visit his site and make up your own mind.

www.shadowstats.com/

[bbzz24]

James Quinn,
Why should we believe you? You are not elected either :P
And elected professional politicians are not any better than their servants.

[JGQ]

You shouldn't automatically believe me. Examine the facts and make up your own mind. I could never be elected. I'm not good at lying with a straight face.

[Umm, yeah]

An excellent article. Thanks.

[fatcat]

bbzz24...WHAT??

[venividivici]

Jim this is the best article I have read on Seeking Alpha. The problem is that people invariably look for the easy way out. America's problems are huge and there are no easy nor painless solutions but until the politicians and the people who elect them accept that, things will only get worse and harder to solve. Well done.

[MuddlingInvestor]

Well, US government debt is 9 trillion or less than 70% of GDP. What can we say then about Japan (110%)? Europe might be not that bad, but almost all European countries are in debt and deficit spending too. We are all doomed! Wait, maybe it's not so bad? Current generation grew up when government was deep (and deeper) in debt and they are not complaining. Life isn't worse now than it was in 1980. We'll survive.

[Andy Cole]

What an excellent article. Finally somebody that understands simple economics.

[mdmrjsds]

I agree that the government, including elected officials, has an incentive to doctor the numbers to their benefit, and has. Elected officials are caught between two masters: the people who pay for their election campaigns, and the voters. Rather than disappoint either, they have taken the easy way out and tried to satisfy both constituencies. Party has become mostly meaningless because of this, as have elections.

I'd like to add some historical context around what is happening to the economy. Over the last 30 years there have been 4 developments that have really had an impact on the US economy: the personal computer, the internet, free trade treaties, and the move to a service economy.

The personal computer allowed corporations to delete large swaths of middle management from their employees. All the data consolidation they used to do could now be done by computer. No need for all those employees.

The internet allowed for easy and rapid communication from anywhere to anywhere. Information became available to everyone at low cost. Management of a far flung empire became feasible. The world is closer.

Free trade with third world countries allowed the destruction of manufacturing in the US, and thus the high wages that had created the American middle class. If you trade freely in labor, then overpopulated countries where people are unprotected from exploitive practices, and in fact don't want to be protected from exploitive practices because they are so desperate, will substitute for much lower cost.

The substitution of service employment for manufacturing employment. This is hailed as a move forward. It isn't. When the agricultural economy shrank in employment, it was because of productivity gains, not that it went away. Today it is only 1 to 2 per cent of the workforce, yet the production is orders of magnitude greater than it was. The same didn't happen in manufacturing. As it shrank as a portion of the economy in terms of employment, it shrank as a portion of output. But services all depend on underlying wealth, they don't create it. They are parasitic. They shuffle wealth around and take a cut of it. If I cut your hair and you shine my shoes, there is no wealth created there. How many insurance policies are being sold by American corporations in Mexico, India, China, Viet Nam, etc.

The computer revolution and the internet are just the natural evolution of the economy. There is no putting the genie back in the bottle. But the free trade with overpopulated countries and the migration to a service economy are the direct result of policies. They can't be reversed overnight but they definitely need to be rethought. And the breakdown of the system that allowed them to happen needs to be addressed.

It's true that free trade creates wealth, but it doesn't mandate the distribution of that extra wealth. And in fact the extra wealth has been going to the already wealthy. Hence the decline in wages.

Suggestions?

Ban all corporate involvement in the election process. No campaign contributions, no lobbyist freebies. They can submit proposals like anyone else, but they can't establish relationships via donations. Corporations aren't really American anymore. They've demonstrated that through their behavior; their allegiance is to their bottom line, let's treat them as such.

The death tax is 100%. When you die all of the assets you own individually are sold off and the monies put in the public treasury. This ends the dominance of a small class of moneyed families. While you are living you can give away your fortune to whoever you want, but they pay taxes on it as income. Any charitable foundations or trusts you set up are exempt. Even up the chances at birth; it is no longer like joining a monopoly game three quarters of the way through.

Reconstitute the federal reserve. It was setup to benefit a small group of financiers and needs to be revamped. Its sole purpose should be the control of the money supply so that the currency is in line with production. No more institutionalized inflation, no more setting interest rates. This wasn't possible before the advent of computers, but certainly is feasible now.

Alter the free trade agreements to become truly free only when certain conditions are met: labor standards equivalent to those of the US or better, population growth rates at or below those of the US, corruption at or below that of the US, education levels at or above those of the US. For each of those factors a tariff is in place, declining as they get closer to those of the US, and zero when they meet or exceed the US.

Actually, I suspect it is too late to recover this time. Our lumps are coming, and we're going to have to take them. But the US does still have a massive economy, and it is still a great place to do business, relative to the rest of the world. It can be turned around.

[User 239864]

this article appears to be largely derived from the work (5 Aug 08) of Chris martenson here: www.chrismartenson.com....

[JGQ]

I've never heard of Chris Martenson. The basis of the article was the work of John Williams at Shadowstats.com

[TheEconomyKilledKenny]

Great article James - very informative and well documented.

[huangjin]

The shadow CPI ignores the structural changes in the U.S. economy. Energy per unit of GDP is down and the CPI correctly reflects that fact. Inflation is understated, but nowhere near as much as claimed.

I don't worry about SS and Medicare, since it won't be paid. Retirement ages will be raised and benefits cut to match what the payroll tax takes in.

[huangjin]

The shadow CPI ignores the structural changes in the U.S. economy. Energy per unit of GDP is down and the CPI correctly reflects that fact. Inflation is understated, but nowhere near as much as claimed.

I don't worry about SS and Medicare, since it won't be paid. Retirement ages will be raised and benefits cut to match what the payroll tax takes in.

[iThinkBig]

Huang Jin. That names sounds Asian. In your culture (or at least it used to be) the old stayed with the young. Do you know if that is still the same? That is not America. Your statement is true, benefits will be cut, SS may not run out but inflation is killing any meaningful benefit of it and those payment itself are likely to be cut. The SS portion tends to really upset me as I put in 20 years into the system many of those years paying the maximum amount. The statement about Medicaid is very obtuse. Seniors these days aren't brittle little cane walkers. They wield tremendous power and are a hefty portion of our population. Such thefts from these groups causes revolutions, something I am sure won't be nice for your global portfolio.

[FootballGeek]

Very good article,
Where is the money going to come from to fund social security, and
medicare when the huge amount of baby boomers start retiring?
These programs were designed for a workforce that was supported
by a large number of younger workers. That is not the case in
the near future. People are living longer, and healthier than in
the past, which will put an enormous demand on these
programs. Either the government will raise pay-roll deductions, or
tax wealthy retired people who have payed into the system
their whole lives.
The trend is for the government to borrow more from other
countries, instead of export goods. The debt keeps growing,
which will be passed onto the younger generations.
The real question is do we make painful choices now, or let
our children deal with the problems?

[E Nuff Sed]

There is no free lunch. Low taxes and socialistic benefits just don't add up. The US will just have to raise taxes and cut benefits.

[Kunst]

mdmrjsds: "The death tax is 100%. When you die all of the assets you own individually are sold off and the monies put in the public treasury. This ends the dominance of a small class of moneyed families. While you are living you can give away your fortune to whoever you want, but they pay taxes on it as income. Any charitable foundations or trusts you set up are exempt. Even up the chances at birth; it is no longer like joining a monopoly game three quarters of the way through."

Amen. Make as much money as you can while you're alive, give it to a foundation to push the world the direction you favor after you're gone, but let your kids make their own way in the world. Inherited wealth is a curse, and creates a power aristocracy that is truly un-American.

[carey_jim]

Government bureaucracy is not the root of the problem, it is the unequal distribution of wealth which allows the wealthy to rule through the bureaucracy.

This small class of around one percent of the American population controls about half of the wealth in America. Control is exerted through a "democratic" political system that was created in the 18th century and needs to be reformed.


We need to reform our democracy so that it is truly representative of the educated, ambitious, responsible and intelligent public (and not subject to mob rule from below by the ignorant, uninformed, lazy and envious.)

Nearly a third of the American population lives in four states: New York, California, Texas and Florida but these states have a total of only 8 out of 100 senators to represent them.

Only 7 percent of the American population lives in the 17 least populated states but has 34 of the 100 senators. By the rules of the Constitution (two thirds vote) this minority can kill any amendment to the Constitution or kill any proposed treaties that are harmful to 7 percent of the population.

The wealthy will continue to dominate politics and the rest of our lives, by manipulating this grossly undemocratic system, if we can't reform it. This system was constructed in the 18th century, by wealthy land owners for the express purpose of protecting their wealth and allowing them to increase it through business, unimpeded by the English Crown.

We live in a new world without slavery, with equal rights for women and with universal suffrage over the age of 18. But our democracy is paralyzed because of an antiquated Constitution.

The Constitution is not a sacred document. It was created by human beings for human beings. It needs to be rethought and reformed.

If we don't fix it, through legislation, our society will always face the danger of collapsing into a revolution led by ambitious upstarts leading the oppressed, ignorant and envious masses from below.

The result will be totalitarianism. As we know, our wealthy leaders are already laying its foundations.

[Capt Bob]

Now you know why we're so anxious to determine if Mars will support life!!!

Like a mangy cur who cannot refrain from pissing on the rug, we are on the verge of being tossed off the Planet by the scruff- --banned- - -in permanent exile!! The other inhabitants of this "living room" have about had enough, the costs of rugs is too high, and would you believe, we won't even contribute in cleaning up.

[john s.gordon]

oligarchy as practiced in latin america: 1% of the population controls 99% of the national wealth (relic of the spanish colomial system).

oligarchy as practiced in u.s.a: 7% of the population control 34% of the senators. are we going to become a spanish colony ? or maybe a mexican colony since they have no population control.
> jack

[carey_jim]

You're right Jack. We need to let Latin America have the word Oligarchy. Plutocracy describes America better:

7% of Americans control 34% of the senators
1% of Americans control 50% of the wealth.
99% of Americans think money is the most important thing in life.

Therefore 1% of Americans control 97% of Americans.

(I subtracted 2% because 90% of Americans are regular church goers.)

Go figure.

[User 240799]

Dear Gentlemen ,

We need a grassroots effort right away with many voices in each of our States ! Lets take our country back and hold these bought & paid for clowns ( Congressmen, Senators , ) accountable for their lack of a real planned out action ! E Mail [e-mail]

[MrX]

Is this based on Chris Martenson's great Crash Course piece ?

www.chrismartenson.com...

[TinyTim]

carey_jim
you scare me. Congress includes the House of Reps which is proportionate to population.
"We need to reform our democracy so that it is truly representative of the educated, ambitious, responsible and intelligent public (and not subject to mob rule from below by the ignorant, uninformed, lazy and envious.)"
And will you decide who is in which category?

[Ricard]

Mr. Quinn,

This is the third article I've read from you, and I am very appreciative of your perspective, which I must assume you prepared a while back. Your articles definitely set a higher standard for this website. Cheers, and thanks!

[ContrarianProfits]

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The Biggest Threat to Your Financial Future: The $53-Trillion National Debt