by James J. Puplava
Financial Sense

Jim welcomes
back John Williams from Shadow
Government Statistics. John believes the real unemployment rate
is 22%, not 8.1%, which is why it still feels like a recession.
He also calculates the CPI at 6%, not 2.8%, and explains how the
government manipulates the rate of inflation. Lastly, John believes
the US is still on track for hyperinflation in 2014 as we near the
coming fiscal cliff. Listen
to the interview.

John 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. Formally known as
Walter J. Williams, his friends call him John. For nearly 30 years,
John has been a private consulting economist and, out of necessity,
had to become a specialist in government economic reporting.

JIM:
Joining me on the program today is John Williams of Shadow
Government Statistics.

And John, before
we get into a real big issue thatÂ’s going to hit the economy
January 2013, I want to talk about the front page of your website.
And you have two graphs that are available publicly and one is the
unemployment rate where you have U3, U6 and then SGS, which is your
own. LetÂ’s talk about those numbers, what they mean for our
listeners and the differences between them. [1:11]

JOHN: Sure.
IÂ’ve been a consulting economist for 30 years. What IÂ’ve
found over the decades is that the governmentÂ’s reporting has
moved further and further away from common experience, and really,
the average guy has got a pretty good sense of whatÂ’s going
on. If you feel the economy is not as strong as the government is
saying or that inflation might be higher than what theyÂ’re
reporting, youÂ’re most likely right because youÂ’re dealing
with the real world.

The numbers
use to deal much closer to real world experience.

And with the
unemployment number, if you, letÂ’s say, went around the entire
country and asked everyone whether he or she was unemployed, youÂ’d
get an immediate answer. Most people have a pretty strong opinion
as to whatÂ’s up, they have a job; they know whatÂ’s going
on. But if you put all those numbers together, youÂ’d come up
with a much higher unemployment rate than the government reports,
or at least the headline government number to date. So thatÂ’s
all due to definition.

In order to
be counted in the headline unemployment rate – and keep in
mind, the government actually publishes six levels of unemployment.
The third level they call U3 is the headline number – you have
to obviously be out of work and willing and able to take a job,
but you have to have actively looked for work in the last four weeks.
There are people whoÂ’ve stopped looking for work after a period
of time when there are just no jobs to be had, yet theyÂ’d take
a job if it were available, and they otherwise consider themselves
unemployed. They want a job; they are willing and able to work.
And again, theyÂ’d take it as soon as it was offered. If you
haven’t been looking in the last four weeks, the government will
count you as a discouraged worker so long as you’ve looked for work
in the last year.

If you haven’t
actively looked for work in the last year, they donÂ’t count
you at all.

Before 1994,
anybody who was a discouraged worker, irrespective of the period
of time, was counted as a discouraged worker. So that where you
have the U3 unemployment rate at, I believe itÂ’s 8.2% in March,
the governmentÂ’s broadest number U6 (which includes what I
call the short term discouraged workers, those who have given up
looking for work, but not for more than a year) and also includes
people who work part-time for economic reasons (they canÂ’t
get a full-time job, they want a full-time job but you know, no
full-time job is available) thatÂ’s running up somewhat over
14%.

And what I
do is I add to that my estimate of the longer term discouraged workers
– those who have been discouraged more than a year. That puts
you up over 22%.

What happens
here is the people who are unemployed roll out of the U3 level;
they become discouraged because there are no jobs to be had, and
so they go into the U6 level.

And after a
year, they roll out of the U6 level in terms of going into another
world that the government does not count. I still estimate them,
so my number is broader than the governmentÂ’s number. So when
you see the unemployment rate dropping, yet the broader measures
are rising or staying at near historic levels, you do not have an
economic recovery and thatÂ’s what weÂ’re showing. [4:26]

JIM: And John,
if we go back to the beginning of the year when we were closer to
9% and we’ve seen – or letÂ’s say the fourth quarter of
last year and weÂ’ve seen it steadily come down. But itÂ’s
been my understanding that the decline in that unemployment rate
(the “U3”) that the government reports, a lot of it is
discouraged workers that are no longer counted, number one. And
number two, correct me if IÂ’m wrong, but isnÂ’t there also
a category, letÂ’s say IÂ’m unemployed and I get unemployment
benefits for 99 weeks or whatever the timeframe is, once those 99
weeks end, arenÂ’t I technically considered employed? [5:06]

JOHN: No. To
be employed you have to have a job. What they call the Household
Survey where they count the unemployed, they actually go around
and survey 60,000 households or so each month. And they have a survey
questionnaire that they use for determining whether people are employed
or how many people in the household are unemployed or employed,
but they donÂ’t count the receipt of unemployment benefits as
a factor in being defined as unemployed. So itÂ’s separate from
the jobless claims, and such now the fact that the jobless claims
have come down some recently does not mean things are getting better.

What you have
to keep in mind is that we have been in the most severe and most
protracted economic downturn seen since the Great Depression. And
this has been – the economy began to collapse in, certainly
by the end of 2007 – and I mean collapse; we had a sharp decline
in economic activity. And right now we are seeing nothing but stagnation
or bottom bouncing at a low level of activity. So what might have
been historic norms, when you were looking at much smaller recessions,
donÂ’t apply here. You have people who have been laid off, businesses
that have cut to the bone wherever they can and the fact that you
donÂ’t have quite as many layoffs as you had doesn’t mean things
are getting better. It just means that you have fewer people to
lay off.

There are two
sides to that: the one side is the jobless claims; the other side
is the hiring. There are no good measures of that, but the Conference
Board puts out a help-wanted index. It used to be with newspapers
which were a – that was a very reliable, good indicator over
time. The internet has taken over in that area and now they have
what they call an online help-wanted advertising. ItÂ’s not
as good a quality; it doesn’t have a history that the newspapers
did. The most recent numbers, even though they are up overall, the
number I would look at there is the new ads for advertising for
hiring people. That actually declined in the last month and thatÂ’s
not a good indicator. Everything we’re looking at here suggests
we’re not seeing an economic recovery and thatÂ’s tied largely
to inflation. The inflation has created an illusion here with some
of the statistics. [7:26]

JIM: John,
do you think this is one of the reasons when they keep doing survey
after survey – and I think they just did one recently where
over 80% of the country still feel we’re in a depression –
is these numbers that youÂ’re reporting, which are over 20%,
are probably more reflective of whatÂ’s actually going on in
the economy? [7:47]

JOHN: I believe
so. Again, the average person has a pretty good sense of whatÂ’s
going on. And if they look globally and they know things are not
doing well, they will tend to extrapolate that into a national level.
They hear the governmentÂ’s numbers, but they tend to disbelieve
them and thereÂ’s good reason for that. The governmentÂ’s
numbers donÂ’t reflect whatÂ’s going on. ItÂ’s a matter
of how they define it. They put in happy definitions that tend to
give them a better economic result with lower inflation rates. [8:16]

JIM: LetÂ’s
go on to the second graph that you have on the front of your website
which is the alternative inflation rate, and they are both tracking
from what the government reports, which is CPI-U, and then you have
your measure. And your measure is probably closer to around 6% right
now. It has been coming down so that might line up with BernankeÂ’s
comment that the inflation pressures have gotten a little better,
but theyÂ’re still at 6%. When you consider that people are
getting 2% on a 10-year Treasury note, when the real inflation rate
is 6%!

So letÂ’s
talk about the difference between your numbers and letÂ’s say
the numbers that are reported every month by the government. [8:57]

JOHN: Sure.
With the CPI, the Consumer Price Index the governmentÂ’s broad
measure of inflation, there you have something that is much more
egregious, and really, sinister as far as IÂ’m concerned in
terms of what the government has done. You have to go back to the
days of Mr. Greenspan in the early nineties, and Michael Boskin,
whoÂ’s then the chair of the Council of Economic Advisors. They
were beginning to protest that the Consumer Price Index overstated
inflation. And oh, well, maybe we could correct that and get a lower
inflation rate. That would help us reduce the deficit because it
would reduce the cost-of-living adjustments for Social Security
and such. Well, thatÂ’s something youÂ’re seeing politicians
playing with academic economists; in theory, it should have no relationship
to the way people look at things. Again, itÂ’s a matter of definition.

The average
person when he thinks of inflation, at least what he thinks the
government is reporting, he assumes that it reflects out-of-pocket
expenditures and it reflects the inflation that youÂ’d need
to match if you wanted to maintain a constant standard of living
if you were using the inflation measure to target your wage or salary
or if your wages or salary are automatically adjusted by that or
your pension or Social Security payments are adjusted by that. Or,
if you are using that to set a downside limit to your investment
target, you certainly want to beat inflation when youÂ’re investing
your funds. ThatÂ’s not going to help you much if you canÂ’t
stay ahead of inflation.

So if the government
is giving you too low of an inflation rate – which they are,
and I’ll explain why – you’re really being cheated
on a number of fronts and the government is not being honest putting
that forward because they are using it to cut entitlement payments.
(TheyÂ’re trying to advance that further in terms of forthcoming
budget deficit cuts with an even worse consumer price measure in
terms of its significance.)

But whatÂ’s
happened here? Go back in time to when this was used first in the
cost of living adjustments in the auto union contracts. What they
measured is what they called a fixed basket of goods. TheyÂ’d
take for example, letÂ’s say theyÂ’d measure the price of
a pound of beef or a gallon of gas or a loaf of bread, theyÂ’d
price them out in current prices, and the next year theyÂ’d
price out that same basket of goods. And whatever the change was
in the cost of that basket of goods, thatÂ’s effectively how
much your income had to go up in order to maintain a constant standard
of living.

Now, getting
back to Messrs. Boskin and Greenspan, if you ask Mr. Greenspan:
What do you mean the CPI overstates inflation? His response was,
well, letÂ’s say the price of steak goes up, people are going
to buy more hamburger and they buy more hamburger, their cost of
living is going to go down. So really the CPI is overstated.

And Boskin
would use the same example, only he would use people buying chicken
instead of steak. Well, depending on how you define cost of living,
if you use their definition, that is a cost of living but itÂ’s
not the cost of living of maintaining a constant standard of living.
The government redefined it to make it maintaining a constant level
of satisfaction, where youÂ’d get to trade off dollars against
your level of satisfaction. So if steak becomes too expensive and
you donÂ’t have the money to pay for it, youÂ’re going to
be satisfied buying hamburger instead of starving. ThatÂ’s not
what the average guyÂ’s looking at or expecting here.

The other thing
they did is they introduced hedonic adjustments, which are quality
adjustments. Quality adjustments are legitimate. LetÂ’s say
the surveyors for the Bureau of Labor Statistics, who go out each
month and measure prices at all sorts of different locations, all
sorts of different goods, letÂ’s say the price of an 8 ounce
candy bar; and the next month they go to price it and the package
is the same but itÂ’s a 6 ounce candy bar. They will pick that
up; they look for it and they will mathematically adjust for that,
so that youÂ’ll actually see inflation because youÂ’re getting
less candy bar for the money.

They then look
at what they started introducing in the 1980s with these hedonic
adjustments that would make quality adjustments to goods. They would
have econometric models that would estimate quality improvements
that you could not directly measure. And if you canÂ’t directly
measure it, the guy whoÂ’s spending his money isnÂ’t looking
at that as an out-of-pocket expense.

An old example
was when the government mandated change in gasoline prices; they
mandated a reformulation of gasoline to help the quality of air
that came out of exhaust pipes. The effect was that it added 10
cents per gallon to the cost of gasoline; that was a big percentage
back in those days. They didnÂ’t count that in the CPI because
it was not a quality improvement that the average person would look
at or quantify in their out-of-pocket expense measure. The guy pumping
his car full of gas is moaning and groaning that heÂ’s paying
an extra 10 cents per gallon, he isn’t thinking “IÂ’m spending
10 cents a gallon here to make the air better.” [14:26]

But getting
into a little more nebulous area, they have hedonic adjustments
for all sorts of things, including college textbooks. Now, one of
the factors that goes into how the computer model will quality adjust
the books is whether the books have color pictures in them. This
is textbooks. Now, the average student, unless heÂ’s an art
student, most likely does not care much whether heÂ’s got black
or white or color photographs in the textbook. His concern is how
much am I out of pocket for my textbooks this semester. And the
cost of the increased books gets mathematically shifted to reflect
these nebulous measures.

The effect
is – and there’s been some press on this recently. The
government puts out the headline numbers, the Consumer Price Index
All Urban Consumers, thatÂ’s the CPI-U. They also have the CPI-W
which is for wage earners; itÂ’s more of a blue-collar measure.
ItÂ’s one that they use for adjusting Social Security payments
et cetera. It tracks very closely to the CPI-U. But the Bureau of
Labor Statistics said, oh my goodness, in that we have such a perfect
measure now with all these adjustments – and this is really
a Rube Goldberg index because theyÂ’ve done things to this that
really make no sense. TheyÂ’ve just tried to bring down the
reported level of inflation as much as they could. They said, oh,
if only we could take these back in time and restate history. Well,
they did. They created another index called the CPI-URS (for “research
study”). And so they take that back in time and they say, well,
we’ve compared those two going back in time and the average difference
per year is only half a percent.

Well, thatÂ’s
accurate to a certain extent. What that half a percent reflects
in a period of time before 2000 when the bigger changes were made,
thatÂ’s the incremental reduction each year, roughly, as a result
of all these methodological changes. The problem is if youÂ’re
looking at it going back in time, you can say thatÂ’s half a
percent a year, but coming forward in time itÂ’s cumulative.
And coming forward in time, starting back in 1980 you see a difference
of roughly 5 percentage points; in other words, 2 percentage points
on top of that in areas that the Bureau of Labor Statistics doesn’t
consider methodological.

But the effect
is order of magnitude 7 percentage points that theyÂ’re now
understating the inflation if you base on the 1980 methodology.
If you base it on the 1990 methodology, itÂ’s around 3%, which
gets you up into the 6-plus percent range right now. So what I do
with my estimates is I estimate what the current inflation would
be if these changes had not been made using what the governmentÂ’s
published as the effects of the change. I have an additive system.
I add back in the amount the government has said itÂ’s taken
out. So that with inflation somewhere – you can argue certain
elements of it, but you know, running somewhere between 6 and 10
percent right now, nobody is staying ahead of inflation with anything
thatÂ’s available in the domestic financial markets thatÂ’s
reasonably safe, except for something like gold. I mean, over time,
gold picks up the actual inflation.

In fact, if
you go back to 1933 when Roosevelt abandoned the gold standard,
since then the purchasing power of the dollar has dropped about
98 percent. ThatÂ’s been fully covered by gold. And gold has
actually covered more than the drop in the purchasing power based
on the CPI-U if you look at my estimated adjusted work and try it
out on the markets. [18:31]

JIM: John,
a final question if I may. Come January 1st of next year, theyÂ’re
calling it a “fiscal cliff.” We have the 1.2 trillion
dollars of budget cuts that was agreed to last August when we had
the debt-ceiling debate. And then on top of that we have the repeal
of the Bush tax cuts, you have the repeal unless extended of the
Social Security tax cuts; you have a 1.2% tax increase coming from
the phasing out of itemized deductions for people in the certain
income group; you have a 0.9% additional Medicare. So if youÂ’re
making 250, you could find yourself in a 45 percent tax bracket.
Then you have the 3.8 percent additional tax on investment income
capital from interest, dividends, pensions to annuity payments and
real estate.

With the economy
growing anemically at best, even if you want to take the governmentÂ’s
numbers at face value, at 2.2 percent, and given the fact that we’re
in an election year where thereÂ’s no stomach in Congress to
do any budget cutting, I mean, heck, the president canÂ’t even
get his own budget voted on by his own party. We haven’t had a budget
in this country for over three years. WhatÂ’s going to happen?
I mean these guys have got to know, you cannot raise taxes 45 percent
and cut 1.2 trillion from the budget and you think youÂ’re going
to have a booming economy. [20:05]

JOHN: Well,
no chance of a booming economy. The deficit reduction is a fraud
and the higher taxes will hammer the economy deeper in the ground.
What can I tell you? Right now, disposable income, which is basically
take home pay (after tax), adjusted for the governmentÂ’s inflation
is not growing. You canÂ’t have any growth in the economy unless
you’ve got real growth in income. The only way that consumption
can grow faster than income is when you have debt expansion, and
you donÂ’t have either because of the debt crisis and the ongoing
solvency issues of the banking system.

So
you take a system that at best is showing flat disposable income,
take the gimmicks out of it and youÂ’re probably dropping 5
to 10 percent per year with disposable income after inflation adjustments.
The taxes just make that worse. And again, that will severely hurt
economic activity. In terms of the budget deficit, these guys are
fraudsters. What can I tell you? You have a circumstance here where
their budget deficit that theyÂ’re cutting is spaced out over
10 years; most of it is cutting the pace of increase in the deficit.
TheyÂ’re not really cutting the deficit per se.

All the budget
projections are based on presumptions of 2 to 3 percent growth in
the economy. WeÂ’re not going to have that. We donÂ’t have
that now. And with the weaker economy, youÂ’ll end up with a
much bigger budget deficit.

If you put
in realistic projections of economic growth, that would more than
offset this purported declines in the deficit. The deficit circumstance
– they’re not doing anything serious here. Nothing is
going on that will address the governmentÂ’s long term solvency
issues without a major change in political Washington. That may
happen with the election, but itÂ’s certainly not in place at
the moment.

I donÂ’t
mean to sound like IÂ’m getting upset here, but I really am
upset with these guys. Where we are is a place we never should have
gotten to, and the people in Washington know that and theyÂ’ve
know where we’ve been going a long time; theyÂ’ve been playing
politics with it. [22:19]

JIM: IÂ’ve
always marveled, John, when you look at Washington, they count a
budget cut – let’s say I’m going to increase spending
by 8 percent but IÂ’m going to scale it back to 4 percent increase.
They call that a budget cut. I mean look at the way the president
has gone after Paul Ryan whoÂ’s not going to cut education spending.
But if you listen to the president, we’re going to throw students
out of the universities. I mean do you think they think weÂ’re
really stupid? [22:49]

JOHN: Yes.
Absolutely. TheyÂ’ve thought that for a long time. And to a
certain extent itÂ’s proven to be accurate with some of the
voters. This is going to be a very interesting election year because
the voting populace is not too happy with whatÂ’s happening
with the economy; the average guy is feeling some financial pain
and that usually leads to a change. But you need a real change here.
You need someone in Washington actually addressing the problems
and I just donÂ’t see that happening, which leads to further
disaster down the road – and not too far down the road. [23:47]

JIM: Yeah.
I would say just looking at the numbers and the way that theyÂ’re
growing that inflation scenario, I think, correct me, isnÂ’t
it still 2014? [23:35]

JOHN: 2014
I believe we will be in a hyperinflation. Yes. [23:38]

JOHN: All right.
Well, listen, John, as always, I want to thank you for joining us
on the program. And if youÂ’re listening to this and you really
want to understand why maybe what you hear on television doesn’t
line up with what you see in reality, I highly recommend you go
to John’s website – even better, get his newsletter –
because John breaks out all these numbers and you get the real facts.

The website
is called www.shadowstats.com.
ThatÂ’s all one word. And we’ve been speaking with its proprietor
John Williams.

John, thanks
for coming on the program. [24:09]

JOHN: Thanks
so much for having me, Jim. [24:11]

Reprinted
with permission from Financial
Sense.

May
16, 2012

James
J. Puplava [send him mail]
is President and Chief Investment Strategist at PFS Group. Visit
his website.

Copyright
© 2012 Financial
Sense