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Democracy at Risk?

Thursday, October 20, 2016

If our democracy is at risk, it is because drivel which would never be permitted by a professor teaching first year critical thinking now passes for competent commentary from the Washington Post.

Our local paper, the San Diego Union-Tribune, carried Catherine Rampell's column this morning.  Apparently she thinks a "particular subset of Americans [read: 'deplorables'] have had enough of experts, facts, math, data. They distrust them all."

She is apparently appalled that "more than 4 in 10 Americans somewhat or completely distrust the economic data reported by the federal government."  And if we only count the 'deplorables', 68 percent do not trust the data "at all."  She calls roll on the usual suspects: unemployment, inflation, household spending, health insurance coverage rates, gross domestic products, etc.

If she had followed up with at least an attempt at substantive discussion of how these numbers are calculated and - even more importantly - how they are used, she could have at least avoided making her college professors look bad.  But there was nothing but red herrings and ad hominem - to the point I am left wondering if she even knows what those two terms mean in the world of critical thinking.

So let's do a little of the substantive analysis she couldn't provide in no fewer than 28 Union-Tribune column inches.

Inflation is easily the most important, and least understood, of the economic series reported by the government.  It is the most important because it provides the foundation for the 'deflator' which is used to calculate Gross Domestic Product.  The most important result of that relationship is this: If you understate inflation, you necessarily overstate economic growth.  Inflation is also what determines interest rates.  Here when you realize that the U.S. Government does not take in enough revenue month-to-month to even pay the interest on its debt, you also realize that keeping interest rates low is 1) a way of staving off the inevitable fiscal - and therefore political - reckoning; and 2) that this reckoning is, in fact, mathematically inevitable.  To understand why, just try to find someone who has refinanced their mortgage at a higher rate.

Rampell derisively refers to "shadow stats."  This can only mean one of two things: 1) She is aware of John Williams' and has thus failed to offer anything even approaching substantive interaction with his work; or 2) she has 'heard' about his work and is just parroting a second-hand narrative of 'conspiracy theories'.  Either way, she and her college profs (and we'll add her editors to the list) don't come out looking very good for her effort.

But leaving Shadow Stats aside, let's look at actual 2015 data from the Bureau of Labor Statistics.  The weighting of various prices in the Consumer Price Index is shown in complete detail.  The most glaring anomaly is rent.  The 'housing' component is 42 percent, which seems about right.  But within that component, only a little under eight percent is 'rent of primary residence' while a category called 'owners equivalent of rent of residences' is no less than 24 percent.  Let's explore that one for a moment: The 'owners equivalent' figure is notional.  This is not what owners are getting in rent; it is what the BLS guesses they could get in rent on their primary residence were they to rent it out.  But 'rent of primary residence' is an actual number - the rent being paid by the average renter of an apartment.  Can Rampell take a crack at explaining why someone would weight a notional number far more heavily than an actual number?

Another example is education.  CNBC writer John W. Schoen shows how tuition inflation has dramatically outpaced broader inflation measurements.  The BLS data shows us that college tuition is weighted at 1.8 percent.  And books and supplies at 0.16 percent (!!!).  Parents of college age students like me and my wife are painfully aware that the BLS formula ought to be labeled as the BLS formula - just remove the 'L'.

I'll round out the examples with health care.  The BLS data shows a weighting of 8.4 percent.  But when looking at various estimates of the percentage of income Americans devote to health care, 9.6 percent is the lowest number out there.  For those making $35-47K, the percentage is 14.5.  And with massive premium increases on the horizon, this picture is only going to get worse.

The long and short? The BLS data significantly under-weights the prices ordinary people (as opposed to the 'experts') know are the main drivers of price inflation.

Inflation - if we go by the 'textbook' - is the difference between the growth of the money supply and the growth of the economy.  Some will differentiate between this definition (monetary inflation) and the growth or decline in consumer prices (price inflation).  If, for example, the money supply has grown by 20 percent, but the economy only by two percent, the rate of monetary inflation is 18 percent.  One would expect - by the textbook theory - that price inflation will follow monetary inflation.  The claim is, of course, that price inflation is about two percent, so those who have been ringing the inflation fire alarm are ridiculed by writers like Rampell.

But if we look at all of the various paths money takes in the economy, and look at three in particular: the stock market; the bond market; and real estate, the answer is right in front of us.  And, no, Ms. Rampell, we don't need 'experts' to see it.

Stocks, bonds, and real estate are 'inflation sinks'.  Just like a 'heat sink' dissipates heat, these three markets are dissipating the inflation of the money supply.  But the only way to hide this effect in real estate, for example, is to underweight actual rents (which are soaring) and overweight notional rents - like what I might get were I to rent the house I live in.  It's as if we are to believe that notional rents have greater influence on consumer spending choices than actual rents.

And by not counting the stock or bond markets (they are not 'consumer prices', after all), we are hiding the real threat to our democracy: wealth inequality.  If Ms. Rampell was actually familiar with the writing of 'deplorables' like myself and others who challenge the 'data', she would see that between us and the Left, we agree that income inequality is a problem.  Where we disagree is on the origins of - and therefore the solutions to - the problem.

Income inequality is a function of public debt; here is how the cycle works: Each time the U.S. Treasury issues a 'bond', it is bought by a 'primary dealer'.  It then gets sold on the 'secondary market'.  When the Federal Reserve was engaging in Quantitative Easing (QE), they were literally creating money out of thin air (digitally) to buy these bonds on the secondary market. Each time a bond changes hands, fees and commissions are booked.  These bonds are issued, of course, to pay for deficit spending. Wall Street loves the arrangement - they are the ones booking the fees and commissions, after all.  And so just as the public debt soars, so does political spending.  Where does political campaign cash come from?  Primarily Wall Street - from the fees and commissions they book trading in government debt.

It is essential, then, both for the political and the financial halves of the 'political/financial' complex that this borrowing continue.  What threatens it?  Rising interest rates... again, who refinances a mortgage at a higher rate?  How do you keep interest rates artificially low?  By keeping the rate of inflation artificially low.

When we look at the multiplier between the salary of an average worker and that of a CEO, the 'norm' used to be about 20 (the CEO would make 20X the salary of the average worker.  When we look at the multiplier in companies 'closest' to all the new money that has been created (the 'political/financial' complex) the multiplier runs as high as 300.  If increases in income can be tied to increases in productivity and other forms of wealth creation, people should be free to make as much money as they please.  But when these increases are derived from proximity to banks and government, and funded by the banks lending to government, something is very wrong. And campaign finance reform will not fix it. And end to borrow-and-spend government will.

Inflation, then, works it way into so many other numbers.  With an honest reporting of inflation - by accounting for actual rather than notional prices for things like rent, properly weighting education and health care, and by taking into account stocks, bonds, and real estate - inflation would be significantly higher. And that would mean GDP would be significantly lower.  That, then, would expose the Big Lie - that we have been 'recovering' since the last financial crisis.  The fact that we have likely been in recession throughout the entirety of Obama's two terms is a very inconvenient truth.  But even worse - for both political parties - a true accounting of inflation would cause interest rates to surge, putting an immediate end to the debate over the debt ceiling.  That debate would be over because when no one is willing to lend us money at a rate we can afford, it will not make one whit of difference what the 'debt ceiling' is.

The cooperation and compromise everyone says they want will not happen until we start doing something very simple: Tell the truth about the economy.

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