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Dead Constitution See other Dead Constitution Articles Title: Cooking the Books To get a read on the vital signs of our increasingly shaky economy, media turn to those all-important stats: unemployment, consumer price index, GDP. But Kevin Phillips, political and economic commentator, says that for decades administrations have been altering the definitions of those stats to paint a rosier outlook. BROOKE GLADSTONE: One of 2008's top stories so far has been our economic woes, and so the media are closely watching those bellwether statistics regarded as the vital signs of the economy – unemployment numbers, the consumer price index, and, of course, the gross domestic product, or GDP. [CLIP] FEMALE CORRESPONDENT: The US economy has added the equivalent of the entire GDP of China. So, and to be growing at 4.9 percent, I am just stunned if that's the right number. Holy cow! [END CLIP] BROOKE GLADSTONE: But is that the right number? Kevin Phillips explains in the May issue of Harper's that these stats are not the reliable indicators we think they are. In fact, they have been rendered almost meaningless over the decades by successive presidential administrations that have changed the criteria to make the economic picture rosier than it really was, and is. Kevin Phillips and other economists call it "the Pollyanna creep." Phillips was a senior strategist for President Nixon. KEVIN PHILLIPS: You had gathering inflation because of the Vietnam War. You had currency gyrations. You had the oil price problem creeping in. And this challenged the politicians because basically they didn't want to have to say, this is awful and these numbers prove it. And the numbers were softened a little bit, and that was the origin of Pollyanna creep. BROOKE GLADSTONE: So tell me how they were able to cook the books. KEVIN PHILLIPS: Well, let me start with unemployment. It's always a question of what the workforce is and how you define people who aren't quite in it. And this might sound like it's fairly simple, but it's not remotely. Government unemployment measurements run from the U-1 to the U-3 and up to the U-6. Now I'll stop sounding like an aircraft designation [BROOKE LAUGHS] and back up here. The U-3 is the number that they generally report. The U-6 includes a lot more people who maybe they're looking for a job, maybe they're not. There's some larger explanation of why they're not working. And the U-6 has unemployment about twice as high as the U-3. Now, the press, understandably, basically takes the government number, which is the lesser number, which runs in the fours and now is up just past five, whereas the other number runs between nine and ten. So which is it? BROOKE GLADSTONE: When the media report that unemployment is, say, at five percent when really by another measurement it may be twice as high as that, what's the impact? KEVIN PHILLIPS: Well, I think Americans tend to believe that we have lesser unemployment than Europe, and part of the reason for that is the media use the number which really is better than Europe's, because frankly [LAUGHS] it's a little bit loaded to be that way. I think, frankly, the one that runs between nine and ten is the more revealing. BROOKE GLADSTONE: Back when I was a kid, we used to talk about the gross national product; now we talk about the gross domestic product. How is that number made rosier? KEVIN PHILLIPS: Well to begin with, the gross national product includes your sort of foreign economic relations. And the difficulty is that [LAUGHS] they weren't doing too well in the early '90s. The United States was emerging as a major debtor nation, so we moved to the gross domestic product. BROOKE GLADSTONE: That was in 1991? KEVIN PHILLIPS: 1991. The problem with the gross domestic product as it now exists is it too has a number of fudge factors. A number of the elements of GDP are imputed as your income. Homeowners' expenses aren't really homeowners' expenses. They're imputed income if you rented your house. BROOKE GLADSTONE: Kevin? KEVIN PHILLIPS: What - BROOKE GLADSTONE: I have to admit I don't know what you're talking about. [LAUGHS] KEVIN PHILLIPS: Well, see, that's the government's secret weapon. [BROOKE LAUGHS] There is no way that the media can get in there and really explain what's happening. BROOKE GLADSTONE: Is cooking the books like this a partisan phenomenon, or does it transcend political party? I can understand why the White House would give these rosy statistics. What I don't understand is why the opposition doesn't come back with the other numbers and say, hey wait a minute, this just isn't right. KEVIN PHILLIPS: The books started [LAUGHS] being cooked quite a while ago. Presidents in both parties have found it very convenient, under the auspices of the Kennedy administration in terms of defining the workforce, then LBJ, then Nixon, then Reagan. George H. W. Bush - they were trying to whack inflation down to save money on Social Security, so they wanted some new definitions. Clinton came in and fulfilled a number of the George H. W. Bush objectives, and then [LAUGHS] you found George W. Bush in, and he continued. So you have to have an outsider politician who hasn't been involved in any of this to feel free to make the charges about cooking the books. BROOKE GLADSTONE: How is anyone to know and report on the economy, if the basic information they're given is so gamed? KEVIN PHILLIPS: Well, that's a real difficulty. All these problems, for example, in the credit markets that we've heard about – structured investment vehicles, collateralized debt obligations, asset-backed securities – well, the media don't know what they are either. BROOKE GLADSTONE: The financial press has been using the word "opacity" to describe the complicated arrangements surrounding the sub-prime mortgage crisis. KEVIN PHILLIPS: That's a nice word. That does not imply either negligence or some sort of deliberate falsification. And the difficulty is that all these definitions and what they do and how, nobody knows. BROOKE GLADSTONE: That's opacity for you. KEVIN PHILLIPS: That's opacity! BROOKE GLADSTONE: Kevin, thank you very much. KEVIN PHILLIPS: Thank you.
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