America: Banana Republic Watch

I’m certain you’re familiar with the expression “death wish.” I am beginning to wonder whether America has a banana republic wish. The country has been taking steps towards being a small-minded, elite-dominated, sham democracy.

Mind you, I am pointing to a tendency, not an established fact. The US isn’t Haiti, or even Argentina. But we are moving in that direction on a variety of fronts, and the devolution seems so concerted that I wonder if there is some unconscious mass desire to give up on the messiness and ambiguity of an open society and surrender to the certainty of one with institutionalized inequality, more authoritarianism, but greater certainty, and perhaps an illusion of greater security.

What triggered this line of thought? Something surprisingly minor: the April employment report, which by any standards was weak. The Bureau of Labor Statistics said that 88,000 nonfarm jobs were created in April, when it takes 150,000 new jobs to absorb labor force growth, and consensus forecasts were for 100,000 new positions.

But even this disappointing figure may have been the product of manipulation, as we will discuss in due course. And we’ve now had so many instances of what charitably may be called artful reporting that it’s beginning to undermine my faith in government statistics. Unreliable government statistics are a Banana Republic Indicator.

Let me go back to 1984, when I went to Mexico City to value a privately held air conditioning company (I was working for a top US consulting firm at the time; we normally didn’t do assignments of this nature, but the client was important).

At the firm’s office, I tried rounding up the usual data: GDP growth, inflation, bond rates, PE multiple, microeconomic stats. I came up with nothing. Everyone acknowledged the governments stats were wrong. The logical suspects, like investment banks, that might develop their own estimates didn’t (or at least didn’t publish them) since the only entity in the economy that was a prospective client was the government, so no one wanted to offend them. Inflation was so high that there was no long term bond market, and there were only 24 public companies that traded at PEs of either 2 or 4. I was soon stomping around the office, complaining that there was no data in the entire economy. Everyone was very pleasant, agreed, and one consultant offered some advice: “We do a lot based on feelings.”

Now I am sure some of you are thinking I am daft. The US isn’t Mexico, and we have lots of economic and company data. Technically, yes, but the integrity of that data is becoming compromised on enough fronts so as to render them suspect. And inaccurate data leads to bad business and bad policy decisions. Bad policy decisions are particularly likely since the information is massaged so as to minimize unpleasant news.

Let’s look at GDP. That’s a fundamental figure, surely beyond question or compromise. Really? Our GDP stats include something called a “hedonic price index” basically to allow for the fact that computers are becoming more powerful at lower costs. In essence, the US grosses up the price of computers in its GDP reports to adjust for the fact that computer prices are dropping.

These adjustments are significant. The US is the only country that uses hedonic indexing. The Bundesbank complained that if they calculated GDP the way we did, their GDP growth would be 0.5% higher. And the cumulative distortion is massive. In 2005, Michael Shedlock contacted the Bureau of Economic Advisers and they supplied some dated information on hedonics (including a spreadsheet). Even so, he found that hedonic adjustment to GDP was 2.257 TRILLION dollars, or 22% of then-current GDP.

Another fundamental statistic, inflation, is also manipulated. The hedonic adjustments of GDP means we can’t rely upon a simple, economy measure other countries use to look at inflation, namely a GDP deflator. No, we have to rely on indices, which means we have to rely on the selection of baskets of goods and services that get tracked over time. But things get thrown out of those baskets if they become inconvenient. For example, now when the powers that be report the Consumer and Producer Price Indexes they focus on “core inflation” which excludes food and energy prices ostensibly because they are volatile. But what good is an index if it omits a very big portion of household budgets? Yet most reporters and analysts happily follow the government’s lead. Barry Ritholtz calls this “inflation ex inflation.”

And this pattern of excluding ugly data is becoming more popular. Last week, Caroline Baum of Bloomberg was widely quoted for writing:

To say that ex-housing the economy is doing just fine is tantamount to claiming that, ex-Iraq, Bush’s Middle-East policy is a rousing success.

Now let’s go back to the April jobs figures. James Hamilton at Econbrowser highlights that a “birth/death adjustment” (a figure the BLS adds to allow for the fact that its survey doesn’t capture the creation or failure of businesses) was unusually large and increased the level of reported gains:

The Bureau of Labor Statistics reported today that the number of workers on U.S. nonfarm payrolls, as measured by their survey of establishments, increased by a seasonally adjusted 88,000 workers in April, of which 25,000 were government jobs. On Wednesday, Automatic Data Processing gave its estimate as 64,000 private sector jobs. The ADP estimate is based on actual payroll data, not a survey, and covers twice as many individual businesses as the BLS. When you add in the public employees (64 + 25 = 89), ADP called the nonfarm payroll number essentially spot on this month two days before we heard from BLS.

Unlike many analysts, I also pay attention to a separate employment estimate that comes from the BLS, which is based not on asking businesses how many people are working for them, but instead comes from sending interviewers to pre-selected residential addresses to ask how many individuals at that address are working. This BLS household survey claimed that the number of people working in America fell by 468,000 in April compared to March, on a seasonally adjusted basis.

I favor looking at all these numbers together because one survey can pick up things the other two might miss. One of the blind spots of the BLS and ADP establishment data is that, by definition, they cannot directly measure somebody who’s employed with a company that didn’t exist at the time the survey was set up. One of the ways that BLS tries to correct for this is with their CES Net Birth/Death Model, which tries to estimate what might be going on with new firms that aren’t in the sample on the basis of regular seasonal patterns and what is currently observed for those firms that are sampled. This imputation led BLS to suspect that there were 317,000 new jobs this April that they did not actually observe, which is three times the average absolute monthly adjustment for 2006.

Now the fact that the BLS result was very close to the ADP figure may mean the report wasn’t so sus after all, but other data watchers took a dim view of the adjustment.

This focus on data has prevented me from discussing other Banana Republic Indicators. Let me give you a starter list:

Compounds with private security for the very rich
Limited economic/class mobility
Debasing of the currency
Very high concentration of income and asset ownership in the very top echelon
Government policies heavily skewed towards the very rich; looting of the treasury
Limited/no press freedom
Election fraud; in extreme versions, coups, one party rule
Attacks on judicial independence/kangaroo courts

This list is admittedly incomplete; I’ll add to it as news items prompt me. On the one hand, America doesn’t hew closely to that profile. On the other, just like the dubious statistics, we have started down the slippery slope on some of them.

In the interest of time, I’ll deal very briefly with two: press freedom and election fraud. The degree of self-censorship in the American press is high and troubling. It seems to have started with the Bush Administration freezing out critics from any contact with their officials, and concerns about appearing unpatriotic in the wake of 9/11. But even now that the Bushies are on the ropes, the level of candor and criticism is oddly muted.

As for election fraud, it was well reported by Greg Palast on the BBC, and virtually untouched here. In Florida, the state scrubbed nearly 90,000 voters from the rolls. An estimated 97,000 ballots were discarded in Florida (virtually all ballots were counted in white counties, while in largely black precincts, it appears any excuse was used to throw out ballots). Another 91,000 voters were excluded incorrectly, and again that population was heavily black. Do the math. Blacks voted nearly 90% for Gore. Including even a small portion of the votes that were denied would have overwhelmed the 500 vote margin of Bush’s victory. Palast also uncovered large scale exclusion of black voters in Ohio in 2004. But again, no one wants to consider that our election process might have been hijacked.