Economic Data Misperceptions in Political Discourse

Bruce Bartlett
In recent years, there have been a number of instances in which politicians and
political commentators have made assertions about economic data that are at odds
with the truth. This has led them to endorse policies that are not merely
inappropriate, but perverse.
Inflation Is Always Just Around the Corner
Its been an article of faith among conservatives since the beginning of the financial crisis in
2008 that inflation, even hyperinflation, is right around the corner. This follows from a core
conservative idea that inflation invariably results from excessive increases in the money supply. 1
Thus, when the Federal Reserve vastly expanded the money supply in late 2008, conservatives
anticipated a sharp rise in inflation. Bank reserves rose from about $10 billion in late 2008 to
well over $1 trillion a year later and continued rising to almost $3 trillion by the middle of 2014.
Figure 1

As Milton Friedman put it in an oft-quoted line: Inflation is always and everywhere a

monetary phenomenon. The Counter-Revolution in Monetary Theory (London: Institute of
Economic Affairs, 1970): 24.
1

The fear of inflation was not an unreasonable idea at the time. There is little doubt that the
inflation of the 1970s had its roots in an excessive expansion of the money supply primarily
engineered by Federal Reserve Board chairman Arthur Burns to goose the economy to aid
Richard Nixons reelection in 1972.2 It took a decade and several recessions to tame this
inflation. Therefore, conservatives believe that the cost of not nipping inflation before it becomes
embedded in the economy is far higher than whatever temporary benefits might result, even in
recessionary conditions.
In 2009, many conservatives predicted an imminent rise in inflation.

John Taylor, Stanford: There is no question that this enormous increase from $8 billion
to $3,365 billion will lead to higher inflation.3
Martin Feldstein, Harvard: The unprecedented explosion of the US fiscal deficit raises
the specter of higher future inflation.4
Arthur Laffer, economic consultant: To date whats happened is potentially far more
inflationary than were the monetary policies of the 1970s.5
Alan Greenspan, former Federal Reserve Board chairman: Statistical analysis suggests
the emergence of inflation by 2012.6

Indeed, many Republicans predicted not just inflation, but hyperinflation.7

Rep. Dan Burton of Indiana: We are heading toward hyperinflation again.8

Senator John McCain of Arizona: My great worry is that if we do not account for this
debt in some way, if we continue trillions of dollars of unnecessary and wasteful

William Poole, Burnsian Monetary Policy: Eight Years of Progress? Journal of Finance,
34:2 (May 1979): 473-84; James L. Pierce, The Political Economy of Arthur Burns, Journal of
Finance, 34:2 (May 1979): 485-96; Burton A. Abrams, How Richard Nixon Pressured Arthur
Burns: Evidence from the Nixon Tapes, Journal of Economic Perspectives, 20:4 (Fall 2006):
177-88.
3
John Taylor, The Threat Posed by Ballooning Federal Reserves, Financial Times (March 24,
2009).
4
Martin Feldstein, Inflation Is Looming on Americas Horizon, Financial Times (April 20,
2009).
5
Arthur B. Laffer, Get Ready for Inflation and Higher Interest Rates, Wall Street Journal
(June 10, 2009).
6
Alan Greenspan, Inflation Is the Big Threat to a Sustained Recovery, Financial Times (June
26, 2009).
7
Economists define hyperinflation as an inflation rate exceeding 50 percent per month. See
Phillip Cagan, The Monetary Dynamics of Hyperinflation, in Studies in the Quantity Theory of
Money, ed. Milton Friedman (Chicago: University of Chicago Press, 1956): 25.
8
Congressional Record (January 22, 2009): H459.
2

spending, then obviously we will find ourselves back in the situation we were in the
1970s, when we had hyperinflation and had to debase the currency.9
Rep. Paul Broun of Georgia: I think were fixing to head for hyperinflation.10

Historical Conservative Macroeconomic Policy

Few conservatives seem to have understood that standard conservative macroeconomic policy,
as articulated by Milton Friedman, is that the Fed should do exactly what it did massively
expand the money supply to keep nominal incomes from crashing, which was the central cause
of the Great Depression, according to Friedman. In discussing Japan in 2000, which had
economic problems very similar to those of the United States after 2008, Friedman offered this
commentary and advice:
During the 1970s, you had the bubble period. Monetary growth was very high.
There was the so-called speculative bubble in the stock market.
In 1989, the Bank of Japan stepped on the brakes very hard and brought money
supply down to negative rates for a while. The stock market broke. The economy
went into a recession, and its been in a state of quasi-recession ever since.
Monetary growth has been too low. Now the Bank of Japans argument is, Oh
well, weve got the interest rate down to zero; what more can we do?
Its very simple. They can buy long-term government securities, and they can
keep buying them and providing high-powered money until the high-powered
money starts getting the economy in an expansion. What Japan needs is a more
expansive domestic monetary policy.11
Economist Anna Schwartz, Friedmans longtime collaborator, confirmed that his advice for
Japan is exactly what the U.S. needed in 2009. Said Schwartz at a Council on Foreign Relations
conference on March 30, Instead of fiscal stimulus we should have monetary stimulus.
Monetary stimulus historically has ended recessions. Monetary stimulus means that the central
bank is increasing the supply of money.12
Friedman was also highly critical of a do-nothing policy toward economic downturns, as
preached by the Austrian school of economists, who are highly influential in the Republican
Party. He said the Austrian policy has done the world a great deal of harm.13

Congressional Record (February 3, 2009): S1392.

Congressional Record (March 24, 2009): H3796.
11
Milton Friedman, Canada and Fixed Exchange Rates, Bank of Canada (November 19,
2000): 421.
12
Infrastructure Spending to Grow, Council on Foreign Relations (March 30, 2009).
13
Quoted in Gene Epstein, Mr. Market, Barrons (August 24, 1998), 32.
10

The problem is that year after year, inflation was low and showed no sign of rising. The
Consumer Price Index has been below two percent since 2011. Indeed, inflation consistently
came in well below the Federal Reserves own inflation target, and indicators of future inflation,
such as long-term interest rates and Treasury Inflation-Protected Securities (TIPS), showed that
low inflation was well-anchored in financial market expectations.14
Figure 2
Actual Inflation vs. Federal Reserve Target

Craig Torres, Fed Aim Off Target as Inflation Descends Near Danger Zone, Bloomberg
News (October 10, 2014). Economists generally believe that long-term interest rates will rise as
soon as expectations of inflation rise.
14

Figure 3
Inflationary Expectations

Yet, year after year, conservatives continued to say that high inflation was right around the
corner. No amount of empirical data seemed to shake their deeply-held belief that the Fed made
a dreadful mistake that would, eventually, make the inflation of the 1970s look tame by
comparison.
Blaming Bernanke
On November 15, 2010, a group of conservatives including reputable economists such as
Michael Boskin, Ronald McKinnon and John Taylor, all of Stanford, as well as some Wall Street
analysts and journalists published an open letter to Fed Chairman Ben Bernanke, a Republican
originally appointed by George W. Bush who had previously served as his Council of Economic
Advisers chairman.15 The letter said:
We believe the Federal Reserves large-scale asset purchase plan (so-called
quantitative easing) should be reconsidered and discontinued. We do not
believe such a plan is necessary or advisable under current circumstances. The
planned asset purchases risk currency debasement and inflation, and we do not
think they will achieve the Feds objective of promoting employment.
15

Open Letter to Ben Bernanke, Wall Street Journal (November 15, 2010).

We subscribe to your statement in the Washington Post on November 4 that the

Federal Reserve cannot solve all the economys problems on its own. In this
case, we think improvements in tax, spending and regulatory policies must take
precedence in a national growth program, not further monetary stimulus.
We disagree with the view that inflation needs to be pushed higher, and worry
that another round of asset purchases, with interest rates still near zero over a year
into the recovery, will distort financial markets and greatly complicate future Fed
efforts to normalize monetary policy.
The Feds purchase program has also met broad opposition from other central
banks and we share their concerns that quantitative easing by the Fed is neither
warranted nor helpful in addressing either U.S. or global economic problems.
One can argue that two years into its policy of quantitative easing, there should have been signs
of inflation stirring if the conservative view was correct. But the facts increasingly supported the
view, often articulated by Paul Krugman in his New York Times blog, that the zero-bound on
interest rates was binding and that there was no reason to expect a sharp increase in inflation
anytime soon.16 The zero bound means that market interest rates can never go below zero or
people will simply hoard cash, but sometimes economic conditions call for negative interest rates
to force money into circulation.17
Interest on Reserves Changed Everything
Even before the conservative letter was released, Ben Bernanke and the Fed itself acknowledged
that low interest rates constrained its ability to stimulate the economy. 18 It was evident that
velocity (the rate of turnover of money as measured by the gross domestic product divided by the
M2 money supply) was falling sharply, offsetting the potential inflationary effect of a higher
money supply.19 A fall in velocity has exactly the same economic effect as a shrinkage of the
money supply.

For example, Paul Krugman, Nobody Understands the Liquidity Trap, Conscience of a
Liberal blog, New York Times (July 14, 2010).
17
See Tony Yates, Monetary Policy and the Zero Bound to Interest Rates: A Review, Journal
of Economic Surveys, 18:3 (July 2004): 427-81.
18
Sewell Chan, Bernanke Expected to Sketch New Fed Action on Economy, New York Times
(August 26, 2010): B1.
19
Yi Wen and Maria A. Arias, What Does Money Velocity Tell Us About Low Inflation in the
U.S.? Federal Reserve Bank of St. Louis (September 1, 2014).
16

Figure 4
Velocity of Money: GDP/M2

Few conservatives have ever noted the significance of the Feds policy of paying interest on
bank reserves, which are like deposits banks keep at the Fed itself. Just as with individuals,
higher interest rates will encourage banks to keep more money on deposit and therefore out of
circulation in the economy, where it might be inflationary.20 In effect, money held in bank
reserves was sterilized and unable to cause inflation. Although the rate was low, it was risk-free
and better than banks could get from buying Treasury bills. A libertarian economist, Lawrence
White of George Mason University, finally admitted this fact, which people like Krugman had
pointed to for years as a reason not to expect inflation from the Feds monetary policy, in
congressional testimony in 2012:
The Fed can reduce the incentive of banks not to lend by scaling back the interest
they pay on reserves. Banks are sitting on more than a trillion dollars in excess

20

The policy of paying interest on reserves, which the Fed began in 2008, originated with Milton
Friedman, A Program for Monetary Stability (NY: Fordham University Press, 1960): 71-75.

reserves, in large part because the interest rate the Fed is paying on those reserves
is about the same as the interest rates the banks can earn on T-bills.21
White, reiterated his point in congressional testimony in 2014 as well:
If you just look at the monetary base and see it double and triple the Feds balance
sheetthen you think high inflation is coming, but you have to recognize that the
Fed has sterilized those injections it is paying on those reserves.22
Another libertarian economist, Gary North, even noted that the Fed policy of paying interest on
reserves is deflationary and he advocated negative interest rates on reserves to get the money
moving a position historically associated with liberals like Princeton economist Alan Blinder, a
former vice chairman of the Federal Reserve Board.23 Said North on August 3, 2012:
There can be monetary deflation as a result of excess reserves held at the Fed by
commercial banks. But this is Fed policy. The Fed pays banks interest on the
deposits. Even if it didn't, there would still be excess reserves. But by imposing a
fee on excess reserves, the Fed could eliminate excess reserves overnight. Then
the money multiplier would go positive, price inflation would reappear, and the
Fed would get blamed. So, it maintains a policy of restricting the M1 multiplier.24
So if conservative economists knew that a big increase in the money supply was exactly what the
economy needed to forestall another Great Depression and understood perfectly well why the
money supply increase was not inflationary, why did they keep saying hyperinflation was right
around the corner? Rep. Bill Foster of Illinois asked Larry White, So you would attribute the
failure of those on the right to that there wasnt runaway inflation to a lack of economic
sophistication, roughly speaking? White said yes.
I dont buy it. I think it suited the conservative political agenda to pretend that hyperinflation was
imminent. I suspect that at least a few conservative economists may well have known that
adoption of a tight monetary policy would have tanked the economy and improved the odds of
Republicans retaking the White House. Moreover, there were many conservatives who made a
considerable amount of money promoting sales of gold coins and other inflation hedges. Radio
21

House Committee on Financial Services, Subcommittee on Domestic Monetary Policy and

Technology, Fractional Reserve Banking and the Federal Reserve: The Economic Consequences
of High-Powered Money (June 28, 2012): 21.
22
House Committee on Financial Services, Subcommittee on Monetary Policy and Trade,
Federal Reserve Oversight: Examining the Central Banks Role in Credit Allocation (March 12,
2014): 16.
23
Alan Blinder, How Bernanke Can Get Banks Lending Again, Wall Street Journal (July 23,
2012).
24
Gary North, Why the Deflationists Argument Is Wrong in Both Theory and Fact,
GaryNorth.com (August 3, 2012).

talkers Glenn Beck and Sean Hannity were particularly aggressive in promoting gold to their
unsophisticated listeners.25
Nevertheless, the concerns of conservatives were not absurd up to a point. It was possible that
the time lag between rises in the money supply and inflation had simply been lengthened by the
recession. Unless the fundamental relationship between the money supply and inflation that
every conservative learned in the 1970s was completely wrong, higher inflation was still in the
pipeline.
Inflation Data Ignored
The real problem is that seven years after the beginning of quantitative easing and four years
after the Bernanke letter was published, there were still no signs of inflation in any commonly
used index, interest rates remained low and even the price of gold, which many conservatives
view as the most accurate measure of future inflation, had fallen sharply from its peak, from
close to $2,000 per ounce in late 2011 to less than $1,200 per ounce in 2015.
Figure 5
Price of Gold

Steven Rosenfeld, Plummeting Gold Prices Wont Stop Sean Hannity and Glenn Becks
Sponsors from Trying to Sell You More, Alternet (April 23, 2013); Bill Carter, Glenn Becks
Gold Deal Raising Questions at Fox, New York Times (December 14, 2009).
25

At this point, a reasonable person would be forced to admit that a prediction of high inflation
made in 2010 was based on faulty theory. Yet, few of those who signed the letter to Bernanke
admitted to doubts when queried by Bloomberg News in October 2014.26 It is worth quoting
them at length.
Jim Grant, publisher of Grants Interest Rate Observer, in a phone interview:
People say, you guys are all wrong because you predicted inflation and it hasnt
happened. I think theres plenty of inflation -- not at the checkout counter,
necessarily, but on Wall Street.
The S&P 500 might be covering its fixed charges better, it might be earning
more Ebitda [earnings before interest, taxes, depreciation and amortization], but
thats at the expense of other things, including the people who saved all their lives
and are now earning nothing on their savings.
That to me is the principal distortion, is the distortion of the credit markets. The
central bankers have in deeds, if not exactly in words -- although I think there
have been some words as well -- have prodded people into riskier assets than they
would have had to purchase in the absence of these great gusts of credit creation
from the central banks. Its the question of suitability.
John Taylor, professor of economics at Stanford University, in a phone interview:
The letter mentioned several things the risk of inflation, employment, it would
destroy financial markets, complicate the Feds effort to normalize monetary
police and all have happened.
This is the slowest recovery weve ever had. Working-age employment is lower
now than at the end of the recession.
Where is the evidence that it worked? Its just not there.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office, in a
phone interview:
The clever thing forecasters do is never give a number and a date. They are
going to generate an uptick in core inflation. They are going to go above 2
percent. I dont know when, but they will.

Caleb Melby, Laura Marcinek and Danielle Burger, Fed Critics Say 10 Letter Warning
Inflation Still Right, Bloomberg News (October 2, 2014).
26

Niall Ferguson, Harvard University historian and author of The Ascent of Money:
A Financial History of the World, referred Bloomberg News to a blog post he
wrote in December 2013, saying his thoughts havent changed:
Though generally regarded by a cause for celebration (even by those
commentators who otherwise lament increasing inequality), this bull market has
been accompanied by significant financial market distortions, just as we foresaw.
Note that word risk. And note the absence of a date. There is in fact still a risk
of currency debasement and inflation.
David Malpass, former deputy assistant Treasury secretary, in a phone interview:
The letter was correct as stated.
Ive observed that credit is flowing heavily to well-established borrowers. This
has worsened income inequality and asset inequality going on in the economy.
Youre looking at the companies that got credit. The problem is the new
businesses that didnt get credit. The facts are that private sector credit growth has
been slow. It is a zero sum process where each corporate bond issue was money
that otherwise might have gone to a new business or a small business.
Amity Shlaes, chairman of the Calvin Coolidge Memorial Foundation, wrote in
an e-mail:
Inflation could come, and many of us are concerned that the nation is not
prepared.
The rule with inflation is first do no harm. So you always want to be careful.
Peter Wallison, senior fellow at the American Enterprise Institute, in a phone
interview:
All of us, I think, who signed the letter have never seen anything like whats
happened here.
This recovery weve had since the end of 2009 has been by far the slowest weve
had in the last 50 years.
Geoffrey Wood, a professor emeritus at City University Londons Cass School of
Business, in a phone interview:
I think everything has panned out. We should probably be more cautious about
the timing. Economists should always be cautious about the timing. Timing is
close to totally unpredictable.

The economy is growing. If the Fed doesnt ease money growth into it, inflation
could arrive.
Richard Bove, an analyst at Rafferty Capital Markets LLC, in a phone interview:
If interest rates are low, it means a large portion of the population was made poor
because passive income declined.
If you take a look at the economy, I think that the economy has grown in line
with the growth in population and the growth in income. I would argue that the
bulk of this QE money never reached the economy.
Someones got to prove to me that inflation did not increase in the areas where
the Fed put the money. We know where they put the money. And we know where
they put the money prices went up dramatically. And we also know the consumer
price index does not pick up either of those price increases. Housing prices are not
in the CPI and fixed income prices are not in the CPI. So how do you know that
QE benefited the economy?
Lying About Inflation Is No Vice
Amity Shlaes discussed her thoughts at greater length in a column for National Review, a
conservative magazine. Basically, she said that even if she was wrong, factually, it was a good
idea to warn about imminent inflation anyway:
Well, inflation hasnt come on a big scale, apparently. Or not yet. Still, a lot of us
remain comfortable with that letter, since we figure someone in the world ought
always to warn about the possibility of inflation. Even if what the Fed is doing
is not inflationary, the arbitrary fashion in which our central bank responds to
markets betrays a lack of concern about inflation. And that behavior by monetary
authorities is enough to make markets expect inflation in future. 27
Shlaes repeated her belief, expressed in a column two years earlier, that inflation can start
suddenly, without any notice at all; her prime example being the German hyperinflation of
1923.28 In point of fact, Shlaes is wrong that the German hyperinflation started suddenly or
unexpectedly. There was plenty of advance warning in the foreign exchange market. Prices
began rising in 1919 and began rising at a faster rate in 1921, well before the hyperinflation hit in

Amity Shlaes, The Other Bubble: Some Highly Placed People Dont Want a Serious
Discussion of Quantitative Easing, National Review (October 16, 2014).
28
Amity Shlaes, Watch Bernankes Little Inflation Capsize U.S., Bloomberg News (March
14, 2012).
27

1923.29 The New York Times published dozens of reports of impending hyperinflation in 1921
and 1922.30
The conservatives who signed the Bernanke letter were not alone in sticking to their guns with
their belief that higher inflation was inevitable, despite the continuing evidence to the contrary.
For example, Carnegie Mellon University economist Allan Meltzer said on May 6, 2014,
Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the
stagflation of the 1970s. Other prices will follow.31
While it is true that food prices were rising slightly more rapidly in mid-2014, others were flat or
falling. In particular, the price of oil virtually collapsed from over $100 per barrel to less than
$50 over the course of a few months in late summer and fall 2014.
Figure 6
Price of Oil

See Robert L. Hetzel, German Monetary History in the First Half of the Twentieth Century,
Federal Reserve Bank of Richmond Economic Quarterly, 88:1 (Winter 2002): 1-35; Steven B.
Webb, Fiscal News and Inflationary Expectations in Germany After World War I, Journal of
Economic History, 46:3 (September 1986): 769-94.
30
For example, Inflation in Germany: Estimate of 900 Percent. Rise of Prices since 1914, New
York Times (April 3, 1921): 30; Germany Looks for Further Inflation, New York Times (June
19, 1922): 20.
31
Allan H. Meltzer, How the Fed Fuels the Coming Inflation, Wall Street Journal (May 6,
2014).
29

To my knowledge, the only conservative economist who has admitted error is Arthur Laffer. In
an interview with Business Insider on January 13, 2014, he conceded that there was something
fundamentally wrong with the conservative model of inflation. Said Laffer, Usually when you
find the model is this far off, youve probably got something wrong with the model, not that the
world has changed. Inflation does not appear to be monetary base driven.32
One explanation for the failure of the conservative monetarist model to work is that increases in
the money supply need to be continuous or expected to continue for some time before they affect
prices. One-off increases, even very large ones, may not have inflationary effects if markets are
convinced that they will be reversed in the near future.
In late 2014, another early inflation-monger, University of Chicago economist John Cochrane,
simply switched gears and started warning about deflation, without ever explaining why the
inflation he long predicted never happened or how deflation can be explained by the monetarist
model.33
Although conservatives are obsessed with inflation, studies show that people are less bothered by
it than they are by high unemployment.34 This is important because there tends to be a trade-off
between one and the other the higher inflation is, the lower unemployment and vice versa. This
is often called the Phillips Curve.
Conspiracy to Coverup Inflation
One way conservatives were able to avoid confronting the reality that their theory of inflation
was completely wrong under current circumstances, was simply to deny reality. A company
called Shadow Government Statistics (SGS), run by a man named John Williams, argued that the
official inflation data published by the Bureau of Labor Statistics (BLS) was wrong, that the true
inflation rate was in fact much higher. Coincidentally, this organization has been forecasting
hyperinflation since at least 2007. In a report dated February 20, 2007, it said, The economic
downturn already underway in the United States is an inflationary recession that could evolve

Rob Wile, Art Laffer: I Was Wrong About Inflation and the Fed, Business Insider (January
3, 2014).
33
John H. Cochrane, Whos Afraid of a Little Deflation? Wall Street Journal (November 13,
2014). For Cohranes repeated warnings about imminent inflation, see The New Financial Deal:
What Do the 1930s Teach About Reforming Todays Financial Markets? Council on Foreign
Relations (March 30, 2009); Understanding Policy in the Great Recession: Some Unpleasant
Fiscal Arithmetic, NBER Working Paper No. 16087 (June 2010); Inflation and Debt,
National Affairs (Fall 2011): 56-78.
34
David Blanchflower et al., The Happiness Trade-Off between Unemployment and Inflation,
Journal of Money, Credit and Banking, 46:2 (October 2014): 117-41; Rafael Di Tella, Robert J.
MacCulloch and Andrew J. Oswald, Preferences over Inflation and Unemployment: Evidence
from Surveys of Happiness, American Economic Review, 91:1 (March 2001): 335-41.
32

into a hyperinflationary depression by the end of the decade.35 Keep in mind that this was well
before the Federal Reserve began its extraordinary increase in the money supply in late 2008.
In a report published in early 2014, SGS was still predicting that hyperinflation was right around
the corner. Said an April 8 report, the effects of various systemic crises, the extraordinary
economic downturn, and the governments responses to same, have moved the likely timing of
the hyperinflationary crisis into the current year.36 A key indicator, according to the report, was
the declining value of the dollar on foreign exchange markets. The underlying fundamentals
driving the exchange-rate value of the U.S. dollar could not be more negative, it said.
In fact, the dollar had been rising since 2011 and rose quite sharply in 2014. The trade-weighted
exchange rate rose almost 12 percent in 2014. Anyone who shorted the dollar because of the
advice from SGS would have lost big.
Figure 7
Exchange Rate, 2014-15

A novel feature of SGS is that it calculates its own rate of inflation rate, allegedly based on
previous BLS methods that were changed. Obviously, changing the rate of inflation impacts on

35
36

Report Nos. 27 & 28, Shadow Government Statistics (February 20, 2007).
Report No. 617, Shadow Government Statistics (April 8, 2014).

many other statistics as well, such as those for real incomes, which SGS also adjusts to give
true figures.
Many conservatives routinely cite the SGS data as correct in order to sustain their belief that
monetary policy has in fact been strongly inflationary.37 For example, historian Niall Ferguson of
Harvard endorsed this view in a 2011 column, saying,
The reason the CPI is losing credibility is that, as economist John Williams
tirelessly points out, its a bogus index. The way inflation is calculated by the
Bureau of Labor Statistics has been improved 24 times since 1978. If the old
methods were still used, the CPI would actually be 10 percent. Yes, folks, doubledigit inflation is back. Pretty soon youll be able to figure out the real inflation
rate just by moving the decimal point in the core CPI one place to the right.38
In 2012, Eamonn Fingleton published a long article in the New York Times arguing that the
Japanese economy had performed better than the U.S. in recent years, contrary to conventional
wisdom among economists. He used SGS to bolster his argument:
On the calculations of John Williams of Shadowstats.com, a Web site that tracks
flaws in United States economic data, Americas growth in recent decades has
been overstated by as much as 2 percentage points a year. If he is even close to
the truth, this factor alone may put the United States behind Japan in per-capita
performance.39
SGS data even turn up occasionally in peer-reviewed academic journals in order to make dubious
claims about prices, monetary policy and so on.40
Not surprisingly, Amity Shlaes strongly endorses the SGS view.41 So egregious was her
dismissal of official inflation data that another conservative, James Pethokoukis of the right-wing
American Enterprise Institute, responded harshly. Said Pethokoukis:
Conservatives like Shlaes she is hardly the only one should really stop
using John Williams and his ShadowStats site as source for their inflation
arguments. Many economists, not to mention the BLS itself, have given reason to
think his approach methodologically unsound. According to one Williamss
Among the first to publicize the SGS data was former Nixon aide Kevin Phillips, Numbers
Racket: Why the Economy Is Worse Than We Know, Harpers (May 2008): 43-47.
38
Niall Ferguson, The Great Inflation of the 2010s, Newsweek (May 1, 2011).
39
Eamonn Fingleton, The Myth of Japans Failure, New York Times (January 6, 2012).
40
Arthur I. Ruoff, World Poverty, Another Look, Environment, Development and
Sustainability, 13:4 (August 2011): 677-83; Richard Westra, The Japanese Economy in the
Crossfire, Journal of Contemporary Asia, 42:4 (November 2012): 697-706.
41
Amity Shlaes, Inflation Vacation, National Review (July 16, 2014).
37

calculation, annual inflation has never been below 5% since the mid-1980s and is
nearly 10% today.
Think for a moment what that means for real GDP growth the past three decades.
Nominal GDP averaged about 5% from 1986 through 2013. Of that 5%, 2% was
inflation and 3% was real GDP growth. If inflation was really 5% and often,
according to Williams, it was much, much higher then there has been no real
economic growth in America all that time. Actually, we have probably been in a
long depression from the Reagan years forward.
Pethokoukis also noted that an alternate inflation calculation taken directly from retail store
scanners, called the Billion Prices Project, calculates inflation rates roughly consistent with those
of the BLS.42
The Right Way to Measure Inflation
This is more than just an argument over the appropriate way to measure inflation, on which there
is and always will be legitimate debate. Reputable economists who have looked deeply into the
SGS methodology have concluded that it simply cooks numbers to suit its own biases and
presumably those of its clients. (Interestingly, a subscription to the SGS newsletter never rises;
its been $175 per year since at least 2005.)
In 2008, BLS economists John Greenlees and Robert McClelland responded to widely circulated
reports among an array of investment advisers, bloggers, magazine writers, and others in the
popular press asserting that the official inflation rate was too low.43 The discussion is highly
technical, but showed conclusively that the BLS methodology was both transparent and well
within international conventions for measuring price changes.
SGS was not mentioned by name, but its web site was referenced in a footnote. This led John
Williams to disclose some previously unknown details about his methodology, which, Greenlees
and McClelland noted, had found that the Consumer Price Index understated the true inflation
rate by an astounding 7 percentage points per year since 1980.44 Williams confirmed that this
was in fact his calculation: Since 1980, the aggregate change in annual CPI inflation reporting
due to methodological shifts has been a reduction of roughly 700 basis points (7%).
Economist James Hamilton of the University of California, San Diego, called Williams to find
out precisely how he incorporated his methodology into current inflation statistics. Williams
said, Im not going back and recalculating the CPI. All Im doing is going back to the

42

http://bpp.mit.edu/usa/.
John S. Greenlees and Robert B. McClelland, Addressing Misconceptions About the
Consumer Price Index, Monthly Labor Review (August 2008): 3-19.
44
Special Comment, Shadow Government Statistics (September 10, 2008).
43

governments estimates of what the effect would be and using that as an add factor to the
reported statistics.45
Hamilton concluded that Williams was not in fact using a methodology that replicated some
earlier BLS method, as he had implied, but was simply assuming that some previously calculated
BLS error had exactly the same impact every single month, permanently. As Hamilton wrote:
I had formed the mistaken impression that Williams was indeed trying to go back
and recalculate measures such as the CPI based on a retrospective application of the
historical BLS methodology. I found the specific quantitative results provided by
Greenlees and McClelland to be convincing demonstrations that this could not be
the case. I take further comfort in the understanding that Williams agrees that his
numbers indeed do not represent the outcome of such a procedure.
In other words, this year and every other year the official CPI is exactly 7 percentage points,
close to 6 tenths of a percent monthly, too low, so he simply adds that amount to the reported
CPI to get his correct data that is widely believed by gullible conservatives.
In 2010, Greenlees and McClelland discussed the SGS critique more directly. 46 They noted that
even if there was in fact zero inflation constant prices the true inflation rate would still be 7
percent, according to SGS.
The irony is that, historically, conservatives have maintained that the CPI overstates the true rate
of inflation. In 1996, Stanford economist Michael Boskin, a Republican who chaired the Council
of Economic Advisers for George H.W. Bush, headed a commission of experts to determine
whether there were biases in the BLS methodology for calculating inflation and how large they
might be. Their report to the Senate Finance Committee concluded that the CPI overstated the
true rate of inflation by 1.3 percentage points per year.47
Subsequently, the BLS implemented some of the Boskin recommendations. However, it is
widely believed among reputable economists that there is still an upward bias in the CPI.48 Many

James Hamilton, Shadowstats Responds, Econbrowser (October 12, 2008).

John S. Greenlees and Robert McClelland, Recent Controversies Over CPI Methodology,
Business Economics, 45:1 (January 2010): 28-37.
47
www.ssa.gov/history/reports/boskinrpt.html.
48
David E. Lebow and Jeremy Rudd, Measurement Error in the Consumer Price Index: Where
Do We Stand? Journal of Economic Literature, 41: 1 (March 2003): 159-201; David S.
Johnson, Stephen B. Reed, and Kenneth J. Stewart, Price Measurement and the United States: A
Decade After the Boskin Report, Monthly Labor Review (May 2006): 10-19; Robert J. Gordon,
The Boskin Commission Report: A Retrospective One Decade Later, NBER Working Paper
No. 12311 (June 2006).
45
46

economists favor a chained CPI that would eliminate most of the upward bias still remaining. 49
The reason this issue is salient is that an overstated inflation rate sharply raises federal spending
because major entitlement programs such as Social Security rise annually to adjust for
inflation.50 An overstated CPI, therefore, causes federal spending to be billions of dollars higher
annually than necessary to maintain the real value of entitlements.51
An overstated CPI also means that the annual inflation adjustment for tax brackets reduces
revenues more than necessary to hold taxpayers harmless. In effect, they are getting an
unjustified tax cut every year. For these reasons, both Republican and Democratic economists
have favored switching to a chained CPI as an effective way of both raising revenue and cutting
entitlement spending without altering the tax code or benefit formulas. The CBO estimates that
such an adjustment would reduce the budget deficit by $182 billion in the first decade.52
Keep in mind that if the SGS view is correct and were adopted, it would lead to an explosion of
entitlement spending and a sharp reduction of tax revenue that would massively expand the
budget deficit.
Exploiting Biased Perceptions
A less sophisticated, but politically potent, conspiracy theory about inflation can commonly
found on social media sites and blogs, where people report anecdotal evidence that such-andsuch price has risen sharply of late, so how can the government say inflation is low?
Part of the problem here is simply that people dont realize that the CPI is an average of many
different prices. Those that are rising may be offset by others that are falling or vice versa. For
example, while food prices were rising in 2014, the price of gasoline fell sharply, from close to
$4 per gallon to just over $2 per gallon.

Julie M. Whittaker, The Chained Consumer Price Index: What Is It and Would It Be
Appropriate for Cost-of-Living Adjustments, CRS Report for Congress RL32293 (June 12,
2013).
50
Dawn Nuschler, Inflation-Indexing Elements in Federal Entitlement Programs, CRS Report
for Congress R42000 (April 24, 2013).
51
Donald J. Marples, Budgetary and Distributional Effects of Adopting the Chained CPI, CRS
Report for Congress R43347 (March 7, 2014).
52
Options for Reducing the Deficit: 2015 to 2024, Congressional Budget Office (November
20, 2014).
49

Figure 8
Gasoline Price, 2014

There is also the problem of perception. It is well known that average people perceive inflation
much differently than professional economists.53 If the wife typically does the family food
shopping while the husband typically fills the gas tank, they are going to have very different
perceptions of inflation. Indeed, studies show that women tend to perceive a higher inflation rate
than men.54 Perceptions of inflation also vary by race, income, education and other factors.55
It probably goes without saying that most people are ill-informed about various economic
statistics. In a 2013 survey by Pew, only 70 percent of people could properly identify the
unemployment rate when shown a graph.56 A variety of polls show that Americans have
routinely said that the U.S. economy is still in recession years after it ended, according to
economists. For example, in December 2013, 79 percent of people said the U.S. was still in
N. Gregory Mankiw, Ricardo Reis and Justin Wolfers, Disagreement About Inflation
Expectations, NBER Macroeconomics Annual, 2003, 18 (2004): 209-57.
54
Michael F. Bryan and Guhan Venkatu, The Curiously Different Inflation Perspectives of Men
and Women, Federal Reserve Bank of Cleveland (November 2001).
55
Michael F. Bryan and Guhan Venkatu, The Demographics of Inflation Opinion Surveys,
Federal Reserve Bank of Cleveland (October 15, 2001).
56
What the Public Knows In Pictures, Maps, Graphs and Symbols, Pew Research (February
5, 2013).
53

recession versus only 19 percent who said it was over, in an ABC News/Washington Post poll.57
According to the National Bureau of Economic Research, the official arbiter of recession dates,
the latest recession began in December 2007 and ended in June 2009.58 Surveys of consumers
find that they consistently expect higher inflation than actually results.
Figure 9
Consumer Expectations of Inflation vs. Actual Inflation

Inevitably, partisans exploit mistaken impressions of inflation for political gain. On June 26,
2013, Fox commentator Erick Erickson posted a typical conservative rant:
America is nervous about where their next meal and paycheck are coming from,
how they are going to afford to bail their kids out of crumbling schools, and the
price of a gallon of milk and loaf of bread that keep going up though Ben
Bernanke tells them there is no inflation.59
Economist Josh Barro responded to Erickson by saying:

57

www.pollingreport.com/consumer2.htm.
http://www.nber.org/cycles/cyclesmain.html.
59
Erick Erickson, Why America Hates Washington, RedState (June 26, 2013).
58

Erickson's rant is literally the definition of derp. He has a strong prior inclination
to believe that inflation is high. As such, his view is not responsive to strong
evidence to the contrary, such as BLS data showing very low inflation both
overall and in the specific products that Erickson is whining about.60
Derp, by the way is a commonly used term for those exhibiting an aggressive ignorance that
appears impenetrable to facts that contradict the derps point of view.61
Similar views to Ericksons are often expressed on right-wing web sites. For example, in May
2014, a writer on the Breibart site simply denied that drought conditions in California had
anything to do with rising food prices. The real culprit for food inflation, he said, is the $940
billion of additional monetary stimulus from the United States Federal Reserves quantitative
easing over the last twelve months. Inflation has been in hibernation for a long time, but it is
wide awake now.62
On August 7, 2014, the conservative Heritage Foundations chief economist, Stephen Moore,
posted a comment on the right-wing Fox News website disparaging the official inflation
statistics:
A 2% inflation rate. Ha. Most Americans see the rate of price increases for the
things they have to buy milk, bread, vegetables, medicines, health insurance
premiums, college tuitions, gas at the pump rising at sometimes two to three
times faster than the official CPI.63
Journalist Dylan Matthews tweaked Moores nose64 by pointing out that back when he worked
for a more responsible think tank, he took the opposite point of view, writing in a 2000 book:
In recent years the official inflation rate has been overstated by about 1
percentage point per year. The inflation calculations have not properly accounted
for improved quality of products and the dramatic decline in price for new
products such as cellular telephones and computer software.65

Josh Barro, Erick Erickson Sees Inflation, But the Only Thing Thats Inflated Is His Derp,
Business Insider (June 28, 2013).
61
Josh Barro, Sorry, Haters: Derp Is a Useful Term, and Its Here To Stay, Business Insider
(June 5, 2013).
62
Chriss W. Street, U.S. Food Inflation Running at 22%, Breitbart (May 26, 2014).
63
Stephen Moore, What Economic Recovery? Fox News (August 7, 2014).
64
Dylan Matthews, A Conservative Economist Makes a Devastating Case Against His Own
Inflation Fear-Mongering, Vox (August 21, 2014).
65
Stephen Moore and Julian L. Simon, Its Getting Better All the Time (Washington: Cato
Institute, 2000): 100.
60

Core Inflation
Another conspiracy one also hears is that the government is using something called core
inflation to adjust benefits. This measure excludes food and energy; sometimes its higher than
the headline CPI, sometimes lower. For example, during the 2012 election, a writer on the rightwing Breitbart website said:
As for the Democrats primary fear targets, seniors, whose social safety net
benefits have increases tied to the core CPI, this dismissal of the cost of living in
its calculation (thus lowering benefits increases) is having a serious impact on
your real standard of living.66
In fact, the measure of inflation used to calculate annual Social Security benefit increases is the
standard CPI. Here is the law:
The term CPI increase percentage, with respect to a base quarter or cost-ofliving computation quarter in any calendar year, means the percentage (rounded to
the nearest one-tenth of 1 percent) by which the Consumer Price Index for that
quarter (as prepared by the Department of Labor) exceeds such index for the most
recent prior calendar quarter which was a base quarter under subparagraph (A)(ii)
or, if later, the most recent cost-of-living computation quarter under subparagraph
(B).
Core inflation is simply a construct used by economists to eliminate the most volatile
components of the CPI to arrive at the underlying inflation trend, unaffected by prices that may
be rising or falling rapidly for reasons unrelated to monetary policy. The core inflation rate (less
food and energy) is less volatile than the headline inflation rate.

Brad Schaefer, Obamas War on Middle Class: The Hidden Inflation Tax, Breitbart
(August 15, 2012).
66

Figure 10
Core Inflation

As the crashing price of oil drove down the Consumer Price Index, one libertarian economist,
Steve Horwitz of St. Lawrence University, lectured his fellow libertarians on their obsession
with inflation, constantly seizing upon any evidence, no matter how flimsy, that it is really higher
than the government says it is and hyperinflation is right around the corner. Writing on his
Facebook page on February 17, 2015, he said:
Question for my libertarian friends who are convinced the actual rate of inflation
is much higher than official government statistics indicate because core CPI
excludes the "volatile food and energy sectors:" How you feeling about that these
days? Let's throw the energy sector back in there with its falling gas/oil prices and
watch inflation fall dramatically. Will you be intellectually consistent and then
stop complaining that inflation is really much worse than officially reported now
that it's included, or will you continue to believe that inflation is really running
rampant because you paid $ X more than last year for the fraction of your total
budget you spent on Y, forgetting how much you saved on gas and the other
goods whose prices are falling?
Availability bias is a bitch, especially when you seem to be rooting for inflation.

There's nothing wrong with excluding volatile sectors if you want a sense of the
longer trend of a price index, and the gov't reports both CPI and core CPI, so you
can decide yourself.
Just because the Fed is creating a lot of new money, doesn't mean we *currently*
have inflation. When it's all being held in bank reserves and not entering the
lending and spending stream, there's no inflation taking place. Yet.
Like those complaining about unemployment statistics being distorted by the
Obama administration, without indicating you understand what they are
measuring and that they have done it that way for decades, the inflation
cheerleaders are not good evidence for the claim that libertarians know more
economics than other people do.67
The Unemployment Rate Conspiracy
Just as conservatives suspect that the official inflation rate is too low, they also suspect that the
unemployment rate is too low. In particular, they believe that the Obama administration
somehow or other manipulated the national unemployment rate in the months before the 2012
election to make it look better than it really was.
Figure 11
Official Unemployment Rate 2012

67

https://www.facebook.com/steve.horwitz/posts/10152642980970334.

The first to make an explicit conspiracy charge was former GE CEO Jack Welch, who did so on
Twitter on October 5, 2012. Said Welch, Unbelievable jobs numbersthese Chicago guys will
do anythingcant debate so change numbers.
The media quickly repeated the Welch charge that the unemployment rate had been manipulated
by the Bureau of Labor Statistics, or perhaps by the Census Bureau, which collects the raw data
from which BLS calculates the unemployment rate. There was also a swift response on Twitter
itself. University of Chicago economist Austan Goolsbee, who had lately served on Obamas
Council of Economic Advisers, said, simply, Love ya Jack but here youve lost your mind.68
The Welch charge was soon echoed throughout the conservative media, especially Fox News.
Although careful not to endorse the Welch charge, numerous Fox anchors said the charges were
very serious and implied that it was indeed exactly the sort of thing Obama might do.69
Republican Rep. Allen West of Florida tied it in with other right-wing conspiracy theories. Said
West in a Facebook post:
I agree with former GE CEO Jack Welch, Chicago style politics is at work here.
Somehow by manipulation of data we are all of a sudden below 8 percent
unemployment, a month from the Presidential election. This is Orwellian to say
the least and representative of Saul Alinsky tactics from the book Rules for
Radicals a must read for all who want to know how the left strategize. Trust
the Obama administration? Sure, and the spontaneous reaction to a video caused
the death of our ambassador...and pigs fly.70
A few days later, Welch wrote a more detailed version of his conspiracy theory in a Wall Street
Journal op-ed. The Journal, like Fox News, is owned by staunch conservative Rupert Murdoch.
Welchs argument basically boiled down to his contention that the drop in the unemployment
rate from 8.2 percent in July to 7.8 percent in September was simply unbelievable.71 Thats about
it.
Despite the paucity of hard evidence of a conspiracy or intentional manipulation of the
unemployment rate for political purposes, the idea that Obama had engaged in exactly that
spread very rapidly throughout the electorate, overwhelmingly believed by Republicans,
substantially believed by independents and even a considerable percentage of Democrats.
Joseph Plambeck, From Jack Welch, a Conspiracy Theory, Economix blog, New York Times
(October 5, 2012).
69
See Phony Conspiracy: Conservative Medias History of Discrediting Employment Data,
MediaMatters (October 5, 2012); Media Dismiss Drop in Unemployment Rate as Government
Propaganda, MediaMatters (October 5, 2012).
70
Quoted in David Weigel, Rep. Allen West, Dean of the Jobs Number Truthers, Slate
(October 5, 2012).
71
Jack Welch, I Was Right About That Strange Jobs Report, Wall Street Journal (October 10,
2012).
68

This fact was documented by Dartmouth political scientist Brendan Nyhan, who had the polling
company YouGov ask several questions about the accuracy of the unemployment rate in a late
October 2012 poll. When people were asked if the September unemployment rate had been
manipulated for political reasons, 55 percent thought it had been manipulated, including 23
percent of Democrats, 61 percent of independents and a whopping 85 percent of Republicans.72
Figure 12

The first person to present actual evidence of a conspiracy to fudge the unemployment report
was John Crudele, a columnist for the New York Post, which, like Fox News and the Wall Street
Journal, is owned by Rupert Murdoch. In a November 18, 2013 report, Crudele traced the
conspiracy to a Census Bureau employee named Julius Buckmon. Ominously, Crudele said that
the deception went beyond one employee that it escalated at the time President Obama was
seeking reelection in 2012 and continues today.73

Brendan Nyhan, Political Knowledge Does Not Guard Against Belief in Conspiracy
Theories, YouGov (November 5, 2012).
73
John Crudele, Census Faked 2012 Election Jobs Report, New York Post (November 18,
2013).
72

Crudele said Buckmon had told him that he was told to make up information by higher-ups at
Census. It doesnt appear, from Crudeles reporting, however, that Buckmon was specifically
told to create fictitious jobs for the purpose of helping Obama. Rather he was told to raise his
success rate in reaching households by phone to determine their employment status. Buckmon,
according to Crudele, was very ambitious and simply made up numbers to meet his interview
target.
The total sample size of the survey used to calculate the monthly unemployment rate is 54,000
households and Buckmon was just one guy in Censuss Philadelphia regional office. So even if
what he said is true, its hard to see how he could create enough phony jobs to materially impact
the national unemployment rate.
Crosschecks on the Unemployment Rate
In any case, subsequent data show that the unemployment rate continued on a downward trend
long after the election, which suggests that any conspiracy must have also continued long after
the election.
Figure 13
Unemployment Rate, 2012-2015

Its worth noting that there is an important check on the accuracy of the unemployment rate. A
completely separate survey of employers calculates the total number of jobs in the economy.

This is not a percentage figure, just a raw number. It comes straight from business records and is
not really susceptible to manipulation, although there are problems in collecting data from
newly-formed businesses and such that require subsequent revisions, which the BLS incorporates
periodically.
Another thing to know is that the payroll jobs number was consistent with the story told by the
unemployment rate. If there was manipulation, economists comparing the data would have
noticed.
There are other checks as well. For example, ADP is a company that handles payroll for many
large companies. On a monthly basis, it publishes reports on the number of workers it handles
payroll for. Its data correlate very closely with that of the BLS.74
Figure 14
Payroll Employment: BLS and ADP Compared

The Inspector General of the Department of Commerce investigated the charge of manipulation
and issued an extensive report on May 1, 2014.75 It concluded that it was literally impossible for

74

www.adpemploymentreport.com/.
U.S. Department of Commerce, Office of Inspector General, Office of Investigations,
Unsubstantiated Allegations that the Philadelphia Regional Office Manipulated the
75

one person to have falsified enough data to have any effect on the national unemployment rate. It
would have taken at least 78 people, working in tandem, to have accomplished this, the IG
found. That many people working together for a common purpose would have triggered the
quality assurance checks that Census has in place to protect against manipulation and error.
It also turned out that Crudeles major source for his charge that the unemployment rate was
faked by the Census Bureau, Mr. Buckmon, had in fact left the bureau in 2011 and couldnt
possibly have been involved in any effort to falsify any data in 2012.76
As far as I can determine, Crudele has never mentioned the fact that his principal source has zero
credibility. But he continued to hammer the Census Bureau for making up data, 77 which is quite
a different thing from systematic bias, which would be necessary to materially affect a number
such as the unemployment rate. Like any bureaucracy, Census undoubtedly has some bad apples
who fudge data out of laziness, overwork or pressure to meet work quotas. But as all statisticians
know, such errors are, statistically speaking, random and, more than likely cancel out in the
aggregate.
The New York Times asked the BLS commissioner who served under George W. Bush, Keith
Hall, to comment on Crudeles allegations. Im skeptical, he said. It sounds like a workplace
performance issue. This is somebody being lazy, or a supervisor really cutting corners. Its
certainly not evidence of an attempt to move the numbers. The Times report went on to say:
So if a few employees in one office fudged the numbers one month, it would
certainly be troubling and cause for a top-to-bottom investigation, but it would not
be enough to alter the nationwide figure by much. In addition, in each 15-month
period, the Census Bureau goes back two or three times and re-interviews a
handful of the original subjects to make sure the results were gathered correctly.
Making up entire caseloads would be caught, said a veteran Census Bureau
field manager on condition of anonymity, because she wasnt authorized to speak
publicly. In terms of the former employee, she said, No matter how hard he tried,
he couldnt move the number.78

Unemployment Survey Leading up to the 2012 Presidential Election to Cause a Decrease in the
National Unemployment Rate, Report No. 14-0073 (May 1, 2014).
76
Brett Logiurato, Key Source In New York Posts Story About Unemployment Rate Rigging
Left Census Bureau in 2011, Business Insider (November 19, 2013).
77
John Crudele, Fraud Runs Rampant in Census Bureau, New York Post (April 21, 2014);
Denver Census Staffer Brings Data Falsification to Light, New York Post (October 6, 2014);
Census Workers Manipulated Economic Data: Whistleblower, New York Post (October 22,
2014).
78
Nelson D. Schwartz, Political Questions About the Jobs Report, Economix blog, New York
Times (November 20, 2013).

True Unemployment Rate

Another sort of conspiracy that one sometimes hears on both the left and right is that the BLS
is covering up the true unemployment rate, which is far higher than the official rate.79 This is
simply a misunderstanding of the nature of the unemployment rate, which counts as unemployed
only those people in the labor force without a job who are actively looking for work. It would
make no sense to count retired people or children as unemployed even though they arent
working. It makes sense to limit the data to those who want to work. Hence, those unemployed
but not looking for work are not counted as unemployed. But some people argue that those not
looking for work because they have been discouraged by their job prospects should nevertheless
be included in the labor force.
In addition to not counting those who have dropped out of the labor force as unemployed, some
people object to counting as employed people who hold temporary or part-times jobs. To be sure,
some people hold such jobs even though they would prefer full-time work, but they are
nonetheless employed, even if unsatisfactorily so.
For some years, the BLS has produced alternative unemployment rates that treat these different
groups as unemployed depending on ones perspective. These data are published monthly along
with the official unemployment rate. For example, in September 2014 the national
unemployment rate was 5.9 percent. If discouraged workers were counted as part of the labor
force, as if they were looking for work when in fact they were not, the national unemployment
rate would have been 6.4 percent. This is known as the U-4 rate.
Another rate, known as the U-5 rate, treats marginally attached workers such as those only
working temporarily as effectively unemployed. This would have raised the unemployment rate
to 7.3 percent. Finally, the BLS calculates the rate including the above plus those working parttime for economic reasons; that is, people who would work full-time if they could but are forced
to work part-time because no full-time employment is available. This is known as the U-6 rate. If
such people are also treated as effectively unemployed, then the unemployment rate would have
been 11.8 percent.
Therefore, some people will say that the true unemployment rate is twice the official rate and
imply there is some sort of conspiracy going on. The truth is that this is a philosophical debate,
not a cover-up. As noted, alternative unemployment rates are easily found on the BLS website
and dont require calculation by SGS or some other outsider. People can chose to believe what
they feel like believing, and many reputable economists do favor using a broader definition of
unemployment for analytical purposes.

Kathy Frankovic, Mismatch Between Economic Data and Personal Experience, YouGov
(January 14, 2015); Jim Clifton, The Big Lie: 5.6% Unemployment, Gallup Poll (February 3,
2015).
79

If one compares the official unemployment rate with the broadest measure, the U-6 rate, one can
see that they tend to move together, which means that the change from month-to-month, which is
the most useful information for economic policy, is about the same either way. And its worth
remembering that if the true unemployment rate really is higher than the official rate, standard
economic models used by the Federal Reserve would suggest the need for an even easier
monetary policy.80
Figure 15
Official and Broad (U-6) Unemployment Rates

Billionaire Paul Singer, a big Republican donor, was still ranting about fake government
numbers in late 2014. In a letter to investors in his company, Elliot Management, a hedge fund,
he appears to have bought every single crackpot theory about inflation and unemployment. As he
wrote (excerpts):
Nobody knows when reality will overtake the rhetoric, lies, phony statistics,
wishful thinking, fake prices and tiresome poseurs pretending to be world
leaders.A good deal of the economic and jobs growth post-crisis is false
growth, with little chance of being sustainable and self-reinforcing. It is based on
fake money conjured by the Fed to buy assets at fake prices.Some of the most
Canyon Bosler, Mary C. Daly and Fernando Nechio, Mixed Signals: Labor Markets and
Monetary Policy, Federal Reserve Bank of San Francisco (December 1, 2014).
80

important government data is unreliable, starting with inflation.Over a long

period of time, these figures have become politicized, always in the direction of
under-reporting inflation.Inflation is also distorted by the increasing gap
between the spending basket of the well-off and that of the middle class (check
out London, Manhattan, Aspen and East Hampton real estate prices, as well as
high-end art prices, to see what the leading edge of hyperinflation could look
like). CPI inflation is being understated by some unknowable amount, which
we estimate is between 1/2% and 1% per year.Unemployment figures are also a
source of faulty or misleading data.Nobody can predict how long governments
can get away with fake growth, fake money, fake financial stability, fake jobs,
fake inflation numbers and fake income growth. Our feeling is that confidence,
especially when it is unjustified, is quite a thin veneer.81
According to an August 2014 survey, on average, Americans thought the national unemployment
rate was 32 percent, when in fact it was 6 percent.82 A November 2014 poll found that a third of
people significantly overestimated the unemployment rate (those guessing over 7 percent), which
was 5.8 percent at the time the poll was taken and had been below 7 percent for the previous
year. This explains why so many people are easily hoodwinked into thinking the official
numbers are wrong.
Table 1
What is the current unemployment rate in the U.S.? Please tell us the percentage
of adults who want to work that are currently unemployed and looking for a job.
If you dont know, please make your best guess.
(percent)
Unemployment Rate Republicans Democrats Independents Total
Less than 5%
1
1
2
1
Between 5% and 6%
31
32
38
33
Between 6% and 7%
22
21
33
21
Between 7% and 8%
12
18
8
13
Greater than 8%
22
12
16
17
Not sure
13
16
14
16
83
Source: YouGov Poll

Paul Singer Slams the Fake World, Zerohedge (November 4, 2014). See also Kelly Bit,
Singers Elliott Says U.S. Growth Optimism Unwarranted as Data Cooked, Bloomberg News
(November 4, 2014).
82
Perceptions Are Not Reality: Things the World Gets Wrong, Ipsos MORI poll (October 29,
2014): 22.
83
YouGov poll (November 8-10, 2014): Q50.
81

Unfortunately, research shows that giving people correct information does little to dislodge
incorrect information when it is supported by ideology or partisanship.84
Going into the 2016 campaign season, prominent Republicans revived the unemployment rate
conspiracy idea. Speaking to potential Iowa caucus voters in January 2015, former Texas
Governor Rick Perry charged that the unemployment rate had been doctored and massaged.
PolitiFact Texas rated Perrys statement as factually unsupported and ridiculous.85 But it did
him no harm with the voters he spoke to and not one of his competitors for the GOP presidential
nomination called him on it.
In August 2015, another candidate for the Republican presidential nomination, billionaire real
estate developer Donald Trump, took the unemployment conspiracy to a new level, charging that
the true unemployment rate was 42 percent, rather than 5.3 percent as the Bureau of Labor
Statistics calculated.86 Reporters traced the origin of Trumps statistic to the website of former
Office of Management and Budget director David Stockman, which often highlights bizarre
conspiracy theories popular on the right.87 Stockman appears to have simply assumed that every
person between the ages of 16 and 68 who was not working or not working full time was
essentially unemployed. As the Wall Street Journal pointed out, Trump and Stockman were
effectively adding to the number of those unemployed but looking for work vast numbers of
people not looking for workchildren, full-time students, retirees, the disabled, stay-at-home
moms and others.88 This is simply ridiculous.
Conclusion
There is no evidence that misstatements and misperceptions of economic data have yet affected
policy. But the constant drumbeat of looming inflation appears to have pushed the Fed toward a
policy of preemptively tightening monetary policy by raising the federal funds interest rate in
late 2015. Historically, the Fed only tightens monetary policy to reduce actual inflation rates well
above those being experience in 2015 or projected in the future by reputable forecasters and
time-tested market indicators. If Fed tightening brings on an unnecessary recession in 2016 and
helps Republicans retake the White House, conservative inflation propaganda may be to blame.
Eric D. Lawrence and John Sides, The Consequences of Political Innumeracy, Research and
Politics, 1:2 (July-September 2014): 1-8.
85
W. Gardner Selby, Rick Perry, in Iowa, Says Unemployment Rate Has Been Massaged, Its
Been Doctored, PolitiFact Texas (January 26, 2015).
86
Donald Trump Explains All, Time (August 20, 2015). He repeated this claim a month later.
See Heather Long, Donald Trumps Wild Claim: Unemployment Is 42% CNNMoney
(September 28, 2015).
87
Dave Stockman, The Warren Buffett EconomyWhy Its Days Are Numbered (Part 4),
David Stockmans Contra Corner (June 15, 2015).
88
Josh Zumbrun, Donald Trump Is Right: About 42% of Americans Are Unemployed (If You
Include My 88-Year-Old Grandma, Real Time Economics blog, Wall Street Journal (August
20, 2015).
84