AND ANOTHER THING
An age when the foolish but crooked virgins beat the wise but innocent ones
PAUL JOHNSON
An article in last Friday's Le Monde tells Inc that L'Institut National de la Statistique calculated that inflation in France rose by only 1.7 per cent last year, the smallest increase in 40 years. This will .come as a sur- prise to the millions of foreigners who visit France and find the prices there increasingly unacceptable. Indeed, that is why the num- ber of tourists going to France fell sharply last summer. Statistics and experience often tell different stories, but are the figures actu- ally wrong — I mean demonstrably, struc- turally and consistently wrong?
It seems they can be. That is the conclu- sion reached by a panel of experts, under the Stanford economist Professor Michael Boskin, who have been examining the fig- ures produced by the official United States Consumer Price Index, the American equivalent of our RPI. The Boskin report produces overwhelming evidence that the CPI has been heavily overstating the rate of inflation in the American economy for at least two decades. This conclusion, if true — and nobody, it seems, has challenged the Boskin findings — would explain a number of mysteries about America which have puzzled me for some time.
For instance, using figures which take account of both nominal wages and the CPI, official statistics have indicated that real average hourly earnings in America declined by 9 per cent between 1975 and 1996. I have never accepted this conclusion — that living standards have fallen in the United States over the last two decades. From my experi- ence, as someone who visits America three or four times a year as a rule, living stan- dards have continued to rise, at roughly the same rate as in the 1950s and 1960s. In the light of the Boskin report, the New York Times asked the economist Leonard Naka- mura to look at these figures again. He cal- culated that the CPI overstated the annual inflation rate by 1.25 percentage points in the 1970s, and that this miscalculation has risen steadily since, to reach 2.75 points now, an enormous margin of error. Nakamura, using the corrected CPI rates and feeding them into the other figures, estimates that real wages during the 20- year period, instead of falling by 9 per cent, actually rose by 35 per cent. That seems more like it. One's own observation, anec- dotal evidence etc., suggest that US living standards rose by about one third in the last two decades, and that is what the revised figures confirm. So all those moan- ers who claimed that the American econo- my was losing its dynamic and failing the ordinary citizens of the country were quite wrong. The performance, under Carter, Reagan, Bush and Clinton, has not been the best in US history, but it has been pret- ty good all the same, and coming at a time when the population has been growing at about 10 per cent a year, and absorbing huge numbers of immigrants — and over 20 million new jobs have been created — it can only be described as remarkable. Revis- ing the figures also undermines the Paul Kennedy school of historians and commen- tators who suggest that America's days as a great power are drawing to a close. I've never believed them anyway, and their pes- simism is based on comparative growth- rates which are now seen to be wrong. In fact corrected CPI figures show that Amer- ica's gross domestic product, in real terms, has been growing at twice the rate we have been led to believe. That too makes sense.
There are all kinds of other implications. The huge American budget deficit, again cited as evidence of US decline, is in great part due to social security payments being linked to the CPI. Under US law, the amount paid to the old. is automatically increased in accordance with CPI figures. A study by Irwin M. Stelzer of the Ameri- can Enterprise Institute, published last month in the Washington Weekly Standard, helps to explain why (as advertising and retailing experts have long known) retired people have been getting mysteriously rich- er. The reason is that their inflation-linked pensions have been increasing too fast. On present CPI figures, for instance, social security cheques increased by $21 this month, making £745 a month. The revised figures would have given an increase of $13 a month, making a monthly total of $737. The amount of 'extra' pensions handed out to the old has been prodigious, and the implications for the future are staggering.
Continuing the present CPI overesti- mates of inflation, Stelzer calculates, will add $1 trillion dollars to the US national `Tony Blair wants you to fax him your homework' debt over the next 12 years. On the other hand, adjusting them to the real figure will mean that one third of the budget deficit projected for the year 2005 will simply dis- appear. In short, once social security pay- ments are pegged to the real, as opposed to the CPI inflation rate, the US budget deficit becomes manageable, and can be eliminated without pulling the house down.
Once you lose confidence in official fig- ures, all kinds of things begin to look differ- ent. For instance, the enormous trading deficits run by the US in recent decades ought to have destroyed the dollar as a cur- rency. In fact, it has appreciated strongly against the yen in the last year, despite con- tinuing Japanese surpluses. Ed Grose, of the US Customs Service, and C. Harvey Monk, of the US Census Bureau, calculate that the under-reporting of invisibles' ($85 billion annually) and of visible exports ($60 billion) means that America's $105 billion trade deficit in 1995 was actually a surplus of $40 billion. That would explain a lot. I have long suspected that our own exports, visible and invisible, are under-reported, and that our trading position is much stronger than we have been led to believe. And I am con- vinced that the French export 'surplus' is a statistical myth, just as I believe their retail price index understates their inflation rate.
A sceptical approach to official statistics is vital because we are entering a period when all the EU governments will be mas- saging their statistics or subjecting them to drastic plastic surgery, to qualify for the common currency. I suspect we are on the brink of one of the greatest financial swin- dles of all time, and that the common cur- rency will not only be based on phony statistics, but will involve a huge transfer of financial responsibility from countries (like France and Germany) which have been improvident enough not to fund their social security programmes, to those (like Britain) which have. And once monetary union is established, it will pay rogue governments which have been faking their price indices downwards to fake them upwards.
We live in an age when the foolish but crooked virgins are going to get the better of the wise but innocent ones. My advice to Tony Blair is, the moment he sets foot in Downing Street to set up a secret statistical monitoring unit to find out the truth about our own figures — and expose the lies of our `partners'. Then at least we will know where exactly we are, and who is cheating whom.
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