It’s easy to watch the news and feel the economy is improving. Comically the performance of the Dow Jones is blasted at us each evening as the key indicator of economic success in America. It becomes more ironic when one thinks of Larry Kudlow shouting accolades of “Green Shoots” across the CNBC airwaves, but our neighbors are losing their jobs and homes. The Obama administration’s economic success is measured by the Dow, unemployment, and inflation. The numbers are reported as better than during the recession of the 1980s and especially better than the Great Depression. However, this is far from the truth.
Every evening the swings in the Dow are blasted across the airwaves as the measure of success of our country. However, the Dow has changed so dramatically no one should pay any attention to these numbers. The Dow is an index of 30 companies, originally started in 1896. In 1896 there were twelve companies in the Dow and only one remains existence today, General Electric. Since 1896 the “components,” or 30 companies composing the index, have changed 48 times. Thus, a more technology weighted or health services weighted Dow can look nothing like the Dow of bygone years. When one adds inflation, as the Dow is unadjusted, the numbers become completely meaningless.
The unemployment numbers are currently 9.1% and considered the holy grail of whether we are better off than the Great Depression. Most people don’t realize the methods of calculating the unemployment rate have changed. The most significant change came in 1994 when those out of work for more than a year were eliminated from the numbers, essentially reducing the count by 5 million and in 2003 the statistical models were changed. Using old methods brings the current U-6 rate to 23%, in line with the numbers of the 1930’s.
The consumer price index (CPI) is the measure of inflation and it too has changed. The market basket of goods is to measure pricing averages as this index impacts policy and more importantly government dole like Social Security and Medicaid. Alan Greenspan argued the historic methods were invalid because, for example, if the price of a steak increased then consumers would substitute with hamburger. A somewhat valid argument until one considers rent, heating oil, and gasoline where there are no substitutions. Changes were made by Carter, Reagan, and Clinton to ensure inflation was not “overstated.” Housing is indexed to “rent equivalents” and energy has been eliminated.
In essence, we are not comparing apples and apples to look at today versus yesterday. “There are three kinds of lies: lies, damned lies and statistics.” – Author Unknown
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