Obscure Department To Choose President Bush-Kerry Deadlock Broken

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The
Bureau of Labor Statistics (BLS) is close to announcing the results
of last week's presidential election. The Bureau, chosen last week
as the arbitrator of the election conflict, has been working around
the clock since then to apply their statistical models to the vote
counts that will determine the next President. Their announcement
is expected at noon tomorrow.

Although
votes were cast one week ago, the winner has not yet been determined.
The two sides have been mired in a legal struggle resulting from
a series of lawsuits
initiated by the Kerry
campaign, met by the Bush
administration's counter-suits
. The legal standoff has brought
into question both the vote counts in various closely fought states
and the legality of voter registration procedures. The number and
complexity of the suits threatened to tie up the result of the election
for weeks or even months.

The
BLS was an unlikely latecomer to the conflict. In an unprecedented
move, teams of lawyers from the two campaigns met in a series of
closely guarded meetings under the supervision of Supreme Court
justices to agree upon a neutral third party. A surprise emerged
from these meetings that stunned even seasoned Washington observers
when the Bureau of Labor Statistics (BLS) was given the job.

The
BLS was chosen because of their statistical expertise. Several well-known
and closely followed index numbers are produced by the Bureau on
a monthly basis, most prominently the consumer price index (CPI),
the producer price index (PPI), and the unemployment report. They
are well known among economists and financial analysts for their
number crunching abilities.

Since
taking on the task, the Bureau's job for the past week has been
to sort through the conflicting claims using their widely used statistical
models to determine who really won: Bush or Kerry.

The
BLS is not without its critics — some have suggested that the choice
of the Bureau may in the end prove even more controversial than
had the results been fought out in the courts. Many of the Bureau's
statistical procedures have come under attack since the mid-90s.
Critics of the BLS have charged that the inflation and unemployment
numbers are manipulated for political reasons.

A
prominent Austrian economist explained, "There are really two
means of funding government expenditures: taxation and inflation.
Government debt can be financed for some time by borrowing, but
it only postpones the decision whether the debt will be paid back
by future taxation or future inflation."

"Taxation
is the most direct means, but also the most easily resisted. Governments
often choose inflation because the mechanism is not well-understood
by the average citizen, so it is easier to blame the loss of purchasing
power that people are experiencing on scapegoats — greedy oil companies,
OPEC, greedy labor unions, u2018cost-push', u2018demand-pull', or by pointing
to whatever price component happens to be going up at the time.
In so doing, they distract people from the real cause of the problem,
which is central bank money printing."

Governments,
according to this economist, have a natural attraction to inflation,
but also to hiding its effects. "Inflation costs the government
a lot of revenues because social security and pension payouts are
indexed to inflation. Because income tax brackets are also indexed,
tax revenue does not go up as much as it might when there is inflation."

"And
there is the effect on inflation of the government's own cost of
borrowing. If credit markets believe that there is inflation, interest
rates will go up to reflect the loss in purchasing power of the
money that will be used to repay the debts. This will in the long
run increase the government's cost of financing its debt. And finally,
a high rate of inflation casts doubt upon the effectiveness of the
central bank's alleged policy of fighting inflation." the economist
continued.

The
Austrian economist's most controversial charge was that the BLS
manipulates the inflation number
for the benefit of the government.
"The obvious solution is to inflate but then to lie
about the effects of inflation
by reporting a low inflation
number. This understates the the reality of the monetary debasement
that is occurring."

The
BLS has adopted a
number of questionable procedures
in figuring its final inflation
number. Among the most controversial are quality-adjusted prices,
altering the composition of the index, seasonal adjustments, and
the proliferation of different index numbers. Also, the use of the
"birth-death" model in the unemployment report has drawn
criticism.

Critics
of the BLS have drawn attention to the practice of adjusting prices
based on improvements in quality, using so-called "hedonic
adjustments". The explanation given is that a good that appears
to have gone up in price because it costs more does not really cost
more because the quality has improved. According to this logic,
it might even cost less.

For
example, computers in today's stores have faster CPUs, more memory,
and more hard drive space than computers of five years ago. These
specifications are used to compute a quality adjustment factor that
is then applied to the price of a computer. If the factor is 0.50,
then a $2000 computer will be assigned a price of $1000 for the
purpose of computing the CPI.

As
the use of these adjustments has spread from high-tech products
like computers and cell phones to cars, washing machines, and even
health care, an ever-expanding array of consumer price increases
are adjusted downwards by their "hedonic multipliers"
before the CPI is computed. The numbers used as input to the CPI
then show the prices of many goods falling that are in reality rising.
This procedure results in a lower inflation number than if the actual
prices paid by consumers were used.

The
BLS has been using the same techniques in computing the final vote
tally in the presidential race. The Bureaus is computing quality
adjustment factors for Bush and Kerry.

According
to a BLS spokesperson, "Using a base year of 1980, the quality
of Republicans has declined considerably," he said. "Republican
candidates use to at least talk about lower taxes and smaller government,
but Bush is a
bigger spender
than any Democrat. We have come up with a Republican
quality adjustment factor of 0.45." Applying the factor to
Bush's vote total of 65 million votes yields a quality-adjusted
total of 29.25 million.

If
the base year were set to somewhere in the 19th century,
that was a time when the Democrats were in favor of sound money
and opposed central banking. But a base year of 1980 brings a comparison
of Kerry to the malaise of the Carter years. This comparison shows
only a small quality drop-off for Democrats. The quality adjustment
factor applied to Kerry is only 0.85 according to the Bureau.

The
arbitrary dropping of certain components from the index has drawn
attention from critics. Food and energy were dropped from the CPI
some years back because these components were deemed "too volatile"
and did not reflect the "core" rate of inflation.

"When
the central bank prints more money, the price of something will
go up. Not everything, and not by the same amount, but something,"
said the Austrian economist. "If you exclude those things that
are going up in price from your inflation index, you can come to
the phony conclusion that there is no inflation. This is equivalent
to saying that there is no inflation, except for those prices that
are rising," he stated.

This
technique is also being applied to the presidential vote totals.
The vote counts from Alaska, Hawaii, and North Dakota were dropped
from the totals on the grounds that "no one important lives
there", said the BLS, and Florida votes were excluded on the
grounds that they are "too volatile". "Look at all
the problems Florida caused for us last time", said the Bureau's
spokesperson.

Seasonal
adjustments are another of the controversial practices used by BLS
statisticians. The idea is that heating oil might be high during
December due to seasonal demand by north-eastern home owners for
oil to heat their homes during the winter months, but this does
not reflect inflation per se, only a seasonal condition that will
be evened out over the full year with lower prices in the spring
and fall.

Some
critics though, have questioned the integrity of the process. According
to the BLS
site
, seasonally adjusted energy prices declined on a quarterly
basis in the 3rd quarter, in spite of record-high prices
for oil and natural gas.

Another
questionable aspect of the process is the way that energy and housing
prices interact in the computation. When home prices are increasing
by 20-30% annually in some US cities, some have questioned how the
contribution of housing to the cost of living could be decreasing.

The
explanation is that Bureau statisticians believe that some housing
rentals include energy. Energy prices are therefore subtracted from
rents to produce an energy-adjusted rental price. When energy prices
go up, energy-adjusted rents go down, resulting in a lower contribution
by housing prices to the total CPI. The energy price increases are
then removed by the seasonal adjustment, resulting in a lower contribution
of both energy and housing to the inflation index even when both
are rising.

Seasonally
adjusted vote totals were computed for Bush and Kerry. "The
apparent vote totals of about 65 million each for Bush and Kerry
are a statistical aberration", the BLS spokesperson stated.
"The election only takes place every four years, so the seasonally
adjusted number of votes is 16.25 million." By way of explanation
he added, u2018If Hillary Clinton were to run next in 2008, we would
have to adjust her vote total by a multiple of 1/12th
because she has been running for president since 1996".

The
proliferation of different index numbers is another area of controversy.
In addition to the CPI, there is the "core CPI" and the
"median CPI". The Austrian economist commented, "If
one if their index numbers goes up too much during the month, policy
makers can always point to another one of the indexes that was more
moderate and come up with a reason why the more moderate index is
the u2018real' rate of inflation. It is Orwellian because the next month,
they will use a different argument to tell you why a different index
measures the u2018real' CPI than the month before."

The
BLS will be computing three different vote totals for Bush and Kerry:
total votes cast, "core" votes, and "median votes".
The "core votes" for Kerry consist of the total number
of votes cast in the heavily Democratic cities and coastal areas
that form the Democracts' core constituency, such as Berkeley California,
Santa Monica California, north-eastern Cities, and Chicago. Core
Republican votes will consist of the number of votes cast in the
core Republican regions such as Texas, the Midwest, and the South.

One
problem with this method is that each candidate shows a substantial
lead in his own party's core vote totals, making the selection of
a president more difficult rather than less. This outcome is inherent
in the BLS' methodology, according to the Austrian economics, who
is on record as stating, "If you can manipulate the perception
of reality by putting only those things that are consistent with
the result you want, you can twist reality to fit your own agenda."

Substitution
of cheaper products for those that have risen in price is another
controversial adjustment procedure. BLS statisticians reason that
if beef goes up in price, people may eat more chicken instead, because
it costs less. They then expand the weighting of the substitute
good — chicken — in the index, while contracting the weighting of
beef. This produces a lower number for the CPI than if the higher
priced beef had been used.

"This
is one of their most dishonest techniques because they are confusing
inflation itself, which is the expansion of fiat money supply, with
peoples' response to inflation, which is to consume less of the
goods that they value more because they are losing purchasing power",
the Austrian economist noted.

The
application of this substitution effects to the election has proved
difficult for the BLS. "Because both candidates are so awful,"
the BLS representative began, "the decision to vote for one
or the other is a u2018lesser-of-two-evils' for most voters. We are
going to determine the number of Bush voters who are only voting
for him because he is not Kerry, and vice versa, then subtract these
effects from the totals because these votes represent substitutions
of a lesser good for a more highly valued one." If there had
been a viable independent or third-party candidate this year, such
as Nader in 2000, that would have confused the process of making
the calculations even more.

A
final adjustment was provided by borrowing a technique from the
monthly unemployment rate computation. Due to alleged measurement
problems in counting the number of jobs created or eliminated during
any month, a computer program known as the "birth-death model"
is used to estimate jobs that cannot be counted. This model was
developed during the booming 1990s when it was assumed that small
businesses were creating a lot of jobs under the radar of the Bureau's
data collection. Government jobs, part-time jobs, and temporary
positions are also counted as net new jobs in this process.

During
some recent months, statistical job losses were translated into
net job gains by the addition of hundreds of thousands of jobs from
the birth-death model. The King Report, a frequent critic of this
methodology, has
written
:

Of
the 947,000 jobs counted by the BLS the past three months, 618,000
representing 65% of the u2018job creation' are due solely to the Birth/Death
Rate. Without going into much detail, it has to do with statistically
created jobs, not real jobs where people get pay checks.

The
Bureau's statisticians have been hard at work to adapt the birth-death
model to presidential vote counting. For the election, this model
has been revised to estimate hypothetical votes that would have
been cast by Democrat and Republican children not old enough to
vote, projected number of children based on estimated family sizes
of Republican and Democrat families, and voters who would have voted
had they not died before the election.

Computing
the correct birth/death numbers for the presidential election has
proven to be a challenging task. According to a
new study
, Republicans are having larger families than Democrats.
However, "Democrats have a long history as the party of welfare
patronage, and the welfare system gives cash incentives to single
women to have more children. We are coming up with a computer model
to estimate the effects of these adjustment factors."

How
the statistical process will play out is anyone's guess, leaving
the election results very much in doubt. Some fear that the announcement
of a winner tomorrow will spark another round of controversy as
the Bureau's statistical methods become the focal point in a renewed
firestorm of debate. The real problem, though, according to the
Austrian economist is "when you trust government statistics,
you give them the right to define what reality is."

November
1, 2004

Robert
Blumen (send him mail)
is an independent software consultant based in San Francisco, who
does not plan to vote in the election.

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