This Oakland economist believes the government’s major economic indicators are lies. Most other economists think he’s a crank. But then, most of them also thought the economy was healthy.
John Williams lives in a one-bedroom Oakland apartment just a few blocks behind the Grand Lake Theater. He doesn’t like to talk about politics, and he certainly doesn’t like to talk about the stock market. He’s sixty years old and has a two-man operation: a webmaster and himself. But in the obscure corners of the Internet, he’s an unlikely legend, an economist who publishes a newsletter that purports to tell the real truth about the state of the nation’s health. His thesis is both simple and surprisingly complex: over the course of thirty years, Washington politicians have pressured federal economists to tweak the methods by which they assess key metrics of the economy, to inflate the numbers and protect the incumbents from voters who would surely rise up in anger, if only they knew the truth.
And the truth, Williams claims, is that the economy has always performed much more poorly than the federal numbers indicate. Prices are higher, fewer people are working, and the economy is growing at a much slower pace. Even now, when the nation faces its greatest crisis since the Great Depression, the real dimensions of the disaster are still being obscured by gimmicks. It’s a message that has earned him an odd bit of notoriety, to the clear frustration of some of the country’s most prominent economists, who claim that Williams has built a career misrepresenting complex mathematical models and spreading panic.
Take February, for example. What does Williams think was the true state of the economy? The official unemployment rate was listed at 9.7 percent, but according to Williams’ models, the real number, including part-time employees and workers who have just given up in despair, is closer to a staggering 21.6 percent. The official February inflation rate was 2.1 percent; Williams argues that it’s really around 5.5 percent. And GDP for the fourth quarter of 2009 was not 5.9 percent, as the government claims, but 2.9 percent.
Williams says he’s just using math to tell you what you already know that your economic life, and that of your friends, is much worse than the government’s numbers say. Everywhere you go, you can feel it. The NUMMI plant shutting down. Foreclosed homes rotting on your block, or being auctioned off on the courthouse steps. The anxiety in the eyes of passers-by. Times are tough.
"Take the unemployment rate," Williams said. "You ask the average person whether he or she is unemployed, you’ll get an immediate response. They don’t have to think about it. Yet if you were to count all the people who consider themselves unemployed, you’d get a higher rate than what the government reports. Because the government has a different definition of employment."
He’s been saying this for years. And for years, officials with the Bureau of Labor Statistics and other federal agencies have scoffed at his claims.
After checking out the kinds of people who swear by his numbers blogs dedicated to pumping investments in gold and alarmist conservative web sites such as Daily Paul, King World News, and WorldNetDaily you might be forgiven for assuming that Williams is something of a crank.
Take the anonymous "financial advisor" who runs the "Coming Economic Depression" blog. Right next to ads for ammunition, dried foods, and "depression & survival guides," the author’s mission statement is riddled with promises that he or she will "help you come to terms as to what is really happening in the financial world." "BE INFORMED!" the author adds. "PREPARE YOURSELF for the COMING DEPRESSION! BOOKMARK this BLOG for NEWS 7 DAYS A WEEK!" And right below that, you’ll read an interview with John Williams, who urges readers to invest in gold and silver, while the blog’s author claims that soon, the dollar could be worth as much as Zimbabwean currency.
Is Williams a crank? Is he cynically selling flawed economic models to panicky investors? Some of the country’s most prominent economists certainly think so. But perhaps a better question is: after a catastrophe brought on by people who get paid to be the stewards of our economy, how can you tell who to trust? After all, Williams isn’t the only Cassandra out there. Over the last ten years, a small collection of economists, investment analysts, and hedge fund managers were warning that something was dangerously wrong with the economy, only to be openly mocked from the pulpits of CNBC. On subjects from derivatives and subprime loans to Bernie Madoff, experts in suspenders assured us that nothing was wrong.
Nobody’s laughing now, of course. For decades, the American way of life was built on a breathless optimism, a giddy delusion that home prices always rise, credit cards are your friends, and banks perform best when free of cumbersome regulations. It’s been morning in America for thirty years. Now, that morning brings a bad hangover with it.
So perhaps this is John Williams’ time to shine. Ever since the 1980s, he has been on a quiet crusade, claiming that politicians and their bureaucratic lapdogs have systematically hidden how poor we really are. Now we’re reeling from the worst economic crisis in seventy years, one that was brought on by the obfuscations and risk algorithms of the very people who think Williams is crazy. After all, it wasn’t Williams who had to personally apologize for wrecking Wall Street, but Alan Greenspan.
Americans are learning that perhaps they will have to live with less for a long time to come, and that it’s time to face the facts. Williams believes he has a few, and they aren’t pretty.
Williams doesn’t like to talk about himself. Ask him about his politics, for example, and he mumbles something about being a conservative "with a libertarian bent" before changing the subject. Ask him about what he’d invest in, or to get in touch with a typical subscriber to his newsletter, or whether he wanted to be a fireman when he grew up, and he’d rather not say. But ask him about the time George H. W. Bush rigged the gross domestic product numbers in the early 1990s, and he’s got a story for you.
Once upon a time, there was an incumbent president seeking reelection at the tail end of a painful economic downturn. It didn’t matter that he’d just won a war against a Middle Eastern strongman or been in office when the Cold War ended. People were out of work and worried, and when that happens, they go looking for someone to blame.
How, he asked himself, can I convince people that their lives are better than they really are? Maybe it’s time to put some of my guys to work. And so, alleges Williams, a "senior executive in the commerce Department" paid a visit to a "senior official in a computer firm" and pressured him to pump up his computer sales in a report to the Bureau of Economic Analysis. "The computer sales reporting was boosted, the GDP picked up as a result, the recession ended, and George Bush talked about how the economy was great," he said. "But people thought he had lost touch with reality."
Williams tells that tale in a delightfully paradoxical monotone, delivering stories of corruption at the highest levels in the style of someone who has read one too many actuarial tables. Although he now lives in the land of Peet’s and medical marijuana, Williams is hardly attuned to his new home; he just moved out here two and a half years ago to be closer to his son and grandchild. Before that, he spent virtually his entire life in suburban New Jersey. His life seemed destined to be entirely prosaic he never imagined he’d become a celebrity in the world of gold-standard conspiracists.
"I do my best to publish information that is free of political and Wall Street hype, and that information happens to suggest strongly that anyone living in a dollar-denominated world would do well to own some physical gold," he writes. "I view myself as an economist, not a ‘gold-bug.’"
But as he began his career as a consulting economist, he began to suspect that something was wrong with the math he was working with. A company that manufactured commercial airlines used a model known as revenue passenger miles to sell their product, and at some point, the model it used to calculate them stopped working. The firm called in Williams to figure out what went wrong. As he bore down into the numbers, Williams claims he found the answer: the numbers hinged on the Gross National Product, and the method by which the government and its partners calculated the GNP was faulty. Williams undid the tweak to GNP, and the model started working again at least until new changes to the GNP "made the underlying data worthless."
Soon, Williams said, he began to realize that there were a number of problems in how the government measured the economy and that he wasn’t alone. He conducted surveys of his colleagues in the National Association of Business Economists, and what he found dismayed him. "What I found in my surveys of the quality of government statistics was that most economists realized they were seriously flawed," he said. "I mean like 70 percent."
Worse, he claims that the more his colleagues knew what they were doing, the less faith they had in the government’s data. "The first time I did the survey, I had the chief economist for a major retail organization filling it out," Williams said. "And he said, ‘You know, I think the retail reports are worthless. I just don’t look at it. But they think the money supply is a good one.’ A second economist said ‘Oh, the money supply is horrible.’ What I found is the people who really understood the numbers they were working with thought there were serious problems."
This hasn’t always been the case, Williams claims; we had a better picture of the economy back in the 1970s, for example. But over time and incrementally, government officials changed the methodology of measuring key economic indicators, painting an ever rosier picture of the economy, which just happened to benefit the incumbent politicians who ran the government. Or as he said in his calm, bland timbre, "Over time there has been a series of methodological shifts in the numbers to tend to create an upside bias in employment and downside in bias in inflation."
Soon, Williams threw himself into "reverse-engineering" the government’s numbers. And as he dedicated himself to this project, he grew more and more specialized; where once his consulting business boasted Fortune 500 clients, now he publishes a web site, ShadowStats.com, and a newsletter, Shadow Government Statistics, for a few thousand subscribers, mostly individual investors. Although his most dedicated followers hail from the armies of Internet goldbugs, mainstream business papers like Barron’s still regularly cite his work as well.
And his work meticulously detailed number-crunching and graphing out raw data examining changes to the method of collecting and assessing the data all points to one grim conclusion: For decades, the economy has been much weaker than we’ve been led to believe, and the hole we’re in now is deep indeed.
According to Williams, the picture of our national economic health is seriously distorted in three key areas: unemployment, inflation, and gross domestic product. The real numbers today, he argues, look like the 1930s. Although economists didn’t start rigorously measuring numbers like unemployment until 1940, the best estimate of nonfarm unemployment during the Depression puts the peak at 34 percent. "We’re not there at this point," Williams said. "But we’re as bad as we’ve been post-World War II." But you wouldn’t know that, he adds, from the official statistics.
May 12, 2010