Government Statistics Do No Reflect Economic Reality: EJ Antoni

So it's essentially a third of all the jobs we thought we had added over that year are gone. They never existed. It's like taking four whole months of job creation, ripping them off the calendar. In this episode, we break down the discrepancies between government data, media reporting and today's economic realities. We don't see the numbers quite matching up to a lot of the government statistics. And we get into some very perverse situations where the BLS actually counts something as an increase in quality, E.J. Antony is an economist whose research focuses on fiscal and monetary policy. He's a research fellow at the Heritage Foundation. Where I think this becomes scandalous is the fact that these statistical problems first became evident in the spring of 2022, and nothing has been done to correct them. This is American Thought Leaders, and I'm Jan Jekielek. E.J. Antony, such a pleasure to have you on American Thought Leaders. My pleasure. Thank you for having me. I've been watching your commentary on a whole series of economic numbers over past months and years. And something that was pretty stark that happened recently was this update to the jobs numbers. I mean, the update was so stark that it changed our perception of whether or not we're in a recession, which is, I mean, I would say that is pretty significant. What you're referring to is something called an annual benchmark where the Bureau of Labor Statistics or BLS, part of the Labor Department, they look back over a 12-month period and they essentially reevaluate jobs numbers. In this case, they realize that the job creation was overestimated by about 818,000, which is a lot. But on top of that, those months in question, those 12 months, were already revised down from their initial estimates. So with these jobs numbers, every single month we get a report and then the previous two months also get revised. So you'll have an initial estimate and then an initial revision and then a final revision. So between all of those revisions, which were down, and this annual benchmark, which was a massive decrease, it's 1.2 million jobs. So it's essentially a third of all the jobs we thought we had added over that year are gone. They never existed. It's like taking four whole months of job creation, ripping them off the calendar. So it's a pretty big difference. And as you said, it's making us question, is the economy even really expanding at this point? Are we in a recession? Are we near or entering a recession, etc.? How on earth do we get here? Well, I think it's worth looking back and saying, have we ever been here before? And there's only one time when we had a revision that was this big, and it was in the global financial crisis and the Great Recession. So essentially what was happening then was the economy was deteriorating so quickly that BLS was having difficulty with their models, keeping up with the changes within the economy. Interestingly, something very similar is happening today, where the BLS essentially has assumptions that worked fine in 2019 and even to a certain extent in 2020 when the economy was reopening. They're assumptions based on the number of businesses that are being created, the number of firms that are going out of business, and how many people are being employed or losing their jobs, respectively, in both of those cases. And it turns out, we have been grossly overestimating the number of businesses in the economy, and therefore overestimating how many jobs are being added by businesses that it turns out don't exist. Right. And I'm remembering now that there's some level of fraud around the business creation because of this money that was put out, trillions of dollars that was pushed out to support things during the pandemic policies. Sure. So is that the reason? Because a whole bunch of people created companies that weren't real to access those funds? Well, that definitely seems to have played a part. It doesn't account for everything, but it definitely seems to have played a part. So there were PPP loans, for example, and there was plenty of fraud in the program. And we've already discovered plenty of fraud, and there's a lot more that hasn't even been investigated. So you can only assume, given the fraud that we have found, how much more there is in the rest of the program. And in that case, like you were saying, people were essentially creating businesses that never existed, never employed anybody, but were then allowing them through fraud to get a check from the government. You know, fast forwarding to today, though, one of the things that's interesting is we are seeing a lot of firms go out of business and not get replaced at the rates they were before the pandemic. And again, even if you want to look at 2020, which is some of the data that the models are currently using, you had a lot of businesses who were just wiped out by the pandemic. But because there was so much government money available, they were able to restart their businesses. And the problem is that those businesses today, a lot of them are gone because of inflation, because of high regulatory costs. And so those businesses are no longer employing people, and they're not getting replaced. One of the things that Vice President Harris, who's now the Democrat presidential candidate, she's talking about how she has a plan to increase the number of new business applications for small businesses. Applications aren't the problem. They're at a historic high. We've never had so many applications for small businesses today. The problem is that almost none of them can actually get off the ground. And those who do, disproportionate numbers of them are failing. And again, the reason is, is the high inflation, which has put their costs through the roof. And then you have a regulatory burden on top of that, which just makes it impossible for the small business to cut it today, especially against their big corporate counterparts. The regulatory burdens, just to be clear, they're quite different across different states from what I understand, right? Oh, certainly. Absolutely. But there's also a federal regulatory state which further complicates things. I mean, this is actually becoming a huge problem now in finance, where you have banking corporations, you know, it could be J.P. Morgan, Wells Fargo, Bank of America, who have one set of regulations at the federal level and another set at the state level. And the problem is they can contradict each other sometimes. So there will be disclosure laws, let's say, where a state says, we want to know what kind of ESG or DEI or whatever three letter acronym you're using and making investment decisions for people's portfolios. And then the federal regulators are saying you're not allowed to disclose that. And you're going to run afoul of those regulations one way or another. So that's strictly the finance realm, but you do have a tremendous regulatory burden just at the federal level, which adds tens of thousands of dollars to the cost of running a small business every single year. The question is, you mentioned inflation as being an important element here. Is this reflected in other sets of numbers that we're looking at? Because you deal with a lot of different indicators in your commentary that I've been following so closely. People look at these numbers and say, my goodness, they're going through they're going to the moon. The economy is doing great. None of them are adjusted for inflation. In other words, if I have if I'm a retailer, let's say, and I have a million dollars worth of stuff in my inventory and we have very high inflation and next year I add up my inventory and it's still a million dollars. There's actually less stuff, less physical stuff in that inventory. The issue is that each individual item in the inventory now is a higher price. And so when I add up all those prices, it's a million dollars and each dollar is worth less than it was. And we're seeing that more and more throughout the economy. And the problem is that people forget that these numbers, again, are not adjusted for price changes. They're adjusted for things like seasonality. So if we go into, let's say, October and retailers have a huge increase in inventory, that's normal. That happens every year because they're getting ready for the holiday sales season. And then what happens in January? Their inventory is like empty. Why? Because they're getting ready for all the returns that follow the holiday sales season. So we can adjust the numbers for that kind of seasonality. That's no problem. The issue, again, is that we don't adjust them for prices. Because the value could be going down significantly if the inflation is up, but you're measuring it as if it's the same, basically, or higher. Right, right. Yeah, you get too focused looking at the dollars and not looking at the value, right? You're kind of missing the forest for the trees, as it were. E.J., we're going to take a quick break right now and we'll be right back. And we're back with E.J. Antoni, economist at the Heritage Foundation. What is the reality of inflation right now? According to your calculations? Well, I think we want to distinguish between these official numbers and and the actual real life data. Right. And this is, I think, a broader discussion. But a lot of our official inflation metrics, things like the Consumer Price Index or CPI, which is also produced by the BLS, under normal circumstances, it does a decent job of estimating inflation. It's not great, but it does a decent job. The problem is we are not in normal times today. And I can give you a few examples of that. One would be the way they measure the cost of homeownership is kind of odd. Ever since the early 1980s, they stopped looking at home prices and they stopped looking at interest rates. Then you may say, well, wait a second, those are the two biggest things that determine my monthly mortgage payment. So how on earth are you going to determine the cost of homeownership then? Well, essentially what they do is they look at rents and they use rents as a proxy. So they will they will go around and ask people who own their home, if you were to rent out this home, how much do you think you could get for it? And they use that when they when they are creating a weighted average for determining the actual the actual rent price for a home. But even then, when they get the change from month to month or year to year, that increase in price is based off of rents. So the problem is that if rents and homeownership don't move up, homeownership costs, I say, I should say, if they don't move up at the same rate, then the metric kind of falls apart. Now, before the pandemic, they were actually tracking very, very closely. So it was kind of no harm, no foul. Rents were going up five percent. Cost of homeownership was up five percent. Just random numbers. But the idea is they were pretty much moving in lockstep. So the metric worked. Today, it doesn't at all because the cost of homeownership has just exploded relative to the cost of rents, which is pretty bad considering that rent is at an all time high right now. It's up one hundred and sixteen percent. So it's more than doubled. Conversely, according to BLS, their metric or their proxy for the cost of homeownership is up twenty one percent. So you're off by a factor of five. Those are the kinds of statistical problems that we're dealing with today in these in these inflation numbers. Fascinating. You said you had you had a few other examples of this. Oh, sure. Sure. One one would be sometimes you have things which are very, very difficult to measure. Health insurance is a good example of that, because when I'm trying to evaluate the cost of health insurance, I don't want to just look at premiums because let's say your health insurer doubles your premium. But also doubles your coverage. And so, yes, you're paying more in premiums, but your copay goes down, your coinsurance goes down. There's all kinds of procedures and treatments and drugs that are now available to you that are covered by your insurance that previously weren't. So in other words, it's a net wash. It doesn't actually cost you any more out of pocket at the end of the year. You pay more in premiums, but you get much more in terms of drugs and services. We don't want to actually count that as an increase in health insurance because you're paying more. But the quality of what you're getting has gone up as well. So what we want to do is try to account for those differences. The way that BLS has chosen to do it is actually by looking at the profits of these health insurance companies. And the idea is if the health insurance company is charging you more, but giving you more, their profits stay the same. So we're going to use that as the proxy for the quality of your health insurance. The issue here is that if something were to cause corporate profits at health insurers to go down, it translates into a decrease in the cost of health insurance within the CPI. And that's what's happening today. So even though people are paying more for health insurance and the quality of that health insurance has demonstrably gone down. And we know that by looking at the things that are covered, by looking at what people are actually using in terms of things that are covered. So let's say your health insurance gives you all kinds of coverage, but it's not for anything you actually need, right? The quality of the product hasn't improved for you. And then we can also look at things like copays, coinsurance, etc. So demonstrably, the quality has gone down, the price has gone up, but the CPI counts it as going down. So you look at it and you say, why is there a 30 percent drop in the health insurance component of the CPI when everything says health insurance costs are going up? That's why we see this a lot with food. We see it with with transportation, with cars, for example. Cars might be the best example of what we call the hedonic adjustment, where essentially what they do is, again, they want to account for quality changes. And the problem here is that if the free market develops a better product and people are willing to pay for that, it's very clear. And it's very easy to measure how much people value that improvement, because if let's say a auto manufacturer puts in a fancy kind of airbag, let's say, or some other kind of safety feature, the cost of a vehicle goes up five thousand dollars. And the same number of people are willing to pay that five thousand dollars extra for the car. It's pretty clear that people value that improvement in quality at the price that at the increase in the price at that five thousand dollars. The issue is that when the government mandates something. That is also thrown in as a hedonic adjustment. All of those things get counted by the BLS as improvements in quality, even if consumers don't want them. Doesn't matter. They still get counted as an improvement in quality and therefore their cost is actually not included in the CPI. And this is a big reason why over literally a quarter of a century you had the price of vehicles not changing in the CPI. So basically, right up until just about before Covid, very, very close to when when the pandemic happened, essentially, the price of vehicles didn't budge. And a lot of that had to do with the fact that BLS kept taking the price increases that we saw year after year and erasing them by saying the quality of the car has improved by just as much as the increase in price. And again, government regulation plays a big role in that, because the BLS just essentially assumes away any higher cost of production from regulation, assuming that it's going to create a commensurate increase in quality of vehicle. And the reality is it would probably be a mix, right? Like some of these things would create real value and some of them wouldn't, from the consumer perspective. Right, exactly. And that's true, I think, for most of these government regulations. There is some kind of increase in the quality of the product, except the question then becomes, is it actually the cost of production? And the answer is almost always no. The reason being, if the consumer was really willing to pay that, the manufacturer had an incentive to provide it anyway. So they would have done it in the first place. And we get into some very perverse situations where the BLS actually counts something as an increase in quality when in fact it's a decrease and the consumer is paying more for it. Dishwashers are, believe it or not, a good example of this. So when the government stepped in and said you can only use a fraction of the amount of water that was previously used, so maybe you can only use two gallons to wash your dishes instead of using eight. Well, the problem is now the manufacturer has to produce a product that is much more expensive because it needs to use so much less water. It needs to be so hyper efficient. So it's going to cost the consumer more, except the BLS looks at this and says, oh, well, we can assume that away because it clearly is now a better dishwasher, even though it's not. So you now have people today who have to run their dishwasher twice to get their dishes clean, except that they're paying more to do so. So the consumer's worse off. You're getting a worse product and you're paying more for it. This is why I have no social life. I spend all my time doing these things so other people don't have to. Well, and I just want to comment on this. The universal issue, basically different people will have different insight into these various personal cost increases, whether it's health insurance, car or something. But something that's universal, you mentioned earlier, is food. Everybody has to buy that. I think that's where people would notice it the most. Right. So how is it? Look, how does how do things look there? This is another case where we don't see the numbers quite matching up to a lot of the government statistics. Part of this has to do not so much with with the quality adjustments as the fact that people are having to change their buying habits. Almost everything went to potatoes because they were poor and that's all they could afford. After the the famine and the potato crop failed, the demand for potatoes actually went up, not down. And the demand for meat essentially collapsed. So despite the fact that potatoes were more scarce and their price had increased, people still demanded them more. And the reason being because it was still cheaper than any other alternative. The reason being is a lot of these people can't afford steak anymore, can't even afford chicken breast. So all they're doing is switching out one type of meat for another. And the cheapest thing available is sausage. So the issue here is that consumers today are not necessarily buying the same basket of goods and services that they did two, three, four years ago. And the problem is now you're getting you're getting what you could call a substitution effect on top of an income effect. So the income effect is inflation has caused prices everywhere to rise. Everything's gotten more expensive. But now there's also a shift in demand where consumers are substituting A for B. I'm not buying as much steak. I'm buying more sausage. And now you have an increase in the demand for sausage, which is causing the price to rise more than it would rise for for steak, let's say, for a beef steak. This is one of the reasons why inflation hits low income consumers harder than anyone else. It's because the things that they were buying disproportionately to begin with, now more of the middle class are starting to buy as well. And likewise, what the middle class was buying more of the upper class are now starting to shift to those buying habits, too. And so you're again, you're getting an increase not only from inflation, but an increase in price because of that shift in demand as well. So is there a hopeful note at all in all of this? Because it sounds pretty dire. I think the hopeful note is the the ingenuity of the American spirit and the fact that we have been through some very, very dark days. We've been through a civil war, my goodness, bloodiest war in American history. The American people have gone through a lot of pain in the past and been able to overcome that. Sometimes it takes us a while, though, to get there. I think it was Winston Churchill who said you can always count on America to do the right thing after she has tried everything else first. And sometimes that's really painful to make those mistakes. But somehow or other, at the last minute, we've always been able to course correct. So fingers crossed, we can do that again. Well, E.J. Antony, it's such a pleasure to have had you on. My pleasure. Thank you for having me. Thank you all for joining E.J. Antony and me on this episode of American Thought Leaders. I'm your host, Jan Jekielek. And I'm your host, E.J. Antony.