While the unemployment and CPI figures have been fiddled with to make them appear smaller (as I discussed in yesterday’s post), the number that measures the size of the economy called the Gross Domestic Product (GDP) has also been fiddled with to make it appear larger than it is and thus appearing to show robust growth.

Kevin Philips, in an article titled NUMBERS RACKET: Why the economy is worse than we know in the May 2008 issue of Harper’s magazine describes the fiddles done with the GDP, which itself was adopted in 1991 when the previous measure of the economy the Gross National Product (GNP) became unpalatable due to rising international debt costs. One of the changes that made the GDP larger consisted of adding to it what is known as ‘imputed’ income to people’s actual income. Imputed income is what one is perceived to get because one is not directly paying for something. This includes “the imputed income from living in one’s own home, or the benefit one receives from a free checking account, or the value of employer-paid health- and life-insurance premiums.” In 2007, this phantom income added as much as 15% to the GDP.

One other major finagle occurred with Lyndon Johnson who was the first to create the ‘unified budget’ that added the surpluses in the social security account to the deficits in the government’s operating budget to make the latter seem smaller than they really were. That practice continues today. It was this disguise that enabled Ronald Reagan and George W. Bush and the Congresses of their time, aided and abetted by then Federal Reserve chair Alan Greenspan, to enact huge tax cuts for the rich.

The scam went like this. By creating a phony scare in the early 1980s (similar to the one we are seeing again now) that social security was going broke, they raised payroll taxes. Since there is a cap on the income that is subject to these taxes (in 2009 the cap was $106,800) most of the money in this trust fund comes from the poor and middle class, making it a regressive tax. This increase in payroll taxes resulted in huge surpluses in the social security current account that, because of the ‘unified’ budget, gave people the impression that there was plenty of money in the public treasury and hid the fact that the country was actually operating in the red. The government then rammed through tax cuts for the rich that used up this bogus ‘surplus’. So basically, the money that middle class and poor people were putting into their social security retirement trust fund was being used to provide huge tax cuts for the rich. This has to be one of the biggest swindles in American history. (See David Cay Johnson, Perfectly Legal: The covert system to rig our tax system to benefit the super rich – and cheat everybody else (2003), p. 123 for an excellent analysis on how this racket was perpetrated.)

This was a clear swindle knowingly perpetrated by the oligarchy. When it comes to fiddling the numbers on unemployment, CPI, and GDP, Phillips says, “Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the political blame for the slow, piecemeal distortion is bipartisan-both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector.” I am not as charitable as he in dismissing knowing cynical motives.

Phillips makes the correct point that the people who prepare government statistics are professionals who are careful, in their actual reports, to accurately explain what they are doing, at least in the footnotes, so that the reality is there for anyone willing to read carefully. But governments have realized that most reporters in the mainstream media are too lazy or stupid or ignorant or stressed for time to do this kind of careful reading and analysis and instead simply swallow the summaries, abstracts, and press releases put out by high-level government officials, thus allowing themselves to be manipulated. Reporters would do a much better job if they stopped trying to curry favor with high-level people and instead focused their efforts on reading official documents carefully and cultivating low and mid-level officials and whistle-blowers who can tell them exactly what is going on. The latter have less of an ideological or political ax to grind and thus are more likely to tell the unvarnished truth.

Public ignorance of the true state of the economy benefits the government. Phillips adds:

Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent) and average annual growth in the I percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markers, and tamp down expensive cost-of-living increases for wages and pensions?

Phillips has to be given credit for warning us in early 2008, before the total collapse of the housing market, of the danger of mortgage debt. He was, however, wrong in predicting that official unemployment figures of 8 percent might make the electorate angry. We are now close to 10 percent with little signs of widespread outrage. This might change with time because the current recession has resulted in unemployment staying high for much longer than previous recessions. I am sure that all of us personally know people who have been laid off and are finding it hard to get work comparable to what they did before.

Next: What is gained by cooking the books?

POST SCRIPT: The Big Brother state

A truly disturbing post from Glenn Greenwald on the assault on our privacy by a government-private sector collaboration, done in order to circumvent laws. I will not excerpt it because you should really read the whole thing.

[UPDATE: Glenn Greenwald has posted an update that the claims of Project Vigilant are highly exaggerated and they may just be publicity seekers.]