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Show THE VOICE OF BUSINESS The vwo mosv political numbers in America By Richard L. Lesher, President Chamber of Commerce of the United States Virtually everyone agrees that for the new administration to succeed it must fashion policies that can win 1 approval in Congress and then turn our economy around. What is less commonly com-monly understood, however, is that our current methods of measuring and reporting economic conditions are inadequate and in need of revision. To put it bluntly, these monthly statistics to which the media devote such attention at-tention are often so misleading they actually contribute to the very problems they are supposed to monitor. A statistician, it has been said, is one who collects data and draws confusion. Admittedly, this characterization is often unfair; nevertheless, when relevant it only increases the potential for trouble that results whenever politicians try to use statistics as drunks use light posts for support rather than illumination. Nowhere is this more true than in the montly reports on unemployment and consumer prices. There are several problems with the Consumer Price Index (CPI) that distort the picture of the rate of inflation. in-flation. First, the housing component of the Index is determined by including the full purchase price of new homes and the total costs of new mortgages for that small percentage of American homeowners who move each year. As a result, rapid fluctuations in interest rates and home purchase costs distort the CPI. Thus, when the cost of new homes and mortgages are rising faster than other prices, as has recently been the case, trie CPI has an upward bias. In periods of deflation, the opposite op-posite is true. Another problem: By concentrating on the many abrupt, monthly changes in the CPI, we are sometimes led to believe inflation has begun to abate. Yet however it is measured, the underlying un-derlying rate of inflation has increased stadily in recent years and will probably continue to increase in 1981. Also, thanks in part to all the attention at-tention devoted to these monthly reports, the media contribute to the misimpression that inflation is actually caused by changes in prices. In reality, the opposite is true prices are the symptoms of inflation, which essentially essen-tially results from the supply of money outpacing increases in the production of goods and services. Finally, the way in which the CPI is used can exacerbate inflation, because many government spending programs are tied to the Index, so as it increases, it automatically triggers higher and higher spending. What's more, the bulk of federal programs are indexed at the rate of 100 percent of CPI changes, and six federal civilian and military programs . are now adjusted semiannually semi-annually as well. It's worth noting that, on the average, private sector pensions rarely compensate com-pensate for inflation at all, while industry in-dustry costs of living clauses only compensate for about 57 percent of the rise in the CPI. Social Security, of course, is indexed to the CPI. As for the monthly report on unemployment, these statistics are also distorted and misleading, and can have a pernicious impact on government policy. The figures are derived from a sample of households that approximates ap-proximates just one-tenth of the percent per-cent of the total; and, while the data collection process can imply a considerable con-siderable error rate, even the slightest change in each month's figures is usually reported without qualification and with great fanfare. The statistics do not reflect 'that with generous unemployment compensation, com-pensation, which is normally tax-free, some workers have little incentive to look for jobs. Similarly, the statistics ignore all those individulas who, having registered as unemployed because they are accepting welfare. Nor, finally, do the statistics reflect the impact of a steadily increasing minimum wage forcing some individuals often black teenagers out of the labor market entirely and onto unemployment rolls. Little wonder that economist Peter Drucker has labelled the traditional unemployment index as "meaningless and misleading" and "an abomination, and Alice in Wonderland Stew of apples, oranges and red herrings." Nevertheless, Never-theless, in recent years Congress has linked federal spending programs such as CETA to measured levels of unemployment. The resulting message to state and local officials is clear: Prove to us you have high levels of unemployment and you will be rewarded with more federal aid. To succeed then, the new administration ad-ministration must do more than adopt radical changes in policy. It must also do away, with the numbers racket presented each month under the guise of official government reports. |