American Thought Leaders - Why Government Statistics Are Not Matching Up With Economic Realities: EJ Antoni

Episode Date: September 14, 2024

Sponsor special: Up to $2,500 of FREE silver AND a FREE safe on qualifying orders - Call 855-862-3377 or text “AMERICAN” to 6-5-5-3-2EJ Antoni is an economist and fellow at the Heritage Foundation, whose research focuses on fiscal and monetary policy. In this episode, we break down the discrepancies between government data, media reporting, and today’s economic realities.“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 and ripping them off the calendar,” says Antoni.Are the financial models no longer trustworthy?“We don’t see the numbers quite matching up to a lot of the government statistics,” says Antoni. “And we get into some very perverse situations where the [Bureau of Labor Statistics] actually counts something as an increase in quality when, in fact, it’s a decrease, and the consumer is paying more for it.”Antoni analyzes various indicators and inputs to determine what the real data reveals about the state of our economy.“Where I think this becomes scandalous is the fact that these statistical problems first became evident in the spring of 2022, so more than two years ago, and nothing has been done to correct them.”Views expressed in this video are opinions of the host and the guest, and do not necessarily reflect the views of The Epoch Times.

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 and 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 when in fact it's a decrease and the consumer is paying more for it.

E.J. Antoni 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 Janja Kelley. Before we start, I'd like to take a moment to thank the sponsor of our podcast, American Hartford Gold. As you all know, inflation is getting worse. The Fed raised rates for the fifth time this year. And Fed Chairman Jerome Powell is telling Americans to brace themselves for potentially more pain ahead.

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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 re-evaluate 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 yeah, 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, et cetera? 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. There are 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, it looks like, 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 kind of put out, I mean, 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? Is that? 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, where, 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. Fast forwarding to today, though, one of the things that's interesting is we 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 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 JP 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 in making investment decisions

for people's portfolios. And then the federal regulators are saying, you're not allowed to disclose that. So you have issues like that where these firms are between a rock and a hard place, where they have a very liberal regulator at the federal level and a more conservative regulator at the state level who are literally giving them contradictory directives, 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 kind of 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. I think one of the biggest things is when we look at business sales, business inventories, and it doesn't matter if we're doing retail sales, wholesale sales, manufacturing sales, you name it, all of these different pieces of information, a lot of which we get from the Census Bureau, people look at these numbers and say, my goodness, they're going to the moon. The economy is doing great. None of them are adjusted for inflation. In other words, 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. So unless you go in manually and do that after the fact, which is one of the things that I try to do on that news feed you were referencing, you'll have no idea how much actual value is present in these inventories or in business sales, for example. 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.

Right, exactly. 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. What is the reality of inflation right now, according to your calculations? Well, I think we want to distinguish between these official numbers and the actual real-life data, right? And this is, I think we want to distinguish between these official numbers and the actual real-life data. 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. 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. Now, 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 home ownership then? Well, essentially what they do is they look at rents, and they use rents as a proxy. So 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 are creating a weighted average for determining 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 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 5%. Cost of homeownership was

up 5%, 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. So if you actually look at the cost of home ownership, meaning look at home prices, look at interest rates, and see what is the monthly mortgage payment on a median price home today versus three and a half years ago, let's say January of 2021, it's up 116%. So it's more

than doubled. Conversely, according to BLS, their metric or their proxy for the cost of homeownership is up 21%. So you're off by a factor of five. Those are the kinds of statistical problems that we're dealing with today in these inflation numbers. Fascinating. You said you had a few other examples of this. Oh, sure, sure. 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 co-pay goes down, your co-insurance 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 co-pays, co-insurance, 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% 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 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, an auto manufacturer puts in a fancy kind of airbag, let's say, or some other kind of safety feature, and the cost of a vehicle goes up $5,000, and the same number of people are willing to pay that $5,000 extra for the car, it's pretty clear that people value that improvement in quality at the increase in the price, at that $5,000.

The issue is that when the government mandates something, that is also thrown in as a hedonic adjustment. In other words, if the government, let's say, imposes a regulation on vehicles, and they say all of these vehicles must have backup cameras, they must have daytime running lights, they must have these new side curtain airbags, whatever the case may be. All of those things get counted by the BLS as improvements in quality, even if consumers don't want them. It 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 covet

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 measured increase in quality of vehicle.

Yeah, 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. So 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. 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. So 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 the quality adjustments as the fact that people are having to change their buying habits. It is reminiscent, not anywhere near to the same extreme, but it's reminiscent of the

Irish potato famine, where people essentially, back at that point in time in Ireland, they were buying a very, very small portion of their budget went to meat, let's say, of their food budget. Almost everything went to potatoes because they were poor and that's all they could afford. After 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. So we see something similar today where the Federal Reserve Bank of Dallas,

in their latest manufacturing survey, one of the survey respondents noted in the food industry that the demand for sausage was exploding and the demand for other types of meat were going down. The reason being is a lot of these people can't afford steak anymore. They 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 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 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 again, you're getting an increase not only from inflation, but an increase in price because of that shift in demand as well. You know, the potato famine exam, it's counterintuitive in a sense, that that's what would happen. Well, so you've given a bunch of examples here, and we're always using some kind of proxy, I guess, for trying to understand what's happening in different parts of the economy.

It's very difficult to measure directly, right? Sure, absolutely. Yeah, so the cumulative effect of these mismatches, how does that look? Oh, it's massive. I think this is why there's this huge disconnect between the business headlines and what we see in the media and how people are reporting they feel today

about the economy. We hear inflation is down, right, or inflation is under control. And people are saying my cost of living has never been higher. I can't make it from paycheck to paycheck. I took on a second or even a third job, and I'm still in massive amounts of credit card debt. Inflation is cumulative. The 3% inflation that we have is on top of the 9% inflation we had previously. Every month, prices are hitting a new record high. They might be going up slower than they were before, but they're still going up. So if we remember, though, the fact that these inflation numbers

are being undercounted, that means that the 3% inflation might actually be 6%, and that 9% inflation might have been 18. And so not only is it cumulative, but if every period is worse than we thought it was, that's also cumulative too. And so you end up with this huge cost of living increase that just blows away the estimation that we have previously. Again, looking at something like the cost of home ownership, which is the single biggest line item in the consumer's budget, the fact that that has doubled in just three and a half years, as opposed to the 21% official increase, I think that says it all. What is the reality of inflation? Is there a number that you can peg on it based on your calculations at the moment? There's several different ways of trying

to go about that, some of which actually seem kind of comical but are surprisingly accurate. The Big Mac index jumps to mind. So a McDonald's Big Mac contains a surprising number of inputs. And you can look at just the food components, right? The beef, the wheat, the lettuce, all of the ingredients in the condiments, right? You name it, the cooking oil. But then you also have labor costs. You have energy, not just the energy to heat the griddle, for example, but the energy that fueled the truck that got the ingredients to the location. The utility costs of running that location,

all of the utility costs of running the factory and the different food production facilities that made those inputs. And again, there's labor at each of those stages. So there is a surprising number of inputs that are essentially across the economy that all go into producing something as simple as the humble Big Mac. And what's interesting is that it provides a remarkably good estimate for inflation. Again, because it's including so many inputs across the economy. And you look at this and you say, wow, it's not up 20%, it's up 50%. And again, you can do that for lots of different things across the manufacturing and service sectors. But the Big Mac Index is a thing.

It is. It truly is. When people are talking about how they can't even afford McDonald's today because the cost of living crisis is that bad. I think that should clue us in, and alarm bells should be ringing here in Washington that there's something wrong and that these official numbers are not really representative of reality anymore. So where does one look up the Big Mac Index?

Oh, just Google. Just Google. Well, no. You said there's other ways to tackle it, or are they all based on these kind of multiple inputs across the economy scenarios? Some of them are. Some of them are like the big Mac index where they do that. There are other alternatives, one of which I'm working on publishing right now, where essentially what we do is we take what we think are the most problematic areas of the CPI, some of which we've talked about already, right?

Things like the hedonic adjustments with cars, the cost of home ownership. By the way, just really quickly, what does hedonic mean here for those of us that are uninitiated? Oh, sure. This goes back to that quality adjustment where we say, OK, the quality of the vehicle has increased by a certain amount. So we don't want to account for that portion of the price increase. Because what

we're trying to measure with the CPI is essentially something that should be constant over time. And the problem is these things like vehicles are not constant over time, right? Your Chevy Impala that you buy today is vastly different from what it was 60 years ago. So we want to say, okay, if your car is going to last longer, if it's going to be safer, if it's going to be faster, it's going to have better performance, right? It's going to have all these different newfangled features, you know, Sirius XM radio. It's got the backup camera. It's got blind spot

monitoring system you all all the fancy stuff all the bells and whistles things that hadn't even been invented when the model first appeared on showroom floors how on earth do we account for that increase in quality because if you're paying the same amount from one year to the next but you're getting a better product you're you're getting more for your money. We actually want to show that as a decrease in the cost. Right. Okay, got it. Sorry to interrupt you. No, no, sure, sure. Essentially, you want to look at all of the most problematic areas of the CPI and you want to re-evaluate them using real-world data. With the caveat, by the way, that just as the current way

the BLS measures these things is imperfect, any other way in which we try to measure them is also going to be imperfect as well. And maybe we can devise something that over the last four or five years works very, very well, but in other circumstances might not work so well. So you have to kind of stay on top of this. So you're working on an index right now, right?

Yeah, absolutely. And again, it incorporates things like this huge increase in the cost of home ownership compared to the very small increase that's shown right now in the BLS estimates. The Antoni Index. Well, let's not go that far. OK, well, no, I'll be watching for that. We often hear about legacy media not doing a good job

at representing reality in different areas. It creates a kind of disquiet in society, where you're not sure if you can trust what you're seeing, you know, when it comes to, and especially when it comes to economic numbers, like, you know, we know that, you know, the pandemic policies were, it created a massive, you know, economic change. It would be, I think, an understatement even to say that. And now we're kind of, we of course have to deal with that in various ways. We looked at CPI, we looked at the jobs numbers, but just numbers in general, how much can we trust the statistics in general that we're seeing? And how can we account for

that? And this is even for the benefits of the people that are, you know, kind of creating these things in the first place, right? Yeah, unfortunately, a lot of the numbers that we get today just aren't very trustworthy. And some of that we can know simply by looking at one set of official numbers and comparing it to another. So you don't need the Antoni index or whatever, right? You can simply compare the official numbers from the government and see that we have a mismatch. If we could go back to the jobs numbers,

I think we have a really good example there. Where ever since the spring of 2022, when a lot of these red flags first started appearing in the BLS statistics, that was when the establishment survey and the household survey just started this unprecedented divergence. So what are those two? You have an establishment survey, a survey of businesses, where we simply ask businesses, how many people are on your payroll? And then we have a survey of households where we ask things like, are you

employed or unemployed? How many people are in your household? How many of you are actually in the labor market versus not? We don't want to count a six-year-old as being in the labor market, for example. So I hope not. And what we saw is that despite this very steady rise in the number of payrolls, the number of people employed has not kept up. In fact, it's actually lately been going down. There are fewer people employed than there were just a few months ago. And so you have to say, why is there this disconnect? Now, it's not uncommon

that in any particular month, one of those numbers will go down and the other up. In other words, maybe the number of payrolls went down last month and the number of people employed went up, and then the next month it reverses. But essentially what happens is these two track together very tightly over time. So the fact that there is this divergence today of literally millions between the number of people employed and the number of payrolls is a significant statistical issue. But if you have a situation, let's say, purely hypothetical, where there's very high inflation, and I can no longer make ends meet, and I have to go out and get a second or even a third job, I am now still the same person employed. But every additional job I get, even if it's a part-time job, gets counted as another payroll. And so the double counting of workers has actually become somewhat

of a problem today. Whereas we increase the number of multiple job holders, you're increasing the number of payrolls. The other issue is that if I already have two jobs and I go out and get a third, you're not even increasing the number of multiple job holders at that point, but you're increasing the number of payrolls. So even the number of multiple job holders at that point, but you're increasing the number of payrolls. So even the number of multiple job holders is now underestimating, I think, the impact on payrolls. You're also in a situation today where as the labor market is slowing down very, very quickly, businesses are getting rid of a lot of full-time workers and replacing them with part-time ones. In fact, over the last year, we've lost over a million full-time jobs in the economy. So all of the jobs we've added on net have been part-time ones.

Well, again, every time I lose a full-time job and I replace it with two or three part-time ones, I'm worse off, but the payrolls go up. In this case, they both track, I guess, right? Because both the payrolls go up and the number of people employed, ostensibly. Unless they're multiple job holders. That's right. I lose my full-time job.

I replace it with three part-time ones. And when we count payrolls, it doesn't matter how many hours you work, it's still a payroll. As long as you are on the books on whatever payroll period includes the 12th of the month is the way they do the statistics. So that's become a big, big problem today. And again, we also have this issue we talked about earlier, the birth-death model, where we're looking at the birth and death of firms. That has been grossly overestimating the number of jobs being added. What is the birth-death model? So that's where we look at firms being born and firms dying. In other words,

firms being created and a firm going out of business. And we assume if this business is created, how many jobs is it going to add to the economy? Likewise, if it fails, how many jobs are going to be lost? And again, the problem today is that we are grossly overestimating the number of firms, the number of businesses within the economy, and therefore we're overestimating the number of jobs that those businesses have created. I mean, to the tune of hundreds of thousands just this year alone. So by some estimates, you can wipe out half of the job growth we've seen this year by essentially correcting for the faults in that model today. And again, it's a model that worked reasonably well before. It's not as if this has always overestimated the number of jobs

in the economy. The problem is that the underlying assumptions behind that statistical model don't represent reality in today's economy. And the BLS still hasn't corrected for that. Hopefully they'll watch this episode. And doing it quickly, I think, is so key because you have major decision makers who rely on this data, whether they should or not. Everyone from the Federal Reserve, major investment houses, you name it. They're all trying to use this data that is supposed to be reasonably accurate and available in a timely manner. And the problem is that that accuracy just doesn't exist anymore today. And we're having to rely on much more accurate quarterly census data in order to look back months after the fact and

realize, uh-oh, we were way off. Let me first say I have absolutely no evidence whatsoever that anyone is cooking the books at BLS, right, or doing anything untoward there. In fact, I actually know some BLS folks and have no indication from them that anything nefarious is going on. Where I think this becomes scandalous is the fact that these statistical problems first became evident in the spring of 2022, so more than two years ago, and nothing has been done to correct them. We need to have some kind of mechanism to correct them in a timely manner. The problems have been evident to those of us outside of BLS. I have to assume they've been evident to the folks who are hip deep in the data. One thing that strikes me also, we're increasing, especially with the advent of AI, we're using AI or automation of gathering data, collating data, spitting out results based on, of course, it strikes me that it becomes even more important to make sure that the underlying assumptions

of the models are correct, because otherwise, you could be mechanistically doing something that, again, deviates from reality by quite a bit. Absolutely. And this is why it's so important to understand. These models are extremely consistent, but that doesn't mean they're accurate. Those are two very, very different things. They're extremely consistent over time, but what would be accurate in one instance can be terribly inaccurate in another.

And so we sometimes have to sacrifice that consistency in order to make them more accurate. We have to, in other words, be able to change the models and methodologies over time in order to try to be as reflective of reality as possible, because that's the goal. You talked earlier about proxies. We want these things to be proxies for reality. Since we wish we could observe reality in its entirety, obviously we can't. We don't know precisely how many jobs exist in an economy every second throughout the year.

But we want to try to get some feel for that, some estimate. And we want that estimate to be as close to reality as possible. So one of your posts made me very worried. You're concerned that recent economic growth is in reality a debt bomb. So explain to me what you were thinking there. Well, so federal finance and even looking at the economy as a whole can kind of be confusing. And I think if we look at it in terms of family finance, it can make a lot more sense. So let's do it from that

route. If you have a family, let's say, who is not making enough money to buy everything they want, and so they get a bunch of credit cards and they start racking up credit card debt in order to increase their spending today. What they're essentially doing is pulling forward from the future, future income into today to increase today's consumption. The problem is that you can only do that for so long. And eventually that debt starts to catch up with you. You have the cost to service that debt. Eventually that debt needs to be repaid. And so you end up having to sacrifice future consumption in order to pay down that debt, because your future income now needs to be used to not only provide for that future consumption, but pay yesterday's consumption as well.

Now, in some cases, this is highly desirable, right? There are plenty of instances where we go into debt, like to buy a home, in order to increase our consumption today, particularly when we can anticipate in the future having a higher income than we do today. Unfortunately, what we're doing right now at the government level is the equivalent of that family going into much more credit card debt than they even have in terms of annual income, to the point where just the cost to service that debt, in other words, the interest on those credit cards, is starting to eat into their budget. So they are spending so much just in monthly finance charges that now they're having trouble to pay their rent, to pay for groceries, to put gas in the tank of the car, cetera. That's where we are at today. And again, eventually, all of that debt has to get paid back. And the fact that it's already starting to bite means that debt bomb is already starting to go off. And we are now at a point where

the family is paying so much in interest on the credit cards that there's not enough money left in the budget to afford it. In other words, you can't pay your minimum on the credit cards that there's not enough money left in the budget to afford it. In other words, you can't pay your minimum on this credit card, and so you do a balance transfer to a new card, let's say. And you keep having to do the same thing month after month. You're having to move debt around. You're going into more debt just to pay the interest. It's a big downward spiral. And again, eventually, when the debt collector comes knocking, you have to drastically cut back your consumption. Even if it's of necessities, you have to cut back in order to try to pay down some of this debt.

And it's going to be really, really painful. Now, where the analogy breaks down is the fact that the family can't run a counterfeit operation in their basement and just print pieces of paper and call it money. The federal government can. Now, we call that inflation. But what the Federal Reserve has essentially been doing to help finance this runaway debt for the federal government is to create, out of nothing, money for the Treasury Department to spend. And when they do that, they devalue the dollar. They are essentially siphoning off a small portion of the value of all the dollars that are

in existence and putting it into the new dollars that they create for the Treasury to spend. But it does provide Congress with the money that they wanted. So I know there's a lot in there. Happy to unpack it more for you. Right. Well, one of the things that strikes me is that in these situations that you described with sort of shifting debt to new credit cards and so forth, eventually there's a company that comes along and says, I can help you

write off some of this. We're going to defer a small fee, of course, and we'll take care of all of that for you. Except that there's no such mechanism here. You have to deal with it. There's no external mechanism to deal with it. Is that right? Well, I guess this would be where we go back to the Federal Reserve, where that is the external mechanism that the federal government uses to pay down its debt. Now, to be clear, it's not paying down the number of dollars, right? This goes back to that question we were talking about earlier with inventories. The dollar amount of the inventories may stay the same, but there's less physical stuff there. In this case, with things like the federal debt, we can go back to the 1970s, even into the early 80s,

when the federal debt was exploding, but the actual value of the debt was going down, not up. The reason for that is because the rate of inflation, the devaluing of the dollar, exceeded the rate of inflation, the devaluing of the dollar, exceeded the rate of increase in the debt. Now, we had very painfully high inflation back then, but we're seeing something similar today, where you are seeing the value of the dollar go down so quickly that it's eclipsing the increase in the actual debt. I mean, even if just the official numbers, which grossly understate inflation, but just the official numbers, which grossly understate inflation, but just the official numbers show the dollar has lost about a fifth of its value in less

than four years. I mean, that's horrific. But it also means that all of the debt that existed before that time has now decreased in real value by about a fifth as well. Well, and so there's this other dimension, too. Like, there's all these holders of this debt. I think about this a lot because I know communist China holds a lot of, you know, U.S. Treasury bills. Although they're selling it off pretty quick. Russia, I think this is actually, by the way, a big reason behind Russia's timing in terms of the war with the Ukraine right now, is the fact that they sold off all of their U.S. Treasury debt. Because if you do have a lot of U.S. Treasury debt, to a certain extent, you're beholden to the Treasury.

You may think, well, shouldn't it be the other way around? But no, the Treasury can at any moment say, you know what, we're not paying that debt back. Those bonds that you hold are now worthless. And I would not be surprised if China, in their race to get rid of all their U.S. Treasury holdings, is waiting until that process is complete before they do something like move against Taiwan. Because if they do that right now, the U.S. government can say, those hundreds of billions of dollars in U.S. debt that you have, we're not paying it back. We're writing it off. We're canceling it.

Right. Because we don't like your foreign policy. Exactly. Exactly. It's part of the politicization that we're seeing of the dollar, which is threatening the dollar's reserve currency status. But unfortunately, you have a lot of Americans that have been holding U.S. Treasury debt as well. And those folks have gotten absolutely crushed. Countless Americans in retirement, for example, had U.S. Treasury bonds paying very low rates of interest with very low yields. And when you have a bond that is only paying you 2% or 3%,

and inflation, even just the official numbers, is 5%, 6%, 7%, 8%, you're actually losing money on that deal. You're essentially paying the government for the privilege to lend them money. It's ridiculous, but that's what's happened. All those poor folks who thought they had enough money saved for retirement, let's say, are now finding out the hard way that, no, they don't. They may have had enough money, but not enough value. There's been a lot of discussion about the debt being too large, right, and what the implications are of that. There doesn't seem to be much effort being made to deal with that. Is that how you view it?

I do. I don't think there's much appetite on either side of the aisle to really deal with the debt. Part of that, I think, is because it's just too politically easy to let the Federal Reserve deal with it. If you're in Congress, it's a lot easier to let the Federal Reserve deal with the problem than for you to have to deal with it. Because if the Fed deals with it, they create inflation. And now everyone is trying to figure out why the heck is my cost of living going up so much. And they have a very difficult time following the path all the way back to the Fed and to Congress that's spending too much money. Conversely, if Congress is going to deal with it, how do they deal with it? It's by reducing

spending. That's very, very tough to do in an age when politicians typically get elected by playing Santa Claus, by promising their constituents, I'm going to give you all these different goodies, right? Never mind the fact that you're paying for everyone else's goodies, right? So it's a net wash. But if Congress is going to cut back spending and really deal with the problem, again, they have to go to their constituents and say, you're not going to get as much federal largesse as you used to. That's very, very tough, I think, for elected officials to do. It's particularly tough when we have an American people that has suffered for many, many years under a dumbed down education establishment that has really robbed, I think, a lot of our fellow Americans

of critical thinking skills, so that at this point it's very hard for them to realize what is the impact of federal spending? What is the impact of the federal debt? And I recently had this conversation with some folks where they said, you know, the federal debt's over $35 trillion. It's going to hit $36 trillion before the end of the year, and we're all still here. What's the problem?

And I said, are you paying more for groceries to put groceries in the back seat or gas in the tank of your car? Is your rent exploding right now? Are you in a cost-of-l living crisis? And the one person said, oh, absolutely. I have four roommates. I used to have my own apartment. Now, you know, we all have to rent this four bedroom together. I said, yeah, you know why that is? Because of the federal debt that you don't care about. That's why. These things have real impacts on people's lives. And I think the problem is just that we don't connect them. We don't see how you get from A to Z. You have to bring in spending.

I mean, there's no scenario. I'm just putting out my conclusion from our discussion today. Well, on a personal level, I don't think it's so much that people are spending too much, because I can only spend as much, essentially, as I take in. I don't have the option that Congress does, where I can go to the Fed and say, hey, Jerome Powell, Mr. Chairman, please print me off a few trillion dollars, because I have this massive hole in my budget. So if I'm going to go into debt, I eventually have to pay that debt off. Otherwise, that debt collector is going to come knocking, and I'll be in a world of hurt.

So I'm not so much worried about the consumer as I am worried about Congress because Congress has that out of the Federal Reserve. If we didn't have that, then Congress would eventually bump up against these hard stops where they have no other option but cut spending, raise taxes, or some combination of the two. Today, unfortunately, they can always pick door number three, and that's inflation. Because inflation is fundamentally a tax. It's a hidden tax because Congress didn't vote on it. The president didn't sign a bill, but it is still a tax because it's a transfer of wealth from the people to the government. And I don't know a better definition

of a tax than that. And so that's why we need Congress to cut the spending. All government spending is paid for, right? It's just a question of how do you want to pay for it? You can raise taxes now, or you can sell bonds now and raise taxes in the future or you can just inflate everything away. And sadly, they keep choosing the third option. At least that's what they've done the last four years or so. So that you don't sound very hopeful here. Hope may not be warranted right now. But look, at the end of the day, we've been in some really, really tough scrapes as a nation. And somehow or other, America has survived. And I'm hoping that's the case right now. I don't know for sure.

The numbers do not look good. I can tell you that. And every day that goes by where we kick the can down the road, actually, it's not that goes by where we kick the can down the road, actually, it's not even so much we're kicking the can down the road, it's where we're rolling the snowball down the mountain. And every inch it goes, the more it's accumulating and the bigger it's getting. And the harder it's going to be to eventually stop it. Now, is it impossible? No, it's not. Is it painful? Yes. Yes.

But again, we've been through this before. The 70s were terrible. It took three pretty lousy presidents to give us Ronald Reagan and the tremendous economic expansion that followed. And to get inflation under control, Paul Volcker had to deliver back-to-back recessions and 20% interest rates on mortgages. So it got pretty painful, but we did get through it. So you're basically saying there's no way around significant austerity. It will be painful. Every single dime of spending has to eventually be paid for. It might not be today, It might not be tomorrow.

But, you know, look, the laws of supply and demand are frankly no different than the laws of physics. We somehow think that society has advanced to a point where we can get around these laws or they don't apply to us anymore. We somehow think we can outsmart them as if jumping off the roof of this building means we can defy the laws of gravity. Again, it may not be today, it may not be tomorrow, but these immutable laws of the universe always catch up to you. I've often heard it described that with this runaway federal debt, as you described, with the snowball, that there's a cliff down the

road at some point. But what does that actually look like? Do you have a sense of that, if you actually do hit that cliff? It looks like the Weimar Republic, I think. It looks like Weimar Germany, where initially everything seems great. People forget that before the hyperinflation in Germany in the early 1920s, they had the greatest stock market

boom in the history of the world because all of that inflation caused a massive bubble in asset prices. We're seeing that today with equities, right? Stocks, houses, you name it. We have all kinds of bubbles throughout the real economy, courtesy of inflation. So it's very common that those things happen before the inflation trickles down into consumer prices. It's not as if those things move in lockstep together. They don't. You typically get the asset bubbles before you get the, again, the consumer price inflation. Looking at today, how does this all unravel? Unfortunately, if we continue down this road where we just let the spending snowball and the debt snowball, the cost to service that debt, in other words, the interest payments, will also snowball. Today, you mentioned the $35 trillion debt. The cost to service that is about $1.2 trillion a year. That's just the interest, not even a dime towards principal,

just paying the interest on the debt. So it's consuming more and more of the tax revenue, leaving less and less for the actual government spending. And so more and more of that government spending needs to be paid for with more and more inflation. And again, that's where you get into that downward death spiral of finance, similar to what the family faces with all the credit card debt, where you have to go into more and more credit card debt every month just to finance your existing credit card debt. And that's how you get to a scenario like they had in the Weimar Republic, where Germany essentially just had to run the printing presses harder and harder every month to the point where they were creating paper shortages in order to create enough money, with nothing to back it, but just creating enough money to pay the government's bills.

In that case, it was war reparations. In the case today, it's largely nonsense, but it's still government spending, regardless of how they're wasting it. So is there a hopeful note at all in all of this? Because it sounds pretty dire. I think the hopeful note is 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, right? 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. and Tony, it's such a pleasure to have had you on. My pleasure. Thank you for having me. Thank you all for joining E.J. Antoni and me on this episode of American Thought Leaders. I'm your host, Jan Jekielek. Music