DRI-322 for week of 7-21-13: Detroit: Postmortem on a Once-Great American City

An Access Advertising EconBrief:

Detroit: Postmortem on a Once-Great American City

On Thursday, July 18, 2013, Detroit, Michigan’s emergency financial manager Kevyn Orr filed a Chapter 9 bankruptcy petition on the city’s behalf. Detroit became the largest American city ever to declare bankruptcy. Although the handwriting for this action had been on the wall long before it appeared on court documents, it still sent shock waves throughout the country.

The interminable interval between recognition of reality and capitulation to it was partially explained by the ruling issued the following day by Ingham Country Circuit Judge Rosemary Aquillina. She ordered the withdrawal of the bankruptcy petition on the grounds that it would violate the Michigan Constitution to endanger the pension benefits of government employees. And retiree pensions do indeed represent roughly $9.2 billion of the $11.5 billion in unsecured claims listed under the bankruptcy petition. “It’s cheating, sir, and it’s cheating good people who work,” was her reaction to the bankruptcy. “It’s also not honoring the President, who took General Motors out of bankruptcy.” This was the same intractable attitude that had prevented Orr from negotiating any concessions from the city’s creditors, particularly pensioners who refused to relinquish the lucrative defined-benefit contracts that had made them the new aristocracy of Detroit’s organized labor community.

Americans are habituated to viewing Detroit as an economic basket case. Thus, it comes as a shock to realize the relative speed and steepness of the city’s fall from prosperity and prominence. Even more shocking is the similarity between Detroit and most other major American cities.

Various sources, particularly the website “Economic Collapse” and the Rush Limbaugh radio program, have assembled a shocking compendium of facts detailing the decline and fall of Detroit. In just over a half-century, Detroit went from one of the premier American cities to a burnt-out wasteland, comparable to a European city devastated by the effects of World War II.

The Glory Days of Detroit

Detroit was founded during colonial times. It got its name from one of the leading Indian tribes. Its location on the Great Lakes assured its economic prominence, but its development took off in the late 19th century with the invention of the automobile. Detroit became the home of the three leading U.S. automakers – Ford Motor Company, General Motors and Chrysler. Henry Ford developed and perfected the automotive assembly line in Detroit and environs. In the second half of the 20th century, General Motors became the phenomenal success story of the U.S. automotive industry.

The first half of the century belonged to Ford. Henry Ford didn’t invent the automobile, but he might as well have. He produced versions that ordinary Americans embraced wholeheartedly: Models A and T. He perfected the assembly line that revolutionized automobile production. His wage policies were public-relations triumphs in a realm where capitalism has historically taken it on the chin. (Detroit was already a high-wage city and the company was merely competing for labor with its $5-per-day wage offer, not practicing altruism.) Henry Ford presided over the automotive world and American industry from his home in Dearborn, Michigan.

When General Motors shouldered Ford aside as the premier automaker, it established a corporate reputation to rival Ford’s. CEO Charlie Wilson’s famous declaration that “what’s good for General Motors is good for America” may have ruffled feathers, but it certainly dovetailed with the thinking in Detroit. When GM decided to build a brand new auto plant in the venerable neighborhood of Poletown, even the black-separatist municipal administration of mayor Coleman Young hastened to grant the company eminent-domain rights and approve the dispossession of longtime residents. As late as 1971, Economists Roger Miller and Douglass North marveled at GM’s “phenomenal ability to generate profits.”

Led by the “Big Three” automakers, Detroit became the manufacturing center of America. As of 1950, it was home to 276,000 manufacturing jobs. During an era when America’s manufactures led the world, those jobs earned good incomes. As of 1960, Detroit boasted the highest per-capita income in the U.S. This attracted people. As of 1953, Detroit was the 4th-largest city in the U.S., behind New York, Chicago and Los Angeles, with just under 2 million people. In 1966, Look Magazine named Detroit as an All-American city.

Today, Detroit is the Dregs

Today, in 2013, Detroit is the dregs. Its 276,000 manufacturing jobs have shrunk to less than 27,000. This might not be so bad if other jobs had taken their place. They haven’t. It has lost 63% of its former nearly two-million population. Those who remain have a median household income of $26,000 and suffer from unemployment of 16%. Less than half of Detroit residents over 16 years of age are employed. 60% of Detroit’s children live in poverty. Only 7% of 8th-graders are rated “proficient in reading,” which helps explain why 47% of Detroit residents are functionally illiterate.

There are over 78,000 abandoned houses within the city. Many houses are up for sale at prices of $500 or less. One-third of Detroit’s 140 square miles are either vacant or derelict. The city hosts more than 70 Superfund hazardous-waste sites.

City services have declined pari passu with the general decline in incomes and employment. Detroit’s murder rate is eleven times greater than New York City’s. The size of the police force is 40% lower than in 2003. Average response time to a 911 emergency call is 58 minutes. Most police stations are open to the public for only eight hours per day. Police solve fewer than 10% of crimes committed in the city. One-third of Detroit’s ambulances do not run. At least 40 streetlights do not work. Two-thirds of the city’s municipal parks have closed since 2008.

The city earns $11 million of its municipal revenue from… its casinos. Police advise travelers to enter Detroit at their own risk.

In the UK’s Daily Telegraph, MP Daniel Hannan recalls the prescient novel Atlas Shrugged, by Ayn Rand. The book describes the town of Starnesville, home to the fabulously successful Twentieth Century Motor Company. Socialism has reduced both the company and its hometown to ruins. Hannan quotes Rand’s evocative portrait of Starnesville to haunting effect:

“A few houses now stood within the skeleton of what had once been an industrial town. Everything that could move, had been moved away; but some human beings remained. The empty structures were vertical rubble; they had been eaten, not by time, but by men: boards torn out at random, missing patches of roofs, holes left in gutted cellars. It looked as if blind hands had seized whatever fitted the need of the moment, with no concept of remaining in existence the next morning.

“The inhabited houses were scattered at random among the ruins; the smoke of their chimneys was the only movement visible in town. A shell of concrete, which had been a schoolhouse, stood on the outskirts; it looked like a skull, with the empty sockets of glassless windows, with a few strands of hair still clinging to it, in the shape of broken wires.”

Hannan compares Rand’s prose – circa 1957! – with a description of Detroit in the London Observer:

“What isn’t dumped is stolen. Factories and homes have largely been stripped of anything of value, so thieves now target cars’ catalytic converters. Illiteracy now runs at 47%; half the adults in some areas are unemployed. In many neighborhoods, the only sign of activity is a slow trudge to the liquor store.”

Hannan is astounded by the similarity between Rand’s fictional Starnesville and the Detroit of today. Even more astonishing, Rand predicted the effect of socialism on a preeminent auto manufacturer in 1957, when U.S. automakers bestrode the world like colossi and Detroit stood atop the U.S. league tables.

What Happened to Detroit?

In Atlas Shrugged, socialism decimated both the Twentieth Century Motor Co. and Starnesville. The real-world municipal analogue to socialism is liberalism, which features unwieldy bureaucracy spending vast sums on tasks that are none of its business. That describes almost all major U.S. cities, including New York, Chicago, San Francisco, Los Angeles, Boston, Philadelphia, San Diego, Seattle, et al. Liberals are Democrats and all these cities are governed by Democrat majorities, mostly machine-made. Only Houston can fairly be called an exception to the rule of liberalism, though even here Democrats cling to a majority in the city.

Detroit certainly fit this pattern. The last Republican mayor won office in Detroit in 1957, during the city’s glory years. Since 1970, only one Republican has been elected to the City Council. Republicans have occasionally gained statewide office – John Engler’s stint as Governor was a notable recent example – but if anything Detroit’s clout was so formidable that the city’s tail usually ended up wagging the state dog when it came to policy.

When Democrat Jerome Cavanaugh became Mayor of Detroit in 1962, he was one of the brightest lights of the Democrat Party. Cavanaugh was a young New Frontiersman, a JFK-image clone. He was determined to use the city’s prosperity as a tool to eradicate poverty and enact social justice. He raised property and income taxes and increased spending. He inaugurated a utilities tax. The failures of Cavanaugh’s policies were manifest by the 1970s and helped pave the way for the long reign of Coleman Young.

One common denominator behind the serial failure of municipal liberalism is the failure of public education. A handmaiden to educational failure in the 1960s, 70s and 80s is school desegregation and its complement, busing. Cities like Boston, St. Louis and Kansas City lived through historic desegregation sagas, all featuring savage disagreements, shocking expenditure of funds, forced taxation and virtually nothing of educational value to show for it. Detroit was a leader in the field. District-court judge Stephen Roth supervised a massive desegregation plan involving 53 Detroit suburbs and some 780,000 public-school students. Average time spent on daily bus travel hovered at 1.5 hours per day. The effect of the plan was to reinforce the separatist vision of Mayor Coleman Young and drive whites to the outer suburbs, beyond the plan’s reach.

Unions played an important role in Detroit’s downward spiral. Municipal unions do not face the private-sector competition from non-unionized labor that private-sector unions face. This gave them the impetus to negotiate fearlessly with government to increase compensation and defined-benefit pensions while lobbying endlessly for expansion of bureaucracy. The United Autoworkers treated the automakers like piñatas to be cracked open for goodies, heedless of the effects on the company.

Technically, one should acknowledge the role played by the federal government in burdening automakers with safety and mileage standards that vastly increased the companies’ costs with no commensurate offsetting gains to anybody except politicians. (Longstanding research, beyond the scope of this article to reproduce, has reaffirmed the net harm done by these categories of federal legislation.) Still, this was at most a glancing blow felt by Detroit during the reign of liberalism.

“America’s First Third-World City”

In addition to the standard drawbacks of 20th century municipal liberalism, Detroit suffered under its own unique handicap. From 1974 to 1994, it experienced the mayoral reign of Coleman Young. Young was a veteran of World War II who became the North’s first black mayor at the same time as Atlanta’s Maynard Jackson became the South’s first black mayor. Young was elected to five terms before retiring and dying of emphysema in 1997.

Although Young followed in the wake of the so-called civil-rights movement, he was really a black separatist in the tradition of Malcolm X rather than a reformer a la Martin Luther King, Jr. Young accused the Army of discriminating against him and carried that chip on his shoulder throughout his public career. When he became Mayor of Detroit, he alienated whites by insisting that only white people can be racists. His frequent diatribes induced whites to abandon the city, whereupon Young excoriated them as “racists in the suburbs,” according to Patrick Mallon’s memoir of his formative years in Detroit, entitled “Detroit: Coleman Young’s Triumph of Self-Destruction.” Mallon feels that Young was principally responsible for changing the course of his childhood by [teaching] me, my parents and my friends that we were all in the [racist] class of people.”  Likewise, writer Tamar Jacoby claims that “Detroit was governed by a black demagogue from the moment Coleman Young was elected Mayor.” Rather than take corrective measures to retain white citizens, Young encouraged the concept of black “independence.” This led writer Ze’ev Chafets to label Detroit “America’s first Third-World City.”

The loss of revenue stemming from white flight was partially offset by millions in payments by auto companies for what has been called “riot insurance.” The granddaddy of all riots occurred in July, 1967, when police tried to break up a party at an after-hours nightclub. When they discovered 82 guests celebrating the return of two Vietnam veterans, they tried to haul off all celebrants to jail. The doorman, son of the club owner, hurled a rock through the back window of a squad car, triggering a melee that spread into general rioting. Local and state police could not contain the violence and looting that killed 43 people, injured over a thousand others and caused millions of dollars in property damage. Ironically, although chronic ill will between the police department and blacks was the spark that set off the misbehavior, the first person killed was a white looter. Subsequent violence and looting was perpetrated by and against blacks, particularly harming innocent store and business owners. The riot was classified as America’s third-worst riot, ranking behind the New York Draft Riot during the Civil War and Los Angeles’ Watts riot in 1992. Despite the terrible toll taken by the riot, Young refused to condemn rioting by blacks, calling it “rebellion.”

Whatever psychological benefits blacks may have gained from Young’s posturing, it provided no economic benefits whatever. Detroit gained a reputation as “America’s blackest city,” but this carried little or no economic value. The racial makeup of the 53 Detroit suburbs became lily white, but this did not prevent Michigan from losing roughly half of its manufacturing jobs in the first decade of this century.

What Killed Detroit? “Liberalism,” Sings the Chorus

The response to the bankruptcy announcement has been well-nigh unanimous. Commentators declare that liberalism killed the city. This verdict is easy to understand.

Detroit has been run by liberals for nearly six decades. In approved liberal fashion, municipal government expanded explosively and spent money lavishly, borrowing when necessary. Detroit was not a run-down, underdeveloped community in Appalachia. It was the most prosperous city in America when the liberals took over.

Still, there were poor people – too many, apparently, to suit liberals. The best and brightest of the Kennedy New Frontier generation took a firm grip on the reins of power and set out to lift the poor out of poverty using the levers of government – government programs, welfare, affirmative action and the full-scale liberal agenda.

There were racial problems in Detroit when the liberals took over. A rift existed between the “black community” and the police department. Liberals attacked the problems full bore. They ushered in Detroit’s first black mayor. They gave him his head. He immediately identified whites as the problem. He substituted blacks for whites throughout the city, much as a producer might substitute a more efficient or cheaper input for a less efficient one. In particular, the mayor gave blacks majority status within the police department. The result was that whites fled the city for the suburbs.

In addition to having too many white people, Detroit was also adjudged to have too many rich people. Not only did rich people inhabit the wealthy suburbs like Dearborn, they also lived in enclaves within Detroit proper. One of the first liberal actions taken in the early 60s was to raise existing taxes and create new ones. These were intended to fund the liberal programs, pay the wages and salaries of burgeoning municipal payrolls and to promote social justice by correcting the unfair distribution of income.

If the creed of liberalism is to be believed – if liberalism actually worked – these measures should have enshrined Detroit in prosperity for the indefinite future. Instead, they succeeded only in immizerizing the city. “America’s blackest city” became so crime-ridden and murder-ravaged that police have now declared it unsafe for entry by outsiders. Capital fled Detroit as if it were a banana republic undergoing a revolution. Detroit was dubbed “America’s First Third-World City.”

After a half-century of undiluted, full-throated liberalism, Detroit became the largest American city ever to declare Chapter 9 bankruptcy. Much of the city has the look of a bombed-out, abandoned wasteland.

Michael Barone, author of The Almanac of American Politics, is America’s acknowledged authority on politics. “When people ask me why I moved from liberal to conservative,” he wrote recently, “I have a one-word answer: Detroit. I grew up there…I got a job as an intern in the office of the mayor in the summer of 1967… [Mayor Jerome] Cavanaugh was bright, young, liberal and charming. He had been elected in 1961 at age 33 with virtually unanimous support from blacks and with substantial support from white homeowners – then the majority of Detroit voters – and he was reelected by a wide margin in 1965… He was one of the first mayors to set up an anti-poverty program and believed that city governments could do more than provide routine services; they could lift people, especially black people, out of poverty and into productive lives. Liberal policies promised to produce something like heaven. Instead they produced something more closely resembling hell.”

The First Municipal Domino

While Detroit’s mayoral leadership may have been memorably incapable, other major U.S. cities are following in its wake. Eric Scorsone, economist at Michigan State University, concludes that “it’s the same in Chicago and New York and San Diego and San Jose. It’s a lot of major cities in this country [that] face the same problems.” After all, virtually all major U.S. cities are controlled by Democrats and governed by large, bureaucratic, wasteful administrative mechanisms. They all contain huge unfunded liability time bombs ticking loudly and conspicuously in the form of defined-benefit retirement programs for civic employees. All are spending far beyond their means, often borrowing in order to finance it.

The federal government’s debt, which now exceeds annual gross domestic product, has garnered most of the dire predictions associated with government finance. State and local government finance has a hard time competing in the doom-and-gloom prophecy business when its competitor has the biggest numbers all sewn up. The problem is that the federal government has the advantage of time on its side, as the Detroit bankruptcy shows. The feds wear square-toed financial boots in the form of money-creation powers and interest-rate manipulation powers. These enable them to kick the financial can down the road longer than state and local governments can.

Consequently, we can expect to see more cities stand in the financial dock before the day finally comes when members of Congress have to shape up or get a real job.

DRI-330 for week of 10-14-12: The 7.8% Unemployment-Rate Controversy

An Access Advertising EconBrief:

The 7.8% Unemployment-Rate Controversy

On October 5, 2012, the Bureau of Labor Statistics released estimates on employment and unemployment in the United States for the month of September. BLS does this every month, and these data are usually a source of interest but only rarely a source of controversy. This release was different.

The Bureau announced that its estimate of unemployment had fallen to 7.8% from its previous level of 8.1%. This came as a big surprise to economic forecasters and analysts, who had expected the rate to remain the same or even rise. The source of controversy was the magnitude of the decrease and its rationale.

The unemployment rate itself is estimated using a survey of roughly 60,000 U.S. households. The results of that survey have been quite volatile in recent years – last month, for example, they showed a seasonally adjusted decline of 119,000 in the number of those working. But the September survey estimated an increase of 870,000 employed. This was a staggering result – the largest total in this category since January, 1990 (1,251,000) and June, 1983 (991,000). (Two larger totals were attained earlier in the millennium, but BLS adjustments in the data make these totals non-comparable with others.)

This was the kind of increase in employment normally associated with rip-roaring growth in economic activity. In June, 1983, for example, annualized growth in GDP was 9.3%. In January, 1990, it was 4.2%. But here in 2012 it is a puny 1.3%. This seeming paradox raised suspicions in the minds of some people.

Much has been made during President Obama’s tenure that no U.S. president has ever been reelected with an unemployment rate above 8%. Conservative talk-radio host Rush Limbaugh went so far as to predict that the Obama administration would somehow contrive to bring reported unemployment down below 8% prior to the election – implying that deception might be involved.

In the face of the decline in the reported unemployment rate, former CEO of General Electric Jack Welch sent a text message to friends in which he directly accused the Obama administration (whom he characterized as “Chicago guys”) of somehow manipulating data to produce this result.

Tons of ink and reams of paper are consumed writing about markets and their misfortunes. Virtually nothing is said about the collection, preparation and presentation of economic data. This time is ripe for that discussion.

Political Theater vs. Political Economy

The brouhaha over the BLS’ handling of this data release is ironic. While clear wrongdoing occurred, it has been virtually ignored throughout the controversy. Public debate has instead focused on a hypothesized conspiracy to invent or distort data, to “cook the books.” As is so often the case, battle lines have been drawn along political lines. Meanwhile, the news media has been perfectly willing to dramatize the conflict as an exercise in political theater while ignoring the underlying issues of political economy.

The BLS, and particularly Director Hilda Solis, plays a key role in the drama, but that role has been miscast by both political factions. The right wing has cast the agency as accomplice and co-conspirator. Defenders of the administration have portrayed the BLS as staffed by politically independent professionals, completely devoid of political sentiment and as behaviorally pure as Ivory Snow.

In reality, the agency is a branch of the “permanent government,” the bureaucracy that keeps rolling along like Old Man River through Democrat and Republican administrations alike. Its only inherent goal is to maintain its existence, size and power. Ms. Solis is a political appointee, named by President Obama in 2009. As such, she has divided loyalties.

As political appointee, she owes her position to the President. The temptation to hew her actions and public pronouncements toward the positions of the administration is ever-present. This would be true regardless of her personal sympathies, but since presidents usually choose department heads whose views dovetail with their own, the sympathies of a director typically reinforce the incentive to side with the administration.

But as chief administrative officer of a federal bureaucracy, she is the only person capable of steering that agency away from its normal self-serving goals and toward the objective of serving the broad general interest. As far as the American public is concerned, that is her only valid function – to steer the agency between the Scylla of toadying to the administration and the Charybdis of bureaucratic inertia.

In this case, Hilda Solis failed miserably. That is the wrongdoing – indeed, the tragedy – of the 7.8% unemployment controversy.

Friday Morning, 8AM, October 5, 2012

On the morning of the announcement, Ms. Solis was presented with the statistical reports prepared by her staff. In order to contrast what she should have done with what she actually did, we must take a critical look at those reports. The BLS takes two surveys of employment that attract widespread public attention.

Its payroll survey uses payroll records of 60,000 businesses to estimate new hires during the target month. The results of this survey tend to be relatively stable. The September report not only presented results for that month but also upward revisions for the previous months of July and August. Payroll jobs for July were revised up to 181,000; the August estimate was revised up to 142,000. The September estimate was a job gain of 114,000.

The first thing to notice about this survey is the downward trend. This, combined with the fact that unemployment has long been considered a lagging indicator, influenced the expectations of many economists who expected the September unemployment rate to rise slightly. While there is no general agreement among economists, it would be fair to state that 142,000 jobs is close to a tipping point when it comes to lowering the unemployment rate – it is either barely adequate to nudge unemployment down or not quite enough, depending on how responsive one finds the labor force to be.

The 114,000 jobs chalked up in September, though, are not enough to make a dent. That is why the result of the other employment survey, the telephone survey of households conducted by BLS, created such a stir.

The household survey purported to locate a total of 873,000 new jobholders in September. Of these, some 582,000 were supposedly part-time jobs. The fact that this total had been exceeded only twice since 1983 – and both times when the economy was growing at elevated rates – made many anti-administration partisans doubt the veracity of the figures.

These job numbers were not only dubious on their face. They were also blatantly at odds with everything else we knew or conjectured about the state of the economy. Growth had begun the year promisingly but had stalled and slowed to an annualized pace of 1.3% in the second quarter. World trade slowed. Recession loomed in Europe.

Some good news tempered the general mood of gloom, but it was measured. Consumer confidence rose somewhat, perhaps buoyed by a stock market rally – but the rally was dampened. Labor force participation increased after steady decreases – but the increase was slight.

In order to believe in the veracity of the household survey’s jobs estimate, we would have to believe that the labor market had suddenly, inexplicably become the leading indicator for a roaring expansion that as yet had no other harbinger – that the household survey was telling us the truth while all other indices were lying, or at least keeping mum.

Historically, the household survey was known to be volatile. The previous month, August, it had recorded an estimated job loss of 119,000. Thus, the variance between the two surveys was still three times greater in September.

The only reasonable conclusion seemed to be that the household survey was wrong. “Wrong” doesn’t mean faked or fraudulent. It doesn’t mean that BLS employees didn’t make the survey calls, or didn’t record the answers correctly. It certainly doesn’t mean that somebody hid the results in the dead of night or bribed the BLS to suppress them.

All experienced economic forecasters and statisticians know that formulating estimates from sample data is far from an exact science. It is like dining out every night – sooner or later you’re going to get hold of something dreadful that needs to be purged. And that is exactly what statistics textbooks advise students to do with obviously aberrant values in a data set – omit them.

The argument for omission is fairly straightforward. The most basic type of statistical estimation technical, called linear regression, tries in effect to draw a straight line through a collection of data points for the purpose of estimating the course future data will follow. The line is an attempt to capture the central tendency of the data. Including a wildly aberrant value will pull that line off course and make the future estimation process less accurate.

What BLS Director Solis Should Have Done

For practical reasons, it may be difficult or impossible to simply cancel or postpone the release of the household survey and associated unemployment rate. This is an eagerly awaited statistic that is followed closely by analysts throughout the world. Regardless of any good reasons advanced for cancellation or postponement, such an unusual procedure would itself be suspect – people would wonder what the authorities were hiding.

Of course, that argument cuts both ways. The world isn’t waiting breathlessly in order to receive estimates that are worthless or downright misleading. Then there is the little matter of a Presidential election that probably won’t – but just might – turn on the result of these estimates.

What Hilda Solis should have done is: 1. order a double-check of all relevant figures and calculations in the household survey; 2. assuming the results check out, announce at the press conference that the data release contains survey data and a consequent estimate that defy common sense; 3. advise the general public that no weighty conclusions be drawn from the suspect estimates, since they are unsound; 4. invite all interested parties to inspect the Bureau’s data, methods, calculations and results.

She should have done this because the purpose of government is to aid and inform the American public, not to serve the political interests of any administration or the economic interests of bureaucrats. By presenting the data but warning the public, she would be telling the truth, the whole truth and nothing but the truth. She would be allowing anybody who still wanted to accept the figures to do so, but at their own risk. And she would be putting everybody else on notice. She would be behaving the same way as a fiduciary – a professional who has the legal duty to put the client’s welfare above all else. That duty covers both commissions and omissions; it is the obligation to place the full range of professional expertise at the service of the client. In this case, the client is the American people.

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What Hilda Solis Actually Did

What Hilda Solis actually did was to release the household survey and unemployment-rate estimate without warning the public. Indeed, she not only refused to supplement the data release with a warning – she passed up opportunities in subsequent interviews. An interviewer from Bloomberg questioned her three times about the dubiety of the 7.8% unemployment rate and the 870,000 job gain in the household survey. She defended the household survey, citing job gains among 16-24 year-olds. At no time did she back away from or otherwise express reservations about the household survey.

Ms. Solis’s act had the effect of inviting the public to take the dubious household-survey results at face value. Some people did that. Others were shocked by the extremity of the 870,000 job-gain and 7.8% unemployment-rate figures. Still others were outraged by what seemed altogether too fortuitous a coincidence – that a bureau in the Department of Labor, long dominated by the Democratic left wing, would produce a wildly extreme employment report favoring a labor-union-supported Democratic incumbent on the eve of a presidential election.

But the people in the best position to evaluate the report were professional economists and forecasters. Here is a representative selection of their characterization of the two disputed estimates – the 870,000 September job gain and the 7.8% unemployment rate: “”Must be an anomaly;” “statistical anomaly;” “just a fluke;” “statistical quirk;” “implausible;” “almost certainly a statistical fluke;” “huge statistical outlier on the upside;” “not reality;” “an aberration.”

All of these comments came from respected economists, forecasters and consultants. One of them is a former director of the Congressional Budget Office. Some of them are known to be supporters of the Obama administration. None are rabid anti-administration partisans. Clearly, they all knew statistical salmonella when they saw it. Yet none of these people criticized Director Solis’ decision to release the estimates without warning or qualification.

The Harm Caused by the BLS Acts of Omission

The news media covered the issue as an exercise in political theater. They pitted right-wing claims of conspiracy against indignant denials and claims of pristine innocence on the left. When the conspiracy angle petered out for lack of evidence, the story died.

The real harm caused by BLS wrongdoing is much more mundane, but more hurtful than any partisan conspiracy. It concerns the day-to-day functioning of government, not the crimes of individuals. The unemployment rate is used by analysts throughout the world as a barometer and index of the U.S. economy. Investment company owners and fund managers use it to calibrate the timing of investments. Financial planners use it to manage their clients’ money. Large corporations use it to gauge the direction of consumer demand. Commercial and investment bankers use it; business and economic forecasters use it; employment agencies and corporate headhunters use it. Even small businesses use it.

All these people suffer when information disseminated by the federal government turns out to be disinformation. When people discover that they have been fooled, they will take the index less seriously in the future. As a result, their job performance will suffer. And their cynicism about government and the rule of law cannot help but harden – after all, they are already suffering their fourth year of being fed false information about interest rates by the Federal Reserve. The Fed’s QE series of government and private securities purchases is openly and deliberately designed to hold interest rates artificially low by increasing the supply of money. Interest rates are even more ubiquitously used and useful than government economic data.

The Enablers

The people best equipped to understand the abdication of professional responsibility by Hilda Solis and the BLS are the premier economists, forecasters and statisticians. They know that the household survey’s September estimates should have been released – if at all – with a stern caution to the general public. This is directly analogous to the warning labels that government regulators require private businesses to stick on products that present a potential hazard to consumers. The 7.8% unemployment-rate and 870,000 job-gain estimates were no less hazardous to the financial, intellectual and political health of the American public.

The quoted comments above demonstrate that these financial experts recognized this danger quite well. But while they noted it in casual asides and obiter dicta, they refused to take the obvious next step. They refused to call Director Solis and BLS to account. They refused to alert the American people to the true nature of the wrongdoing. They refused to limit the damage done. And they lost the opportunity to deter future episodes of misconduct.

The 7.8% Solution

The real wrongdoing in the 7.8% unemployment-rate controversy stems from negligent omission, not active conspiracy. It is patent in the reactions of professional economists and forecasters. The permanent government was derelict in its responsibility to aid and inform the American public. Instead, it catered to political and/or bureaucratic interests. That is not the kind of dramatic, theatrical conspiracy that attracts the attention of news media. But the failure of day-to-day government to do its job grinds down our living standards, morale and respect for law.