DRI-307 for week of 6-30-13: Paving the Road to Hell: A Short History of Bailouts

An Access Advertising EconBrief:

Paving the Road to Hell: A Short History of Bailouts

A versatile sports anecdote of obscure lineage pits a combative baseball manager against a first-base umpire. The manager conducts a prolonged, high-decibel – but utterly unavailing – protest against the umpire’s decision to call a runner out at first base. Upon returning to the dugout, the manager encounters a quizzical coach.

“Why waste all that energy?” the coach inquires. “You know he’s not going to change his call.”

“I’m not arguing about that call,” the manager replies vehemently. “I’m arguing for the next one.”

The story may be apocryphal, but its point is sound. Umpires are known to be influenced by their own nagging suspicions that they have blown a call, so much so that umpire schools teach pupils not to compensate for mistakes in subsequent decisions. The immediate aftermath of the play is the manager’s only window of opportunity to influence the umpire – about future plays, not the one argued about.

From the beginning, economists have argued against “bailouts” – the use of government (e.g., taxpayer) funds to rescue failing business firms. Although the arguments supporting bailouts pretend to be economic, the true motivation is invariably political. This suggests that economists’ opposition is futile. Yet the opposition continues, just as the bailouts themselves do.

Like the proverbial manager, economists are arguing for the next one. They know that the bailout process has a cumulative momentum. A bailout is not an independent, isolated event that stands or falls purely on its own merits. Each bailout establishes the precedent for the succeeding one. Moreover, each new generation requires a fresh introduction to the illogic of the bailout, as well as to the history of the process. Economists direct their arguments against past bailouts, but their true targets are the bailouts to come – the ones whose fate they can influence.

That is why a history of bailouts and the ghastly reasoning that inspired them is far from pointless. It is our only prophylactic against the flood of bailouts to come.

Penn Central (1970)

The Penn Central Railroad was created by the 1968 merger of two venerable American railroad companies: the New York Central Railroad and the Pennsylvania Railroad. A year later, the New York, New Haven and Hartford Railroad joined the party to form Penn Central Transportation Company. These railroads all shared common features, particularly their location in the northeast United States. The Northeast corridor was the most population-dense region of the country. Each of these roads specialized in short hauls of people and freight, in contrast to the mostly long-haul traffic carried by railroads elsewhere in the U.S.

The problem was that, while shorter routes made geographic sense, many competing means of transport had evolved by the late 1960s. Barges carried bulky, low value-to-weight commodities like gravel and sand. Trucks carried retail goods and foodstuffs, including refrigerated perishables. Buses and automobiles carried passenger traffic. This left specialized raw materials like coal and commuting passengers for the railroads.

The roads wanted and needed to lower freight and passenger rates to compete with rival industries. Alas, they were hamstrung by the Interstate Commerce Commission, whose regulations forbade rate changes without regulatory hearings. Ironically, the very regulatory body ostensibly created (in 1887) to prevent railroads from utilizing monopoly power now prevented them from behaving competitively. The erosion of railroad customer base to these competing transportation modes left the railroads with scads of excess capacity and no way to utilize it. This was a recipe for bankruptcy.

The theory behind Penn Central was that merger would allow the single entity to better utilize capacity by selling off abandoning track and rolling stock. Unfortunately, it succeeded only in building a bigger, bulkier and less efficient mousetrap. Penn Central declared bankruptcy in 1970 and was eventually declared unsuitable for reorganization. The federal government took over its passenger business and operated it under the name of Conrail.

Railroads in general and Conrail in particular were saved, not by government bailouts, but by the deregulation of railroads in the Staggers Act of 1980. This gave railroad companies the freedom and flexibility to act quickly and decisively to serve customers by cutting prices and dumping unprofitable lines of business. Unfortunately, the federal government continued to operate a nationalized passenger-rail transport system called Amtrak. Today, a completely deregulated railroad industry would undoubtedly serve the part of the U.S. where passenger-rail service remains viable – the Northeast. Instead, Amtrak continues to serve markets where the demand for passenger service is feeble and the costs of service are astronomically high.

Why in the world was Penn Central bailed out to produce Conrail? What crying necessity demanded it? What calamity would have accompanied an orderly bankruptcy and the demise and liquidation of the company? “None” and “none,” respectively, are the answers to the last two questions. Many upper-middle-class and upper-class Northeasterners traveled the commuter routes served by the roads, and the railroad unions wielded political clout in inverse proportion to the value created by their members for the railroads. (The term “featherbedding” was coined to describe the work practices of railroad-union employees.) The Republican (!) administration in power was powerless to resist the political temptation to “save jobs” and preserve a highly visible service catering to an influential elite.

Today, everybody has forgotten about Conrail. Nobody remembers the first great federal bailout of private business. Of course, it did not end in a huge fiasco. And today the railroad sector is a tremendous transportation success story. But the reason for success is the subsequent deregulation of railroads, and the remaining legacy of the bailout – Amtrak – continues to hemorrhage red ink and suck involuntary transfusions from taxpayers.

Great oafs from little acorns grow.

Lockheed (1971)

The longtime producer of jets had come to derive the bulk of its business from government contracts. This made it a creature of government, even though it technically operated in competition with other airplane manufacturers. The bankruptcy of British firm Rolls Royce – famous for its luxury automobile but also a proficient builder of engines – threatened the completion date for Lockheed’s TriStar L-1011 jet fighter. Default on this U.S. government contract would have put Lockheed under. To tide the company over, the U.S. Congress issued some $250 million in loan guarantees to Lockheed, over the protests of free-marketers.

This time, the rationale was somewhat different. Lockheed’s defense status allowed the company to wrap itself in the cloak of national security, a nuisance that probably destroys more GDP annually than any other economic pest. This required considerable chutzpah on Lockheed’s part, considering that America could still boast firms like Boeing and McDonnell Douglas even if Lockheed had padlocked its doors. But that didn’t stop the company from pointing to the dread specter of its 60,000 jobs that would be lost – gone forever! – if Congress did not ride to its rescue.

Sure enough, the TriStar made it to market. Fittingly, it was deep-sixed by competitors like Boeing’s BA747 and McDonnell Douglas’s DC-10. When the TriStar ceased production in 1983, Lockheed abandoned jet production (so much for our national security) and later merged with Martin Marietta to form Lockheed Martin.

Note, once again, that even though Lockheed did not default on its loans, the bailout was still exposed as a fraud. The pretext of protecting national security proved to be nonsense, the object of the loans proved to be superfluous and as for the jobs – well, the loan guarantees ended up saving a product that deserved to fail but didn’t immunize against an eventual loss of jobs, which went unnoticed anyway.

Chrysler (1980)

In 1979 Chrysler, the smallest of America’s “Big 3” automakers, turned in a then-gigantic $1 billion loss in net income and teetered on the edge of bankruptcy. Dynamic CEO Lee Iacocca heeded the newly evolving American tradition that, when the going gets tough, the tough go begging – to Washington for a bailout. Probably recalling Lockheed’s loan guarantees, Iacocca secured $1.5 billion in guarantees for Chrysler. In addition to the (by now) old chestnut that he was “protecting jobs,” old-hog Iacocca was able to root up a new chestnut – that America’s automotive vanguard had to be protected against the encroachment of foreign competition from Japan. This was a conveniently flexible argument. If there had been no competition from Japan, Iacocca would then have argued that Chrysler needed to be saved to make sure that Americans didn’t run out of cars. Now he could argue that Chrysler needed to be saved to make sure that America “won” the “car war” with Japan. The fact that “winning” by subsidizing an inferior product was the same thing as losing didn’t seem to occur to most people – certainly not to Congress – and Iacocca was hailed as a genius for his lobbying efforts.

President Carter signed the bailout legislation in January, 1980. His administration saved face by requiring Chrysler to raise its own financing for the loans. Iacocca could later brag that the company returned to profitability by 1983 and repaid its loans. No harm, no foul, right? What a triumph for bailouts! At least, that was the general impression conveyed. Yet American consumers paid for Chrysler’s comeback in the form of taxes and quotas levied on imports of Japanese automobiles. That price was very steep.

The biggest price, though, came later. The Chrysler bailout set the stage for the later bailout of General Motors and Ford. The precedent set by Chrysler made it easy – indeed, virtually inevitable – to bail out the “Big 2” when their time came. Not only was it that much harder to reject the same bogus “jobs” rhetoric Iacocca had advanced, but the mere fact that Chrysler had done it and gotten away with it set a psychological minimum standard for treatment of ailing corporate giants. Previous bailees had been either quasi-utilities like Penn Central or quasi-government firms like Lockheed. This was a straightforward case of corporate welfare. It was a line jumped, a Rubicon crossed, a rule broken. Things would never be the same again.

Long Term Capital Management (1998)

In the late 1960s, a group of investors that included Nobel-Prize winning economists formed one of the first hedge funds, named Long Term Capital Management (LTCM). The fund was designed to incorporate asset pricing and portfolio management principles embodied in tools like the Capital Asset Pricing Model developed by William Sharpe. The most striking notions employed by LTCM were those involving portfolio risk.

LTCM designed highly risky portfolios that included long-term fixed-income instruments and currencies. It was precisely the long terms that produced the high risk, since the interest-rate risk of fixed-income securities increases with term to maturity. Currency risk likewise increases with the holding period. The high risk produced very high rates of return. So far, there was nothing remarkable about LTCM’s activities or methods. But the firm was able to offset most of the high risk through a hedge position, whose value was specifically designed to move inversely to that in the risky portfolios. Alternatively put, it was supposed to move directly with interest rates. The general idea behind this hedge investment was simple in concept but hard to achieve in practice: to rise in value when LTCM’s risky portfolios were falling in value, thus offsetting the otherwise-high risk LTCM was running. This made it possible for LTCM to earn spectacularly high profits in good times and break even (more or less) in bad times.

The hedge investment was a short position in U.S. Treasury securities. When worldwide interest rates rose, LTCM’s risky portfolio value would plummet. But LTCM’s managers knew that investors would bid down the prices of Treasury securities and, as a result, their effective yields (interest rates) would rise. Only this higher yield would make Treasury bonds equally satisfactory to investors when world interest rates had risen. The fall in Treasury-bond prices would make big profits on LTCM’s short position to offset the losses on its risky portfolios. And so it went for about 20 years until 1998.

That was the year of the Russian government default. Suddenly the world’s investors abandoned risky investments altogether. They embarked on a “flight to safety.” At that point, the U.S. government’s Treasury bond was still the prototypical riskless asset. So investors bought Treasury bonds, driving up their price and driving down their effective yields (interest rates).

Whoops! Now LTCM was losing boatloads of money on both sides of its trades. In no time it was going down for the third time, financially speaking. And its owners, having kept their eyes open for the preceding 20 years, did what any red-blooded American financier or CEO would do. They ran to the federal government for a bailout.

LTCM was not a railroad. It was not a defense contractor. It was not a car company. It wasn’t even a bank. It was just an investment company whose investment strategy had blown up in its face. Now its investors and owners were suddenly staring insolvency in the face. Except, in this case, they decided to stare Fed Chairman Alan Greenspan in the face instead. And Greenspan blinked. Acting through its New York branch, the Fed passed the plate around Wall Street and collected $3.8 billion in funds with which to salvage the firm’s investments while delivering the firm into the hands of its rescuers.

And what was the rationale for this unprecedented act? Basically, to prevent turmoil in the markets. LTCM was so big that the Fed was afraid that its failure would scare investors to death. Note that there was now no pretense of saving jobs, defending national security, preserving the sanctity of motherhood or the recipe for Mom’s apple pie.

LTCM was a hedge fund whose investors were people of considerable means. The whole idea behind the tight regulation of the investment business is to make sure that investors and investments are suitable for each other and risks are borne by willing individuals who can afford to lose the money. And now… the Fed said we couldn’t afford to let them lose the money! Why? Because the knowledge that one firm had failed would drive this group of rational investors to collectively commit irrational acts. The Fed intervened massively in capital markets to reverse the outcomes of legitimate trades because their subjective reading of collective psychology told them it was the thing to do. And they arbitrarily commandeered private resources to do so, without statutory or judicial warrant.

The Bailouts of the Great Recession and the Financial Crisis (2007-2010)

For most people, the steps taken by the federal government during the Great Recession and the Financial Crisis of 2008 seemed unique and precipitous. But our history of bailouts shows their roots extending far back in history.

The nationalizations of General Motors, Fannie Mae and Freddie Mac were preceded by the nationalization of Conrail. The bailout of GM came after the bailout of Chrysler. The bailout of a financial firm like LTCM paved the way for future bailouts of AIG, Goldman Sachs Hedge Fund and others. The numerous bank and near-bank bailouts in the Financial Crisis were the grandchildren of the Continental Illinois bailout.

The ostensible legacy of the Great Depression was that particular markets needed tight regulation. Financial markets needed it to insure that all parties had the information needed to make rational voluntary exchange possible. Banking needed it because the principle of fractional-reserve banking allowed banks in the aggregate to exert an undue influence over the supply of money through credit creation. In good times, this could facilitate inflation and the creation of bubbles. In bad times, this could cause disaster when bank runs and bank failures have a downwardly cascading effect on the money supply.

Our history of bailouts, however, indicates that bailouts began forfirms in specialized sectors like railroads, defense and banking, but gradually spread to mundane sectors like manufacturing and investment. It comes as no surprise, therefore, that today programs like TARP offers bailouts to a substantial sector of the American population. Homeowners make up a majority of U.S. households and it is not hard to envision a day when a mortgage will come with a guarantee against foreclosure.

The ultimate guarantors of a bailout are taxpayers. The government can obtain funds to bail out a business firm from only three sources: tax receipts, borrowing and money creation. Taxes reduce the real income of taxpayers. Borrowing requires the repayment of principal and interest; thus, it reduces taxpayer real incomes unless it funds the creation of a productive asset. Money creation reduces the value of taxpayers’ money holdings, which is tantamount to a tax.

When everybody bails out everybody else, the process is self-defeating. It becomes impossible and purposeless to sort out gainers and losers. Only the brokers, politicians and bureaucrats, are net gainers. Since the expenditure of resources necessary to produce the bailouts far exceeds the gains enjoyed by these groups, economists frown on the whole process. Far better to allow market to allocate resources and pass judgment on how well or how badly business firms use them to satisfy consumers. Of course, anybody who wants to voluntarily contribute their own resources to compensate losers in the competitive process is welcome to do so. When people act voluntarily, we can presume they gain more than they lose from their actions.

But when government meddling takes the form of bailouts, there is no such presumption.

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.


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.