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Wall Street: The dark theory

`Pollyanna Creep' theorists blame Washington's economic statistics.

By Richard Siklos, editor at large
Last Updated: September 19, 2008: 3:13 PM EDT

Economist John Williams says that government statistics misleading.
Pimco bond manager Bill Gross has been critical of the CPI.

NEW YORK (Fortune) -- No shortage of villains stand accused of igniting the brushfire raging across Wall Street: greedy lenders, gullible home buyers, negligent regulators, numbskull credit ratings agencies, and vicious short-sellers, for starters. Maybe they share the blame. But what if the underlying problem goes deeper? What if the reality is that the US economy has been a lot worse than was thought for a long time, and now the chickens are finally coming home to roost?

That's the dark thinking beyond what is known as "Pollyanna creep," a phrase coined by an economist named John Williams and supported by a cadre of other macroeconomic dissidents.

Williams, who lives in California, runs a Web site called that trades in the idea that key government statistics have become so optimistically misleading as to become essentially useless. Yes, this sounds a bit like the thinking of the black helicopter crowd, or the plotline of a Matrix movie. But given what's gone on in the financial sector of late, it doesn't sound quite so fringe.

Indeed, over the past few years some of Williams' views on economic indicators - the Consumer Price Index in particular - have been echoed by well-known, if generally pessimistic, investment gurus like bond investor Bill Gross, strategist Stephen Roach and newsletter writer James Grant.

"The numbers are misleading, and Wall Street uses the numbers to help sell their products," says Williams. "Recently, I'd contend that what we've been getting is absolutely junk on the GDP," he adds. The official stats say gross domestic product grew 3.3% in the second quarter, after a small increase the previous quarter.

"There's no question that we're in a recession," says Williams, "and probably have been in one since the last quarter of 2006. It didn't start with the housing mortgage crisis." (Williams, one guesses, is not on John McCain's speed dial.)

According to Williams, all the big measures have had their methodologies revised repeatedly over decades to paint the U.S. economy in the best possible light - and this has gone on regardless of which party controlled the White House. Modifications were always spelled out at the time - with rationales for doing so. Thus it's not as though this has gone on in the dark of night.


In his recently-published and rather depressing book "Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism," onetime Nixon White House adviser Kevin Phillips discusses Pollyanna creep as part of an era of "Bullnomics: the pied-piping of America toward a misleading financial ideology (the efficiency and reliability of markets), buttressed by a spectrum of dubious thinkers, doctrines and enablers."

Phillips contends that some of the biggest changes to CPI calculation took place between 1997 and 1999, "while the public and the politicians were preoccupied by bull market euphoria and the actions in Congress to impeach Bill Clinton."

In their effort to reduce Social Security outlays - and buttressed by a belief that CPI overstated inflation - government economists with backing by Federal Reserve Chairman Alan Greenspan implemented controversial modifications to CPI that, among other things, tried to measure increased satisfaction from goods.

"Pollyanna creep" in many ways is not unlike the advent of "earnings before one-time items" reporting in the private-sector world - an accounting practice that was virtually unheard-of 20 years ago, but which is now commonplace. The resulting rosier view comes to be accepted because it suits the purposes of all involved - and those who highlight the bright side were no doubt rewarded.

No 'conspiracy blog'

Four years ago, Pimco bond manager Gross made waves when he published a newsletter calling the CPI an "haute con job." He recently penned an update, arguing that it's hard to reconcile the U.S.'s reported CPI rates with the much higher inflation rates around the world.

Noting that he does not write for a "conspiracy blog," Gross went on: "Just as many in the global economy are refusing to mimic the American-style fixation with superficialities in favor of hard work and legitimate disclosure, investors might suddenly awake to the notion that U.S. inflation should be and in fact is closer to worldwide levels than previously thought."

On its Web site - in a section about "misconceptions" about the CPI - the Bureau of Labor Statistics attempts to debunk the debunkers. "The improvements chosen by the BLS that some critics construe to be a response to short term political pressure were, in fact, the result of analysis and recommendations made over a period of decades, and those changes are consistent with international standards for statistics."

The Pollyanna creep crowd, naturally, isn't buying it, and this week they may have some currency. Amid the talk of hundreds of billions in financial market clean-ups, a debate over the accuracy of economic bellwethers may be a can of worms worth opening. To top of page

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