Tuesday, May 13, 2008

Kevin Phillips, Bad Money and the Consumer Price Index

It's always a real ego boost to be quoted twice in a bestselling book. Kevin Phillips did me the honor by noting my revulsion over the Labor Department's Consumer Price Index.

I'll be straight with you: the CPI goes beyond the government's expedient fabrications on the economic conditions of everyday Americans. The index is a bald-faced whopper on a scale of Pecos Bill and Paul Bunyan. It's so mythological in scope that just about any Disney movie is
much more credible.

The CPI grossly understates the largest expense for most Americans: home ownership costs. Instead the blind stat-lovers at the Bureau of Labor Statistics embrace a goofy measure called "Owner Equivalent Rent," that is, what would your home cost if you rented it out? It gets better. The government uses the CPI for the basis of cost-of-living increases for Social Security, so older folks on fixed incomes are getting hosed. What about rising property taxes, home maintenance or even adjustable-rate mortgages? Taken at look at your utility bills lately? The government doesn't want to know about it. Its "core" CPI even strips out food and energy, which, as you know are rising at double-digit clips with no end in sight.

Although the government can certainly cap what it pays seniors getting Social Security, the monthly expenses of the elderly keep going up. Did you know that Medicare only covers about 40 percent of out-of-pocket medical care for those over 65? There are large gaps in coverage, not to mention dental care and a host of things that aren't covered. And with fewer and fewer companies paying defined-benefit pensions -- it's a 401k world now in W's "ownership society -- it's unlikely that the CPI measures anything important about the true cost of living.

So when Kevin Phillips noted my ire over this phony stat, I was happy to see it in his bestselling Bad Money, an indictment of the financial system and how debt is this huge anchor weighing the whole system down. Will it collapse under the huge burden of personal, corporate and government debt? We know that the Medicare and Social Security system have run up trillions in unfunded liabilities, that is, nobody has socked away the money to cover future payments.

We also have no way of knowing how derivatives, or what Warren Buffet calls "financial weapons of mass destruction" are poised to wreck future havoc with the thousands of debt securities the government and corporate sector have floated in the last decade.

While Phillips's book sounded the alarm on not only the rising level of debt on every level, it highlighted the inability of elected government officials to act on this unfolding fiscal nightmare.

To me, one of the greatest fiscal lies foisted on the American people is the pretension that anything has been done to cover the future liabilities for Medicare and medical expenses in general. The Medicare program alone may be bust within 10 years unless some major program cuts or tax increases are put in place. No candidate dares to step within 10 feet of this issue, Ironically, a single-payer national health program, wouldn't even begin to fix this problem.

On the personal finance front, it's clear that people are leveraged to the hilt and tapped their home equity just to pay everyday bills. What's left over is financed through credit cards. Want an explanation of the housing bust? People had to borrow more than ever to buy homes, so Wall Street stepped in with even more flexible credit terms called option, or interest-only adjustable mortgages. Even less well-heeled Americans with no credit rating to speak of got a piece of this action. The 21st Century American Dream: Easy terms, no downpayment, pay later -- or never.

If the government wanted to do something useful, it should publish a consumer retrograde index. This gauge would measure how much people are falling behind. It's simple: Subtract personal income growth (or declines) from the increase in household expenses. I want to see some negative numbers out there, because after inflation and taxes, most families are in the hole these days. Wage growth hasn't kept pace with the cost of living in this century.

With home values dropping -- 75% of home prices across the country dropped this year -- there's no home equity to prop up falling real wages. The stock market is just about where it was before the credit crunch. If we're heading into a recession or facing stagflation (stagnant economic growth with inflation), forget about Wall Street bailing anyone out. They have problems of their own these days.

This whole economic drama is called falling behind. My index would also account for how much more employees have to pay to cover lost benefits. In an ownership society, corporate America has phased out the guaranteed defined benefit pension for the unguaranteed 401(k). You fund it. You pay the expenses. You learn about investing. If you come up short at 65, tough luck.

Now corporate chieftains and MBAs who are walking away with record pay packages are whittling away at employer-provided health benefits. Some 6 million lost health care coverage from 2000 to 2007. Certainly this raises the cost of living for these families in some measurable way. This is my last shout-out for now on what's happening with the Consumer Price Index. Make it honest or make it fly away like the dodo.

Here's Kevin's Huffington Post piece, headlined "Washington's Great No Inflation Hoax" (May 8)

Billionaire California bond manager Bill Gross calls it "a haute con job." Bloomberg News columnist John Wasik describes it as "a testament to the art of economic spin." More and more shoppers and consumer simply disbelieve it.

The subject of this scorn is the federal government's vaunted Consumer Price Index or CPI. Americans are now beginning to understand that this indicator has its own share of gimmicks not unlike a sub-prime mortgage or the six pages of fine print that accompanies your credit card agreement.

Some of these CPI ingredients -- product substitution weightings, "hedonics" (price reductions for added product quality or satisfaction), and use of owner's equivalent rent (instead of home ownership costs) -- have a comic aspect suitable to mockery by Bill Maher, Stephen Colbert or Jon Stewart. But in a larger sense, they're not remotely funny. That's because the federal minimalization and misrepresentation of inflation, pursued statistically over the last 25 years, has been the main buttress of Washington's over-favorable and self-serving portraiture of the U.S. economy.

Distortions aplenty have followed. Some of the most pernicious include the shortchanging of federal pension and Social Security obligations and cost of living increases, a parallel shortchanging of cost-of-living increases in wage contracts tied to the federal CPI, the suppression of equitable interest payments on bank accounts and certificates of deposit, and the camouflaging of weak U.S. economic growth through inadequate adjustments for inflation. The benefits to the executive branch in Washington jump out -- huge annual federal savings on Social Security and pension outlays, as well as on the amount of interest paid on the federal government's multi-trillion-dollar debt. Some $250 billion a year could be involved.

If many individuals are losers, many businesses and financial institutions have been winners. Minimal cost-of-living increases favor corporations, while low interest rates make money cheaper to the financial sector. In particular, the gargantuan $10 trillion increase in financial-sector debt since 1994 could become unmanageable if mounting inflation forced borrowing costs up to 8% or 9%. And it is axiomatic regarding equities that when rates rise in the bond market, that competition usually undercuts stock market values.

In short, there have been three big gainers from understatement of U.S. inflation: the federal government, wage-paying businesses and the institutions and markets of the swollen U.S. financial sector. But skeptics have a weighty counter: Okay, it's easy to understand how they all might profit from understating inflation. But if the understatement is patently false, how can they hope to get away with it?

In fact, the belief by many conservative U.S. economists that inflation is under control, despite global indications to the contrary (including soaring commodity and energy prices), has a major ideological component -- their fidelity to monetarist economic principles (that only money supply expansion can create inflation) and to the Efficient Markets Hypothesis (that markets process all available information, so that if inflation were serious, markets would have reacted already). As late as January, monetarists on the Federal Reserve Board, notably Chairman Ben Bernanke and colleague Frederic Mishkin, believed in the new-version CPI and argued that U.S. inflationary expectations were safely "anchored."

Financial economists and money managers generally agree. A late April survey of 120 U.S. institutional money managers by Barron's, the financial weekly, found that on average, they predicted a CPI inflation rate of 2.72% in December 2008 and just 2.79% in December 2009. Elsewhere in the world, central bankers and politicians are worrying about another wave of commodity inflation akin to that in the 1970s, but U.S. money managers take comfort in the Efficient Market Hypothesis and in the wisdom and sanctity of the CPI.

Critics, by contrast, smell a potential disaster. Oil is up over 80 percent in the last twelve months. The New York Times' consumer reporter, W.P. Dunleavy, wrote on May 3 that his own groceries now cost $587 a month, up from $400 a year earlier. That's a 40 percent increase. Reports in the financial press make frequent reference to foreign investors who distrust the U.S. dollar because they calculate true U.S. inflation at 6% to 9% including food and energy.

California economist John Williams, who runs an organization called Shadow Statistics, contends that if Washington still used the CPI measurements applied back in the 1970s, inflation would be in the 10 percent range. My own analysis, set out in much more detail in an article in the May issue of Harper's, comports with that of the cynical foreign investors.

Therein lies the danger. If the current inflation rate is really 6-9 percent instead of the 2-3 percent claimed by government and most U.S. money managers, then Washington's official estimates that the economy still grew at a rate of some 0.6 percent in the first quarter of 2008 become nonsense. Subtracting a 6-9 percent inflation rate from nominal GDP growth would identify an economy that was deteriorating and shrinking, not growing. Concerned foreign dollar-holders would become even more concerned.

In theory, a vigilant Congress might want to hold hearings, but in practice I suspect not. Democratic presidents (notably Bill Clinton) have been involved in the numbers game along with Republican administrations. Neither party has clean hands. Far more likely that any serious investigation will be mounted clandestinely by central banks or sovereign wealth funds in places like China, Singapore and Saudi Arabia as part of their ongoing study of just how much longer they can continue to support a deteriorating U.S. dollar. It is not a happy prospect.

Kevin Phillips's new book Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism was published by Viking in April. His article on untrustworthy government statistics ("Numbers Racket") appears in the May issue of Harper's.

Thursday, May 8, 2008

Smart Home: Green + Wired Revisited

Up for some real, world class green homebuilding?

Head on down to the Museum and Science and Industry to see the Smart Home, which was designed by Michelle Kaufmann. Not only is every detail green, but it's modular. I saw them bring it up on flatbed trucks and install it with cranes.

This is my second visit to the home. When I was out two months ago, I saw a crew hoist the five modules onto the foundation. It only took a few hours. The finished product is a cubist interpretation of a two-story city home. It feels much larger than its 2,000-odd square feet. While exquisitely modern, it's not a post-industrial eyesore. "Nanowalls" are accordian doors that open up the home to exterior courtyards and patios. The outside is embraced in this light and airy manufactured home, yet it doesn't sacrifice any intimacy.

Ironically, the home stands in the footprint of a Frank Lloyd Wright Usonian Home. The house itself is nestled in a courtyard of burr oaks that Frederick Law Olmsted himself must have seen and left alone when he was planning the World's Columbian Exposition -- in 1893. Landscape designers have built in bioswales and permeable paver bricks to let the water seep into the soil. Having seen the "before" and "after," I can tell you this is a remarkable project.

A lot of what is being done in this home can be done anywhere. A big exception is that all of the lighting is LED-based. While that's extremely expensive now ($90 a bulb!), the power consumption was such that the home's thin-film Unisolar panels were generating more power than the house was consuming -- and this was during a downpour! New PV technologies create electricity from several spectrums of light, even during an overcast day.

How do I know how much power was being generated? I saw the whole-house energy monitor on a big-screen TV in the living room. The home's Lutron energy system was so comprehensive, it was able to automatically open and close shades and turn off HVAC in rooms that weren't being occupied. The actual high-velocity air ducts, by the way, were roughly the diameter of jelly jar lids. The higher speed air reduces the need for air conditioning. The energy monitor will tell you when ComEd is producing cheaper, off-peak power, so you can program your appliances to run at 3am, when juice is less dear. (A ComEd representative was only too happy to point this out, although the vast majority of homes they serve can't do this now, but should).

I know Michelle spent incredible attention to the materials she used in this home. There were no VOCs in any of the coatings, so the house lacked that "new house" smell of volatile chemicals (really bad for asthma sufferers). The kitchen countertops were bamboo and recycled chardonnay bottles were used in the glass bathroom tiles.

In every space, there was some green element. The green roof was growing chives and sedum and the cistern in the crawl space was storing 5,000 gallons of water for irrigation. The garage had glass doors on either end and was as tightly insulated as the house, so you could convert it to living space at some future point, "when you don't need that second car," Michelle told me.

Such an elegant house also hummed with low-tech ideas that have been around for millenia. A stairwell served as a chimney stack because windows could pull up hot air using the Venturi effect. Chairs were made of recycled plywood. Gutters drained into the water holding tank. A graywater reservoir collected dishwater.

The only drawback is that admission is $23 for adults, $22 for seniors and $14 for kids age 3-11. Nevertheless, if you're serious about major innovations in green building, this is a must-see. The house itself is a major revolution waiting to happen not so much because of its green features, but because it's built in a factory and will be mass produced some day, bringing an eco-conscious, energy-stingy home to the masses.

I think Michelle is the Henry Ford of home designers. She will do more to restore the American Dream once we get out of this housing crisis than a capitol dome full of politicians. And you can step inside her solution to global warming and resource gluttony. That's more than I can say about the hollow talk coming out of Washington these days.

If you don't want to see the home, then partake of the many pleasures of one of world's greatest and most interesting museums. The farm exhibit has been totally revamped and is really kid friendly. A new genetics exhibit is first rate and hands on. Old chestnuts like Moore's Fairy Castle, the coal mine, the Zephyr, circus section and Crown Space Center (you can play with the Mars Rover!) are still enthralling. If you're really, really bored, there's always the IMAX movie and countless smaller exhibits. Currently there's a glass-blowing special exhibit where you can see a wide variety of glass from tiffany windows to art glass. As Walt Disney would say, "there's something for the entire family," but MSI is much more of a bargain. The u-505 submarine alone is worth the price of admission. You can also see a lunar module, Apollo and Gemini spacecraft.

Here's the press release for the Smart Home for more details. If you see it, let me know what you think. Enjoy!

Michelle Kaufmann Unveils First mkSolaire™
at the Museum of Science and Industry’s Smart Home: Green + Wired Exhibit

Chicago Exhibit Showcases the Best in Green Living and Technology

Chicago, IL—May 8, 2008--- Today Michelle Kaufmann, award-winning architect and green living expert focused on thoughtful, sustainable design, opens the doors to the first mkSolaire™ home ever built as part of the original Museum of Science and Industry (MSI) exhibit Smart Home: Green + Wired, Powered by ComEd and Warmed by Peoples Gas. The exhibit will feature a fully functioning version of the mkSolaire, the latest prefabricated, modular home configuration from Michelle Kaufmann Designs (MKD). With the help of key partner Wired magazine, the home will incorporate “smart” technologies, with a focus on energy efficiency, making greener choices and homeowner awareness. Visitors to the 2,500 sq. ft. home, will have the opportunity to learn about the future of innovative, environmentally focused architectural designs and lifestyle solutions.

“The Smart Home is an educational experience that shows visitors, adults and children alike, that an eco-friendly lifestyle is not only good for the environment, but also good for you. I hope that visitors to the Museum and residents of the city will take with them these lessons about sustainable lifestyle choices and adopt them as their own,” said Michelle Kaufmann on the goal of the Smart Home.

“To celebrate the Museum’s 75th anniversary, we brought together a world-class team to create a fully functioning home to explored the promises of green building and technology while honoring the past,” said Anne Rashford, director of temporary exhibits and events for MSI. “We chose Michelle to design the Smart Home because of her exceptional talent and tireless commitment to building and living green.”

5 EcoPrinciples: Unique Solutions for a Healthy Home + Lifestyle

When designing any space, including the Smart Home, MKD thinks of and creates sustainable design based on 5 EcoPrinciples (http://www.mkd-arc.com/company/ecoprinciples/): smart design, eco materials, energy efficiency, water conservation, and healthy environment. “We believe so strongly in each of these principles that we implement every one of them into our designs,” explained Michelle.

Revolutionary Building Techniques

Construction of the Smart Home began in December 2007 with the groundbreaking and laying of the foundation at MSI. Concurrently, the home’s various modules were constructed by All American Homes at the company’s factory in Decatur, Indiana. Within the factory the home’s entire infrastructure was built before being transported and set on the completed foundation located on the East side of the Museum. The University of Illinois Extension partnered with the team to develop the home’s native site landscape.

MKD employs prefabricated, modular building techniques in all their homes, which reduce resource consumption, waste, costs, and building time by up to 50%-75% over conventional building methods. In addition to the mkSolaire, which was designed specifically for healthy living within an urban environment, MKD offers four other prefab, modular configurations: Sunset BreezehouseTM, mkLotusTM, mkLoftTM, and GlidehouseTM, as well as custom homes and larger multi-family and community developments.

Anyone can visit Michelle’s blog (http://blog.michellekaufmann.com) to get an insider’s perspective on the entire building process with insightful entries, detailed images, and engaging videos.

The Smart Home: Green + Wired exhibit is a true celebration of the future of architecture, design, and technology. This is a must-see exhibit for anyone who is interested in learning about how to incorporate smart and simple solutions to create a healthier and more environmentally friendly lifestyle. The exhibit is open to the public beginning May 8, 2008 through January 4, 2009. Tickets are available at www.msichicago.org.

Smart Home: Green + Wired, powered by ComEd and warmed by Peoples Gas, is also sponsored by American Honda Motor Co., Inc.; Dominick’s; and the Motorola Foundation as part of the Museum’s 75th Anniversary.

About Michelle Kaufmann Designs

Michelle Kaufmann Designs (MKD) is a full service design/build architectural firm that specializes in sustainable, innovative, high-quality modular architecture. The goal of her company is to make it easier for people to build green and live a more sustainable lifestyle. MKD was founded in 2002 and is headquartered in Oakland, CA. MKD owns and operates its own factory, mkConstructs, located just outside Seattle, WA. mkConstructs builds homes for California, Washington, Oregon and Hawaii. Michelle Kaufmann Designs works with key factory partners to handle increasing volume and expanded territories. More information can be found at www.michellekaufmann.com

About the Museum of Science and Industry

The Museum of Science and Industry’s mission is to inspire the inventive genius in everyone by presenting captivating and compelling experiences that are real and educational. The Museum first opened its doors on June 19, 1933.

In 2008—more than 175 million guests later—the Museum commemorates its 75th Anniversary with a year-long celebration. Located at 57th Street and Lake Shore Drive, the Museum is open every day of the year except December 25. Regular Museum hours are 9:30 a.m. until 4 p.m., Monday through Saturday, and 11 a.m. until 4 p.m. on Sunday. Extended summer hours, until 5:30 p.m. each day, will be offered from May 24 to Sept. 1. The Museum offers indoor parking and is accessible by CTA and Metra. The Museum is supported in part through the generosity of the people of Chicago through the Chicago Park District. For more information, visit the Museum’s Web site at www.msichicago.org or call (773) 684-1414 or (800) GO-TO-MSI outside of the Chicago.