Now, the point was made by a gentleman up here that, how come inflation and interest rates rise together? Well, the point I was trying to make, if we had more time, was, I would explain to you that inflation is the result of rising interest rates. And the reason they rise together is that interest rates rise first, and then inflation follows. How you are going to marry the two ideas-Carter's popularity and Carter's success is that he has convinced the conservatives of this country that he has fiscal responsibility. Every American citizen, husband and wife living together, have one thing that they cannot do, and that is spend more money than they make. If they spend more money than they make, one of two things happens: They end up in divorce or bankruptcy, or both. And one of the reasons why we have an increase in the number of households is the number of single people, formerly married, living alone. The public would like low inflation. Well, we are going to get low inflation, whether we do anything about it or not, with the next recession. But low interest rates provide money for capital formation, and what we are doing with high interest rates is, we are destroying capital and we are destroying savings. So, what I want to do is to marry the idea of, keep the cost of money down which will keep inflation down, with the Republican philosophy that people have to live within their means. This is what I am trying to say. The CHAIRMAN. The time of the gentleman has expired. Mr. Pattison? Mr. PATTISON. I am also fascinated by your testimony; and I intend to read all of your booklets. Mr. SINDLINGER. Thank you. Mr. PATTISON. You very briefly mentioned, when you were talking about statistics, the unemployment statistics, and I wonder if you would expand a little bit on that. Mr. SINDLINGER. Well, in 1975, in April and May, the Government made a very bad error in its count of the unemployed and we were going into the recession in April and May of 1975. The BLS will admit that they made the error, and if you talk to them, they are saying that we will trend it out. And that is what they are doing-the process of trending out the error and the process of trending out the whole statistical problem of the seasonal adjustment and this applies to M, and all the money figures. The reverse is true of bank savings. But the statistical quirk makes the first half of every year look better than it is, including GNP, and it makes the second half of the year look worse than it is. So, last year, in the middle of the year, you started to read about an economic pause, and now you are reading about another economic pause. This is a statistical aberration in the economy. What worries me now is that now we are reading about an economic pause, and all of the Government figures are falsely coming down because they were falsely inflated in the first half. With the psychology that I am measuring, this is going to amplify this coming recession. I don't think any Member of Congress realizes how much an error there is in the statistical seasonal adjustment. If your read the Open Market Committee of the last April meeting, they were talking about a growth of credit explosion. Well, the growth figures they were reading were the seasonally adjusted growth figures, and they were talking about the growth of bank loans. Those were only seasonally adjusted. They are only seasonally adjusted, so they are reading all of these seasonally adjusted figures that were going out, which was creating the M1 to falsely go up. And they said the economy is overheating, and they aborted it. Now, what I am concerned about now is with the coming recession and the Government figures going to be down. Unemployment this month cannot possibly be 7.1 percent. If they do it right, it will be 7.4 percent, and it will probably come in at 7.2 percent. You are going to see 8-percent inflation-I'm sorry, 8-percent unemployment in November of this year, if nobody more loses a job, just on the statistics of the data. And if you are interested, I have a report that I will send to you that will show you exactly where this error is made. That is why I spent all this time on these booklets, to document how the statistical errors crept in. The first booklet that I have explains why this has only happened recently. The seasonal adjustment worked OK for the last 30 years until the last 2 years. Next year, it will be worse. Then, next year, it will be far worse. Ten years from now it will work again. Mr. BLANCHARD. If the gentleman would yield for a second, I would like to receive a copy of that booklet, too. Mr. SINDLINGER. I will see that you get it. Mr. PATTISON. There are those who take the position that the unemployment figures in an increasingly postindustrial world are less and less valid, compared to an industrial world. Mr. SINDLINGER. You are talking about the reliability of the figures? Mr. PATTISON. No; not so much reliability-validity, that they don't mean as much because there is the notion that, as productivity increases through cybernetics and a variety of other productivity and technological devices, that they replace people and obviously more and more people are not going to be working, and some of them will be people who would like to work, and there will be some of them who treat that as a benefit and they go fishing, or vacation, or retire. Mr. SINDLINGER. Well, that's fine, as long as somebody else is paying for their fishing. Mr. PATTISON. I agree. Mr. SINDLINGER. This is the problem. In the next recession, they are going to have to pay for their own fishing. Mr. PATTISON. Then, it becomes a question, then, of how do you distribute it? Mr. SINDLINGER. That is correct. This is our problem. Mr. PATTISON. And that is really the fundamental problem. Mr. PATTISON. Thank you. The CHAIRMAN. Mr. Sindlinger, I would like to have you tell us precisely what the Federal Reserve does by way of seasonal adjustment, to the actual monetary figures. What is the matrix, the template, by which they change things? It must be written down someplace. We ought to have that in the record. Mr. SINDLINGER. Well, the procedure that the Federal Reserve Board uses is exactly the same procedure that is used for every Government data that you read. Now you get, each month, a booklet from the Council of Economic Advisers. And I'm sure every Member of Congress uses it The CHAIRMAN. The economic indicators? Mr. SINDLINGER. Right. Now if you read all the pages in that booklet, every page, except three, out of all the tables says in small print "seasonally adjusted." Now the seasonal adjustment thesis is outlined in booklet No. 1 that I gave you in these little booklets. The CHAIRMAN. Yes; but where is it outlined? I really couldn't find it. Mr. SINDLINGER. The Federal Reserve Board-Let me explain the theory of the seasonal adjustment. I think I can do it in a few minutes. The theory of the seasonal adjustment was that because Easter and Christmas and tax time and seasonal things happen throughout the year, we want to take the raw data and statistically smooth out these aberrations. The CHAIRMAN. Let me interrupt you at that point. Why is it difficult for any one to say what any 3-year-old must know, that Easter, and Christmas, and tax time do odd things to the money supply, and we ought to expect odd things to happen? Mr. SINDLINGER. Now you are asking my question. Why don't we look at the data year-to-year, look at the raw data? Why do we have to make monetary policy decisions and this is what I would like to have Dr. Burns answer: Why don't we look at the raw data? If they have looked at the raw data, as I have documented, we have no statistical change. The CHAIRMAN. With friends like the seasonal adjusters, who needs enemies. Mr. SINDLINGER. Well, it gets a lot of employment. I would say that 200,000 jobs in Washington are seasonally adjusted. But let them seasonally adjust the stock market. That would be more fun. Or let them seasonally adjust interest rates. The CHAIRMAN. Let us go back, however, So in what piece of paper is what these rascals do set forth? Mr. SINDLINGER. It is done by a computer program identified as the X-11 program. The CHAIRMAN. And what finite human being created that? Mr. SINDLINGER. No; he did it originally when he was at the Bureau of the Census. And he has been successful in getting every Government data seasonally adjusted, and the Fed adopted it and are using the same thing. All Government data, everything you have, is seasonally adjusted by this program. The CHAIRMAN. But the human input has to be, does it not, somewhat different? For instance, if you are looking at unemployment, you probably would want to reflect the fact that in June a lot of high school kids come on the labor market, and then they disappear in September. So that is one thing. Mr. SINDLINGER. Well, why don't we just look at The CHAIRMAN. Let us talk about the money supply. Mr. SINDLINGER. I think probably the St. Louis Fed-I got an impression from the man who was sitting in my seat earlier that he is not too impressed with the St. Louis Fed, nor am I. I think that probably the St. Louis Fed had a lot to do with this. For me to answer that question, I have not been able to get the answer myself. I don't understand why we have to take our moneywhy don't we take the money as the banks count it and look at it, this year versus last year? Why do we have to take that money and go through all of these statistical gyrations? The CHAIRMAN. Then it becomes our task to pursue this with the Fed, and I will do that tomorrow. Mr. SINDLINGER. I would like to know why we do this. Why don't we look at the raw data? Because if they did, the Fed would not have aborted the economy in 1975, or in 1976, or in 1977. Now, if Congress does not make this illegal, they are going to do it next year. The CHAIRMAN. The seasonally adjusted M, went up 19-plus percent in April 1977, but what did the actual, sure-enough, honest-to-God M1 do? Mr. SINDLINGER. In my testimony, look at page 6. The CHAIRMAN. It went up how much in April? Mr. SINDLINGER. On March 30th, it went up 4.7 percent. On April the 6th, it went up 6.7 percent. On April 13th, 6.3 percent. On April 20th, 5.7 percent. The following week, 6.7 percent. The CHAIRMAN. Is that an annual growth rate? Mr. SINDLINGER. That is year-to-year. The CHAIRMAN. Was it business-as-usual, or a little higher? Mr. SINDLINGER. Well, it wasn't much higher. The CHAIRMAN. With these figures, the Fed would have relaxed, and not have felt compelled to raise interest rates in May so as to compensate for it. That is your point, isn't it? Mr. SINDLINGER. That is my question. The CHAIRMAN. Well, I wanted to inquire of you whether you knew exactly what the template was. And since you don't Mr. SINDLINGER. No, don't misunderstand me. I do know. I have been talking to people at the Fed for the last 25 years. I know what the procedure is, and I would like to have you ask some of the people at the Fed who work on the figures, tell you how they seasonally adjusted last year. I think you ought to talk to some of the people on the staff who worked with the seasonal adjustment, and I think you are going to learn something. The CHAIRMAN. Well, we will ask Chairman Burns to be armed with that. Unfortunately, there is now a record vote on. I would ask Mr. Blanchard or Mr. Pattison whether they have additional questions? Mr. PATTISON. No: Mr. chairman. The CHAIRMAN. Mr. Blanchard? Mr. BLANCHARD. I have none, Mr. Chairman. The CHAIRMAN. In that case, I want to thank you, Mr. Sindlinger, for your great contribution to our deliberations. We are going to follow this seasonal adjustment matter. Mr. SINDLINGER. Mr. Chairman, it is a very serious thing. The CHAIRMAN. We should be informed on both the seasonally adjusted series, and the honest-injun series. Mr. SINDLINGER. If we were writing a script for a television program, we would be having a good comedy. This is comical what is going on, and we are making decisions involving the monetary policy of the Nation based upon statistical aberrations. I don't like it. The CHAIRMAN. Very good. We are grateful to you, and thank you very much. We now stand in recess until tomorrow morning at 10 on these hearings, in which case we shall hear from Chairman Burns. [Whereupon, at 12:50 p.m., the hearing was adjourned, to reconvene at 10 a.m., Friday, July 29, 1977.] |