Phony Statistics


This blog has often pointed out the problem with government statistics (see excerpt from the Citizen’s Guide below). This quote is by Mortimer Zuckerman from an article in the WSJ analyzing the “economic recovery.” (Full article here.) Washington wants us to party like it’s 1999, but that’s not going to happen.

The measure of those adults who can work and have jobs, known as the civilian workforce-participation rate, is currently 63.5%—a drop of 2.2% since the recession ended. Such a decline amid a supposedly expanding economy has never happened after previous recessions. Another statistic that underscores why this is such a dysfunctional labor market is that the number of people leaving the workforce during this economic recovery has actually outpaced the number of people finding a new job by a factor of nearly three.

Excerpted from Common Cent$:

[A] serious problem we face today is that the feedback signals from the macroeconomy have become deliberately distorted. We hear various statistics announced every week in the media. The three main ones that capture our politicians’ attentions are Gross Domestic Product (GDP), the unemployment rate, and the Consumer Price Index (CPI). All three statistics have been manipulated in recent years with new formulas that bias the information they were designed to convey. For instance, core CPI inflation statistics, which determine wage and Social Security cost of living adjustments (COLAs), do not include food and energy price changes, even though these have a big impact on household spending patterns. Then, in 1983, housing price changes were removed from the index, further understating one of the largest costs facing families, especially in the last ten years. A widely subscribed alternate statistical service estimates that our current level of inflation as of early 2011 is closer to 10% than the reported CPI of 1%, and that our meaningful unemployment level is closer to 23% than the reported 9.4%. Our real GDP is -2% rather than the reported 3.4%.[i] The biases also indicate some conflicts of interest among those who determine these statistics. A lower reported CPI allows the government to pay out less in benefits and inflation-adjusted bonds because these payments are keyed off the CPI. We have already discussed how confidence has a real impact on the valuation of capital, so this strategy on the part of our political leaders to overstate the “good news” is not surprising. Ultimately, however, the data we use to formulate policy are misleading and have been corrupted by politics.

Given the distortions in the statistics our policymakers use to measure macroeconomic performance (GDP, the unemployment rate, CPI), it is little wonder that their preferred solution to every problem is to maximize real GDP growth to make all these statistics look better. This is also where our current macroeconomic theories and tools gain the most traction with their proposed solutions. It’s a little bit like the old saying that if you only have a hammer, every problem looks like a nail. Economic growth has become the solution for every problem. We can agree that growth is a good measure of material well-being and brings improvements in the quality of life. But, as we have demonstrated with our simple model of sustainable growth, the economy is a system of flows between consumption, saving, investment, and production over time. This system of flows is a distributional process. Sustainable economic growth is a function of how we distribute or allocate our resources across different activities over time. So while politicians and economists have been focusing on the production problem—how to produce more—ultimately, we must also face the distributional problem, for which we have few solid answers.

[i] A detailed discussion of these statistics is beyond the scope of this brief guide but can be referenced here:


2 thoughts on “Phony Statistics

  1. Pingback: Money Delusions | Casino Capitalism and Crapshoot Politics

  2. Pingback: Gross Output Statistics | Casino Capitalism and Crapshoot Politics

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