Pollyanna Creep
posted by Frank Pasquale
In the May 2008 Harper’s, Kevin Phillips argues that current macroeconomic indicators systematically overstate the health of the economy:
[Over] the past five years, [the press could have been reporting] 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range). . . .
Phillips focuses on the work of John Williams, whose “shadow stats” offer a skeptical look at official government reporting. Executive branch officials have manipulated the figures to the point that some commentators find GDP and CPI numbers useless. Food and fuel crises may barely dent current inflation figures due to a fateful decision during the Nixon administration:
[In the 1970s], Federal Reserve chairman Arthur Bums develop what became an ultimately famous division between “core” inflation and headline inflation. If the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of “volatility,” categories that happened to be troublesome: at that time, food and energy. Core inflation could be spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called “inflation ex~inflation”-i.e., inflation after the inflation has been excluded.)
What happens to our view of the economy when statistics better represent reality?
Here’s what occurred at the global level when new, more accurate measures of “purchasing power parity” were developed:
The economics profession underwent a revolution in December last year, as economic understanding of the world suddenly shifted. Suddenly the world has more poor. Incomes declined in emerging economies: down by 40 percent in China and India, 17 percent in Indonesia, 41 percent in the Philippines, 32 percent in South Africa and 24 percent in Argentina. For Indonesia, the decline was far worse than the Asian crisis, and for China and India, the decline was worse than the one experienced by Germany during the Great Depression. . . .
The event was the release of new estimates of purchasing power parity, or PPP. Measured as part of a large international endeavor called the International Comparison Program, PPP aims to accurately calculate a country’s economic power rather than simply dividing total national output by a country’s population. . . .
These new estimates will have far-ranging consequences. Literally hundreds of scholarly papers on convergence or divergence of countries’ incomes have been published in the last decade based on what we know now were faulty numbers. With the new data, economists will revise calculations and possibly reach new conclusions.
Statistics in the US may be ripe for a similar adjustment. Consider these examples explored by Phillips:
[In] 1994, the Bureau of Labor Statistics redefined the workforce to include only that small petcentage of the discouraged who had been seeking work for less than a year. The longer-term discouraged–some 4 million US adults–fell out of the main monthly tally. Some now call them the “hidden unemployed.” For its last four years, the Clinton Administration also thinned the monthly household economic sampling by one sixth, from 60,000 to 50,000, and a disproportionate number of the dropped households were in the inner cities; the reduced sample (and a new adjustment formula) is believed to have reduced black unemployment estimates and eased worsening poverty figures. . . .
[S]ince the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely, hedonic adjustment, an unusual computation by which additional quality is attributed to a product or service.
The minimization of unemployment and inflation (and maximization of GDP) can be accomplished via real economic progress, or via statistical sleight of hand. If it’s getting harder and harder to distinguish between the two, perhaps we need to focus less on aggregate data and more on the degree to which all citizens have basic needs met–such as decent schools, affordable public transit options, and freedom from fear of medical debt and health insurance fine print.
May 12, 2008 at 10:46 pm
Posted in: Economic Analysis of Law
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FJP - May 15, 2008 at 5:11 pm
In reporting “inflation ex-inflation” and the like, government accounting is no better or worse than private business. I always get a kick out of the corporate annual reports that tout how well the company is doing “after excluding one-time items,” only it seems they have a new set of bad one-time items every year. Following closely on that is the use of “EBITDA” and the like, which is in essence “earnings before bad stuff,” or “let’s just overlook the fact that we aren’t making enough money to service our debt and replace the capital assets we are using up.”
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