Misleading Indicators

Unemployment rates, GDP, and CPI all look to measure our world with methodologies developed decades ago.  Do they still do their jobs?  Zachary Karabell in “The Leading Indicators: A Short History of the Numbers That Rule Our World” explores that question and here are some excerpts from my reading:

the world we are living in is not the one that these statistics depict. (page 2)

As long as the world remained unmeasured, however, anecdotes could always be trumped by anecdotes, and those with power and money could always argue that things were better than what a few malcontents claimed. (page 30)

With the passage of the Pendleton Civil Service Act in 1883, civil service became a profession rather than a reward for political support, and with the spirit of reform on the rise, more people were drawn to government as an agent of positive change.* (page 3)

It’s been said that accepting and acknowledging a problem is the first step toward solving it. (page 40)

New Deal laws were designed to support farm prices and output, and they authorized direct government intervention in industrial America in order to restore confidence, generate activity, and create jobs.  Equally vital for the future arc of American society was the rush of enthusiasm for better information and for statistics that would prove that these programs were working.  (page 41)

Employment numbers today are based on samples and surveys of sixty-four thousand businesses and four hundred thousand households, which is less than a half a percent of the population. (page 44)

Economics then was still a branch of the humanities, closer to history and philosophy than to math and science.  It was free from the intricate formulas that soon became its hallmark.  Any lay reader today can pick up a copy of Adam Smith or of his influential contemporary David Ricardo and understand what is being written.  The same cannot be said of someone picking up a copy of the journal of the American Economic Association in 2014. (page 53)

But while [William Petty] may have been wide of the mark statistically, his work did succeed in establishing the principle that sound policy could be made only if rulers could gauge the actual wealth of the nation. (page 59)

In Western Europe and in the United States during the industrial revolution, measurement was all the rage, in part from the belief that what could be measured could be tamed and shaped. (page 60)

The goods produced by a furniture factory owned by an American businessman operating in England would be included in GNP.  But not in GDP.  Conversely, a factory owned by a Japanese or Chinese company in Tennessee today has its output included in US GDP but not in GNP.  Given that the extent of these foreign ventures was minimal in the 1930s, gross national product was the preferred metric, and not until 1991 did GDP fully supplant GNP. (page 67-8)

Until the mid-1930s, the term the economy appeared hardly at all; after that, its usage soared.  In short, the leading indicators invented “the economy.” (page 78)

We crave order and meaning, and so find it. (page 94)

Within a few years, the mandate of the Fed, established in 1913, was expanded not only to include price stability and the oversight of banks but also to ensure full employment as well. (page 114)

The CPI was the direct successor to prewar cost of living indices, and was christened in 1945 as the “consumer price index for moderate income families in large cities.” Ever since, it has engendered dark conspiracy theories about government officials purposely understanding (sic) the cost of living in order to pay citizens lower Social Security benefits and allowing corporations to underpay workers.  (page 117-8)

Even though the BLS approach led to chronically higher reported inflation than the alternative approaches (given that it made no allowance for the substitution effect), it still attracted the ire of labor leaders such as Meany and has ever since. (page 123)

They wanted to capture the inner workings of the world of economic affairs with the same level of precision they thought that physicists possessed. (page 124)

The CPI was underpinned by surveys of thousands of families (and today the number is seven thousand families each quarter and another seven thousand keeping meticulous diaries of what they have spent. (page 124)

In 1978 Congress passed the Full Employment and Balanced Growth Act, which set a target of 4 percent unemployment and moderate inflation.  Of course, like many pieces of legislation before and since, it left vague how those targets were to be achieved. But the passage of the bill made better calculations of both numbers that much more imperative. (page 128)

The specific solution to the volatility of food and fuel prices was a new index called core CPI, which was CPI minus food and energy costs.  It was unveiled in 1977.  In the years since, people have derided core CPI as “inflation minus whatever gets more expensive,” (page 129)

Cost of living measures what it actually costs people to meet their needs, versus CPI, which is an index of prices.  (page 132)

The mutability of the number fuels popular beliefs that these figures are gamed in favor of those who have power and resources (government and business).  Writing in Harper’s magazine in May, 2008, Kevin Phillips described the legacy of suspicion surrounding official inflation figures, saying, “Since the 1960s, Washington has been forced to gul its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economic are measured.  The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitutde, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt, even as real economic growth has been slower than claimed.” (page 133)

As the indicators developed totemic status as absolute markers of what was going on, they were assessed not in terms of their methodological rigor but for their social and political consequences….They were created to empower officials and give policy makers clarity.  They were not designed to give Mr. and Mr.s Smith insight.  Once these metrics became part of our collective culture, however, Mr. and Mrs. Smith took great interest in what the numbers said, and often found that the numbers reflected their own experiences hardly at all.  (page 133-4)

How individuals experience “the economy” is distinct from how statisticians measure the economy.  The indicators were invaluable tools in the first half of the twentieth century, especially in contrast to the complete absence of such indicators for most of human history.  But by the end of the twentieth century, the gap between what these numbers say and what many people and businesses experience was growing untenably wide. (page 134)

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* After 131 years it might be time for a new Pendleton Act .

5 responses to this post.

  1. Volume affect, not attentive to ‘what if…..? questions, and just designing low use in today’s world, brings our systems to their knees as evidenced by ObamaCare, immigration, full gerrymandering, and those many others around, culminating in the vast populations in troubled world areas, including here!

    Reply

  2. Posted by Javagold on July 12, 2014 at 12:17 pm

    TRUMP PLAZA CLOSING !!! Oh boy, NJ is finished. ….. these public takers are in big big trouble ….. the end of their ponzi has arrived.

    Reply

    • Posted by MJ on July 13, 2014 at 2:03 pm

      Java. That has very little to do with the article other than another casino may be closing. Big surprise. Too much competition in other states.

      Reply

  3. Hey! This is my 1st comment here so I just wanted to give a quick shout out and tell you I genuinely enjoy reading your articles.
    Can you recommend any other blogs/websites/forums that go over the same subjects?
    Thank you so much!

    Reply

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