Everything you thought you knew about economic statistics is wrong
Physicists may be the only people who understand that the quest for exact measurement of the real world is a wild goose chase -- the Heisenberg uncertainty principle tells them that the more precisely they measure the momentum of a particle, the less they can know about its position (and vice versa).
Economists are positioned at the other end of the spectrum: Their impulse to measure economic trends is fueled by an absolute confidence that at the end of the quest lies exact knowledge.
“There’s this belief that we have enough credible long-term data to come to absolute conclusions that we know what’s going to happen with stimulus spending or too much debt,” said Zachary Karabell. In truth, he said, it’s too soon to tell: “A thousand years from now, we might have just enough data points to say with some certainty that if we spend X we might get Y jobs.”
That’s the case Karabell colorfully makes in his new book, “The Leading Indicators: A Short History of the Numbers that Rule Our World.” A commentator and financial analyst familiar to viewers of CNBC, Karabell places these statistics we seem to live by in historical context, and reminds us how much important information they leave out. (He’ll be talking about the book at a Milken Institute Forum on Wednesday afternoon.)
To be precise, it’s not that the numbers are wrong -- they’re accurate enough within their own constrained little parameters -- but that they can’t bear the weight we place on them. The most glaring recent example of such misuse was policymakers’ reliance of a statistical standard proposed by economists Kenneth Rogoff and Carmen Rinehart suggesting that once a nation’s debt reached 90% of its gross domestic product, growth cratered.
The rule became the basis for post-recession austerity policies the world over, but it had a few problems. One was that it’s absurd to juxtapose debt, which is paid down over decades, with GDP, which is a snapshot of an economy’s size. Worse, the economists’ calculations were based, as three University of Massachusetts economists uncovered, on erroneous data. It was a case of the quest for precision yielding less than zero.
Karabell takes particular aim at inflation, and our reliance on the consumer price index -- or a whole galaxy of consumer price indices -- to gauge it. “No matter how well you keep or refine the statistics,” he said in an interview, “you’re still going to run into the basic issue of what they’re supposed to measure. Price stability? The cost of living for this statistical fiction called the average American? It’s probably not a good idea to guide your life by what the official inflation numbers tell you.”
But we do. Versions of the CPI govern how our tax rates change from year to year and how much retirees gain in cost-of-living raises, and factor in to our perceptions of how our investments are doing. When budget-cutters in Washington went hunting for ways to save money on Social Security, their bright idea was to tinker with the cost-of-living inflation factor.
Karabell is not opposed to the effort to measure economic trends and phenomena, just to the conviction that having a hard number means we have absolute knowledge. The most important warning in his book comes in a quote from Robert F. Kennedy, delivered during his tragically truncated 1968 campaign for president.
“The gross national product,” Kennedy said, “does not allow for the health of our children, the quality of their education, or the joy of their play. ... It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.”
