The Con in Economics – how we are being fooled by shonky Government Economic data that is fooling even the experts

http://wp.me/plM5Z-2I – shortlink

By Alan McCrindle

It is amazingly easy to hoodwink economists using shonky government statistics – even in this age when there are easily accessible articles that can be found with a few simple internet searches that point to the errors in the data.

Shonky USA productivity Data fools the Economist Magazine

A current example is a piece in the Economist based on a report by a USA based organisation called the Conference Board. The Economist – Slash and earn Productivity has surged in America and slumped in Europe. Neither trend can last – rightly questions large differences in recent productivity growth between the USA and Europe. In the article they speculate as to the reasons for the large increases in productivity in the USA.

However no where in the article do they even question the validity of the data as a proxy for measuring productivity growth in the USA.

If the Economist had done an internet search they would have discovered the same article that I had read a few weeks earlier that explained the issue. The article – an op-ed piece on this in the New York Times titled – Trading Away Productivity: How American Trade Policy Relies on faulty measures of Productivity

To quote parts of the article

“But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.”

“The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

“This oversight is no secret: as Labor Department officials acknowledged at a 2004 conference, their statistical methods deem any reduction in the work that goes into creating a specific unit of output, whatever the cause, to be a productivity gain.

This continuing mismeasurement leads economists and all those who rely on them to assume that recorded productivity gains always signify greater efficiency, rather than simple offshoring-generated cost cuts — leaving the rest of us scratching our heads over stagnating wages.

“Above all, if offshoring has been driving much of our supposed productivity gains, then the case for complete free trade begins to erode. If often such policies simply increase corporate profits at the expense of American workers, with no gains in true productivity, then they don’t necessarily strengthen the national economy.

In this regard, the case for free trade as a stimulus for innovation weakens, too. Because productivity gains in part reflect job offshoring, not just the benefits of technology or better business practices, then the American economy has been much less innovative than widely assumed.”

Shonky Economic Data is widespread and Used by Governments of all political persuasions

Maybe it is time for the Economist to do an article on how governments of all persuasions around the world have changed how they measure statistics such as employment, inflation, productivity, debt levels and GDP to mask economic problems, dodge liabilities and justify damaging economic policies that help special interest groups at the expense of the general public.

Kevin Phillips has an excellent article on the subject in the MAy 2008 edition of Harpers Magazine. In the – Numbers racket: Why the economy is worse than we know

To quote his article:

“since the 1960s, Washington has been forced to gull its citizens and creditors by debasing official statistics: the vital instruments with which the vigor and muscle of the American economy are measured. The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, 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. If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is”

The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances—inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences too. An administration is helped when it can mouth banalities about price levels being “anchored” as food and energy costs begin to soar.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 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). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?“

Another interesting article written by Chris Martenson looks at USA economic data and attempts to divide it into 3 groups – Good Data, Murky Data and Unreliable Data.

Is the Internet setting us free or being used to delude us?

The commonly held idea is that the easy accessibility of data via the internet is making it harder for  governments and special interest groups to deceive us. The internet is supposed to be devolving power to the people.

But as I have attempted to show here it is surprisingly simple to delude even so called experts

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1 Comment

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One response to “The Con in Economics – how we are being fooled by shonky Government Economic data that is fooling even the experts

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