Lies, Damed Lies, and GDP

Back in the day, I was being only partly facetious when I suggested that the government stop compiling foreign trade statistics. Once you know the numbers, some countries will have trade surpluses while others have deficits. Left alone and unobserved, those imbalances would resolve themselves one way or another, and their automatic resolutions would almost always be less painful that government measures to cure the deficits and promote surpluses. This is especially true since most major countries adopted flexible exchange rates, which facilitate adjustment with less pain that policy induced changes in internal prices, wages, and employment.

I was reminded of this when I saw the last week’s official report on exports and imports of goods and services. Over the past year, our excess of imports over exports hardly budged despite the improvement that should be coming from fracking and horizontal drilling. It’s like pulling your hand out of a bucket of water. You can’t see the hole.

One of the most profound lessons I learned studying economics was the old bromide about what happens to GNP—yes GNP—if a man marries his maid. If she continues doing the household chores after marriage, GNP would fall since what was once a recordable market transaction disappears from the marketplace. Nowadays, to be politically correct, it would probably have to be something like a woman marrying her tennis coach. But the lesson is broader than a few marriages. In my neighborhood, very few people mow their own lawns since lawn services are so reasonably priced.  Those that do are shrinking the neighborhood’s GDP, or preventing it growing to its full potential.

We just got the March labor report last Friday. It looked like good news to me since I’ve grown accustomed to the weaker new normal. But the stock market—especially the NASDAQ—apparently disagreed. The report showed net new jobs from the establishment survey of 192,000 in March, with upward revisions of the previous two months totaling 37,000 jobs.

Note that I said “net” new jobs increased 192,000. Most people leave the “net” out. The net is the net of two very large gross numbers of increases and decreases in jobs throughout the economy. Just reporting the small net misses most of the labor market dynamics and gives a false impression of precision. Speaking of false precision, the report also showed that the labor force participation rate went up slightly to 63.2 percent; the employment to population ratio was up slightly to 58.9 percent, the average workweek rose to 34.5 hours from 34.3 hours, and average hourly earnings declined by a penny to $24.30. A penny!

Every Monday morning I give a brief report to a company’s executives on economic developments and statistics from the past week. One of the nice trends over the past couple of years has been the gradual decline in the consumer price index and other measures of inflation. My problem is that one of the two top guys simply doesn’t believe it. He’s a smart guy. He knows about market baskets, averages, and all that. It’s simply that his experience at the grocery store and elsewhere has him convinced that some government bureaucrats are cooking the books.

Given that circumstance, Ms. Yellen makes me very nervous placing all the emphasis that she does on how inflation is too low and below the Fed’s target of two percent and how seriously she takes the Fed’s inflation target. Chairman Bernanke was primarily responsible for getting the FOMC to adopt an inflation target, but he had the decency not to talk about it too much.  I don’t know why I haven’t been asked yet to defend the Fed’s wanting higher inflation. But I know it’s coming.

Back to GDP. I can sort of understand how government workers can set up a reporting system for business establishments to report payroll data and a sampling system for gathering the household employment data. The idea of pretend shoppers cruising grocery store isles for prices sounds reasonable enough. But what I can’t even begin to fathom is how they gather all the information together for the GDP numbers. Just thinking about it makes my head hurt, as do discussions of black holes.

Given all the ambiguity surrounding most statistics on the economy, how does one dare draw conclusions from them and recommend policies? To begin with, there is no alternative. But I figure that while I don’t really believe in any GDP number, I have some faith that they are reasonably consistent in collecting them over time. I never pay any attrition to the GDP total, but I do follow changes in that total. That’s good enough for government work. It has to be.

Comments (41)

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  1. Alex B. says:

    There is a lot of ambiguity in the statistics recorded by the government. The majority of these statistics is fundamentally flawed and paints vague pictures that normally are not perceivable by the American people. The only numbers that are reliable are the ones that show rate of change. These ones, certeris paribus, show us if there has been improvement in the economy. At the end is measuring the same things the same way, thus it removes the ambiguity as we compare changes.

  2. Alberto L says:

    I believe that the worse statistic is the one that measures unemployment. It gives a narrow definition of what is unemployment and don’t reflect how many people are out of work in reality. It is so flawed that if an unemployed person commits suicide, due to its unemployment, the statistic goes down. Every time the statistic goes down, people celebrate and make us believe that this is a wonderful thing. Yet, in many cases it is the contrary. Everything is going so wrong that people are opting-out of the workforce rather than keep looking for jobs.

    • tobyw says:

      Google “fred emratio” to get a graph of the ratio of employees to the workforce . At the St Louis Fed.

  3. Peter A says:

    Dr. McTeer,
    You write that in the past, you advocated for government to stop reporting data on trade. As a zero-sum game, trade will have its winners and its losers. Do you still believe that we should ignore trade balance? Thus reporting it matter right now, when governments can hardly do something about it?

  4. Emanuel H Rosen MD says:

    Garbage in, garbage out. But lets put lipstick on the pig and call it valid cause its all we got.

    Great post. Thanks.

    No wonder they call economics the dismal science.

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