Economists offer insight into ‘misleading’ government statistics
by January 14, 2009 12:45 pm 68 views
John Tamny believes that many key economic statistics compiled and released by the federal government are misleading.
Tamny, editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics, and a senior economic advisor to Toreador Research and Trading, comes at the opinion from years of watching the markets and comparing what he sees with what is reported.
“And if government economic statistics aren’t misleading investors about the health of the economy, they’re frequently telling us long after the fact what has actually happened,” Tamny noted in this report at RealClearMarkets.
Another long-time market and statistics watcher is Jeff Collins (pictured at right), a partner in Springdale-based Streetsmart Data and the former head of the Center for Business and Economic Research at the University of Arkansas.
What follows is a summary of a few of Tamny’s key points with a response from Collins.
Tamny on trade deficits
“The best way to look at trade is to view it in an individual context. As individuals we run trade deficits with our landlords, our grocery stores, and restaurants we frequent. But are we in deficit? Hardly. We’re able to maintain those supposed deficits in trade thanks to the work we engage in elsewhere. In the end all trade balances due to the basic truth that we can’t buy from anyone unless someone’s purchased something from us of equal value first.”
“When Americans buy shoes, socks and shirts that are made in China, those purchases accrue to the deficit. Conversely, the Chinese are big purchasers of our equities, land and debt. None of those purchases count in the alleged “trade” balance because they are “capital” assets. But we export opportunities to invest in our generally booming economy in exchange for goods that are not in our economic interest to make.”
“The reality is that trade deficits are a sign of economic health. And while GDP figures are highly misleading (more on that later), periods when our GDP has grown the most have regularly correlated with rising trade ‘deficits.’”
Collins’ response:
“Obviously an over-simplification. (Tamny) glosses over the relationship between unequal exchange of goods and the terms of trade. First, I doubt many American’s are comfortable with substantial Chinese ownership of equity in American companies, U.S. real estate, and U.S. Treasuries. That U.S. prosperity would enrich a totalitarian regime that represses political and social freedom is unpalatable to many.”
“With regard to terms of trade, poor export performance relative to consumption of imports can cause interest rates in the U.S. to rise if our partners require higher return to offset increased risk — increased risk caused, for example, by periods of economic downturn or bursting of asset bubbles (likely caused in part by increased inflow of cash from foreign firms and governments seeking investment opportunities). This dampens domestic investment as well as consumption as the cost of both increase.”
“A friend of mine who is also an economist once said he wasn’t concerned about the trade deficit because we have the goods and services and they have IOU’s. The logic goes, if we don’t pay what are our trading partners going to do? I suppose that is true to a degree but they could decide to reduce trade with us, which would lower domestic standards of living. I think the trade deficit statistic matters in the sense that it is a measure of risk. As long as our economy is ‘generally booming’ the cost of our preference for foreign made goods is relatively affordable. The issue is what happens when the boom is over? As a statistic, like all statistics, it only provides partial perspective on our economic performance.”
Tamny on the savings rate
“The paradox here is that the government regularly reports that the savings rate in the United States is nil, or often times negative. This is so despite the fact that the Federal Reserve frequently reports on total wealth in the U.S., and the number of late has hovered in the $50 trillion dollar range. If we allegedly don’t save, how is it that we’re so rich?”
“The answer to this question lies in how this statistic is computed. When the government measures our savings, it measures it in terms of our monthly income versus our monthly spending. And there lies the problem with this statistic. The savings rate first of all can’t distinguish between spending on a vacation or spending for instance on home Internet access that would in theory lead to higher income.”
“The reality that Americans as a whole have historically invested some of their income at some point greatly distorts the whole savings picture. That is so because the savings rate does not account for capital gains. What this means is that if someone bought 1000 shares of Dell Computer back in 1994 only to see those shares split six times, this person might not appear as a saver in the government’s calculation.”
“To find a time when the savings rate was high, one would have to go back to 1982 when stocks and housing were both down at the same time. With no capital gains to access, Americans rightly saved a great deal of income. Far from a sign of prosperity, this signaled a weak economic outlook. In short, the notion that Americans don’t save is yet another myth.”
Collins’ response:
“That American’s don’t save is not a myth; it is a very real fact. The place to start is to ask, ‘What is savings?’ Savings is the act of taking a portion of income and purchasing assets that we hope will be worth more tomorrow than today.”
“Recent history in the U.S., at least up until December 2007, gave average American’s the sense that rates of appreciation in their assets were going to exceed their wildest dreams. We felt fat, rich, and happy. This lead many to retire early (they are now returning to the workforce); it led many to increase their expectations about how well they would live during retirement, and most importantly, it led many to increase their rate of consumption now. Why save when your investments are performing so well and you see no reason to expect that trend to stop? Of course you could be wrong. Maybe your assets are outperforming your expectations because foreigners are bidding up the price of those assets as you luxuriate in your foreign made automobile filled with foreign gas. But then again, trade deficits don’t matter.”
“Finally to (Tamny’s) direct assertions. I agree that consumption statistics mask household purchases that could lead to increased productivity. Increased productivity from this type of household consumption should also lead to increased household income. At some point we should reasonably expect to see savings increase as the household productivity gains lead to surplus income. Next, the $50 trillion in wealth is based on asset prices that have risen as companies that sell goods and services have seen rapid growth in demand (due at least in part to increased consumption rates). That $50 trillion in wealth is also based on inflated real estate prices.”
“Frankly, our increased ‘wealth’ of late probably has more to do with asset inflation and foreign investment than exceptional returns from our own past investments purchased with past savings.”
Tamny on durable goods orders
Former Fed Chairman Alan Greenspan has frequently pointed out that while the aggregate output of the United States is five times greater in real terms than it was in 1950, the output weighs the same. Greenspan’s observation deserves special attention considering all the attention given to the durable goods number produced by the federal government. When the durable goods number comes in below expectations, economists and commentators frequently key on it as evidence that the economy is not very sound.”
“Fifty years ago, steel, aluminum, chemical, paper, and mining companies made up half the value of the S&P, whereas today those sectors account for only 12 percent of the index’s value.”
“The durable goods number is rooted in the past given its reliance on heavy equipment. But we are once again an economy of the mind, so when commentators suggest a poor number here is indicative of poor economic health, they’re engaging in thinking that mattered in the past, but that has very little relevance to the present.”
Collins’ response:
“Here I agree. Durable goods is a statistic that had much more relevance at the time national income accounting was developed than today. That is not to say that declining durable goods purchases don’t bode ill for the manufacturing sector, just that durable goods manufacturing is a smaller part of the U.S. economy than it used to be and certainly not the source of employment it was during the previous century.”
Tamny on unemployment
“Probably the most watched economic statistic each month on Wall Street is the unemployment number. It is assumed that the level of employment is an indicator of health, thus the attention.”
“The reality is that the level of employment or job creation is very much a function of population. When populations grow, so do job levels. In this sense, unemployment is somewhat of a misnomer. People aren’t not working so much due to lack of jobs as they don’t work owing to a failure to supply their labor at a rate that attracts employers.”
“And while it is correctly said that lots of jobs were created during the Reagan and Clinton years, it’s also true that percentage job growth under Jimmy Carter was the highest of any president post WWII, not to mention that job growth has been very impressive under President Bush. No one would mistake the Carter/Bush economies for those enjoyed under Reagan/Clinton, but if you measured them purely in terms of employment, they might all look very similar.”
“Instead, it’s better to look at the quality of jobs and economic dynamism forever revealed by the stock market. In that case, jobs were plentiful and good under Reagan/Clinton in ways that the Carter/Bush eras have not measured up to. In short, employment is a factor in our economic health, but not a reliable one.”
Collins’ response:
The unemployment statistic is absolutely a poor indicator of changes in economic health as measured by labor market performance. It does not account for changes in the quality of employment, for workers who are discouraged and leave the workforce, for the over employed or underemployed.”
“However, to argue that unemployment is not a useful statistic because unemployment exists only due to the unreasonable salary demands of potential employees is poor economic reasoning. … To relate unemployment to population is like saying we should measure global temperature change with a household thermometer. Unemployment is not a tool to measure long-term phenomenon or even make country-by-country comparisons. It is a tool for measuring short-term changes in the labor market.”
“The primary reason unemployment is important is as a trend measure of economic performance. Can anyone reasonably assert that the last 11 months of unemployment data aren’t telling us something more is going on than workers are asking too much for their services. People are unemployed not because they are asking too much but because there simply aren’t employment opportunities as businesses respond to economic uncertainty and falling demand. It is ludicrous to assert that unemployment would disappear tomorrow if only those displaced workers would lower their asking price.”
"Finally, unemployment statistics are a quick and dirty indicator of the health of the U.S. labor markets. Rapid changes indicate something abnormal has occurred that will have implications for other markets and our overall economic well-being.”
Tamny on the gross domestic product
“Certainly no national measure of production could ever be definitive evidence of broad economic health, or weakness for that matter. … Furthermore, one region or city’s productivity in one country is surely a function of foreign productivity that lies outside the scope of what is a national calculation. Silicon Valley thrives not just for its human capital based in northern California, but also booms thanks to the productivity of workers on the other side of the world.”
“We also don’t distinguish between spending on economic goods and economic bads in the calculation of GDP. For example, increased spending in response to 9/11 is included in the GDP calculations but does not imply we are better off than we were prior to the attacks. Also, we do not adjust GDP for depreciation of our natural capital stock only the physical stock. That is, we use up our stock of natural resources but don’t show the depreciation in the GDP calculation, only depreciation of plant and equipment. I could go on but won’t.”
“Even if we ignore the limiting nature of border-specific calculations, we must remember that while the trade deficit’s economic reality is one of capital and goods inflows that are a reward for our productivity, a large deficit in trade subtracts from our GDP growth. Conversely, while government spending is by definition an economic retardant for capital being removed from the private sector for immediate government consumption, when it comes to GDP, this adds to the number. Government spending also increases productivity…education, roads, health, etc. This should be considered investment not spending on a par with much of the private investment that takes place in the U.S.”
Collins’ response:
“(Yes, I agree.) Single measures of economic performance are always poor. What is required is a set of measures, continually refined, that provide relative rather than absolute indications of the economy is performing. That is why we have an index of leading economic indicators not a leading economic statistic. What is critical is that we measure performance and work to identify the causes of abnormal performance.