Credibility Gaps

Economic Policy By the Numbers

The Economist has carried an interesting piece on the reliability of national economic data. It claims that the US "botoxes" its own data. If you take away the ministrations of the cosmetic data masseurs the situation in "these United States" appears much worse than the official statistics are letting on.

The Economist compares differences in the way Europe presents its official data statistics with the way those same measures are compiled in the United States. It turns out that these differences make the US appear much less saggy and wrinkly. The first comparison: public sector debt. Now this has become a focus in recent months. How much public government debt can a nation bear before it collapses in a screaming heap of public fury storming the barricades? We have seen such eructations of wrath in Greece, Portugal, Ireland and the UK. But not the US. Why? In part because the measurements of public debt in the US disguise the actual levels of public indebtedness.

Take public-sector debt. The definition used in Washington, DC, is “federal government debt held by the public”, which stood at 62% of GDP at the end of 2010. But if you instead use Europe’s preferred measure—general government gross debt, which also includes the borrowing of state and local governments and Treasury securities held by other government bodies, such as the Social Security Trust Fund—it jumps to 92% of GDP. That is on a par with Portugal’s level of public debt. Likewise, America’s budget deficit of 8.9% of GDP last year would have been 10.6% using Europe’s preferred measure.

Ninety-two percent of GDP. In other words the lenders to the US Treasury are actually living in cloud cookoo land. They have willed themselves to believe that things are just not that bad--and the official statistics provide a cover for those willing to be duped.

The second example is the way productivity is measured. The US prides itself on how much more productive its work force is--as compared to Europe. It would appear that the average US worker produces more goods and services than his European counterpart. Really? No--it's all botox.

Official figures also flatter America’s relative performance on productivity growth. The headline figures compiled by America’s Bureau of Labour Statistics are based on output per man-hour in the non-farm business sector. The European Central Bank tracks GDP per worker across the whole economy. By excluding the less efficient public sector, America’s productivity growth is bumped up.

Not so rosy, then.

The third area of data-augmentation is GDP growth--the measure of how much economic growth is occurring within an economy. It turns out that the American data suffers from a dose of irrationally exuberant cheerleading. Much in the initial GDP figures are estimations. They are always revised much (years) later when all the actual data comes in. It transpires more often than not that US economic growth figures are revised--downwards, once the actual data comes in. European statisticians appear to be far more conservative in their initial estimates, and have a track record of far fewer downward revisions.

A third cosmetic treatment is the way quarterly GDP figures are published. European press releases give the increase in GDP during the latest quarter—a rise of 0.9%, say. But Americans annualise quarterly growth, so an identical increase would be announced as a more impressive-sounding growth rate of 3.6%. Much more important, European economies’ initial estimates of GDP growth tend to be more cautious than those in America. Kevin Daly, an economist at Goldman Sachs, estimates that during the ten years to 2008, America’s quarterly GDP growth rate was, on average, revised down between the first and final published estimates by an annualised 0.5 percentage points. In contrast, GDP figures in the euro area were revised up by an average of 0.3 points. (Emphasis, ours)

Why is this important? Well, the media and the economic chattering classes always focus upon the initial (estimated) number, not the much later revised number--which is very old news indeed.

This matters because financial markets and the media focus heavily on the first estimate, but largely ignore revisions several years later.

The politicisation of numbers and data to reflect national pride? To support an incumbent government? To keep the lenders happy so that the party can go on? Probably all of the above. Let's party on while Rome conflagrates.

The dismal science and practice of macro-economics relies on national data statistics. When the data is fudged or manipulated, resulting in a more optimistic picture, we have something akin to the king debasing the nation's gold and silver coins to fund his ambitions. It was theft then. Is it any different now? Oh, wait. We forgot. The Federal Reserve is busy printing money (aka debasing the currency) in order to fund the US government's exponentially increasing debt. And its smoothing the passage of this debasement, in part, with shonky statistics.

There are lies, damned lies and macro-economic statistics. He who trusts them is foolish indeed.