Statistical fetishism and other approaches to economic health

[Aimless]

http://www.worldpolicy.org/journal/s...brave-new-math

EXCERPT

[...]

In some respects, the fields of medicine and economics have much in common. Both are multidisciplinary fields that strive to improve and maintain the health of complex systems. But unlike medicine, economics hasn’t progressed much in the last 40 years. In late 2008, the United States and many other countries suffered a major economic heart attack that might have been prevented by better diagnostics. Today, more than three years later, societies on every continent appear to be recovering, though many still face the threat of relapse. The reason so much of the world is on edge, with many countries still on life-support, is that governments have simply been prescribing the equivalent of economic bed rest and morphine (low interest rates and some fiscal stimulus) without any significant lifestyle changes.

Yet there are better, more sophisticated treatments that should be prescribed—new sets of statistical indicators to help monitor economic health, as well as fresh policies based on new numbers that can help diagnose and treat these ailments to the principal organs of our fiscal well-being. Traditional measures point to an American economy that’s up even when Americans are feeling down. Across Europe and in Japan, there is also a sense of confusion over current economic directions—a universal sense that the numbers that have been our staples are increasingly meaningless to everyday people.

Newspapers, radio, and television routinely spout headlines about key statistics on GDP, inflation, and employment—astonishingly influential indicators computed in the United States by the government’s Bureau of Labor Statistics and in capitals around the world. Most seem to have little correlation with the realities on the street. Yet, governments, businesses, and individuals still use these yardsticks in their decision-making worldwide, and minor revisions in the data can have major ramifications. Inflation measurements help determine mortgage and savings rates, stock market prices, interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. Despite dramatic shifts in the world over the last few decades, we are still using the same old gauges, nomenclature, and policies of the past. These outmoded statistics skew perceptions, leaving us with a distorted worldview and a shaky foundation as a base for policy.
If we can’t accurately diagnose the problem, we won’t cure it.

[...]

[GGT]

It does seem like economics, finance, and monetary policies have been using out-dated models to "diagnose" problems, based mostly on symptoms, and being reactive instead of proactive (or treating the wrong underlying problem). GDP hasn't been a reliable indicator for a while now, yet it's still used to calculate budget policies (as percentages of GDP). Unemployment numbers haven't meant much either, unless one looks at which "survey" was used, whether it's U-3 or U-6, and considers underemployment, inflation and COL, too. Most of these things can be politicized, and massaged by politicians.

There are plenty of analyses for what's ailing economies, and what's the best treatment. But it's still using conventional wisdom from previous eras, when the world has fundamentally changed. Our Modern Time means patients (citizens) challenging those prescriptive courses, and even the validity of diagnoses. *Most* people don't want leaders (or governments) trying to prop up terminally ill or toxic body parts, promising time and intervention (instead of protracting an inevitable death).

But when push comes to shove, someone has to eventually turn off the pacemaker or ventilator when the other body parts have died, or expended any useful purpose. Even after harvesting the salvageable organs and transplanting them into bodies that can still work in other ways. Physicians have more empirical evidence in those ethical/moral dilemmas than economists, financiers, politicians or legislators.

However, it's quite possible that if we put physicians in charge of economic/fiscal/monetary policies.....we'd have even more spending, with less revenue, and a whole lot of zombie banks AND zombie economies.

[Loki]

http://www.worldpolicy.org/journal/s...brave-new-math

EXCERPT

Most of the criticisms are either relatively minor or widely known by economists (and taken into account). Just because the news media is obsessed with GDP and unemployment rates doesn't mean that current economics research is only interested in those measures. There are already plenty of better economic indicators out there, including many that are used by governments. Don't confuse the statistics that are talked about frequently because they are easy to understand with statistics that actually drive government policy.

The part about the share of the economy being spent on "productive goods" betrays an utter lack of understanding of economics by the way. Not surprisingly, the author in question is a money market manager, not an economist.

[GGT]

Loki, are you blaming the news media for 'obsessing' over the wrong indicators, when they're simply reporting what economists and researchers focus on? Which statistics that actually drive government policy aren't being covered by the media?

[Loki]

Loki, are you blaming the news media for 'obsessing' over the wrong indicators, when they're simply reporting what economists and researchers focus on? Which statistics that actually drive government policy aren't being covered by the media?

Why don't you have a look at an actual economics journal and then tell me what percentage of the articles talk about GDP or the unemployment rate.

[GGT]

Why don't you have a look at an actual economics journal and then tell me what percentage of the articles talk about GDP or the unemployment rate.

How's that related to my question about media coverage of the economy/economics and gov't policy?

[Loki]

Ok, then we can safely conclude that biologists only care about which foods cause cancer or lead to weight loss. After all, if that's what the media focuses on, it must reflect reality.

[wiggin]

Loki's right on this one. Have any of you actually looked at the Beige Book or the Fed's Statistical Release? It's chock full of a huge amount of detailed data and analysis that is far more nuanced than looking at unemployment and GDP. Hell, the article and GGT get upset that things like unemployment are poor measures of things, since there's a huge difference between, say, U-3 and U-6 unemployment. BUT THOSE NUMBERS ARE BOTH CALCULATED BY THE BLS! They are different measures of unemployment that were both developed by the same organizations being criticized for having too narrow a focus. You can get the same sorts of criticisms about the CPI published by the BLS, saying it's out of date and a poor measure of things - when in fact the BLS continually updates their methodologies and provide a wide-ranging and detailed analysis of prices across the economy. Hedonic regressions, part of their modern modifications on inflation readings, has come under criticism by the same people (including our author) as being a way to whitewash inflation and play with the numbers, when in fact they're just doing their jobs and providing a more nuanced statistical understanding of the economy.

Bottom line, the fields of economics and the specifics of statistical methods used to gauge our economy's health have progressed quite a bit. Just because the media has a fixation on the DJIA, the CPI, unemployment, and GDP growth doesn't mean that economists or policymakers do (though I'd argue that banks with too narrow of a mandate and not enough independence - like the ECB - do tend to focus too exclusively on one or two numbers). There is a wealth of data now available that is cut and sliced many different wants to both understand economic trends and suggest new policy initiatives.

The author is right that the economy is complicated. That's about as far as it goes, though - I can't imagine that there are any self-respecting economists who look at headline numbers (whether inflation, growth, or anything else) to make realistic policy recommendations.

I also love how the author complains about people taking too simple of a view from economic statistics, and then turns around and suggests that the HDI or the OECD's BLI are somehow better single measures.

[GGT]

Beige Book releases and Fed minutes are routinely reported in internet news, even covered by "main stream" cable media. (Just as complicated science and medicine makes its way out of academic journals and into other publications.) I took issue with Loki's portrayal that news media is 'obsessed' with the wrong numbers, while economists --- and policy makers --- are focused on the right ones.

I notice there wasn't an answer to Which statistics that actually drive government policy aren't being covered by the media? Media coverage is broader now than ever before, with access to all sorts of wonky economic information from around the globe, way beyond "head line numbers". The economists who do make policy recommendations come from different schools of thought and theory, and that becomes battles waged in political arenas (just like healthcare).

I didn't reply to critique the article/author, but to comment on the statistical fetishism that's led to poor diagnostics: economies and financial institutions on the brink, proclamations that the housing bubble/sub-prime debacle was contained even as it was being monetized, crisis management before the whole thing blew up, and the shock, shock I tell you from folks within Treasury depts, governments, and central banks.