Lies and statistics, revisited
STELZER, IRWIN M.
"Lies, Damned Lies, and Statistics" Revisited By Irwin M. Stelzer So now we all know what many of us have suspected all along: The Consumer Price Index is wrong, and has been wrong for two decades...
...Ed Grose, the international trade manager of the Customs Service, believes that "our reporting of international trade in services may be deficient by 40 percent...
...So we classify as "poor" many people whose consumption patterns suggest they aren't that badly off...
...Consider the billions we spend in our ongoing war on poverty...
...Consider the trade deficit...
...As a consequence, according to our flawed statistics, "poor" people spend only a small proportion of their incomes on food...
...Finally, believers in active government, one that must continually relieve the pain it feels for its citizens, should trade their customary hubris for a bit of humility...
...But in reality, we know very little about the state of our trade balance with the rest of the world...
...When the trade figures turn against us, they should wonder whether we indeed have a serious trade deficit or merely a data-reporting problem, before engaging in a new round of Japan- or China-bashing...
...That comes out to $60 billion absent from the trade numbers...
...Since the newly accurate CPI would show a far more modest inflation rate than an uncorrected one, Social Security payments would increase more mod-estly—while still conforming with the legal requirement to grow along with inflation...
...And high time, too, because the picture our government has drawn of the American economy has led to misleading and misguided economic policy...
...The Boskin commission has exploded a myth that has guided American policy for too long—the myth that the economic statistics provided by the U.S...
...But there are reasons to take a less cheery view, even if Moynihan and Kerry do get $10 million to dangle before economists' eyes...
...Indeed, so persuasive is the case made by the commission that no one seriously contests it...
...That works out to $85 billion missing from the government's calculation of the trade deficit...
...And it is more difficult to gather data in a service economy than in one that consists largely of manufacturing...
...First, we should all pray for the continued good health of Alan Greenspan...
...When the data tell them that there are millions of "poor" people needing help, they should wonder how it is that more than 75 percent of them have managed to buy a car and how over 40 percent manage to own their own homes...
...And it would allow them to invest in securities at prices that already take into account the investor's anticipation as to the future course of inflation...
...If this new CPI were not put in place, the commission says, the "upward bias would constitute the fourth largest federal outlay program, behind only Social Security, health care and defense...
...Which leads to three important policy conclusions...
...Boskin commission—a panel of experts led by Stanford economist Michael Boskin—lays out a host of reasons why the CPI has long overstated the rate of inflation in the American economy...
...Or he cannot do so unless his wife also works...
...After all, they moan, paychecks are not keeping pace with inflation, so the working man cannot sustain his standard of living...
...It has given us Pat Buchanan's nativism and protectionism to shield workers' wages from the competition of immigrants and imports...
...If I wanted to be absolutely certain of the direction in which the economy was moving, I would call a trade association to check on the production of cardboard cartons...
...Steel told me that month's output, and the Atchison, Topeka & Santa Fe railroad told me the number of freight cars it had loaded...
...It has given us studies of the causes of America's declining competitiveness and its anemic increases in productivity...
...But it will take a serious display of courage for American politicians to bell this particular cat, as it has a way of biting the hand that comes between it and its food bowl...
...At the request of the New York Times, economist Leonard Nakamura plugged a more accurate inflation indicator into economic data from the past 20 years—and it turns out that, instead of declining by 9 percent between 1975 and 1996, real average hourly earnings actually rose by 35 percent...
...C. Harvey Monk, Jr., who runs the Census Bureau's foreign trade division, estimates that the Customs Service fails to count about 10 percent of the forms exporters fill out and file with it...
...The Boskin commission is more conservative than Nakamura: It says that the CPI has overstated the inflation rate by 1.3 percentage points each year since 1978...
...Second, we really should bell the cat and privatize the Social Security system...
...Robert Patton assisted in the research for this article...
...Inevitably, government data-gatherers just aren't getting information as accurate as they did in the old days...
...The poor taxpayer, no better off in terms of what his paycheck could buy, nevertheless ended up paying taxes at a higher rate...
...By some estimates, a third of the budget deficit projected for 2005 would simply disappear if the "upward bias" in the CPI were ended—that is, if the gap between what we now know is the actual rate of inflation and the inflated rate of inflation were closed...
...The report recently released by the so-called Irwin M. Stelzer is director of regulatory policy studies at the American Enterprise Institute...
...Griliches's service on the Boskin commission suggests he remains hopeful that government data-gathering can be improved...
...Senators Pat Moynihan and Bob Kerry want to spend $10 million on a multi-year study of how to do just that...
...This really comes as no surprise when you think about it...
...Lies, Damned Lies, and Statistics" Revisited By Irwin M. Stelzer So now we all know what many of us have suspected all along: The Consumer Price Index is wrong, and has been wrong for two decades or more...
...Though the politics here are fascinating, they pale beside the true significance of the Boskin commission's findings...
...That doesn't mean, of course, that there is any political agreement about what to do with the information...
...For the principal policy conclusion that flows from the report is that the nation's old folks are being overpaid...
...In this case, the rewards for bravery would be substantial...
...As my colleague Nicholas Eberstadt points out in his brilliant The Tyranny of Numbers, official data on poverty are based on what people report as income rather than on what they consume...
...True, seniors are frightening to challenge, but if politicians don't fix the CPI, they will have to face the wrath of younger constituents who will see reductions in their benefits as the painful effort to balance the budget goes into the homestretch...
...The commission says that the continued use of the incorrect CPI will add $1 trillion to the national debt over the next dozen years...
...When I was a young economic forecaster, two telephone calls would give me much of what I needed to know: U.S...
...Nakamu-ra estimates that the CPI overstated the annual inflation rate by 1.25 percentage points in the 1970s and that the overstatement has risen steadily to 2.75 percentage points now...
...And no matter how hard he tries, the middle-class worker cannot offer his children the prospect that they will live better than he did...
...And the level of federal taxation would be more honestly calculated as well, because the CPI also lowers the amount of money people pay in federal taxes...
...The economy is not going to revert to the days when data-gathering was a relatively simple matter...
...Following Bush's defeat, President Clinton's tough-talking trade representative, Mickey Kantor, was willing to risk economic warfare with China to keep a few T-shirts off the shelves of Wal-Mart solely for fear of the trade deficit...
...But if Ed Grose and Harvey Monk are right, $145 billion of American exports isn't included in that number...
...It was a good deal easier to gather data from the large companies that accounted for the bulk of economic output in the 1950s and 1960s than it is to pry information from the thousands of small companies that are the source of economic growth today...
...Or he cannot do so unless he works longer hours...
...According to Harvard economics professor Zvi Griliches, who served on the Boskin commission, "It is the preparation skill of the econometric chef that catches the professional eye, not the quality of the raw materials in the meal, or the effort that went into procuring them...
...Now, more than 70 percent of our economic output consists of services...
...But if he tried to find out the value of software produced last month, or the volume of legal services produced, he would be unlikely to get answers to his questions that would be even remotely accurate...
...Will it be politically possible to support a cut in the growth of Social Security payments totaling only $84 a year—and a tiny increase in the amount of money people may have to send to the IRS...
...The difference between the official figures and the real story in America has been obvious for some time...
...And then there is the matter of the federal government's simple inability to determine the sheer number of physical objects being exported...
...In short, they should heed Ronald Reagan's admonition: "Don't just do something, stand there...
...This is pretty close to unimaginable, yet that is what the statistics tell us...
...To keep taxpayers whole, Congress decided not to count pay rises that merely compensated for price rises...
...The government can revamp the way it collects data all it wants, but it will not be able to cope adequately with a service-based economy, especially one increasingly dominated by smaller firms...
...In his view, not only have real average hourly earnings increased rather than decreased, but the gross domestic product has grown by twice as much as the statistics said...
...But exports are a different matter...
...For years, critics of the American economy have happily wallowed in despair over the future of the American dream...
...more implausibly, their spending outpaces their annual earnings many times over...
...But it used the CPI to measure the rate at which prices are going up, overstating the inflation rate and giving American taxpayers an unintended tax cut...
...The fact that we have been buying more from abroad than we have been selling to our trading partners has haunted successive administrations...
...Remember inflation-induced "bracket creep...
...This would reduce the number of people with a political stake in how the government computes the CPI...
...So if government statistics are wrong, isn't it time they were fixed...
...Americans have been buying homes and cars in record numbers, paying for supposedly unaf-fordable college educations in record numbers, and laying out record sums for household furnishings more or less steadily over the past several years...
...When America was primarily a manufacturing country, we could pretty well count the tons of steel and boxes of goods we exported...
...The Federal Reserve chairman has an uncanny ability to look at data, understand their imperfections, correct for those failings on the basis of bits and pieces of data gathered from key people and firms, and come up with policy tweaks that are better than most...
...So, rather than receiving $745 a month, seniors would get $737...
...If a young economic forecaster today were to follow that technique, he would miss what is going on in 70 percent of the economy...
...We can measure imports with reasonable accuracy and have an incentive to do so, since many are subject to tariffs...
...Until now, policy makers have acted on the assumption that real median family incomes rose by only 2 percent between 1978 and 1995...
...government are accurate...
...And when the data say that real family incomes are falling, they should hesitate before concocting still more job training, educational assistance, and union-satisfying programs...
...Every year, by law, the amount of money seniors receive from Social Security grows with the Consumer Price Index...
...Small entrepreneurs don't set up departments to comply with data requests from government agencies, and even large companies have cut back on such staffs...
...This is to prevent rising prices from eroding the value of their checks...
...It reduced George Bush to the role of auto salesman in Asia, where his efforts were hampered both by the inability of our domestic auto companies to produce vehicles suitable to Japan's narrow streets and by his inability to adjust to Japanese cooking...
...And since the CPI overstates the rate at which prices have been and are rising, seniors have simply been getting too much money from Washington...
...This litany of woes has given us Robert Reich and "the anxious middle class," not to mention James Carville and "the economy, stupid...
...And the effect of the correction would be startling-ly modest...
...And it has added fuel to the fire of multilateralism—for, no longer rich enough or strong enough to go it alone, America must put its soldiers at the mercy of foreign commanders operating under rules laid down by a francophile Egyptian politician sitting atop an enormous bureaucracy at the United Nations...
...All wrong...
...If the commission's recommendations were implemented today, next year Social Security checks would grow by $13 a month instead of the $21 now scheduled...
...Broadly defined, bracket creep was the unjust phenomenon whereby an increase in salary moved a taxpayer into a higher bracket even if his pay raise only kept pace with inflation as measured by the CPI...
...If it were, there would be no trade deficit...
...It sounds good, but the idea itself doesn't deal with the central truth about these numbers: The government probably cannot get them right...
...First of all, the skills that lead to the collection of accurate data are no longer taught in graduate schools or rewarded by the economics profession...
...Perhaps...
...Last year, America's reported trade deficit was $105 billion...
...No physical object crosses a border when an American investment banker puts together a merger for a British firm, but we have exported a valuable service all the same...
...This is not the behavior of a people beset by falling real incomes and overwhelmed by insecurity...
...If the Boskin commission is right, and it most certainly is, family incomes actually rose by 19 percent, which isn't bad for a nation that is supposed to have interred its dream...
...There would instead be a trade surplus of $40 billion...
...The misleading character of the data on which we base economic and social policy does not stop here...
Vol. 2 • December 1996 • No. 15
