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Statistics and Other Untruths by Paul J. Updike INTRODUCTION The purpose of this article is to
argue that many macroeconomic measurement statistics like GDP are approximations
at best. At times, these approximations reflect reality, but sometimes they
miss reality by a country mile. One of my economics professors suggested that
some economists in the field of economics considered econometrics to
represent the ‘rubber-ruler’ approach. The colorful image in my mind’s eye of
a straight-edge that twists in the wind in order to connect data points is
unforgettable. There is a natural human tendency to ascribe more accuracy to
numbers that are in print than those numbers may deserve. Please remember
that human tendency when employing econometrics and other macroeconomic
tools. In order to make meaningful
economic-based comments, I often end up quoting GDP statistics to buttress
this idea or sell that point. However, it is important to remember that
neither access to nor use of computers have changed human nature much from
that found in the quote the economist David Colander puts at the beginning of
Chapter 7 of his 4th edition book, Macroeconomics -- "The
government is very keen on amassing statistics … They collect them, add them,
raise them to the nth power, take the cube root and prepare wonderful
diagrams. But you must never forget that every one of these figures comes in
the first instance from the village watchman, who just puts down what he damn
pleases." Sir Josiah Stamp - head of If one is looking for absolute
truth, economics is probably the wrong field. Meaningful macroeconomic
analysis depends on statistics. If you are searching for truth, try looking
within the world’s religions. Truth might well be found there. (The search
for truth is a much different discussion). However, the point of this
writing is to propose that one may find approximate statistics that
are close enough, such that meaningful economic conclusions can be
drawn. By the way, the main reason an abundance of economic data actually reflects reality is because of taxes.
This lecture will discuss what kinds of economic statistics are more or less
likely to be meaningful and why. COMMENTS REGARDING GATHERING
STATISTICS Trying to measure GDP in a highly
industrialized country that has well-developed markets is hard, but do-able.
Measuring GDP for an economy in a less developed country with immature
markets that suffers from serious transportation and communication
infrastructure problems is much more difficult. But such measurements abound all
around us. One time I performed a Goggle search on the Internet for ‘Nations
and GDP’ and got 317,000 resulting sites. May I comment on just two of these
sites? When I went to Mr. Dowling’s Interactive Table of
World Nations site, all kinds of fascinating statistics appear, listed
by individual nation. But may I point out below significant problems with
these numbers? When I went to the United Nation’s site, United Nations Statistics Division - Common
Database, I found hundreds of records and links, a real plethora of
numbers. Do any of these measurements reflect reality? Can these numbers be
used for meaningful economic analysis? Good questions. At the bottom of his World Nations
chart, Dowling admits that the "literacy rate figures in each country
are only a rough
estimate" [emphasis mine] and that "nations often have unique
methods to define literacy". How rough is rough? Plus or minus two
percent, plus or minus 20%, or plus or minus 50%? Yet Dowling includes these
questionable statistics in the table like they are facts, even though he
knows that literacy numbers for many countries can be relatively
meaningless. Dowling cites the CIA World Factbook
as his source. Many people wonder how good the CIA is at spy-related
intelligence work, their main task. Why would we conclude that CIA people are
better at collecting meaningful economic statistics? Is it possible that many of the
nations included in Dowling’s list also have "unique methods"
for measuring GDP? Besides import and export trade with various sophisticated
countries that have better measuring tools, do nations use ‘rough estimates’
of their own country’s economic activity? What if they are mostly command
economies? Who is going to argue with the strongman running the country? Do
the ‘worker bees’ in the United Nations want to lose their jobs over an
argument with a particular country’s GDP numbers because the worker bees are
not happy with the collection methodology? I would doubt it. When exports of
commodities to industrialized nations are the biggest contributor to their
GDP, then perhaps GDP can be reasonably
estimated. But that still makes GDP an estimate. SOME PROBLEMS WITH NUMBERS When serving as a controller for
several companies in The government's reach into local
and statewide markets and most companies in highly developed countries, as
well as the public disclosure of financial information for many companies
ensures that there is rhyme and
reason to most of the economic numbers in Have you ever tried to call a
state employee to ask for help filling out state government forms? After a
thirty-minute hold (who has 30 minutes to spare in a ‘for-profit’ business?)
someone finally picks up and says, "I don’t know the answer, you need to
talk to so and so to ask". Whenever this happened to me, I never called
back, but did the best I could without assistance and sent the form back to
the state government. Then those numbers I struggled over, the numbers I knew
were not very accurate were added together with all the others. When I saw
GDP numbers that included the ones I sent to the government, I said
"Oops!" GLOBAL OIL USAGE NUMBERS When numbers get large, many
people, even economists, can make mistakes. May I illustrate? There are
approximately 70 to 75 million barrels of oil produced and consumed in the
world every day in 2001. (See link below – That total has grown to
approximately 85 million barrels daily consumption in 2007.) http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/.htm This approximates a 25,000 million
barrels (25 billion barrels) annual usage rate. In the world in 2001, there
are approximately 1 trillion barrels of proven oil reserves
including approximately 600 to 700 billion barrels of proven oil
reserves in the ground under the The course textbook by David Colander
(4th edition) is perhaps the best overall, and most readable book on the
subject of macroeconomics I have ever perused. Yet even careful
economists can misuse numbers. On pages 92-93 of the 4th edition,
Colander uses the following ‘shift in supply versus movement along the
curve’ example, "At $15 dollars a barrel, producers supplied 1,500
million barrels of oil a day, and at $36 a barrel they supplied 1,750 million
barrels a day." These are not real oil consumption
numbers! If you do the math extension with
Colander’s numbers, i.e., 1,500 million barrels of oil a day for 365 days a
year at $36 per barrel, you arrive at a dollar amount that is twice the
size of the total American economy in 2002. This is a rare example of an
error with numbers by Colander. Yet, and more importantly, his supply curve
example in Figure 4-6 is not affected at all by the relative size of the
numbers. But it is instructive to realize that we cannot be too careful with
statistics, which are the lifeblood of macroeconomics. POPULATION COUNTS We have a constitutionally
mandated census in What about lesser-developed
countries in Asia or Africa or Central or Estimation, using ‘tried and true’
statistical methodology from one’s desk is often much cleaner, faster, and
safer. Besides, there is a reason to believe that native who represents their
government. All governments are very interested in establishing the exact
population in their country. It is for a simple, but universal reason. If you
count your citizens, then you know who they are and where they live and you
can tax them much more easily. TAXES One of life’s certainties is that
your government will attempt to collect taxes from you. The government’s bias
is to collect as much in tax revenue as possible. Therefore the government
makes all kinds of measurements and gathers all sorts of statistics to assist
themselves in that quest. If a nation’s income tax compliance is high,
then corresponding government statistics drawn from tax information tend to
reflect reality. If income tax compliance is low or poorly enforced,
then we ought to consider questioning whether or not some of the economic
statistics emanating from that country are meaningful. Therefore, we need to know how
taxation works within a country. What is the source of government revenues?
Because fiscal policy has a hand-in-glove relationship with tax collection, our
economic analysis is improved by our knowledge about taxation in a country.
There are usable economic statistics collected alongside tax revenues. When I refer to taxes, I do not
simply mean income taxes, but also include customs, tariffs, excise taxes,
license fees, payroll taxes, sales taxes, access fees, city taxes,
county taxes, state taxes, corporate taxes, property taxes, estate and gift
taxes, etc., etc., etc., (there are literally hundreds of taxes most of us
pay). However, not all market activities are taxed, even in a highly
developed country. If GDP measures market-based activity, what about
significant market-based activity that often happens outside official
(taxed) channels? The so-called underground economy
or black market is alive and well in most countries. There are two main
reasons: 1) they are trying to hide the production and/or distribution
of illegal goods and services like illicit drugs or prostitution;
2) they are involved in the legal production and/or distribution
of goods and services that they choose not to report. People
try to avoid paying taxes, if they can get away with it, everywhere,
which is why the government wants as accurate statistics as
possible. Sometimes government officials help people avoid paying taxes as
long as the beneficiary is willing to pay something to someone. One
meaningful word that can be found in most languages around the world is the
word ‘graft’. When I lived in ECONOMIC STATISTICS From personal experience I can
tell you that oranges cost many times more on the streets of Theoretically, by adjusting for
PPP one can make comparisons of per capita GDP figures from different
countries, apple to apple. The theory is quite reasonable, and allows for
meaningful analysis in macroeconomics. Yet the idea of one basket of goods
for every country can be problematic. If one major food in the basket of
goods is not available in another country, what do we substitute
instead? Are substitutes for foodstuff in the basket of goods the same in
nutritional value? What if haircuts always include a wash, massage and a
shave in one country, but most people never get massages and shaves when they
get haircuts in another country? Should one add up or subtract down to
equalize the basket of goods and services used to measure PPP? Year-to-year statistics are much
better barometers of reality, if they are collected the same way, by the same
people, in the same country, etc. (Ceteris paribus – other things
being equal). This is important because it means that yearly data within the
same country is often reliable and can be fruitfully analyzed. Comparing
measures of growth within an economy from year to year, or even quarter to
quarter are meaningful analyses! However, once we leave one country and move
to another, we need to remember that just like the changing appearance
and value of the paper currency, economic statistics change too.
Economic statistics may be called a
similar name, but may not be
measured the same way in a different country. CONCLUSION There are several ways to
ensure that you are using meaningful statistics. One way is to relate your
numbers to the taxation numbers being used within that country. If that
country is highly industrialized (i.e. most market activities are taxed) then
you are more likely to find numbers that approximately reflect reality. Another way is to find
multiple sources that have the same or very similar information. Ignoring
the possibility that several different sources all used the same
original source, then by comparing and contrasting the numbers, you develop a
meaningful range of information. If the range is relatively tight, then you
likely have good information. To use economic statistics well, it is
always best to define and stay within the relevant range. Yet another way is to check the
footnotes for the year the data comes from for information how the data
was collected. Be wary of questionable sources that do not include
assumptions and explanations on how the numbers are collected and calculated.
Try to avoid situations which
insist you compare the same-named numbers for different countries.
When you have to compare different countries in the same sentence, identify
known or likely problems with the data. Economic tables that show comparison
economic data from year to year are the most likely tables to have good data.
Then you can use your own analysis to generate your own measures of growth or
other economic data. Finally, beware of the political
agenda of the people who collect the data, then present that collected
information as fact. A political agenda can cause enough bias in the data
collector that important corollary information can be overlooked or even
altered. Sometimes that corollary information is intentionally overlooked to fit the political bias of the
data collector. It is not that unusual for collected economic data to be
intentionally altered to fit a political agenda. Always remember to
use economic information in the same context in which it is found
and cite the source. One of the best economic
statistics web sites I have found is at the following link: http://www.bea.doc.gov/bea/dn1.htm.
(All links cited in this article
worked at the time I first used them, but may no longer work.) REFERENCES: Colander, D.C. Macroeconomics,
4th edition, Irwin/McGraw-Hill, 2001 Global Oil Consumption Report: http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/.htm Global Oil Consumption report: http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/.htm Fortune magazine, September 10, 1990,
Special Oil Report, pp 35-56 Robert D. Hershey, Jr., Counting
the Wealth of Nations, New York Times, December 19, 1995 US Overview: Shifting views on
Inflation www.senate.gov/~budget/republican/analysis/archive/eb4.pdf Mr. Dowling, Interactive Table of
World Nations United Nations Tables and Graphs, United Nations
Statistics Division - Common Database |
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