How Mainstream Economic Statistics are Used in Self-Deception

Late last year, when the world (as we now “know”) had just freed itself from the vise of the longest recession since WWII, we posed, somewhat tongue-in-cheek, the following line of questioning to our Fellow Reckoners:

“If GDP is telling us that the US economy is steadily improving, how come so many folks on Main Street feel so bad? Don’t they read the papers? Don’t they know the GDP is improving?”

The widening chasm between the fantasyland of popular economic statistics and the reality of day-to-day life implores us to again revisit the questions above. If the US economy is indeed experiencing a genuine recovery, as we are regularly reassured, why then do so many people continue to struggle along, barely making ends meet? With shrinking (real and nominal) wages to spend on items they want, how could consumers, which account for an extraordinarily large percentage of the US economy (approx 70%), actually be better off today than they were yesterday? And, with the value of their largest asset – the family home – still going down, how can any politician look a voter in the eye and tell him things are actually getting better?

Either our own experience is not what we thought it to be or the shysters in critical decision-making positions are lying to us…or, at the very least, making use of metrics that do the lying for them.

We’ll leave the question of which seems most likely to the safekeeping of the reader. But first, consider the following scenario:

Imagine, for a second, standing on the scale on Monday to find that you weigh 200 pounds. After consuming a dozen cheeseburgers and a few liters of cola per meal for a week, you return to the scale the following Monday to discover you have somehow managed to lose 10 pounds. All else being equal, the honest dieter must confront one of two possibilities. Either:

1)    He/she has just made a revolutionary – nay, miraculous – discovery about the weight-loss properties of fast food or,
2)    He/she is in need of a new scale.

Unfortunately, many dieters – including ALL unsuccessful ones – tend to err on the side of dishonesty. The same self-deception is no less prevalent when it comes to the sphere of economics. To cite one of Bill’s oft-repeated Daily Reckoning dictums, “People will come to believe what they must believe when they must believe it.”

Why else, for example, would otherwise reasonable folks so willingly allow themselves to be fooled by such nonsense as appears nightly on the evening news? Why else would we continue to adhere to junk statistics like GDP and U3 unemployment when attempting to gauge the sickness or health of the economy? And why would we celebrate (and decorate with Noble Prizes!) anyone who employs such nonsense measures with a straight face?

We’ve explored the GDP fraud in these pages before. And anyone who’s ever heard the phrase “discouraged workers” knows better than to trust the official unemployment rate. So far, so good. But why, do we still look to GDP to define for us whether or not we are in a recession? And, if we know that employment does not necessarily equal productivity, why are we so transfixed by what Henry Hazlitt calls “The fetish of full employment”? If it were true that we could drag ourselves out of recession by simply counting one and other, as the government recently employed hundreds of thousands of census workers to do, the mayor of New York would be well advised to hire the City’s entire jobless population to polish each and every blade of grass in Yankee Stadium with a quiver of Q-tips. Bang! Full employment!

What’s more, the government could pay its army of scrubbers a million taxpayer dollars a year each for their efforts. Boom! Rising GDP!

But so what? The make work scheme might do well to tip the scales toward “official” recovery, albeit temporarily, but how is society made any better for it in the long run?

Intuitively, we know it is not…but most folks fall for the sham anyway. Investors load up on junk food non-indicators as part of their program to build a newer, fitter self. And all the while they scratch their heads and wonder why reality stubbornly refuses to comply with the statistics that are supposed to represent it.

Joel Bowman
for The Daily Reckoning