Inaccurate Data Lead Economic Planning Astray
December 3, 1996
Economic figures which the U.S. government releases every month dictate the size of Social Security checks, the interest rate on house or car purchases, the cost of a college loan, even the direction of the Dow Jones industrial average. Unfortunately, according to a study by USA Today, many of the government's numbers are wrong, and often by a wide margin. For example:
- The government is wrong 25 percent of the time on whether the economy is growing or shrinking.
- Inflation is overstated by at least 1 to 1.25 percentage points.
- Productivity growth is being understated by three-quarters of a percent.
- The numbers are so wrong so often that even Federal Reserve Board
Chairman Alan Greenspan reportedly ignores them on a regular basis.
Here's a breakdown on the biggest flaws, starting with Gross Domestic Product growth.
- There are two ways of calculating growth: output (the total spent by consumers) and income (wages earned by workers and revenue of business and government), which in theory should match.
- Divorce rates soared between 1970 and 1990, and the number of single-person households climbed from 17 percent of all households to 25 percent -- where it, too, has remained.
- But the past two years, income has been higher by one percent, or $7.5 billion, because the government has been undercounting output (often because it doesn't take into account the impact of large industries' computerized production systems).
- This is bad, because if long-term, inflation-adjusted GDP is off by half a percentage point, it adds $200 billion to federal budget deficit estimates over five years.
- According to one analyst, "A tenth of a percentage point error can have a profound impact on every household in the land."
Another serious problem is overestimating inflation by way of the consumer price index.
- Tomorrow a bipartisan commission will report the CPI overstates the cost of living by a percentage point or more.
- Correcting the error would cut the inflation number by 33 percent.
- The correction would cut the government's Social Security bill by $48 billion a year (about $100 a year per recipient).
- The reduction of at least $260 billion over six years could move Congress and the White House closer to a balanced budget agreement.
Critics believe the figures are off because the way government collects its figures hasn't changed in decades. For example, 12 percent of the $3 billion annual statistics budget is spend on agricultural data, even though farming only accounts for 4 percent of the total economy. And while services account for 75 percent of total employment and more than half of economic output, less money is spent collecting information about the service sector than on the mining industry. Statistical agencies also fail, or don't have the resources, to keep up with rapid changes in the economy that would give different readings.
Finally, some analysts also believe that outdated methods of counting and inadequate tracking of seasonal employment also leads to chronic underestimating of the number of unemployed.
Source: Beth Belton, "Bad Data," USA Today, December 3, 1996.
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