NCPA - National Center for Policy Analysis

Government Measures Misstate Economic Situation

March 5, 1997

Economists are becoming increasingly disillusioned and uneasy with important federal statistical gauges. Measurements ranging from the consumer price index to payroll figures and new jobs statistics are being discounted. Yet these figures influence important government and business policies -- including determination of Social Security payment levels, interest rates, taxes and wage contracts.

Right now, 70 agencies track the economy. Unfortunately, analysts believe they're tracking the wrong one: a machine-based economy that's stationary and predictable, not one powered by rapidly changing technology.

How bad is the situation.?

The Labor Department had to adjust for nearly two-thirds of all the new jobs it has reported since the last recession because it could not capture jobs created by start-up companies.

  • At the same time, since the agency polls the same firms over and over, it had to use payroll numbers of big firms even after they went bankrupt or merged, being unable to adjust for restructurings.
  • The Commerce Department reports a trade gap when there may not be any, because it cannot properly evaluate service trade.
  • A National Bureau of Economic Research study found that sectors viewed as "harder to measure" grew to 70 percent of the economy in 1990 -- from 51 percent in 1947.

Then there is the much-discussed overstatement of inflation by perhaps 1.1 percentage points, due to the rapidly changing quality of goods consumers purchase. Just two examples explain how the CPI can get so far out of whack:

It missed the massive price drop in microwaves and VCRs because the Labor Department waits 10 to 15 years to update its market basket of goods.

And it tracked the "ice delivery" industry (as in the iceman cometh) until 1987 because it waits decades to update its industry and job classification.

As to whether blacksmiths have been eliminated, word isn't in yet.

Source: Paul Sperry, "'It's Like Measuring an Amoeba,'" Investor's Business Daily, March 5, 1997.


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