The Misleading Nature of Government Statistics
"Macroeconomics is a tautology and a myth, a dangerous one at that, sustaining the illusion that prosperity is necessarily linked with territory, national units, and government spending in general." - Reuven Brenner, Labyrinths of Prosperity
The Labor Department is set to announce the nation's unemployment rate tomorrow. And while the number is expected to be bad, what sometimes goes unquestioned is the reliability of the government's calculations when it comes to the health of the economy. The view at H.C. Wainwright Economics is that its various measures of our economic health are faulty.
And if goverment economic statistics aren’t misleading investors about the health of the economy, they’re frequently telling us long after the fact what has actually happened.
Trade deficit. Probably the best place to start is the alleged trade deficit given that it’s arguably the least understood economic statistic. It should be said plainly that there is no such thing as a trade deficit. It is a myth. For one, countries don’t trade; instead people trade. When we consider it in that light we must conclude that rather than deficits, individuals are constantly exchanging what they deem personal surplus for something they don’t have but want.
The best way to look at trade is to view it in an individual context. As individuals we run trade deficits with our landlords, our grocery stores, and restaurants we frequent. But are we in deficit? Hardly. We’re able to maintain those supposed deficits in trade thanks to the work we engage in elsewhere. In the end all trade balances due to the basic truth that we can’t buy from anyone unless someone’s purchased something from us of equal value first.
The question then becomes why the government produces statistics suggesting we’re in “deficit” on a monthly basis? The answer lies in what they define as “trade.” When Americans buy shoes, socks and shirts that are made in China, those purchases accrue to the deficit. Conversely, the Chinese are big purchasers of our equities, land and debt. None of those purchases count in the alleged “trade” balance because they are “capital” assets. But we export opportunities to invest in our generally booming economy in exchange for goods that are not in our economic interest to make.
The reality is that trade deficits are a sign of economic health. And while GDP figures are highly misleading (more on that later), periods when our GDP has grown the most have regularly correlated with rising trade “deficits.”
Savings rate. In his classic book The Wealth of Nations, Adam Smith wrote that “Capitals are increased by parsimony, and diminished by prodigality and misconduct.” This is important when we consider the savings rate, because the basic truth is that without savings, there is no wealth.
The paradox here is that the government regularly reports that the savings rate in the United States is nil, or often times negative. This is so despite the fact that the Federal Reserve frequently reports on total wealth in the U.S., and the number of late has hovered in the $50 trillion dollar range. If we allegedly don’t save, how is it that we’re so rich?
The answer to this question lies in how this statistic is computed. When the government measures our savings, it measures it in terms of our monthly income versus our monthly spending. And there lies the problem with this statistic. The savings rate first of all can’t distinguish between spending on a vacation or spending for instance on home Internet access that would in theory lead to higher income.
The reality that Americans as a whole have historically invested some of their income at some point greatly distorts the whole savings picture. That is so because the savings rate does not account for capital gains. What this means is that if someone bought 1000 shares of Dell Computer back in 1994 only to see those shares split six times, this person might not appear as a saver in the government’s calculation. Thanks to six splits, that individual might sell shares on occasion to fund all manner of purchases, so despite the fact that this person would be wealthy by any definition, the extra spending wrought by past parsimony would often eclipse that person’s savings rate thanks to the spending of capital gains.
In short, the broad prosperity experienced by Americans over the last twenty five years has created enormous capital gains that were attained by savings but, in the ultimate paradox, have driven our savings rate lower. To find a time when the savings rate was high, one would have to go back to 1982 when stocks and housing were both down at the same time. With no capital gains to access, Americans rightly saved a great deal of income. Far from a sign of prosperity, this signaled a weak economic outlook.
In short, the notion that Americans don’t save is yet another myth.
Durable goods orders. Former Fed Chairman Alan Greenspan has frequently pointed out that while the aggregate output of the United States is five times greater in real terms than it was in 1950, the output weighs the same. Greenspan’s observation deserves special attention considering all the attention given to the durable goods number produced by the federal government. When the durable goods number comes in below expectations, economists and commentators frequently key on it as evidence that the economy is not very sound.
But as the late Warren Brookes wrote in his 1982 book, The Economy In Mind, “the thing that is most responsible for keeping the United States competitive in the world market has relatively little to do with physical assets.”
To understand what Brookes meant, we need only look at the composition of the S&P 500 upon its inception in 1957 compared to today. Fifty years ago, steel, aluminum, chemical, paper, and mining companies made up half the value of the S&P, whereas today those sectors account for only 12 percent of the index’s value.
Conversely, the technology, health-care, and financial sectors now account for nearly one-half of the S&P, compared to 6 percent fifty years ago. So while many still concentrate on statistics measuring investment in new plant and equipment, the actual U.S. economy has evolved in such a way that these measures are far less impactful to our overall economic well-being.
The durable goods number is rooted in the past given its reliance on heavy equipment. But we are once again an economy of the mind, so when commentators suggest a poor number here is indicative of poor economic health, they’re engaging in thinking that mattered in the past, but that has very little relevance to the present.
Unemployment. Probably the most watched economic statistic each month on Wall Street is the unemployment number. It is assumed that the level of employment is an indicator of health—thus the attention—but it seems the major reason unemployment gets so much press is that the Fed watches the number owing to its counterproductive obsession with employment levels.
The reality is that the level of employment or job creation is very much a function of population. When populations grow, so do job levels. In this sense, unemployment is somewhat of a misnomer. People aren’t not working so much due to lack of jobs as they don’t work owing to a failure to supply their labor at a rate that attracts employers.
So barring government restrictions on employment, jobs are always being created and destroyed at the same time. Indeed, the computer is arguably the greatest destroyer of jobs in world history, but the efficiencies wrought by its broad use freed up all sorts of human and financial capital that led to the creation of higher paying jobs.
Notably, when we read about “high” levels of unemployment in some of the European countries, it’s important to not take them very seriously either. Due to high rates of taxation, many workers seek to hide their employment from the government. At the same time, restrictions on firing most notably in France have fostered a high level of unemployment there that is belied by strong stock-market returns in that country over the years. Through temping and other ways around the rules, businesses continue to hire.
And while it is correctly said that lots of jobs were created during the Reagan and Clinton years, it’s also true that percentage job growth under Jimmy Carter was the highest of any president post WWII, not to mention that job growth has been very impressive under President Bush. No one would mistake the Carter/Bush economies for those enjoyed under Reagan/Clinton, but if you measured them purely in terms of employment, they might all look very similar.
Instead, it’s better to look at the quality of jobs and economic dynamism forever revealed by the stock market. In that case, jobs were plentiful and good under Reagan/Clinton in ways that the Carter/Bush eras have not measured up too. In short, employment is a factor in our economic health, but not a reliable one.
Consumer price index. The Consumer Price Index, or CPI, is probably the most backward-looking government statistic of them all. That is so most prominently because prices are sticky. All one need do is go to a bookstore to figure this out. Most books are priced in U.S. and Canadian dollars, and the despite the looney’s near parity with the dollar, books are usually priced 50% higher in the Canadian currency.
Another example showing the misleading nature of consumer prices involves Dreyer’s Grand Ice Cream. Rather than raise the price of a tub of Cookies & Cream, Dreyer’s has recently shrunk the size of each ice-cream container from one holding 1.75 quarts to a smaller one holding 1.5 quarts. Given the infinite inputs producers consider in reaching a market price, it’s undeniably difficult for government bureaucrats to reliably factor in those same inputs.
It should also be said that prices change all the time for reasons unrelated to the value of the currency. Outsourcing and the growing efficiency of computer makers has led a sharp drop in computer prices, while the memory contained in a $300 iPod would have cost you $10,000 ten years ago. CPI cannot account for productivity either; the very productivity that has at least in the short-term mitigated the rising costs of goods that would result from a weaker unit of account.
Looked at today, despite a stupendous drop in the dollar which has shown up in the price of gold along with every major foreign currency, government measures of inflation stateside are largely quiescent. But we shouldn’t be fooled, and if this is doubted, we need look no further than the countries whose currencies have crushed the dollar in recent years, and that are experiencing multi-year highs in terms of consumer-price inflation.
In the end, consumer prices organize the market economy, and in doing so they account for all manner of inputs that have nothing to do with the value of the unit of account. Since inflation is purely monetary in nature, it’s important to remember this in light of the consumer prices relied on by the Bureau of Labor Statistics to divine inflationary pressures.
Gross domestic product. This economic measure is perhaps what Brenner was alluding to most prominently in proclaiming macroeconomics a myth. Certainly no national measure of production could ever be definitive evidence of broad economic health, or weakness for that matter. All one need do to confirm this is make the short drive from New York City to Newark, New Jersey.
Furthermore, one region or city’s productivity in one country is surely a function of foreign productivity that lies outside the scope of what is a national calculation. Silicon Valley thrives not just for its human capital based in northern California, but also booms thanks to the productivity of workers on the other side of the world.
Even if we ignore the limiting nature of border-specific calculations, we must remember that while the trade deficit’s economic reality is one of capital and goods inflows that are a reward for our productivity, a large deficit in trade subtracts from our GDP growth. Conversely, while government spending is by definition an economic retardant for capital being removed from the private sector for immediate government consumption, when it comes to GDP, this adds to the number.
Furthermore, GDP in the ’70s actually grew more than it did in the ’50s; this despite the fact that the ’70s are correctly known for economic malaise rather than vitality. If one solely used GDP as a measure of economic health, one would be unaware that the S&P 500 rose a mere 17 percent in the allegedly high-growth ’70s versus a 255 percent gain in the ’50s. The economy in GDP terms grew all four years of Jimmy Carter’s presidency and has grown impressively under George W. Bush, but the S&P rose only 30% under Carter and has had negative returns under Bush.
What these numbers tell us is that rather than using government statistics to understand our economic situation, we would do better to reference market prices. Market prices serve as the world’s great voting booth when it comes to the health and direction of the economy.
Economists and commentators alike will continue to try and draw economic pictures based on the misleading and backward looking statistics. But Wainwright research will continue to draw a more accurate picture; one informed by the wisdom of infinite individual decisions that government statisticians could never hope to harness.