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Monday, August 29, 2005

In Search of Accurate Economic Data

To an econometrician or policymaker, accurate data are essential.  So I am all for improving the data that we use to evaluate economic theory and to guide economic policy, and there are calls from politicians who are unhappy with what the statistics are telling us to revise the calculation of economic statistics.  We’ve known about these problems for some time, and efforts have been made in the past to improve statistics, so why are these questions being raised so loudly now?  If the problems had easy solutions, they would have been implemented already.  I worry this is driven by politics with science as the cover (failure to revise bad statistics can also be a problem when politics intrudes in the process).  I want more accurate data, but the process needs to be as free as possible from political manipulation.  If we’re going to do this, let’s do it right, and let’s be sure to separate issues concerning how data are presented in summary statistics, i.e. the question of what to measure, from questions about the accuracy of those measurements, a distinction not made in the article.  Many of the complaints are about what is measured rather then the accuracy of those measurements:

Measuring the Economy May Not Be as Simple as 1, 2, 3, by Jonathan Weisman, Washington Post:  The Census Bureau tomorrow will release the latest statistics on poverty in the United States, the income level of an average household and the number of Americans still lacking health insurance. Don't believe the numbers. A growing chorus of experts and politicians is raising questions about the data that frame Americans' understanding of their nation's well-being. … "We're getting at best an impressionistic sense of what's going on in the economy," said Rep. Rahm Emanuel (D-Ill.), who recently introduced legislation to establish an independent commission aimed at overhauling government economic statistics. "Major policy decisions are being made based on data that is inadequate to the task."

This seemingly technical problem has real-world consequences, allocating federal assistance to some who don't need it while cutting off others who do, raising the costs of programs like Social Security, or pushing policies for problems that may not exist. For example, since poverty levels are not adjusted for regional costs of living, the working poor in expensive urban centers like Washington are routinely excluded from federal programs because their income lifts them above the official poverty line. The rural poor in low-cost states like Arkansas often can afford considerably higher standards of living than their urban compatriots...

Perhaps no statistic has more critics than the poverty rate ... University of Chicago economist Robert T. Michael, who chaired a National Academy of Sciences panel tasked to update poverty statistics a decade ago, called the current poverty data "truly awful." ... Officially, the poverty rate has drifted upward since 2000, ... But a more sophisticated measurement … shows the official rate has consistently understated poverty. ... At the same time, household incomes may be understated because they do not include non-cash income like food stamps. … Since poverty rates are based on pre-tax income, refunds like the earned income credit do not count. … For more than 20 years, the Census Bureau has been developing alternative poverty measures, many of which answer these criticisms, ... But it is up to the White House budget office to change the official measurement, and successive administrations have declined to do so…

The Census Bureau on Tuesday will also update its count of the uninsured, and any change from the 2003 figure of 45 million likely will be slight. But recent studies by the Urban Institute and the Annandale-based Actuarial Research Corp. concluded the number is overstated by 4 million to 9 million people, largely because it includes Americans already enrolled in Medicaid and other federal health care programs. …

From the conservative Heritage Foundation to the more liberal Brookings Institution, economists agree the government's basic measurement of consumer price changes is overstating inflation. ... The Labor Department's standard consumer price index measures the cost of a basket of goods in urban areas as they rise over time. But since 2000, the department's Bureau of Labor Statistics has also tracked more realistic spending patterns, allowing for the substitution of products when prices spike. This "chained" CPI, … would cut $70 billion from Social Security payments while raising income tax collection by $83 billion, according to Brookings Institution economists. Yet Congress has made no effort to change the official inflation measurement, in part because lawmakers have no desire to slow the growth of either tax bracket increases or Social Security benefits. "This is a political decision, and no one wants to make it," said Fritz Scheuren, president of the American Statistical Association.

More recently, a debate has begun over the nation's savings rate, which officially hovers just above zero. When Congress returns in September, the House Ways and Means Committee will try to put together legislation to raise personal savings through tax credits and other incentives. But according to David Malpass, chief global economist at Bear Stearns & Co., the … official savings rate measure does not consider economic gains from patents, innovation, capital gains or land appreciation. "We may be throwing billions of dollars at a problem that isn't there," said Emanuel, who has advocated savings proposals.

The statistics for any given time period will not, in general, be perfectly accurate. But the question is how large the errors are and whether the statistics are correct on average. The implication in the article is that there are problems with easy solutions, but it isn’t that simple. This is an area of ongoing concern and the BLS and others do a considerable amount of research on these issues. For thos who are interested, research from the BLS on improving price indices, poverty measures, and other problems can be found here. Work from Census on poverty measures is here.  If we are going to try and implement some of this work, let’s be sure to set politics aside.  I think Big Picture would agree.

    Posted by on Monday, August 29, 2005 at 11:25 AM in Economics, Methodology | Permalink  TrackBack (0)  Comments (11)

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