Is Our Economic Data Fatally Flawed?

Is Our Economic Data Fatally Flawed?


The New York Times uncovers a rather disturbing oversight that economists are just now focusing on.

Actually, disturbing isn’t the right word. Terrifying is much more of an accurate descriptor.

In any event…

The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country.

American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics.

“We don’t have the data collection structure to capture what is happening in a real time way, or what is being traded and how it is affecting workers,” said Susan Houseman, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., who has done pioneering research in the field. “We have no idea how to measure the occupations being offshored or what is being inshored.”

Yeah, this is a tricky one because the government would literally have to account for every single import, how much it was bought for, etc. And there’s no way big business will go for that.

So it does indeed seem like our economic data has a big, gaping hole in it that is impossible to fill. But if we can’t point to the GDP as an accurate measure, which number do we point to? Employment and median wages seem to be the most obvious indicators since the more people are employed, the more likely they are to spend and the more our economy will flourish…given that it’s driven by consumer spending.

But maybe I’m missing something. What do you think the focus should be on if the GDP is a big boatload of nonsense?

  • kranky kritter

    GDP is another one of those “crappiest except for all the others” kinds of data.

    Plus, its primary value is comparative, so if you change the way its measured, it becomes harder to compare it to past data.

    The gov’t has been giving us inflated numbers for productivity for years. Peter Schiff discusses this in some detail in several of his books. I suppose most folks consider here him anathema, a scary arch-conservative boogeyman. But when it comes to finance and investing and government stats, he really know his stuff. If you have enough in the way of basic critical thinking skills to take some of his predictions with a heavy grain of salt, he’s well worth reading.

    I feel like I learned a lot from him.

  • Jimmy the Dhimmi

    Employment and median wages seem to be the most obvious indicators since the more people are employed, the more likely they are to spend and the more our economy will flourish…given that it’s driven by consumer spending.

    Low unemployment may occur during a bubble economy, as it did during the late 1990’s and much of the past decade. The fact that our economy is driven by consumer spending is the problem. As we are consuming more than we produce, someone else has to be producing more than they consume. You mention Peter Schiff, he has a great analogy about this:

    Six Asians and an American are stranded on an island. The first day, they divide up responsibilities. The American is assigned to eating. One of the Asians is assigned to fishing, another to foraging, yet another to hunting, etc. At the end of each day, they gather on the beach, where the American eats the food produced by all the Asians, leaving enough crumbs for the Asians to eat and be able to go back out the next day for more food.

    Economists would look at this situation and conclude “Hey, without the American, the island economy would surely collapse, because without his demand for food, none of the Asians would have a job.” Of course, in reality, the island economy would in no way collapse, Indeed, the standard of living for each Asian would immediately increase dramatically if they were to boot the American from the island.

  • Mike

    I’m confused. Imports subtract from GDP, they don’t add to it:

    GDP = private consumption + gross investment + government spending + (exports ? imports)

    So wouldn’t over-valuing imports cause the GDP to be lower, not higher, than otherwise? And wouldn’t worker productivity appear higher, not lower?

    But I’m sure I’m not as informed on the subject as the NY Times writer, so what am I missing?

    Also, whenever something comes up that appears to have no good explanation, that’s usually a good time to ask: maybe there’s a reason things are done this way? Sure, sometimes things “just happen”, but not usually. One possibility is that if we are measuring the “value added”, then what difference does it make if the same component costs 1/2 as much in China. If it is valued at $100 in the US, then that’s it’s value for the US. I’m not an economist (I just like to pretend), but I’d like to hear some more economists’ perspective on that.

  • Mike

    Sorry, the minus symbol didn’t show up in that formula when I pasted it:

    GDP = private consumption + gross investment + government spending + (exports – imports)

  • Mike

    Sorry, correction #2: I should have said this:

    “And wouldn’t worker productivity appear lower, not higher?”

    I’m up past my bed-time, as you can see.