THE BLOG
06/03/2013 10:37 am ET Updated Aug 03, 2013

By the Numbers?

We live by numbers. We count on them to anchor reality for us -- for they are taken to be the surest representations of truth. To the modern mind, numbers convey rigor and precision -- they are associated with the scientific. Hence, numbers' claim to authority is a powerful one. We rely on them to tell us what's happening in the economy, to measure investments public and private -- tangible and intangible, to evaluate every manner of work, to establish the threshold of mental illness, even to measure when chemically induced ecstatic pleasure threatens our health.

Our faith in numbers all depends on their reliability, though. Do they in fact tell us what they purport to tell us? By reducing phenomena to digits, do we exclude aspects of reality that may be of crucial importance although not countable? Are we so enthralled by numbers that we are too ready to set aside our skeptical faculty when confronted with dense arrays of them? There is telling evidence that we are too often misled by numbers in just these ways. Let's take a look at some examples.

Gross Domestic Product (GDP) is the most commonly referenced number when we discuss the state of the economy. It represents the aggregate of all goods and services produced -- supposedly. The United States economy grew at a rate of 1.84 percent in the year ending March 2013. So we are getting richer.

Not so fast. The country's population grew at a rate of 1 percent. On a per capita basis, the 1.84 percent should be lowered to 0.84 percent. In other words, yes the American economy has been growing in aggregate terms but not in a way most assume by just looking at the well publicized number.

Second, there is the more basic question of exactly what we are measuring. The techniques for coming up with the GDP figure are elaborate; but the concept of what constitutes economic activity is very simple: any transaction that appears in official statistics. That includes legal gambling. It also includes the array of speculative activities undertaken by financial institutions that are little different from gambling. Illegal gambling -- whether of the numbers running or Wall Street variety -- doesn't get measured (and rarely prosecuted). What economic value has created by these activities? Isn't it truly just a matter of people playing a game that results in the shift of money from one pocket to another? Why should be represented as growth in GDP? Magnify the gambling numbers by several fold to account for related forms of intangible activities, and you have a substantial figure that should be subtracted from that (remaining) 0.84 percent growth -- by any reasonable standard of aggregate performance. That brings us to a roughly 0.5 percent GDP growth rate.

Third, there is inflation. The GDP number rightly is reduced by discounting nominal growth for any rise in the Consumer Price Index (CPI). The accuracy of the CPI in measuring changes in the cost-of-living has long been in dispute. Many economists assert that it overstates inflation. A close look at the methods of calculation point to understatement.

Here is one obvious example -- ignored in the official statistics: the cost of an airline ticket. Current methodology ascribes a fixed utility to a given flight. But it should be obvious that an airline ticket is not an airline ticket is not an airline ticket. The product one buys today when flying from San Francisco to Washington is not the same product that you bought in 1973. Sardine Class represents a qualitatively different experience from Economy Class back then. The only equivalence is that your body is delivered to the same destination -- now less rather than more intact. This is logically absurd. Yet the CPI is distorted by numerous misrepresentations of that kind.

We also should add the matter of local taxes -- especially real estate taxes. Their annual rate of change varies drastically from jurisdiction to jurisdiction. In some growing communities, they rise almost automatically by 10 percent a year. In my individual situation, that amounts to a rise in my annual expenditures of 1 percent. The cost-of-living rise over that period is 1.5 percent. Standard calculations cannot cope with these real world phenomena. If the actual rise in the CPI has been 2.3 percent rather than the adjusted 1.8 percent, then the quarter's GDP number should be 0.00 -- if not in negative territory. Seen any discussion of this? No -- because the authority of the number goes unchallenged due to vested interests -- economic, political, intellectual, professional, psychological -- in perpetuating an inaccurate statement of what objective truth supposedly is.

I do not know for sure that these numbers are correct. But neither are the National Bureau of Statistics' numbers definitive.

The dubiety of GDP numbers is but one example from the economics field where seemingly hard truths presented in digits turn out to be anything but hard when subject to scrutiny. Official unemployment rates are a prime candidate for the blue ribbon of deception. The number that we see monthly simply tells us how many people are receiving benefits. It makes no reference to the total number of people who want to work and cannot find employment. Once you leave the rolls, you no longer exist insofar as the publicized statistics are concerned. That is why we see a slow but steady decline in the official unemployment rate even though the percentage of those of working age who are actually employed is declining.

Moreover, the numbers make no distinction between full-time jobs, on the one hand, and part time or temporary jobs, on the other. The latter are low paid, carry no benefits -- or, of course, any security of employment. Yet 60 percent of the jobs created since 2008 are in the latter category. That is one reason why wage earners have lost 3.2 percent of real income during this time period. That percentage will remain high because it says employers money. An additional incentive has been added by the Affordable Health Care Act which provides a loophole for employees that allows them to evade health insurance obligations for those employees working fewer than 30 hours a week. The rewriting of contracts to push workers hours below that threshold is going on all around us. That phenomenon, though, is taken to be anecdotal since nobody bothers to enumerate the degrading of terms of employment.

Failure to take these factors into account (which is the case for most commentators) voids the ballyhooed unemployment rate numbers of much of their claimed meaning.