Truth Doesn’t Fit into Headlines

If the porkulus bill hasn’t snorted away all your oxygen this week, you might remember last weekend’s top catastrophe, “GDP contracts 3.8% as inventories limit downturn; Fourth quarter marks worst performance for U.S. economy in nearly 27 years.” I heard different version of the “worst since when” comparison, ranging from the 1980s to the ominous Great Depression.

Let’s look past the headlines. The figure was better than expected, as usual. Expectations were for a 5.5% drop. The figure is an annualized estimate. If nothing changed, if companies and workers prevented from adapting for another nine months, the reduction in activity would be 3.8%. The number is a projection, a guess.

For the entire year of 2008, despite the tone of news, the US economy grew 1.3%. Yes, we grew. So what changed in the last two quarters, partially offsetting 2008’s initial two quarters of growth?

Personal income went down (-2.4%), which likely explains a drop in consumer spending (-8.9%). But it’s only a partial explanation. Spending was down because we saved more of what we earned. The BEA reported, “The personal saving rate -- saving as a percentage of disposable personal income -- was 2.9 percent in the fourth quarter, compared with 1.2 percent in the third.”

The drop in income was itself partially offset by a drop in inflation. Which is actually a deflation, but people tend toward panic if that word is used. However couched, consumer prices were down 5.5% in Q4 2008.

What I see is a combination of traditionally good news and bad news. People are saving more, which is good. But they’re spending less, which lowers GDP. People have less income, which is bad, but their earnings go farther because goods are cheaper.

The statistics can be used to drive any agenda. And this hints at a structural flaw in macroeconomics. Macro is all about statistics and aggregates. It ignores the individual incentives which firms face.

Keynesian theory—the current President’s darling—only attempts to address these macro abstractions. Policy is aimed at changing the statistics, which means it is not aimed at increasing the amount of wealth our economy creates.

The competing macro theory, Monetarism, has the same flaw. Monetarists target the amount and flow of money, while Keynsians target demand. If Barry’s advisors were more of Monetarist bent, we would likely see headlines about that negative inflation (deflation). The policy cure would likely be something like the previous President’s bank bailout, aimed at getting more money moving faster. And the stats could be interpreted to support that policy.

Both Presidents and their advisors from both schools of macroeconomics seem to make a perceptive error. As the philosopher Korzybki remarked, the map is not the territory. Abstractions are necessarily incomplete. The lack of detail about invidividual personal choice and action leads to waste in the best of cases. It might be like choosing a straight-looking road on a map, only to find there were many unmarked crossings once driving the actual highway. It looked good, but turned out that the trip would have been faster on a curvy road without the intersections.

I set out to challenge the popular perception of doom by showing that economic statistics are complex and contradictory. Current conditions are largely what we make of them, compared to our expectations. I have veered off into an introduction to the failings of the theories by which governments attempt to control economic activity. In short, they can’t know enough to make good choices for everyone. And I’m sure I can find statistics to prove it.