Opinion

Felix Salmon

Can national statistics be self-fulfilling?

By Felix Salmon
April 26, 2012

John Kemp has a timely reminder, in the wake of the news that the UK is now back in recession after posting a -0.2% GDP figure:

Modern societies have made a fetish of official statistics, particularly the national income and production accounting (NIPA) system developed by Nobel Laureates Simon Kuznets and Richard Stone during the 1930s and 1940s.

NIPAs, especially the top-line figure for gross domestic product (GDP), as well as monthly employment data such as U.S. nonfarm payrolls, have become the arbiters of economic policy and the success and failure of politicians.

In a strange way, Britain’s ONS, and similar agencies like the Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA) in the United States, hold the fate of politicians in their hands because they help write the political narrative.

It is only a slight exaggeration to say BEA is one of the most powerful agencies in the U.S. government. It may not have as many tanks as the Pentagon, but by measuring the success and failure of economic policies, it can make and break presidencies, as President George H W Bush could confirm and Barack Obama fears.

As Kemp points out, it’s silly to imagine that the UK’s Office for National Statistics can measure the entire economic output of the United Kingdom between January and March, hone it to within a single decimal point, and release an accurate figure before April’s even out.

But I do wonder about all those studies tying election results to various economic statistics like GDP growth or the unemployment rate. To what degree are voters responding to economic activity and joblessness, and to what degree are they responding to statistics? On an individual level, of course, no one has the kind of direct sensitivity to national economic growth which would make vote one way if it was low and another way if it was high. That’s why we need statistical offices. Still, in aggregate, it’s plausible to believe that the population as a whole will be happier, and more well-disposed towards incumbents, when the economy is growing and unemployment is low.

Certainly there’s a very strong way in which national statistics — rather than the underlying economy — drive the national conversation, especially in an election year: Jim Surowiecki’s column in this week’s New Yorker is a prime example. And the strongest word of all is “recession”: it’s incredibly hard for a politician to win an election so long as her opponent can correctly say that she has driven the economy into a recession.

That’s the real reason why there was so much anger when the ONS released its first-quater GDP statistic in the UK: the fact that everybody now knows (or thinks that they know) that the economy is back in recession is itself going to slow down the pace of economic activity in the second quarter.

None of which is to say that national statistical agencies are a bad thing, or that they shouldn’t release their data as efficiently and quickly as they can. It’s just to say that, in good Heisenbergian fashion, they affect the economy just by observing it. It’s even possible that all those lies told by the Argentine statistics office were more than just spin, and actually helped the real economy, somehow. Not that I’d ever recommend such a course of action.

Comments
8 comments so far | RSS Comments RSS

Funny how the statistics’ validity comes under fire when the results show the Conservative austerity approach is a dud.

That is the old distraction trick.

The original point of austerity was that it would inspire confidence and that would spark suppliers to produce. It was supposed to be an effective policy over the short and mid term. That has not happened so the game is now to argue about the statistics. The next game will be to argue that austerity has long term benefits. That would distract from the original argument, which was that in the choice between two policies that end up the same in the long run – austerity versus a more Keynesian approach – the choice of austerity was the better way to reach the same goal of fiscal solvency and economic health. It has not worked that way so we’ll change the debate.

Posted by jomiku | Report as abusive
 

You asked that question just for me, didn’t you Felix? You knew I would say of course, statistics can be self-fulfilling, because a market based economy is driven by positive feedback. If people believe the economy is growing, they are more likely to spend and invest, resulting in economic growth, and if they think it is shrinking, they will reduce spending and investments, yielding a recession.

When unchecked, positive feedback in the economy will lead to bubbles and depressions. It has to be attenuated and dampened (the positive feedback response needs to be delayed as much as possible), and offset with negative feedback, to keep things from spiraling out of control (all bubbles burst, and depressions are often terminated by wars). One way to dampen and attenuate positive feedback in a growing economy is to increase the tax rate on capital gains for short term investments. This will prevent speculative gains from being fed back into the system – you know, like flipping houses that are bought with no money down and drive the prices even higher.

In a shrinking economy, we need to make sure more capital gets injected into the economy. We can do that by penalizing hoarding and rewarding investment, and if that doesn’t get that job done, we have to resort to the government printing and spending money. That’s not desirable, but if those with more capital than they could possibly use in 100 lifetimes refuse to deploy it, we shouldn’t just let the rest of the economy suffer.

So thanks for asking.

Posted by KenG_CA | Report as abusive
 

“Expectations of accuracy and reliability in early estimates are often too high. Revisions are an inevitable consequence of the trade off between timeliness and accuracy. Early estimates are based on incomplete data.”
http://www.ons.gov.uk/ons/dcp171778_2635 78.pdf

As usual, the media are doing a terrible job at putting the data in perspective.

Posted by alea | Report as abusive
 

Felix

Heisenberg’s Uncertainty Principle states that one can not simultaneously know both the position and the momentum of a sub atomic particle. The uncertainty principle states a fundamental property of quantum systems- not about the observational acuity of current technology.

Posted by crocodilechuck | Report as abusive
 

This has been studied, and voters vote more based on how they think the economy as a whole is doing than based on their perception of their own situation. Errors in election-year statistics go directly into the election outcome, even excluding the effect of self-fulfilling prophesies within the economy itself.

Posted by dWj | Report as abusive
 

What has been self-fulfilling about the UK situation has been the politics. For a year before the last General Election the Conservatives were talking down the economy, saying it was broken, that it would take years to fix, and that there was no money. For the first year after getting elected, they continued saying the same things, and after two years of it, it really started working: people stopped spending, they started paying down debt instead. This then pushed growth down. With lower growth, debt as a percentage increased, and so more austerity was planned.

Even now, 88% of the planned austerity has NOT yet arrived in the UK economy! When it does hit, this will scare people even more when it does finally arrive, and so growth will suffer again, increasing debts as a percentage, causing more austerity and so on. Until someone stops screaming “Austerity is the only cure!” and brings some positivity to the front of people’s minds, people will not spend, companies will not invest, and the claims that the economy is broken will have fulfilled their own prophecies.

Posted by FifthDecade | Report as abusive
 

This – ^ ^ – here from 5thDecade was more persuasive in its original Argentine-Spanish/Greek-accented iteration.

Posted by MrRFox | Report as abusive
 

You say this as if it is something new, but the UK (and most of the rest of the world) has historically generally estimated the GDP pessimistically and subsequently adjusted it up, while the US has generally estimated optimistically and then adjusted it down.

Are people not spending because of statistics? Of course not. They are not spending because they have less money in their pockets. Only this month, with the public sector pension changes, the government has taken about £100 million per month out of the economy.

Posted by mudlark | Report as abusive
 

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