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Chapter Thirty-six: More Creative Uses of Statistics

 

In October 1992, the St. Paul Pioneer Press ran a story on the presidential campaign of Ross Perot, purporting to do a reality check on his campaign issues. Perot had referred to a “giant sucking sound” as U.S. jobs went south of the border. “FACT: A study by the Institute for International Economics found that the United States would gain 130,000 jobs by 1995 if the North American Free-Trade Agreement were approved,” read the bullet-point itemin this newspaper report. By implication, Perot was talking through his hat.

I happened to have purchased a copy of the book which provided that statistic. Published by the Washington-based Institute for International Economics, it was “North American Free Trade: Issues and Recommendations” by economics Gary C. Hufbauer and Jeffrey J. Schott. The net gain of 130,000 jobs by 1995, I found in reviewing the authors’ argument, was based on an assumption. There was no empirical basis for the claim of a net gain in jobs. Yet, this study was widely touted in the press as providing evidence for a gain in jobs under free trade.

I outlined Hufbauer’s and Schott’s calculation on a sheet of paper. (This outline, in abbreviated form, appears in Appendix A.) I then called the editor of the Pioneer Press to inform him of my discovery. No, it was not a “fact” that 130,000 jobs would be created, merely an assumption. I offered to walk a Pioneer Press editor or reporter through my analysis of the two economists’ argument. The editor promised to take a look at materials that I might send. Some time later, he wrote me to suggest that my rebuttal would better take the form of an opinion article. So I wrote it up in that form. Eventually, I received a postcard from another editor stating that my opinion piece was “a bit dense & technical”; but, he added, “try us with something else.” In the meanwhile, the 1992 presidential election was held. People in St. Paul thought Ross Perot was misinformed on trade issues.

This was my introduction to how the media play the game of statistical studies. The statistic did not have to be true. All that was required was that it be issued by a prestigious organization or individual. And certainly the Institute for International Economics was that: Its letterhead listed such persons as Peter G. Peterson, Michael Blumenthal, Alan Greenspan, Donna Shalala, Lawrence H. Summers, Andrew Young, and David Rockefeller. And, even if the media were presented with evidence that the statistic was specious, they were not interested. As an accountant, I had the patience to review detailed calculations and chains of statistical reasoning. Most other people did not. The fact that a statistic appeared in the newspaper meant that it was probably true; and newspapers did not seem to care about accuracy if a published piece of “information” supported the conventional wisdom.

On March 22, 2004, the editor-in-chief of U.S. News & World Report wrote in a column that “according to a McKinsey Global Institute study, for every dollar a U.S. company spends on outsourcing, our economy gains $1.14.” I wrote that magazine challenging the editors to produce details of the study. What did the statistic mean? If the results of outsourcing were that good, we might as well shut down our whole economy, outsource everything, and pocket the 14% margin. Or was something else meant? (There was no response.) The rest of the column did not seem all that factual. Its author was calling opposition to outsourcing “delusional”. Democrats, he said, were “demagoguing” the issue. Arguments opposing free trade were “economic nonsense” and “the old protectionist dodge.”

To be honest, I do not know how one proves that NAFTA will create 130,000 jobs in three years or even how, after the fact, one can show that this many jobs were created as a result of a free-trade agreement. I have absolutely no idea how the U.S. economy can gain $1.14 for each dollar of something sent abroad for production. This makes little sense to me. As a former accountant, however, I have seen how statistics are made. Assumptions, changes in definitions or methodology, or totaling mechanisms often drive the results. To understand what is happening, one needs to know where the numbers come from and see how all the factors work together. In news reports one typically sees only the numerical result. The media plug these factoids into arguments of various kinds. A prestigious organization lends them its seal of approval. That’s all that is required to make a fact-based argument nowadays.

I prefer to let intuition and experience play a part in forming such judgments. An actual person who has been laid off is a good source of information about unemployment. As one lives each day in this world, one finds examples of something and, after several instances, begins to see a pattern. That type of evidence should count for something. Statistical studies also have a place if they are transparent. References to authority mean little. We know that interest groups support think tanks and universities financially. Professional reputations depend on affiliation with them. Research funds will not be available to scholars likely to reach the wrong conclusions. Anyone prominent enough to appear on television or be quoted in the newspaper will likely be connected to well-established organizations with adequate funding.

I listened to a press conference given by John Donahue, president of the U.S. Chamber of Commerce, which was broadcast on C-SPAN. His world view contradicts mine. According to Donahue, job outsourcing is a necessity in today’s business world because employers can’t find enough qualified workers in the United States to handle the available work. What’s more, the shortage of workers will only get worse. To fill the gap, employers must look to places like India to find the needed skills. Alternatively, they may have to require even longer hours of work from their existing employees.

Why is that so? Are Americans stupid? Donahue would not say that, but he did say that our school system is no good. There’s not enough emphasis on math and science. On the other hand, American universities are the best in the world as evidenced by the fact that so many foreigners are coming here to study. American industry had a “lock” on certain kinds of knowledge and that would assure our economic supremacy well into the future. Elsewhere, Donahue said that only 25% of U.S. jobs today required a college education. He said that labor productivity was advancing at a breakneck pace. This, rather than outsourcing, was the cause of most of the job loss that Americans have experienced recently. Productivity increases were obviously good, weren’t they?

Donahue stressed that his arguments were supported by the facts rather than emotions. Each statement was delivered smartly and with impressive certitude. But the presentation as a whole did not add up. To wit: Why is a bad educational system the source of our employment problems if uneducated people are qualified for most of the jobs? How can our knowledge-based industries stay ahead of foreign competition if so many foreigners are attending American universities or working for American firms on skill-related visas? If productivity advances are destroying so many jobs, why is a labor shortage meanwhile developing? If the “shortage” could be filled, what were all these highly qualified persons from India or elsewhere supposed to do?

That, indeed, is the question. The man from the U.S. Chamber of Commerce was stressing the need for more workers and for ones with more sophisticated job skills - but to what end? Design computers? How much of the work force is engaged in that pursuit? The reality is that, when I drove around Louisiana, I saw casinos, not computer factories. I saw churches and universities in places of economic decline. Each day, telemarketers call me to urge me to refinance my mortgage or to sign me up for a free vacation trip that will require me and my wife to spend ninety minutes listening to a sales pitch. Perhaps some of these people were calling from India because Americans lack the required skills? The junk mail pours in with solicitations of various sorts. Is this increasing my happiness and prosperity? Isn’t the point of economic input to produce a certain output? Where, then, is the output, Mr. Donahue? Where is this better life for the American people?

Speaking of statistics, the U.S. Government attempts to measure economic output by a numerical construct called Gross Domestic Product (GDP). This is the presumed volume of goods and services produced in the domestic economy. If GDP rises per capita, then it is assumed that we are growing more prosperous. The actual output is a hodgepodge of products defined in terms of dollars which have been adjusted for quality and for price. If new features or improvements have been added to a product, that increases its quality and therefore the quantity of the product even if the number of physical units are the same. Also, if the per-unit price of the product drops, the same dollar amount spent on the product translates into more units and therefore higher GDP. So, measuring GDP with its infinite variety of goods and services is tricky business, subject to many assumptions.

However, I would focus on the changing mix of goods and services. It is not that consumer preferences have changed so much or that new and better kinds of products are being developed for the same function. Rather, the content of GDP has shifted from goods and services which are needed for living to those which we regard as a necessary evil. In a simpler time, for instance, we might not have had to worry so much about the security of our homes when we left for work each day. As urban crime has risen, we are now having to pay the additional cost of installing electronic security systems or replacing items taken during burglaries. Such expenses, borne reluctantly or under pressure of a disaster, do not increase our prosperity in a real sense although, as a component of GDP, they may seem to do so. The government does not compile statistics which distinguish beneficial from remedial types of spending.

I believe that it becomes a significant policy question if GDP growth is concentrated in the remedial areas. If there were some way that the problems could be avoided which necessitated the extra spending, then common sense would say we should go that route even if GDP rose more slowly. It would be better never to have been sick than to incur both the illness and treatment. And, if fact, health-care expenditures have been rising far more rapidly than expenditures for most other consumer products. It is not that we are becoming a healthier nation but that more medicine, together with its administrative overhead, is being pushed at us. More consumer debt is also being pushed at us. More education, based on career-related fears rather than the joy of learning, is being pushed at us.

We, of course, have to deal with the disproportionately rising costs of crime, the criminal-justice system, and the corrections system. We have to support a large military force although no nations are threatening to attack us. We have to support a growing class of lawyers needing to be fed. We tolerate a huge increase in gambling expenditures, known to have a corrupting influence upon many people. If the basics of an economy boil down to food, clothing, and shelter, we in the United States have moved more heavily into areas whose products are less basic and which, indeed, are harmful in many respects. Such expenditures are worse than frivolous; they represent enslavement to predatory interests.

I think that our economic policymakers tolerate these undesirable types of activity in part because they provide jobs. Part of a growing mass of dollar-denominated GDP, such activities also generate growing taxes for the government. They postpone the day when its fiscal irresponsibility will come home to roost. So let the financial bubble continue to grow. My view is that the fuller and more productive employment that would come from more leisure would address the despair which many people feel in their lives. A sounder basis of personal life should make it possible to escape many of today’s social ills. It would, therefore, be better to pay more attention to people’s physical needs and to their psychological and spiritual well-being than to preserve existing financial relationships. Money is a fiction.

To the extent, then, that government policy can promote increased material comfort for its people, combined with greater personal freedom, I would be for that political program. Yes, government can play a role in reshaping society to serve the broader interest of its people. Let not statistics mislead us into believing that dollars spent for the current purposes equate with better, happier, or more prosperous lives.

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