Bad data is ok according to DOE

According to the Department of Energy, falsification of data is ok — if other events prevent you from using it. That is what DOE is telling
Congress. As a story in Washington > Importance of False Data Is in Dispute” href=””>The New York Times – “Importance of False Data Is in Dispute” relates:

Energy Department officials testified Tuesday that admissions by government scientists that they had falsified information about a Nevada site being readied for nuclear waste storage were not important, because other delays had prevented them from submitting the bad information in a license application.
In more than two hours of testimony before a House subcommittee, Energy Department officials made their first substantive remarks about the department’s disclosure last month of internal e-mail messages in which Interior Department scientists discussed how they had made up scientific entries or deleted material they did not understand about how water would flow through the storage site. They said they were only beginning to evaluate whether the information made a difference in the conclusions reached in studies about the safety of the site, Yucca Mountain, about 100 miles northwest of Las Vegas.

Falsified data is falsified data. You don’t need to “evaluate” its impact; you need to retract and redo any studies that might have tainted by the falsification. This isn’t about an errata sheet where there is a typo or a missing citation.
In the information economy, the information has to be valid if the system is going to work. Or maybe folks at DOE think we should change the concept to “the falsified data economy.”

Inadequate statistics – example of education

We may live in an information age, but getting accurate information is still a problem. Take for example the issue of student graduation rates. According to a story in today’s Washington Post,
“Education Statistics Difficult to Interpret”, the National Center for Higher Education Management Systems has collected the following data:

For every 100 students who enter ninth grade:
&bull 67 will graduate from high school.
&bull 38 will enter college.
&bull 26 will remain in college beyond freshman year.
&bull 18 will earn an associate’s or bachelor’s degree.

That is rather grim. But, as the Post story points out,

the U.S. Department of Education responded with a different, and somewhat more optimistic, set of numbers based on a longitudinal study in which 12,000 students were followed from the time they were in eighth grade, in 1988, until December 2000.
For every 100 students in the eighth grade in 1988, their statistics showed:
&bull 78 graduated from high school on time in 1992 with a regular diploma.
&bull 53 entered a postsecondary institution within seven months of graduation.
&bull 47 remained in the postsecondary system beyond the first year.
&bull 34 earned an associate or bachelor’s degree by age 26.

What is going on? Well, it turns out that we really don’t know. The Post story does on to explain:

U.S. Education Secretary Margaret Spellings has complained about the lack of good information on college graduation and other issues. “We can tell you almost anything you want to know about first-time, full-time degree-seeking students who have never transferred,” she said in a recent speech. “The trouble is, today, that’s less than half of the total student population.”

In other words, we have good data on the prototypical industrial age student – “first-time, full-time degree-seeking students who have never transferred” – but little about the information-age student who maybe in and out of “the educational system.”
This is a problem that comes up over and over and over again. Our statistical system continues to be geared to our industrial age past. We can track with great precision the number of box cars unloaded each month, but have no idea as to the value-added of a creative worker.
In fairness to the statisticians, they are not to blame. They are working diligently to come up with better measures (see my January posting on savings and the National Accounts). Our mindset is what has not changed.
Take for example the above educational statistics. Are graduation rates the best measure of a successful outcome? That may sound heretical – and it is meant to be. These statistics track students like so many widgets coming down the assembly line. Graduation means certification — the end of a process. Yet, we all give lip service to the concept of lifelong learning — where supposedly the process never ends. Under the current system, one needs the certification to go one to the next step. But does one need a college degree in order to proceed with lifelong learning? A high-school degree?
My answer is that one probably needs a high-school education in order to prepare for a life of learning. Kids who drop out of high school are probably not infused with a love of learning. So we use graduation as a proxy. We also use it as a short-hand proxy for some type of skill attainment – just as we use patents as a proxy for innovation.
Both are inadequate. If we are to make policy for in the information economy, we need much better information. But we first need to better understand what type of information we need. When we know what questions to ask, we will get better data.

Deficits and globalization

Does globalization help or hurt? And do current account deficits matter? In recently released paper looking specifically at the link between multinational corporations and the current account deficit, the McKinsey Global Institute clearly coming down on the “help” side. And their analysis is that the deficit is nothing to worry about. As reported in – U.S. Multinationals Reap Overseas Bounty:

In a recent paper on the subject, analysts at McKinsey & Co. conclude record U.S. trade deficits aren’t as threatening as they appear, because they are being driven in part by increasingly profitable U.S. companies, producing in places like China, Mexico and India, and shipping their goods and services back to the U.S. It concluded overseas profits account for $2.7 trillion in stock-market capitalization and those profits are helping to promote investments in new technologies and jobs abroad and back home.
“Far from reflecting the weakness of the U.S. economy, at least a third of the current-account deficit is actually evidence of its strength,” the report says. “The U.S. acts as the world’s financial intermediary, gathering up and allocating global savings to companies that then invest them around the world,” it later concludes.
McKinsey argues the important role of U.S. multinationals means today’s record trade deficits — a source of so much uncertainty about the economic outlook — could last much longer than many economists expect.
The U.S. current-account deficit hit 6.3% of gross domestic product in 2004, a level that has triggered financial crises in other countries in the past. Classic economic theory holds the trade gap should make foreigners less willing to hold U.S. assets. That, in turn, should push down the value of the dollar, making U.S. products more competitive abroad and making foreign products more expensive at home. Theory holds this would ultimately correct the trade imbalance.
But McKinsey argues that labor is so much cheaper in countries like China and India that U.S. multinationals are unlikely to alter their international strategy anytime soon, meaning the old corrective mechanisms won’t work the way they used to. “For at least the next decade, we would expect foreign investment by U.S. multinationals to go on adding to the current account deficit as it is currently measured,” McKinsey says.
Last week, Goldman Sachs fired back at McKinsey’s conclusions about the U.S. economy’s place on the global stage. Edward McKelvey, a senior economist at Goldman, argues that it doesn’t matter who is driving the deficit wider. The end result is still that the world is awash in dollars and because of that the currency is still prone to sharp — and potentially destabilizing — depreciation.
For now at least, McKinsey’s rosy view of the world is holding up. The current-account deficit was 25% wider in 2004 than it was in 2003 and shows no sign of letup. And while the dollar has weakened, it hasn’t touched off a much-feared financial crisis.
But Diana Farrell, director of the McKinsey Global Institute and co-author of the study on multinationals, says that doesn’t mean there aren’t pockets of truly vulnerable Americans in this process. The $2.7 trillion in stock-market capitalization created by multinational profits overseas doesn’t reach individuals who don’t own shares in these companies. These are often the same low-skilled workers most vulnerable to lose their jobs to inexpensive low-skilled workers overseas. The real worry in today’s economy, Ms. Farrell says, isn’t the current-account deficit. It is finding ways to equip and enrich those workers least prepared for the globalization of profits.

There are two comments in the above story I agree with and one that raises a concern. The comment that concerns me whether we need to worry. The WSJ story quotes the paper’s author as saying 1/3 of the current account deficit is really strength because it represents funds of US based multinational – and therefore productive investment that really isn’t from foreigners. That may well be true — I don’t know. But even if it is, it is no source of comfort. There is still the other 2/3 of our huge current account deficit to worry about. If the deficit was only one-third the size of what it is now, I would sleep easier and might be inclined to buy the argument about the US being the “financial intermediately to the world.”
The two points I agree with are: 1) that traditional macroeconomic measures will not self-correct the problem and 2) that many people are not benefiting from the increased corporate profitability.
On the first point – see my earlier posting on dueling on the dollar. Macroeconomic models assume instantaneous and seamless adjustments. It can not account for the phenomena that McKinsey report describes: labor so cheap that an extraordinarily large change would be required to alter behavior and the increasing need for companies to locate production closer to emerging new consumer markets, such as China.
On the second point, let’s first leave aside the link between profitability and stock prices, and the fact that companies rarely share their profits with their stockholders, i.e. pay dividends, any more. Most American’s — even high-earning people like sports figures, CEOs and movie stars — still get their money through earned income (wages and salaries). The Trust-Fund Society (aka Ownership Society) is still some political operative’s dream. Thus, the link between corporate profits and the economic wellbeing of most Americans is indirect at best (i.e. profitable companies stay in business and hire more workers).
And now we have the Bush Administration apparently attempting to downplay this link in order to rationalize their projections for Social Security that assume slow economic growth (and therefore lower contributions to Social Security) but high rates of return for private accounts. According to a story in The New York Times, “Social Security, Growth and Stock Returns”

In barnstorming the country over Social Security, administration officials predict that American economic growth will slow to an anemic rate of 1.9 percent as baby boomers reach retirement.
Yet as they extol the rewards of letting people invest some of their payroll taxes in personal retirement accounts, President Bush and his allies assume that stock returns will be almost as high as ever, about 6.5 percent a year after inflation.
“For the life of me, I can’t imagine why anybody would argue against young workers having the ability to invest and build a better retirement for their future,” Treasury Secretary John W. Snow said Wednesday in a speech in Bozeman, Mont.
A growing number of economists, however, including many who favor personal accounts, say Mr. Bush’s assumptions are optimistic.
Many believe that stock returns will be lower than they have been in the past, closer to 5 percent than 6.5 percent, and that returns on a balanced mix of stocks and bonds will be much lower than that.
“Most economists would argue that, over a long period of time, there is a linkage between what the stock market will return and how well the economy does,” said David Blitzer, chairman of the Standard & Poor’s index committee, which oversees the S.&P. 500 stock index.

I firmly believe that stock prices are tied to how well the overall economy does. I’m not so convinced that these factors are that strongly linked to the economic prosperity of the average American any more. A robust stock market, corporate profitability and a healthy GDP growth rate may turn out to be necessary but not sufficient conditions for economic prosperity. We have seen repeated job-less recoveries and periods of robust GDP growth with anemic income growth. As the intangible economy continues to globalize, the WSJ story highlighted the challenge: to equip and enrich those workers least prepared. Unfortunately, I worry that this category is including more and more of us.

March employment

March’s employment numbers came out this morning. BLS reported a drop in the unemployment rate to 5.2%, but an increase in total employment of only 110,000.
Here is the breakdown by occupation:
Management, business, and financial operations occupations:
continues to have a below average unemployment rate (2.4%); down slightly from March 2004. Employment up (21,00) from last year; total number of people in this occupation (working or looking for a job) down by 44,000.
Professional and related occupations:
below average unemployment rate (2.2%); down significantly from March 2004. Employment down (66,000) from last year; total number of people in this occupation (working or looking for a job) down by 210,000.
Service occupations:
above average unemployment rate (6.9%); down from March 2004. Employment up significantly (475,000) from last year; total number of people in this occupation (working or looking for a job) up by 391,000.
Sales and related occupations:
average unemployment rate (4.8%); down from March 2004. Employment up significantly (671,000) from last year; total number of people in this occupation (working or looking for a job) up by 460,000.
Office and administrative support occupations:
average unemployment rate (4.9%); down from March 2004. Employment down (186,000) from last year; total number of people in this occupation (working or looking for a job) significantly down by 379,000.
Farming, fishing, and forestry occupations:
significantly above average unemployment rate (13.7 %); down significantly from March 2004. Employment up (23,000) from last year; total number of people in this occupation (working or looking for a job) down by 25,000.
Construction and extraction occupations:
significantly above average unemployment rate (10.1%); down slightly from March 2004. Employment up significantly (711,000) from last year; total number of people in this occupation (working or looking for a job) up by 683,000.
Installation, maintenance, and repair occupations:
slightly below average unemployment rate (4.3 %); down from March 2004. Employment up (222,000) from last year; total number of people in this occupation (working or looking for a job) up by 182,000.
Production occupations:
above average unemployment rate (7.3 %); same as March 2004. Employment down (20,000) from last year; total number of people in this occupation (working or looking for a job) down by 23,000.
Transportation and material moving occupations:
above average unemployment rate (6.6 %); down from March 2004. Employment up (226,000) from last year; total number of people in this occupation (working or looking for a job) up by 117,000.
Bottom line: Managers and professions continue to have the lowest unemployment rates and construction and production workers the highest. But, the US economy has more service, sales, construction, repair and transportation workers and fewer managers, professionals, office workers and production workers than this time last year.
Very interesting, if we are supposedly becoming an information economy. Now, these are one month’s numbers. I don’t know if this is the larger trend or not. I hope to do some more detailed work and will report back.