Sad state of statistics

A story in this morning’s Washington Post (“Measuring the Economy May Not Be as Simple as 1, 2, 3”) gives us a heads-up on the latest statistical controversy:

The Census Bureau tomorrow will release the latest statistics on poverty in the United States, the income level of an average household and the number of Americans still lacking health insurance.
Don’t believe the numbers.
A growing chorus of experts and politicians is raising questions about the data that frame Americans’ understanding of their nation’s well-being. From poverty levels to health insurance, inflation to personal savings, widely accepted statistics are overstating some problems and understating others, miscounting people, and sending policymakers down blind alleys.

One example of a blind alley:

When Congress returns in September, the House Ways and Means Committee will try to put together legislation to raise personal savings through tax credits and other incentives. But according to David Malpass, chief global economist at Bear Stearns & Co., the United States is accumulating savings hand over fist. The country’s pool of liquid savings grew by $1.5 trillion last year, he said, and U.S. households remain the world’s largest creditor, with $37 trillion in financial assets.
The problem, Malpass said, is that the official savings rate measure does not consider economic gains from patents, innovation, capital gains or land appreciation.

In part, this problem (especially capital gains and land appreciation) can be solved by the movement in accounting to switch from historical costs to fair market value. While this will add realism to the numbers (since current worth is usually very different from cost), it will also add volatility since cost is a fixed number but current value fluctuates – as anyone who has watched the day-by-day and minute-by-minute gyrations of their 401(k) knows.
Accounting for intangibles (patents, innovation) has others difficulties, as outlined in our white paper Reporting Intangibles: A Hard Look at Improving Business Information in the US (see earlier posting for a summary). Given the problems with valuing some of the “softer” intangibles, such as leadership and an innovative culture, I doubt that we will ever be able to include all intangibles in the economic statistics. However, a certain portion of “intangible goods” such as patents can be assigned a value and therefore deserve to included.
It will not, however, be easy. Current valuations of patents are not necessarily very good (witness the controversy over suspected inflation of the value of patent donations). And patents are one of the most concrete types of intangibles.
Thus, bringing our economic statistics into the I-Cubed Economy will be daunting task – but do-able. In the meantime, that the Post’s advice: don’t believe the numbers. Or, better yet, take them with a grain of salt.
FYI – for Paul Krugman’s take on the irrelevancy of many economic statistics to current economic reality, see Summer of Our Discontent – New York Times.

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