Americans are bombarded by terms and numbers that are supposed to give us a better picture of our economy. Where do the unemployment rate, GDP, inflation and consumer confidence numbers come from and why do they mean so much to economists?
Zachary Karabell, president of RiverTwice Research, is out with a new book, "The Leading Indicators," to explain how these numbers "rule our world."
From the Wall Street Journal:
The leading indicators that Mr. Karabell describes are central to modern governance. The measurement of GDP in theory allows one to gauge how far actual output deviates from "potential" output — a foggy calculation on which hundred-billion-dollar stimulus plans are founded. Consumer-price inflation data create the illusion that a fiat currency can provide the same price stability that a metallic standard would by giving central bankers a target at which to shoot. Data also help politicians build support for their policies, a technique adopted by Franklin D. Roosevelt in his 1936 campaign when he defended his deficit-spending binge by pointing to supposed increases in national income.
How scary, then, to read Mr. Karabell's recitation of the flaws with all these data. Washington's GDP statistic until recently didn't include the value of much intellectual property created on America's shores. The unemployment rate doesn't include unemployed individuals who have given up looking for work or who are underemployed. And inflation indexes are prone to manipulation both in what they exclude — think of the "core" consumer-price index, which doesn't include the things like food and gas that people spend so much of their money on — and in how they measure what they do cover.