Issue Briefs
The Impact of False and Misleading Economic Data
Paolo von Schirach
May 12, 2016
We are used to hear that we live in a “data driven” world. Thanks to ICT and the computing power explosion, it is now possible to gather, streamline and organize millions, in fact billions of bits of information on consumers’ preferences, economic sectors’ performance, credit flows, and a lot more. All this intelligently organized and sifted data provides precious information that will influence, in fact will determine investments, marketing strategies, purchases, and even the pitch of political campaigns.
Reliable data
Fine, all well and good. But this “data revolution” rests on at least two fundamental assumptions: number one all gathered data is reliable; number two we do have the ability to understand “what all this means”, once we have carefully looked at all the available information. In other words, data can be interpreted wrongly by error or by design.
And here I see serious problems. At one level, we may engage in self-deception by giving excessive weight (or not enough weight) to some data. And, on a different level, what if the data is false, or heavily manipulated? In both cases we are in trouble.
Data in context
Let’s talk about exaggerating the importance of some data. For example, take unemployment. The US Government is proud to tell us that at around 5% the unemployment rate is back to “normal’. True. Except that this unemployment statistic, while correct, is rarely placed in its proper context.
Unemployment is definitely way down, and this is good news for America. However, the percentage of the US population that is actually working compared to the entire working age population is well below what it used to be 10 or 15 years ago. Indeed, labor participation reached 67.3% in 2000. And now in 2016 it is at down to 63%. And this really means fewer people employed. In other words, the often cited unemployment data omits the fact that millions of Americans simply dropped out of the work force, and thus are no longer counted. Therefore, if we look at how many Americans are actually working compared to the overall working age population the picture is not as good as when we focus only on the official unemployment rate.
Likewise, when employment statistics are presented, we usually get an aggregate number or percentage. The conventional wisdom is that if unemployment is down this must be good news. This must mean that the economy is growing, and therefore there is demand for more labor. What can be wrong with this? Well, nothing wrong really.
From a different angle
However, if we look just a bit under the surface, we see that among the millions of new jobs that have been added in the last few years very few are related to productive activities (manufacturing, mining, energy) that produce new wealth. We have millions who found work in the hospitality industry, or who are in the lower echelons of the health care industry, along with many janitors and landscaping workers. Most of these are low pay, often part-time, marginal jobs.
Therefore, if you focus only on the overall unemployment figures and conclude that all is well, because a healthy labor market is a powerful indicator of a healthy economy, you are engaging in self-deception. Those policy-makers who tell you only this part of the story are trying to deceive you.
Overvalued stock market
On a different level, a buoyant stock market used to be considered a sign of a healthy economy. But these days it is no longer so. US share prices are dangerously inflated for reasons that have nothing to do with any misinterpretation of the real economy and market forces.
They are inflated because the US Federal Reserve continues to keep real interest rates at historically low levels. This most unusual –in fact unprecedented– zero interest-rate policy (ZIRP) created a bias against any form of traditional savings. Since they get zero per cent keeping their cash in the bank, people seeking some return on their money are induced to invest in the stock market. And since millions started buying stocks for lack of any alternatives, this has inflated stock values.
So, at this time the stock market data is not a helpful indicator of anything regarding the real economy because valuations (thanks to ZIRP) are grossly inflated. High valuations are disconnected from economic performance. Of course, there have been bubbles before and we can expect more in the future. But this gigantic bubble has been deliberately created by the Federal Reserve and its monetary policies. The day to day shares valuations data does not capture any of this background context. There are no warning signs.
False data
And now let’s get to the bigger problem: false data. When the Greek debt crisis emerged back in 2009 it became obvious that the truth about the impending fiscal disaster had not become public knowledge up to that point in part thanks to the complicity of the national statistics agency, (Hellenic Statistical Authority, ELSTAT). At the behest of the Greek government, the agency was happily producing false data, with the obvious intention of hiding the truth about the huge fiscal hole for as long as possible.
More recently, right after Mauricio Macri was elected President of Argentina, one of his first moves was to get new staff in the national statistics agency, (INDEC). His goal is to recreate credibility for economic data published by his new pro-growth government. It is clear that the previous administration routinely published false (or distorted) data in order to convey the message that the tottering Argentine economy was in fact doing well under their stewardship.
Just a few bad apples?
Well, these are some of the cases we know about. But are these just a few exceptions? Are all other governments around the world complying with high ethical and professional standards when it comes to reporting economic statistics? I would not be so sure. For example, a major country in Africa, beyond inflating GDP growth statistics, cuts the actual total number of its very large population in order to show a higher per capita GDP, this way trying to show a sign of economic progress that is not really there.
And then we have impeachment procedures against Dilma Rousseff, the President of Brazil, accused of manipulating public accounts in order to show a healthier fiscal situation. And what about India’s GDP numbers? Most experts argue that they are inflated, even though it is not clear by how much. In other words, India is also under suspicion of “cooking the books” in order to create a brighter economic picture. To make things even worse, The Financial Times recently published the results of surveys indicating that many citizens in most European countries do not trust the official economic statistics published by their governments. Please note: this about European countries, theoretically run according to high legal and ethical standards.
China’s GDP numbers
And, finally, the real monster: China’s GDP growth figures. Nobody believes the official Chinese data anymore. No, China does not grow at almost 7% a year. The question is: how big a lie is this? Is the real GDP growth 6%, or is it 3%? We simply do not know. There are many theories but no hard facts, simply because nobody trusts the official Chinese data.
Now, think about all this for a moment. China is the second largest economy in the world. And yet most experts and analysts argue that the official agencies routinely publish unreliable or indeed fake data. But why would China do this? It is quite simple. In China positive economic statistics are necessary tools to strengthen the regime’s political legitimacy. Inflated growth numbers tell everybody a good story: the Communist Party leadership is doing a splendid job.
What about everybody else?
Once again, are we talking about just a few cases of rogue governments that do not play by the rules? Or is this fraudulent manipulation of sensitive economic data far more extensive?
I would say that the likelihood of data manipulation increases with the degree of authoritarianism. A government not held accountable by any one is not motivated to enforce high standards of truth and transparency. You can bet that it will say whatever it can to make itself look good. As there are not that many accountable democratic governments around the world, we can safely conclude that much of what is published and is then used by analysts as “data” is at least inaccurate, in some instances totally false.
Bad consequences
And data manipulation has really bad consequences. Unless a company operating in any given country enjoys the benefits of political favors, it is hard for its management to make major economic decisions when they literally “do not know what’s going on”, since the government is in the habit of manipulating important economic data. Likewise, it is hard to attract serious foreign investors when you cannot reassure them that the destination country is ruled according to proper transparency standards.
Data driven world, with many lies
So, here is the thing. We live in a very strange and paradoxical world. The IT experts tell you that they are able to capture millions of pieces of information on consumers, their preferences, their habits and buying patterns. And all this data drives major strategic decisions and investments plans by large corporations.
At the same time, we see how statistics are often fraudulent. And, even when correct, they are routinely manipulated in order to fit a preordained (and often dishonest) narrative. As noted above, if you want to make the case that the US economy is doing fine, you can point to hard data: 5% unemployment, 2% GDP growth, historically high stock market valuations, low inflation.
But if you want to paint a different and probably more accurate picture, you will point to other hard data. 2% GDP growth is 1/3 below the historic U.S. 3% GDP growth norm. On the basis of other real data, you will say that most of the new jobs are part-time gigs that at best provide survival wages, without creating any chances of upward mobility. You will argue that there are millions of part-time workers who would rather have full-time jobs but cannot get them. And you will also say that, based on hard data, (real corporate earnings for instance), the US stock market is overvalued, thanks to Fed policies.
No reliable data without accountable governments
Once again, regarding the wider world, you can rest assured that in every non-democratic regime in which leaders are not held accountable –and there many of them– economic numbers are either false or heavily manipulated, so that they can be used by the leaders to support a self-serving political narrative.
Yes, this is a data driven world. And data analysts can indeed perform wonders, provided however that they have real facts to work with. And this is not always the case. At least not in large parts of the world.
In the end, there is no chance to have true data driven decision-making processes without true democracy, real accountability and transparency. In the final analysis, good governance is a key precondition for getting good data, and therefore a reasonably accurate picture of what is really going on.
Paolo von Schirach is President of the Global Policy Institute and an Adjunct Professor at BAU International University. A different version of this article first appeared in the Schirach Report www.SchirachReport.com