Does the Government Really Know the Economic Numbers?

A couple of articles that highlight disparities in the official government statistics on some fairly important economic gauges caught my eye today. Let me offer you a couple of excerpts as well a a thought or two.

First, Ed Harrison’s always informative Credit Writedowns did a nice job highlighting some of John Mauldin’s recent thoughts. Mauldin points to a disconnect between the reported improvement in spending and state tax sales tax collections.

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let’s look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we’re in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called “Beyond California” (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover mid-sized and up retailers, leaving out smaller businesses. Further, if you are a retail chain that has closed 10% of its stores, the remaining stores should in theory benefit from getting your loyal customers into them.

The second anomaly for lack of a better word comes from Louis Uchitelle in a New York Times article. He points out a key defect in the manner in which the government measures imports which misstates economic growth and productivity.

A widening gap between data and reality is distorting the government’s picture of the country’s economic health, overstating growth and productivity in ways that could affect the political debate on issues like trade, wages and job creation.

The shortcomings of the data-gathering system came through loud and clear here Friday and Saturday at a first-of-its-kind gathering of economists from academia and government determined to come up with a more accurate statistical picture.

The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country.

American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics.

As you readers know as well or better than I, it is nigh on impossible to attack any problem if you can’t define it. If your data is wrong then any fix is likely at best to be of little use and at worst it might well exacerbate the problem. Assuming these two gentlemen are correct in their assertions, and there seems to me little reason to quibble with their logic, the government is stumbling around trying to come up with solutions to an economic mess the scope of which they don’t understand. Compounding their errors, they appear to be concluding that the issues are not as dire as they may in reality be.

These sorts of glaring errors might well explain why the majority of the population fails to discern any meaningful recovery in the economy. The perceived reality on Main Street is at obvious odds with the pronouncements of an improving economy from the lofty perches of Washington and Wall Street. The economists, bureaucrats and politicians are relying on faulty data as a gauge and since the data they are producing provides the sort of evidence they prefer to see, they are disinclined to question its validity.

Reality has a crude way of intruding on these sorts of delusions. The longer the official line remains at odds with the ordinary experience of the rank and file members of the society, the greater will be the political repercussions. It may well have worked to put forth distorted measures of economic activity when most were safe and secure in their personal lives. It works not at all when many find themselves in dire straits and their neighbors fear that fate might await them at a moments notice. Such circumstances engender regime change and, unfortunately, do permanent damage to the credibility of government.

A bit less cheer-leading, talk of “saved jobs” and more sober recognition of the long, difficult road that we face in rebuilding our economy might go a long way towards truly making some inroads. In reality, that sort of shift will have to await a new class of representatives.

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