The Economics Section - Page A4
November 24, 1996 GROWING CONCERN OVER POOR QUALITY
by William Heartstone, Staff Journalist, The Daily Republican
OF WHITE HOUSE ECONOMIC DATA
Related Story:
- Why President Clinton's Economic Forecasts Can't be Trusted
WASHINGTON BUREAU - Almost every business day, the government produces economic statistics that affect financial decisions, from buying a new house and expanding a business to monetary policy and the federal budget.
Now, a senior Clinton administration official warns that the quality of those statistics has been eroding steadily, increasing doubts about how accurately they depict economic activity. That, he said on Friday, is hampering policy makers and threatening to undermine the confidence of investors. He went even further when he said:
'Our statistical system is failing to keep track with a rapidly changing economy. The data we provide give us a good picture of where we are in the business cycle but risk misrepresenting such long-term phenomena as inflation, productivity growth and the economy's changing composition.'
Everett Ehrlich, under secretary of Commerce for economic affairs.Others warn that remedies could involve reducing the growth of government benefits, including Social Security and raising taxes.
A panel appointed by the Senate is expected to report in early December that the Consumer Price Index overstates inflation by as much as 2 percentage points, which would cost the government as much as $634 billion over the next 10 years, primarily because of inflation-linked payments for Social Security and other federal benefit programs.
Prof. Howard Hobbs at the Economic Institute in Washington D.C. told the Daily Republican that the economics methodology used by the White House has become outdated. Increasing globalization of business and the growing economic role of servicesis not accurately reflected in the government's statistical forecasts.
Hobbs said that the probability of accuracy of any White House economic forecast to June 1998 is no better than 1 out of 370,000. When the White House issues forecasts to the year 2001, the chancws that they are going to be correct are no better than 1 out of 100,000,000,000.
There are more down-to-earth reasons, too. The price index, for instance, tends to overstate costs. It does not reflect the fact that people tend to substitute, say, chicken for steak when the price of beef rises, and that they are more frequently buying during sales and at discount stores rather than paying full price.
Ehrlich is proposing a three-year, $150 million program to combat the problems.
But while some changes proposed by officials and experts would stir passion only in an accountant, could raise considerable opposition.
Concerns about the quality of the systems used to produce the figures were also voiced recently by members of the Federal Reserve Board's Open Market Committee the panel that sets short-term interest rates and influences the rates on loans, from home-equity mortgages to corporate bonds.
In September, facing a difficult decision on interest rates, members of the committee complained about poor data, especially concerning productivity, a basic element of the nation's economic well-being, according to minutes of the meeting released recently.
The committee's minutes, which did not identify any participants but reflected publicly expressed views of Federal Reserve chairman Alan Greenspan, called figures on productivity in services "implausible" and suggested that they had been considerably understated.
Among other things, raising the measure of productivity would increase figures for the gross national product and result in a calculation of real wages that would show them having gone up somewhat in recent years rather than stagnating, as has been widely reported.
Widespread agreement among economists that inflation measurements were inaccurate led the Senate Finance Committee in 1995 to appoint the commission to study the Consumer Price Indexwhich is used to determine the annual cost-of-living increases for Social Security and other federal programs and for indexing federal tax brackets.
Headed by Michael Boskin of Stanford University the commission,will also make recommendations on how to fix the price index. That may well set up a confrontation with the Bureau of Labor Statistics of the Labor Department which compiles it and has voiced complaints against critics who assert that it is widely off the mark.
Katharine Abraham, the commissioner of labor statistics, took exception to Ehrlich's appraisal of government statistics, contending that those produced by her agency, at least, are getting better despite a budget that has not risen in real terms since the late 1970s.
But Abraham acknowledged knotty conceptual problems and said it was now harder than ever to keep the gauges up to date, partly because economic activity is increasingly concentrated in sectors like services, in which activity is much harder to measure.
She also acknowledged that more people are complaining about statistical flaws, largely because of the increased "pocketbook implications" of relying on the figures to adjust everything from Social Security to union contracts.
"The stakes certainly have gotten higher," Abraham said.
Joel Popkin, an economic consultant, said the system had deteriorated because companies were less willing to respond to government requests for data, partly because those businesses have fewer people to do such work. Also, budget cutbacks have made it ever harder for the government to attract high-caliber economists and statisticians.
Ehrlich of the Commerce Department who is in charge of one of the biggest government agencies that gather economic statistics, said that unless the measurement flaws were corrected, financial markets could lose confidence in the government's data.
'Good data allow markets to anticipate economic policy and, by doing so, make it more efficient' Ehrlich said.
He estimated that any crisis from data erosion was 'years, but not decades' away. But while citing the seriousness of the problem, he acknowledged that the Commerce Department had not requested extra money in the budget for the 1998 fiscal year now being developed.
More attention, Ehrlich said, needs to be paid to measuring intangibles like insurance coverage, rental activity, wholesale trade and on-line transactions. The numbers also fail to fully capture such 'phantom' production as a construction company building something for itself instead of a paying customer.
One measure of how the system has failed to keep up, he said, is that the number of businesses that defy traditional categorization has grown considerably.
Government hardware also needs to be improved, he said, so the risk of a disastrous computer failure, like the one that nearly happened last Christmas at a Commerce Department site, is minimized.