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Tuesday, April 23, 2013

They're Just Numbers

Unfortunately, we make significant decisions on numbers.

What got me thinking about this was the recent report that the 'Bureau of Economic Analysis' (apparently it's a thing) has decided to modify the formula it uses to calculate Gross Domestic Product (GDP), a key indicator on the financial standing of the economy.

U.S. economy set to grow 3 percent -- on paper

"The U.S. economy is set to see a major growth spurt in July -- at least on paper. That's when the government will start including so-called economic intangibles, like film royalties and spending on research and development, in how it calculates the size of the economy.

The change by the Bureau of Economic Analysis will increase the nation's gross domestic product by 3 percent -- an amount equal to the total GDP of Belgium. It is part of an effort by the U.S. government to capture aspects of the economy that are now omitted and thus better measure the nation's economic output.

Currently R&D spending is figured as a cost of doing business. This means the final output of a Ford Mustang is included in the GDP, but all the money that goes into engineering and design isn't. Under the new system these R&D costs will count as an investment, and this alone will add about 2 percent to the size of the economy. Creative works -- movies, TV, books, music and theater -- are expected to add another half-percent to the GDP.

Not everyone is happy about the proposed change. For one thing it will be applied retroactively. Brian Moulton, of the Bureau of Economic Analysis, admits that it is rewriting economic history but believes it will present a better picture of what actually took place.

Critics also complain that the unilateral move will make it impossible to compare U.S. figures with those from other nations. If so, it shouldn't be for long. Because America sets the standard for GDP measurement, other countries are likely to change their statistics as well.

There are also concerns that the new method will result in double-counting some economic activity. While no one doubts the value of these intangible assets, some economists believe they are already accounted for under the old methodology as "brand value."

Brand value represents the present value of a branded product compared to the value of the same product sold without the benefit of that brand. For example, though there are many tablet computers on the market, the Apple iPad is the biggest seller. The quality of the product is what has made the brand so powerful in the eyes of consumers. At the same time, consumers are willing to buy new products just because of the Apple name. Both of those qualities -- the value of the brand -- are based on R&D spending.
" (CBS News)
Obviously, if the changes results in a "more accurate" picture of the economy it can be more easily justified. However, as is, the usage of GDP as an indicator is being questioned and not considered by some economist when evaluating state/world economics.

Additionally, one cannot help but think that the alteration is, in part, politically fueled.
Announcing that GDP grew by 3% since last announced would be a nice headline and boost for the Obama administration.


To that note, if you do not think economic numbers are skewed for political gain (after the past couple elections, does anyone?), take a look at the figures for "unemployment".

This is just incredible to me:
The Bureau of Labor Statistics also calculates six alternate measures of unemployment, U1 through U6, that measure different aspects of unemployment: 
U1: Percentage of labor force unemployed 15 weeks or longer.
U2: Percentage of labor force who lost jobs or completed temporary work.
U3: Official unemployment rate per the ILO definition occurs when people are without jobs and they have actively looked for work within the past four weeks.
U4: U3 + "discouraged workers", or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
U5: U4 + other "marginally attached workers", or "loosely attached workers", or those who "would like" and are able to work, but have not looked for work recently.
U6: U5 + Part-time workers who want to work full-time, but cannot due to economic reasons (underemployment). (Wikipedia)
Six numbers to report unemployment!
Granted, each of these figures is useful to some extent, but it also leaves a lot of leeway for the term "unemployment" to be construed, particularly by unscrupulous politicians.

My Solution

Report full-time Employment numbers. (Perhaps part-time numbers could occasionally be included as well).

On a larger scale, this figure seems more robust and comparable long-term.
    Ex. Employment was at 85% last month and grew to 86% this month. Therefore, 14% of the population is not working.
Forget those unemployed for 1 week, 15 weeks, or 100 weeks; anyone looking for a job within the past four weeks or once every other month; those who have given up looking; or those who "would like" work but have not looked recently. Regardless of what they say they are doing, they're still unemployed.

Additionally, there's no need to track those who choose to file for unemployment or continue reporting that they are underemployed. Simply take monthly reports on payroll (or other) tax filings. The government already does this and can aggregate the total number of those paying federal taxes.

Unfortunately, this term is too simple and cannot be manipulated. Thus, its usage will never be widespread.
I'm being a bit facetious, but why don't we use this number instead of six different ones?

Thoughts on using Employment numbers over Unemployment?
Any economists out there that want to weigh in?

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