There are few things our federal government does that are more important than tabulating how the economy is performing. And there are few things it does better.
Yet, reflecting what historian Richard Hofstadter called “the paranoid style in American politics,” few acts of our government are more subject to “suspicious discontent,” in Hofstadter’s words. Many, on both sides of the political divide, are quick to assume the government cooks the books before announcing economic indicators.
That has been particularly evident in recent weeks, both in the reaction to the announced unemployment rate and employment numbers for September and in the particular Consumer Price Index that will be used to adjust Social Security payments for 2013.
Why does any of this matter?
First, it is important that government compile these indicators. It is impossible to make coherent policies in a modern economy without having accurate measurements of just what is going on. Furthermore, such information is vital to managing businesses of all sorts and many nonprofits. Without information on growth trends, price level changes and labor market conditions, it is hard to plan what to produce or how and where to sell it. It is harder to get necessary staff.
Second, if the numbers are important for public and private decision-making, then it is vital that the numbers be accurate and that people trust them. Put out incorrect data or undermine people’s faith in it and you introduce great uncertainty into decision-making. Uncertainty leads to poor decisions and to economic inefficiency. The same use of resources results in fewer goods and services to meet people’s needs and wants.
The economic indicators compiled by both federal and state governments in our country are about as accurate as statisticians and economists can make them, given resource constraints. Economists, whose views range across the political spectrum, accept them as accurate.
When all the scoffing about the September unemployment rate broke out, it was notable that no respected economist, even among those who strongly oppose the Obama administration or who are advisers to presidential challenger Mitt Romney, expressed any such doubts. But there always are many skeptics in the general public who think the White House or Congress can dictate the numbers.
Some knowledge about the processes may be useful. Start with the myriad labor force indicators tabulated monthly. Most come from two key surveys.
The Current Population Survey contacts some 60,000 households to ascertain the employment status of everyone in the household 15 years of age and older. The households are chosen in a “multi-stage stratified sampling” designed to achieve as representative as possible a sampling of the population as a whole. The primary info from this survey is the unemployment rate.
The establishment survey gets data about 141,000 “establishments” representing nearly a half-million workplaces. The word “establishment” is used because it covers for-profit businesses, governments and nonprofits. These generally are the largest employers in the country, and reporting is mandatory.
However, not all establishments are zealous about submitting their numbers by the deadline, and this can cause problems as it did this past summer.
This survey provides information on the number of jobs, hours and earnings. Estimates of the number of people who are self-employed or work in firms too small to be included in the survey are made using statistical techniques based on past relationships.
Both surveys are large efforts involving many people. All are civil servants, not political appointees. Anyone who has had professional contact with these people knows how serious they are. They take pride in what they do. If some political appointee tried to get them to cook the books, there would be myriad calls to Congress and to investigative reporters. And while some of the work is compartmentalized, they know how their data fits into the whole and would publicly reveal any fiddling after their work is passed to the next level.
Furthermore, the data is shared with labor market researchers in each of the 50 states who use the numbers as part of the data to calculate employment numbers and unemployment rates for their state and its cities and counties. Any corruption of the data at the federal level would raise alarms at the state level.
There are elaborate measures to keep preliminary inferences from one survey affecting the analysis of information from the other survey. The two groups don’t talk to each other. And there are also measures to ensure no one who is privy to the information prior to its release can use it for insider trading.
The head of the Bureau of Labor Statistics usually is a political appointee, but she has no direct involvement in compiling the numbers and hears them only when the tabulation is complete.
Right now, the Bureau is headed by a career civil servant, because as in many other cases, Congress has stonewalled confirmation of anyone appointed by the Obama administration.
The tabulation process is accurate and honest, but the numbers are not perfect. There is time pressure, and when there are data glitches, such as large employers failing to submit accurate numbers in a timely manner, it necessitates subsequent corrections. As with any statistical survey, accuracy depends on sample size. The CPS sample was larger at one time, but a funding cut in the first year of the Reagan administration forced a reduction in size. People do not realize it, but a 0.2 percentage point change, as from 8.0 percent to 7.8 percent or 8.2 percent, may represent no real change at all in the underlying rate for the labor force as a whole.
The process and the products are good. Economists trust the integrity of the numbers. It is unfortunate that the general populace does not as well.