Being data driven into a ditch

(Originally posted for Carolina Journal on June 4th, 2020 here.)

Written by Paul F. Cwik and Abir Mandal

Governors across the nation announced that the coronavirus-related policies for closing businesses were based on “data driven” analyses by medical professionals. Next, they announced that the reopening phases also would be strictly “data driven.” Over and over, the officials said that they were being guided by “the science” and “the data.” Of course, being guided by science and data is appropriate in a time of crisis; we wouldn’t want it any other way.

However, what if the decision makers were getting only a small fraction of the overall picture? This is not to say what they had was wrong. The information was most likely the best available. Our question is, “What is the likelihood that good decisions can be made if only a small part of the overall picture is considered?” It would be like the chance a blind man has in guessing the weight of an elephant by only touching its trunk.

From the start, officials have been looking at incomplete data. The key statistics that a data driven analysis would need to have is the number of COVID-19 infections, the number of people who are hospitalized by COVID-19, and the number of deaths caused by the virus. If we had instantaneous data of those three variables, then creating an appropriate response would be a straightforward process. Unfortunately, data of this sort never actually occurs.

Taking the wrong path

Where did we go wrong? To get perfectly accurate results would require health care workers to test everyone. Unfortunately, we simply do not have enough tests. When we cannot test the entire population, we take a sample and extrapolate results. In essence, we create a model. Models require simplifying assumptions.

The first hurdle we needed to overcome was the issue that people may be infected and yet asymptomatic. As a result, health care workers had no way of knowing who to test. Since COVID-19 is a novel virus, for which our testing capacity has been and is likely still constrained, the next step would have been to test random people.

Unfortunately, medical necessity and proper statistical methods do not always line up. Medical workers needed to know if the patient in front of them was a risk to others and with a limited supply of tests (especially in March 2020) tests were restricted only to those who were symptomatic. The nonserious and asymptomatic cases were left out. Thus, the data that we were collecting was skewed from the very beginning. This sort of error is called sample selection bias.

Sample selection bias is where the data points of the test sample is not gathered in a random process. As we are observing now, making deductions and deriving estimates based upon biased data is misleading and can lead to disastrous consequences. In fact, it is precisely this bias that has led to the assumption of the death rate being between a range as wide as 0.5% and 16%, as calculated as a proportion of the total number of people tested positive for COVID-19. This estimate depends on the number of people tested positive, which in turn depends on the testing capacity of the country — hardly consistent across the world.

Governments around the world and in North Carolina have based their projections using such biased figures, implying that the disease was many-fold deadlier than the seasonal flu (which has about a 0.1% mortality rate). Unfortunately, this assumption should never have been taken as accurate, because the sample of people tested did not accurately reflect the population of those actually infected.

The rates of infection were unknown at the beginning. But estimates could have been roughly “ballparked” using the lab-derived figures for rates of infection and the empirical multiplier used each year by the CDC to estimate the annual flu load from confirmed cases. Policy makers, who were mostly led by a team of health experts, chose not to pause and do so. Therefore, the projected death rates are likely to be too high by a factor of 50 to 100 times, as now evidenced by the serology tests on the general population which test for COVID-19 antibodies.

Consequences of poor understanding

The overall result was massively inaccurate projections and apocalyptic scenarios. The number of infected people was projected from biased data. Using the number of people infected as the base, the projections of the number of ventilators needed and resulting deaths were grossly exaggerated. A statistician could have helped matters, in our opinion, by highlighting the dangers of conflating the case fatality rate with the overall mortality rate. The unfortunate result was that flawed models, which predicted between 500,000 deaths with social distancing completely implemented, and 2.2 million deaths if nothing were done in the United States, were touted as scientific truth.

The data that has now been released to the public show that these projections are clearly flawed. Furthermore, many government officials, including Gov. Roy Cooper, have simply refused to release the data and models used in making their executive orders. (See here and here.) When looking at more recent numbers, the death rate and hospitalization rates are likely not significantly different than that of an average or bad flu season.

It seems that government officials continue to use the inflated metrics to determine whether, for example, North Carolina should open. Additionally, the debate has shifted from “flattening the curve” to “stopping the spread.” Again, looking at the spread of the virus is also falling into the trap of sample selection bias. Today health departments are looking at the proportion of positive cases, which on the face of it sounds like a reasonable number at which to look. As the number of tests increase, even given a constant number of infections in a community, the number of positive tests would increase.

However, this is where the trap of sampling bias occurs. The tests are still predominantly performed on those who are sick enough to seek testing. People who feel fine (and are not at risk) are not going out of their way to get testing. The collected results do not constitute a true representation of the state’s population and shows nothing about whether the disease’s spread in the community is increasing or decreasing. The only reasonable metric that the state should use is the number of hospitalizations due to COVID-19 like diseases.

Where to look

In our opinion, North Carolina officials should focus on the number of serious hospitalizations (as imperfect as it may be) as the primary metric for its policy making. However, we should not be myopic and only focus on one statistic.

Always, the goal is to use the data properly. Let’s consider the following scenario. Suppose that there is an outbreak of COVID-19 cases in Wake County, what should the government do? Should the entire state be shut down? Or more to the point, should we close Graham or Hyde counties if there is a spike in Wake County?

It is upon these questions that we see science and the law come together. When a political area engages in a lockdown, it is purposefully suppressing the citizen’s legal rights. Recently judges have been rolling back executive overreach by claiming that the restrictions of rights must be of the greatest concern. When rights are to be violated, it must be done in a manner that is targeted and not expansive, it must be short-term and not perpetual, and it must be done under scrutiny of the other governmental branches.

The science is required to assist the law by showing the least oppressive limits of a lockdown. The best statistic to start with is how is the most likely to die. Then who is the most at risk of suffering severe problems. Stemming from these we come to the number of serious hospitalizations. The capacity of hospitals is a limit that cannot be crossed. We have seen the results in Europe when people are denied beds or are “overflow” in hallways because this limit is crossed. Many needlessly suffer. The U.S. goal from the beginning has been to “flatten the curve.” Which curve? The curve of serious hospitalizations.

Setting a better policy

When focusing on serious hospitalizations, government officials at the local and county levels can look at the stress on the area’s hospitals and compare it to the area’s hospital capacity. There are significant differences between regional areas. For example, there are no hospitals in Hyde County but there are 10 in Wake County. Wake County has much more capacity than Hyde County, but it also has a much larger population. If there are 10 cases in Hyde County, a lockdown may be required. However, if there are 10 cases in Wake, a lockdown could be excessive. Using the data in this manner requires policies to be focused. Our concern is the overreach across the entire state.

Furthermore, there is no evidence that statewide lockdowns work. South Dakota did not lock down. Their numbers are no worse than states with the worst encroachments on the freedoms of movement of citizens. Sweden did not lock down. Its death rate of around 330 per million due to COVID-19 is slightly higher than the U.S.’s 295 per million. Sweden’s economy is projected to contract by 5.6%, but not as bad as the rest of Europe at -8.1%. When North Carolina began Phase Two on May 23, the state reported a “surge” in cases. However, this surge of 1,107 cases is an aggregate number of people who have tested positive and is based on a record-setting 26,000 tests. In terms of the number of cases tested positive as a proportion of total tests, the figure for that day is just 6.9%, lower than the dataset average of 7%. Additionally, there is no mention if these cases are in a single county, spread across the whole state, or in areas that have hospital capacity.

A better path

The largest consequence of this statistical illiteracy on the part of American policy makers is that we have essentially destroyed our economy. The irony is that antibodies and herd immunity, either via infection and recovery or gained through a vaccine, are the key to defeating the virus. Keeping ourselves locked up in isolation from each other would not really save lives because the virus is here to stay. Isolation and quarantining are only prolonging our misery. If statewide lockdown measures were not put in place, and instead we chose to protect the most vulnerable, the virus would spread throughout the population, harmlessly for most, while generating antibodies and herd immunity.

The very fact that a spike in the number of cases as our testing capacity increased did not correspond to a similar spike in deaths should have given our politicians pause. Government officials, like all people, are very reluctant to admit that they were wrong. The result of this stubbornness is an overreaching and illogical lockdown that continues today. We need to account for sample selection bias, meaning that we should not focus simply on the number of cases. For example, NC Department of Health and Human Services reports that the plurality of positive tested cases (43%) are for people between the ages 25 and 49. However, 64% of the deaths are 75+ years old. The probability of someone younger than 45 succumbing to the disease is so low, that it can be taken as zero.

Does it make sense to quarantine the people who are in their prime working age range? When we more closely examine the governor’s executive orders, we see that restaurants can open but not bars. Day camps are allowed to open, but not playgrounds. Salons can open but not gyms. For all the calls for data and science, Governor Cooper seems to have regressed to whimsy. Yes, precautions for the most vulnerable need to be taken, but it is past time for our state’s economy to be reopened. If we fail to open soon, it will be as President Trump mentioned: The cure for COVID-19 in North Carolina will turn out to be much worse than the disease itself.

Paul F. Cwik is the BB&T Professor of Economics and Finance at the University of Mount Olive. 

Abir Mandal is an assistant professor of economics at the University of Mount Olive.

Which Economists Show Support for Obama's Plan?

Today there was an article by Derek Kravitz on the AP which was entitled as "Economists Show Support for Obama Job-Growth Plan".  Now which economists are those?  Well, he quotes Mark Zandi of Moody's Analytics, Allen Sinai, chief economist of Decision Economics, Susan Wachter, a finance professor at the University of Pennsylvania's Wharton School, Michael Mandel, chief economic strategist for the Progressive Policy Institute, Paul Ashworth, chief U.S. economist at Capital Economics and Menzie Chinn, an economist at the University of Wisconsin.  (Personally, I have only heard of Zandi before and I think he usually has it wrong.)  Amazingly they say that more stimulus is what is needed.  Well, maybe not Mandel.  (Kravitz is not very clear on this point.)  And Ashworth says that people might just save it instead of running out and spend, spend, spending it.  (How horrible!)  However, as we see by the article's title, the whole point is to show how much economists love Obama's plan.  In fact, Chinn says that the plan doesn't go far enough.

Here's the commonality: they are all locked into the formula GDP = C + I + G + (X-M).  In other words, the size of the economy is equal to Consumption + Government Spending + Investment + Net Exports.  Of these components, they rightly see that consumption is by far the largest. 

The only problem with this approach of looking at the macroeconomy is that it is completely wrong. 

GDP is defined as the summation of all final goods and services in an economy over a certain period of time, usually a quarter or a year.  Only final goods and services are counted because we do not want to double count.  In other words, when we make a table, we don't want to count the table when we chop down the tree, and count it again when we turn it into boards, and again when we construct the table and then again when it goes to the wholesalers, and so on.  It's one table and we only want to count the one table once.  Fine.  That makes perfect sense; however most economic activity does not take place at the final stages of production.  That's the "Do you want fries with that?" stage.  Most people and most economic activity are not there. 

So what is a better approach?  The Austrian Approach is, by far, better.

We need to disaggregate the Capital Structure--The Structure of Production.  Only by viewing the economy as a process of production can we get an idea of how the economy works, and more importantly, how it grows.

The economy does not grow because people simply "demand" stuff.  Think about it.  Do you demand more than your parents, or grandparents, or people who lived 1,000 years ago?  Are we rich in the US because we simply want things more than those who came before us?  Ridiculous!  So, if it isn't demand that has caused us to be wealthy, then it must be that other thing that economists talk about--supply.

Yes, it is supply that allows us to be wealthy.  Now, let's pause as before and think about this point too.  Could it possibly be that more stuff is what allows us to have more stuff?  Duh!  Yes of course it is.  Supply has always been the limiting factor, not demand.  Thus, we need to focus our attention on production. 

In order to get out of these economic doldrums, we need to produce more.  It is only through production that we will be able to grow.  So how do we grow when starting from a depressed economy?  We need to let the costs of production fall.  We need to stop propping up prices and let them fall.  As input prices (yes, this includes wages) fall, profitability will rise.  As profitability rises, there will be more economic activity from both existing companies and new rivals.

The bottom line is that the business sector needs to cut its costs.  We could let input prices fall (commodity prices are still fairly high); we could let nominal wage rates fall; and we could reduce the costs of keeping up with rules and regulations.  Additionally, imagine how much productive energy would be released if we simply abolished the corporate income tax.  All those wasted hours converted into productive activity.  A zero corporate income tax would attract capital from all over the world to the US.  The first country to do this will be the big winner and then other countries will have to do the same to remain competitive.  Instead of implementing Frank-Dodd and ObamaCare, we should repeal these and even more regulatory burdens.  What a boon to business and the economy!  Production will grow and with it, the economy. 

And remember, consumption, jobs and prosperity are a consequence of production, they are not the reason for it.

Real Meaning of Say's Law

Last March I gave a talk at the John Locke Foundation in Raleigh, NC.  The topic was on Say's Law.  In this interview I explain the real meaning of Say's Law and contrast it with today's Keynesian point of view.




Here is the clip from that talk last March.  (I also posted this last March.)

New Numbers Show the Economy is Worse Than We Thought

As many people know on Friday July 29, the US Dept of Commerce has posted the revised numbers for the US economy. What many people may not know is that the old numbers have also been revised. The Bureau of Economic Analysis posts GDP in real dollars, i.e., they calculate an inflation index and generate the real numbers using chained 2005 dollars. How this is calculated is an interesting topic to very few and so I won’t dwell on that part here.

The interesting part is that the numbers have been revised downward, some of them by quite a bit. In Q3:2007, just before the official start of the recession the old GDP number and the revised numbers were virtually identical. ($13,268.5 billion old vs. $13,269.8 b revised)

Now we see that the drop of the recession was much larger than we originally thought. The old trough was $13,223.5 b in Q3:2008, but now the Q3:2008 number is $13,186.9 b. The old number is 0.28% higher than the new number. Curiously, since Q3:2007, this is the smallest discrepancy. The discrepancy rises to a 1.6% differential by Q4:2009. ($13,019.0 b old vs. $12,813.5 b revised)

The upshot of all of this is that we are in much worse shape than we originally thought. The bottom of the recession was deeper than we thought and we still haven’t reached the pre-recession numbers of Q4:2007 of $13,326.0 b vs. Q3:2011 $13,270.1 b.

 

Say's Revenge: Living in Keynes' Long-Run

I gave a talk at the John Locke Foundation today, which I thought went rather well.  It is called, "Say's Revenge: Living in Keynes' Long Run."  Here is a clip from the talk:

For the full video please go here:
http://lockerroom.johnlocke.org/2011/03/21/saying-what-say-said-rather-than-what-keynes-says-say-said/
or here:
http://jlf.streamhammer.com/speakers/paulcwik032111.mp4

Twisting the Yield Curve--Again!

The more things change, the more they stay the same.

Today the central bank of the US, the Fed, has announced that it will buy 600 billion dollars worth of “longer-term” Treasuries. By the end of second quarter 2011, they are planning on buying $75 billion in 30-year bonds per month. (I suppose that 20-yr bonds would also fall under the heading of “longer-term” as well.) They again hope that this additional liquidity, “stimulus” will jump start economic growth.

The Fed also announced that they will target Fed Funds rates between 0.00% and 0.25%. This is eerily similar to an announcement they made on March 18, 2009. In that announcement they said that they were going to target Fed Funds rates between 0.00% and 0.25% and inject $850 billion into the economy. $300 billion were to go into the purchasing of longer-term Treasuries. I have already described how such a scheme is pure folly here.  In that article, I also pointed out that it didn’t work when they tried it in the Kennedy Administration. Have we started to notice a pattern forming?

It is odd to find that we have tried this before and have not achieved the desired result. The key to impacting the so-called “real economy” by using expansionary monetary policy is by catching people unaware. If businesses see how much is injected and when, then they will adjust in anticipation of the injection. In other words, the only effect that the monetary stimulation will have is the immediate devaluation of the currency.

Our National Debt, the Age of the Universe and Our Future

There has been a lot of controversy centered on the size of the U.S. National Debt and rightly so, because it has never been a larger number. Today, the national debt is approximately $13,550,000,000,000 dollars. Such a large number needs context. I could say that if we stacked a trillion $1 bills on each other that this stack would stretch around the Earth 2.72 times. Unfortunately, that boggles the mind, especially if I say that our debt is 13.55 times that. Clearly, we need another way to understand the vastness of this number.

Using the Hubble Space Telescope, scientists have a clearer picture of the origin of the universe. Scientists estimate that the universe is approximately 13.7 billion years old. When we compare the age of the universe with the size of our national debt, our national debt is a 1,000 times larger. In other words, if we had spent about $1,000 a year, every year, since the beginning of time, we would have a number about the size of our national debt. Or, suppose you had spent $2.71 a day, every day, since the universe began. You would have spent as much as our current national debt.

How did the debt get so large if there was a surplus in the Clinton years? It is true that the federal government collected more tax revenue than it spent in the late ’90s and national debt shrank, however the debt did not fall to zero. (The last time the national debt was zero was in 1836, under President Andrew Jackson.) We have since had budget deficits—with each borrowed dollar adding to the debt. With the TARP funds, bail-outs, stimulus injections, and other spending programs, there is little wonder that the resulting deficits are so large.

There are three ways that we can get ourselves out of this hole. The first is to monetize the debt. In essence, this means that we can convert the debt into dollars and pay everyone we owe. In fact, this can be done tomorrow. How? Quite simply, allow the central bank of the U.S., the Federal Reserve, to buy up all the existing debt. Let it buy up all the T-Bills, Treasury Notes and Bonds—all of it. Dollars would replace the outstanding debt. Where would the Federal Reserve get all this money? The answer is simply that the Fed would get it out of a big black hole of nothingness. The dollar isn’t backed by anything—not gold, not silver, nothing but the “full faith and credit” of the United States (whatever that is). That means the Federal Reserve can just create money at will. It can create an infinite supply. It doesn’t even need to print new bills. The Fed could simply type numbers into a computer account and it’s done.

What is the problem with monetizing the debt? When $13.55 trillion new dollars hit the economy, the banking system multiplies the new dollars by a factor of a little more than 9. That means the money supply will swell by more than $120 trillion. (The current size of the money supply, as measured by M2, is $8.7 trillion.) If we took this route, we would be well on our way to hyperinflation. There have been several historical instances of hyperinflation, which wipes out life savings and destroys resources that form capital. The most famous instance was the German hyperinflation of 1923. Prices were rising so fast that people had to be paid multiple times a day. When workers were paid mid-morning, the men would run to the gates to give the money to their wives so that they could buy something before the money became worthless. Inflation was so bad that the price of a cup of coffee tripled by the time one finished drinking it. And this was happening for all prices! Germany could not continue with this situation. It had to abandon the Paper Mark and eventually switched to the Reichsmark.

The second way out of this deficit is to increase the amount of tax revenue that flows into the Federal Treasury. This approach has failed miserably for two reasons. The first is that the politicians always seem to find ways to spend all the additional money brought in and leave us no better off. The second reason is that increasing taxes is like having the economy drop an anchor. Taxation slows the economy, stunts business activity and penalizes the behavior of entrepreneurs. As a result, the higher tax rates take a larger percentage from a smaller pie, leaving a small and short-term increase in the revenues flowing into the Treasury followed by a drop-off in tax revenue a year or two down the line leaving a large debt and a stagnant economy.

This leaves the third option: a cut in spending. By a cut in spending, I don’t mean what politicians have been calling a cut, “a reduction in the rate of spending.” I mean, “Stop the car, put it in reverse, and back it up.” We need to cut spending to levels that are below our revenues. This will constitute many broken promises and real pain. The federal government has made very large promises. In fact, the size of the Unfunded Liabilities for the federal government exceeds $110.7 trillion. In other words, just to fulfill the promises already made, another $110.7 trillion are needed in the bank collecting interest right now. (U.S. GDP is only $14.5 trillion.)

So where can we cut our spending? If we look at the amount that we have spent on national defense this year (and I mean all of it), add up the total money spent on all the branches of the military—including equipment, personnel, operations, the wars in Iraq and Afghanistan—we have a year-to-date total of a little more than $527 billion. That is a lot of money and there are certainly areas that could be cut. Yet, if we look at how much we have spent on Social Security over the same period of time, we see the total to be above $534 billion. Furthermore, if we look at Medicare and Medicaid, that number is nearly $604 billion. Unlike defense spending, Social Security, Medicare and Medicaid are currently considered “Non-discretionary” budget items, so radical structural changes are needed to fix this problem, as well as the courage to solve this deficit issue.

I recently heard a good analogy. Imagine that you received some terrible news: your child has an awful, horrible disease. This disease will cause a lot of pain and suffering and could possibly result in the child’s death. Any parent’s natural reaction would be to fall to one’s knees and pray to God, “Give it to me. I will take the pain. I will suffer the burden, but please spare my child.”

Our National Debt is that disease. Why are we so willing to pass on the pain and suffering to the next generation, to our sons and daughters? Why are we so unwilling to bear the burden of our past excesses? The country is already broke. At this point, we are simply piling on. We have to address this issue now; it is getting worse. We have to look in the mirror and ask ourselves, “What kind of a person am I? What am I willing to do? What am I willing to sacrifice?” It has come to the point where the only way to fix this problem is through a sacrifice in today’s comforts. Will we try to spare our children from this disaster or will we impose this debt on them for our own comfort today? What are we willing to sacrifice for our children? What are you willing to sacrifice?

Is There Another Recession Around the Corner?

The best indicator of a recession has been the Term Structure of Interest Rate, better known as the “yield curve.” When the yield curve inverts, the economy slips into a recession approximately 4 - 6 quarters later. For my explanation of why this occurs, you can read my article here: http://pcpe.libinst.cz/nppe/1_1/nppe1_1_1.pdf or you can read the full dissertation here: http://mises.org/etexts/cwik-dissertation.pdf.


The yield curve has been making some troubling signs. Typically, the yield curve has an upward slope, and it looks like this:

However, when the economy reaches the upper turning point and is poised to fall into a recession, the short-term end rises relative to the long-term end. When this happens, it is called an inverted yield curve. We can plot the slope of the yield curve by simply taking the difference between the long and short ends. When the yield curve is upward sloping, the difference is a positive number. When the yield curve inverts, we have a negative number.

Here is a chart illustrating this difference over the past ten years:

(You can click on this picture for a close up.)

As we can see, the difference is falling again. The 10 year – 3 month spread dropped more than a 110 basis points from a recent high of 3.69 in April to 2.54 in August. The 10 year – 1 year spread dropped almost a 100 basis points from a recent high of 3.40 in April to 2.44 in August. The 20 year – 3 month spread dropped 101 basis points from a recent high of 4.37 in April to 3.36 in August. And the 30 year – 3 month spread dropped almost a 100 basis points from a recent high of 4.53 in April to 3.64 in August.


Each of these indicators fell by about 100 basis points in only 5 months, from April to August. This is a very sharp decline. The Fed has been absolutely flooding the market with as much money as the market can take. Many economists think that the Fed is running out of room to maneuver. 3-month T-Bills are under .20% and have been since April of 2009. 1-year T-Bills are now under .25% and with the Fed stimulant, there is a continuing downward trend. The question on the table is how long will this untenable situation remain?


When we see short-term interest rates start to rise, we will not the long-term rates follow suit. I am expecting to see the yield curve continue to flatten. If trends continue as they are, we are staring at a potential second dip in this recession.

The Prodigal President (and the rest of us too!)*

*This article appears as an Editorial in July 28th edition of The Garner Citizen News and Times here.

I cannot recall the first time that I heard the story of the prodigal son. I know that I have heard this story at least once a year in church and I am sure it has been more than that. For the longest time I thought that “prodigal” meant that the son returned. So I thought that the title meant that the story was about a returning son. I could not have been more wrong. Recently, the true definition of the word “prodigal” was brought to my attention. According to Dictionary.com, the definition is “wastefully or recklessly extravagant.”

In other words, the story is about the wasteful son, who asks for his fortune upfront and then spends it all in a reckless and extravagant manner. What was known to the people that Jesus was telling the parable to, and unknown to me, was that being prodigal was acting sinfully. Every one knew that spending everything on trifles and then borrowing, spending that, and then trying to spend even more, was just flat-out wrong.

It is amazing how much the world has (and has not) changed. Today, Americans are encouraged to spend, spend, spend. We are encouraged to run up credit card debt and purchase luxury items like new TVs, stylish clothes and nice gadgets. The tax code is designed to discourage savings and thrift. It is designed this way purposefully.

The dominant economic philosophy that governs the writers of our tax codes is the Keynesian economic philosophy. In the Keynesian point of view, GDP and Aggregate Demand are everything. According to economists, Aggregate Demand is defined as the summation of Consumption, Investment, Government Spending, and Net Exports. The largest component in this list is consumption. Therefore, the government “encourages” us, by manipulating the tax code, to spend our money on consumer goods, especially in a recession.

The government wants us to be a “prodigal populace.” (I think that they have been largely successful.)

Continuing along the Keynesian train of thought, since we are in a recession, it can be concluded that there is simply not enough Aggregate Demand. Thus, we need to increase one of the variables to boost our GDP. The variable most easily manipulated is government spending.

The Congress has been more than a willing accomplice to increasing government expenditures. The Federal Budgets have been as follows: $2.7 trillion (2007), $2.9 trillion (2008), $3.5 trillion (2009), $3.7 trillion (FY2010). In less than four years, we have expanded the annual Federal Budget by another trillion dollars. Meanwhile we have increased the national debt to well over $13.1 trillion. Despite these record levels, there are many in Washington that say that this is not enough.

We are clearly living in an age of the “prodigal politician.”

Finally, we come to the piece of news that recently caught my attention. The White House announced that through the $862 billion stimulus package that was passed in 2009, somewhere between 2.5 and 3.6 million jobs have been “saved” or created. I have no idea how one calculates a “saved” job, but let’s assume that these numbers are true. In fact, let’s assume that the larger number of jobs (3.6 million) is the correct number. So, how much did we spend per job? (The math isn’t all that hard.) The answer is $239,444.44 per job!

We can easily see that this is a policy package that was created by a “prodigal President.”

Why? Because, the jobs created by the stimulus package must be some of the nicest jobs in the world. I think that I would like to have a $239,444 job. In fact, with all of this excessive, wasteful and reckless spending I’ve been doing recently, I think that a job that pays $239,444 is the only way I will be able to start to pay my bills. Then again, maybe I should just go ahead and spend it all anyway. But if I did that, would I then become a prodigal Paul?

Distress Index

The Foundation for Economic Education has asked me to put together a Distress Index. So I quickly threw together five variables to create the index.

There is more detail at the FEE webpage (and a better picture too).

Methodology:
The idea was to keep the index simple, so that no more than a handful of statistics are used, and it was also important that those statistics be relatively uncontroversial. So we relied solely on numbers provided by the Federal Government.

Included Statistics:

Unemployment: Clearly, no “misery” index would be very relevant without considering unemployment. This is pretty self evident.

Consumer Price Index: Like the original “misery” index, we included inflation, even though we are actually in a deflationary period at the moment.

Gross Domestic Product: GDP is the market value of all final goods and services in a particular geographic area over a period of time. It is the most widely recognized measure of the "health" of economy.

Total Capacity Utilization (TCU): This is a measure of the utilization of the all available capital goods. We use the inverse of this number, since higher utilization is generally a good thing. So for instance, if TCU is at 70 percent, we would add 30 percent to our index as a measure of the idle capacity.

Household Financial Obligations as a percent of Disposable Personal Income (HFO/DPI): This measure is intended to gauge the ability of individuals to participate in the consumer economy.

It is important to emphasize that no statistic will ever fully articulate what is happening in the real economy. The real economy is made up of living, breathing, planning, acting individuals. Statistics are simply an abstraction and, as such, imperfect. Nevertheless, we feel this index has substantial value for two reasons.

First, it gives us a tool to help interpret what the media and government are telling us about the economy. Second, we hope it will give voice to the taxpayer and the frustrating conditions he or she is enduring these days. We hope the index will keep pressure on policy makers and opinion leaders to make decisions that improve the economy rather than distressing it further.

After a cursory historical analysis on the index, we can see that the results were pretty impressive. The chart below shows the Distress Index since 1967 with economic recession periods highlighted. There seems to be at least a superficial correlation between the index breaking 45.0 and the economy falling into recession. (Note we have not tested the strength of this correlation). In most cases the index appears to lead the recession’s beginning and end, which would seem to indicate that the index is actually useful in telling us where we are headed, not just where we’ve been.

THE CURRENT DISTRESS INDEX IS 61.0.

Unemployment: 9.7%

CPI: -1.5%

Real GDP: 3.897% (as a % change y-t-y × -1)

TCU: 30.4% (100% - TCU = an Idleness Index)

HFO/DPI: 18.5%

Please feel free to comment and improve this index.