People who misuse economic statistics obscure reality

Posted: 9:00am on Aug 10, 2011

Economic indicators don’t have to be complicated to be misused. Even a simple average can serve to cloud reality rather than illuminate it. Sometimes this is done in ignorance and sometimes on purpose. One cannot be sure of motives, but one can be aware of the potential for being misled.

Here are three examples I ran into recently. The first comes from state fiscal problems, the second from youth unemployment and the third from agricultural pollution.

Start with states’ fiscal problems. The specific example here is from my home state of Minnesota, but our ups and downs are nearly identical to many other states of similar size, particularly across the Midwest and Pacific Northwest, that have a history of “progressive government” in the classical sense.

Here, after a long stalemate, we got a budget agreement that includes a 4 percent spending increase over a typical state two-year biennium. Some loudly contrast this with average increases of some 18 percent every two years over the half century from 1960 to 2010. So it is a big change, right?

Even though the numbers are correct, they are misleading. An average over 50 years tell us little about the last 30 years in this case because spending growth rates varied tremendously within this half century.

The high rates of growth are skewed by very rapid growth in outlays in the 1960s and 1970s, as state government took over much education funding and other functions long borne by counties, cities and school districts. This took place in many other states too, although to greatly varying degrees.

In my state, from 1961 through 1977, state outlays increased by 32 percent every two years, nearly all from increases in outlays on education and roads. But from 1977 through 2011, the biennial increase was only 11.5 percent.

That still sounds like a lot, but it ignores other important factors. First, prices rose substantially over that time, especially when the Federal Reserve let inflation get out of control in the 1970s. Second, my state's population has increased by two-thirds over the past 50 years. Third, the overall economy has grown, both in terms of value of goods and services produced and in terms of income.

Adjusting for inflation over the past half century cuts the rate of increase in the general fund budget by more than half. Now, adjust for the fact that the population grew. Adjusting for that in addition to inflation brings the increase to 6.7 percent per biennium over 50 years and 1.4 percent every two years since 1977. You may think that high or low depending on your politics, but it is far different than the “18 percent per biennium for a half-century” take on things.

A second example of the misuse of percentages appeared in a recent op-ed by pundit Amity Shlaes. Arguing that the minimum wage is responsible for high unemployment among young people, she criticized congressional Democrats for raising the federal minimum wage 41 percent from 2006 to 2009.

Again, the calculations are roughly correct in themselves. The minimum actually had been $5.15 until May 2007. And Democrats did make up the majority of those voting to increase it in three steps to $7.25 by July 2009. So there was a 41 percent increase in just over two years.

However, it would be just as correct to say the wage went up 41 percent over 12 years. That is because the $5.15 level was set in 1997. Spread over 12 years, that 41 percent increase works out to a raise of 2.9 percent per year.

Adjusted for inflation, the increase was just 5.1 percent over 12 years rather than the 41 percent unadjusted figure Shlaes cites. And even though inflation has been very modest since the 2009 bump to $7.25, that amount now has no more buying power than $5.15 had in 1997. Adjusted for inflation, the minimum wage's buying power now is lower than at any point from March 1956 to August 1984. Having a minimum wage at all may or may not be a good idea, but the increase has not been as precipitous as implied.

I heard a third example of abuse of percentages when an environmentalist asserted that some Midwestern farmlands had lost an average of X tons per acres of topsoil to erosion since cultivation started in the 1870s. Her facts also were correct, but largely irrelevant for current policy. An amount over 140 years says next to nothing about what is going on now. There were very high rates of erosion from the first plowing of the prairies through the 1930s. But changes in farmer attitudes and farming techniques cut erosion rates dramatically, even though off-farm environmental damage from erosion remains an important problem.

And that illustrates an important point. Misuse of statistics can undermine a legitimate argument. The environmentalist was correct about the basic issue of agricultural erosion harming ecosystems. Shlaes was correct that the minimum wage can increase unemployment, especially for low-skilled youth, although few labor economists would make the sweeping argument she did. But supporting such basically sound positions with misleading use of some number is more likely to make knowledgeable readers shy away from one's argument than agree with it. And it certainly does not raise the level of public understanding.

Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.

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