Friday, August 5, 2011

All economic discussions need to drop absolute dollar figures

The use of absolute dollar figures in economic discussions drives me crazy.  Given the realites of inflation and population growth, the absolute dollar figures for everything will nearly always be the highest in history.  In non-political terms, the one that bugs me most is the list of top grossing movies.  Compare that list (which doesn't have a movie made before 1993 in the top 20) to this list adjusted for inflation.  One can still quibble about these things, after all in the era of Gone With the Wind there wasn't things like television, TiVo and movie piracy, and clearly these things drove increased ticket sales.  Still, the point should be obvious that you cannot measure the "top grossing" movies in unadjusted dollars and expect to get any kind of fair comparison. 

In politics, this sort of thing is far worse.  Today's example from the Politico:
The White House anticipates unemployment at 8.25 percent, and Goldman Sachs and others warn the number could be higher — close to 9 percent, which would mean no net job growth after the biggest stimulus package in the history of the world. No president has won reelection when unemployment was higher than 7.2 percent in 50 years.
I don't doubt this is true in absolute dollar figures.  But "the history of the world" is a big claim.  Was the ARRA really bigger than the construction of the Great Wall of China?  Bigger than World War II?  Bigger than the Great Pyramids?   Only a comparison using relative economic indicators (such as ratio to GDP, or some kind of inflation adjusted metric) could possibly tell you this.  Anyone who has more than glanced Krugman's direction over the past several years will know the serious economic objections to this claim anyway:  1) ARRA was far too laden with poorly stimulative tax cuts and 2) It really only counteracted the precipitous decline in State government spending so that there was no net government stimulus. In fact, once you adopt a metric that compares to the size of the economy, it's clear the US stimulus program wasn't even the biggest one in the world in 2009 - Saudi Arabia's program was bigger as a percentage of GDP. 

Leaving aside the ancient examples, it's pretty clear to me that WWII remains the biggest stimulus program ever in any meaningful sense worth discussing.  That WWII wasn't explicitly designed as a stimulus program doesn't matter, as the theory driving stimulus only requires that a) the economy be under utilized and b) that government spend a lot of money, which clearly fits the bill c1939-1942. 

I think this can be fixed.  The general public understands a surprising number of abstract and relative metrics.  We typically measure unemployment as a percentage, and not in absolute terms.  People have some sense of what "GDP" is (though I doubt many could tell you how it is calculated).  It's sloppy journalism (unsurprising from the Politico) and it opens the door to various dishonest demagogues with agendas to push. 

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