Why government numbers don't add up
Critics of government spending are fond of using federal economic statistics to buttress their arguments. But in one of the ironies for which the debate is famous, one of the few programs to be pared to the bone has been the data collection system itself. This has led over the past decade to an archaic system of statistics collection that often results in flawed analyses.</br></br>Yesterday's release of revised 1992 gross domestic product data by the Commerce Department highlights the need for more accurate reporting of economic statistics by the federal government. Indeed, these revisions show that the slow-growth assumptions behind the Clinton economic policy were fundamentally flawed.</br></br>The accompanying chart shows how economic growth accelerated at a much more rapid pace in 1992 than initially estimated (see accompanying illustration -- WSJ Sep. 1, 1993). It also shows a series of revisions that occurred from 1989 through 1991; in seven of the 12 quarters, growth was initially overestimated, leading the Bush economic team astray. In the fourth quarter of last year, the recovery from Hurricane Andrew may have caused a surge in economic activity, but growth was underestimated for all four quarters of 1992.</br></br>Recent research by the Statistics Committee of the National Association of Business Economists (NABE) shows that the misestimation of growth has followed a counter-cyclical pattern dating back as far as early 1986 and continuing in 1992. In 1986-88, when growth was relatively strong, economic activity was underestimated. In 1989-91, when growth was slowing and then declining, economic activity was overestimated. We now know that growth was underestimated in 1992.</br></br>NABE research also shows that misestimation of GDP has caused serious problems in forecasting economic events. These forecasts and the econometric models that produce them drive billions of dollars of investment activity -- making forecast accuracy a major concern for Wall Street's stock and bond specialists.