ECONOMIC STATISTICS AND MACRO ECONOMETRICS:

The Figures Lie

FUTURECASTS online magazine
www.futurecasts.com
Vol. 3, No. 7, 7/1/01.

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  Ordinary lies, damn lies, and statistics:

 

 

 

 

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  Mark Twain should have added a fourth, and worst, category to his list of lies. He should have added "government statistics."
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  Herein, we cover weaknesses in the sources of economic statistics, the limitations of accounting, the effects of currency fluctuations, the limitations of adjustment devices, and the peculiar problems of government statistics and statistics concerning government activities. Finally, we review the obvious implications for macroeconomic econometric models.
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  The productive capital of a nation is impossible to accurately estimate. See, "Capital as Purchasing Power." Estimates of national productive capital may be the most grossly inaccurate and important weakness of our economic statistics.
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 Statistics are at most merely additional evidence; they must first be evaluated and then properly interpreted before being used.
  Our economic statistics come from a variety of sources. There are census statistics - polling data of various types - data from securities, commodities and money markets - financial reports of business and governmental entities - government reports - and studies from various professional and academic sources.
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  Statistics are seldom what they appear to be. It is generally dangerous to take them at face value. They are almost never determinative of an argument - they are at most merely additional evidence that - like any other kind of evidence - must first be evaluated and then properly interpreted before being used in whole or in part.
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 Even market statistics have to be interpreted, and are no more reliable than "the information in the market."

 

 

   Market statistics - derived from our securities, commodities and money markets - are generally accurate and up to the minute. However, that still leaves the problem of interpretation. As any market speculator will tell you, discerning the meaning in the market figures can be as difficult as discerning the meaning of a Delphic prophecy. Even when the figures are accurate, the figures do not resolve the issue.
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  And, accuracy and reliability are two different matters. While the figures themselves may accurately reflect the "information in the market," that information can be, and generally is, of varying degrees of accuracy. Reliability is only as good as the information known to market participants.
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 Polls and academic studies are no more reliable than their authors.
  The figures taken by a poll are, of course, no better than the poll takers and the poll questions. Academic studies are similarly no more reliable than their authors.
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  For example, a poll that asks whether voters would approve a $100 billion tax increase to fund a $100 billion health care program might get one answer, while a more realistic poll about a $100 billion tax increase to fund a $67 billion dollar health care program that would massively push up future health care costs would get a far different response.

Financial Reports

 The financial reports of business and governmental entities provide the vast majority of economic statistical information. Even the commodity and money markets are heavily influenced by the mass of financial reporting data. And that's where the problem really starts.

 The accountants' dilemma:

 

They must maintain a high degree of credibility for their efforts and for the fairness of the financial statements they produce and audit, while acknowledging, as they must, that accounting is one of man's more nebulous practical arts.

 

 

 

 

 

 

 

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  Accountants are confronted by a host of demands for increased scope and reliability in financial reports. They must maintain a high degree of credibility for their efforts and for the fairness of the financial statements they produce and audit, while acknowledging, as they must, that accounting is one of man's more nebulous practical arts.

  • Financial statements can't be made as precise as they tend to appear;
  • The value of capital assets cannot be derived from accounting data;
  • Increases in productivity, and in the quality and variety of goods and services produced, can't be accurately evaluated;
  • The value of knowledge - and the effectiveness of its distribution and use - cannot be accurately estimated;
  • Efforts - legitimate and otherwise - to minimize taxes and/or influence regulatory oversight seriously distort corporate financial reports;
  • A host of "smoke and mirrors" accounting gimmicks - such as measuring the costs of inputs instead of the costs of outputs - the artificial distinction between capital and operational budgets - improper allocation of inconvenient costs - "off-budget" items - semi-autonomous agencies - and credit allocation mechanisms - seriously distort government accounting;
  • While the cost of government input is thus difficult to ascertain, the value of government output is frequently impossible to evaluate;
  • Accounting doesn't produce valid economic statistics;
  • The financial statements of each enterprise or governmental entity must be evaluated in light of its individual peculiarities; and,
  • An understanding of the risks being assumed and the limitations of the data remains an essential responsibility of the management, the investor, the analyst, or other user of the data.

Increasingly, corporations keep an additional "pro forma" set of books reflecting their belief that the books kept according to Generally Accepted Accounting Standards do not reflect the reality of the business.  

 

Users must keep the limitations in mind and cannot abdicate their responsibility to understand fully and interpret properly the data provided.

  Calculations based on best estimates provide the fragile lattice work of financial reporting. Such vital data as profits, inventories, assets, and liabilities can become impossible to meaningfully quantify. They can become even more impossible to meaningfully compare over time and among different reporting entities.
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  Indeed, accounting difficulties are visibly worsening.
In the 1970s, market value typically corresponded closely to the book value of conventional assets. Today, as much as 80% of market value reflects values such as human capital, intellectual property, and brand reputation, that accountants don't even pretend to measure.
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  Footnotes or separate schedules are often required of our public corporations to provide legally required notice of substantial inaccuracies in their financial disclosures.
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  Multiple books of account and multiple financial statements - one for financial reporting - one for tax reporting - and others for government contracts, rate making or other regulatory needs - are provided by many businesses. Increasingly, corporations keep an additional "pro forma" set of books reflecting their belief that the reality of the business is reflected neither in the books kept according to Generally Accepted Accounting Standards nor in the books kept according to other required standards.
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  The interference of politics, government regulatory agencies, and the ubiquitous interests of the Internal Revenue Service cause many of the accounting profession's most intractable problems.
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  The accounting process is essential for economic management at all levels - and for all manner of economic analysis - but the users must keep its limitations in mind and cannot abdicate their responsibility to understand fully and interpret properly the data provided.

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 Inflation:

 

 

 

Economic statistics of the 1980s are in no way comparable to those in the 1960s.

  Shifts in accounting methods forced by inflation affected statistics on earnings, capital, and inventories during the 1970s. In a typical shift - undermining the accuracy of inventory statistics - industry changed from the FIFO (first-in-first-out) method to the LIFO (last-in-first-out) method in order to protect the validity of earnings reports that otherwise would not have accurately reflected the rising replacement cost of goods sold.
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  Thus, items bought several years - or even decades - ago, are still allowed to remain on the books at prices much lower than those of replacement items, providing a gross underestimation of the value of inventories on hand. A long period of stable prices might eliminate this problem, but even at 3% inflation, inventory on hand can still be substantially undervalued.
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  Thus, economic statistics of the 1980s are in no way comparable to those in the 1960s. 
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  Overstated profits were a problem during the 1970s, because inflation pushed up risks and replacement costs. The markets responded to the declining "quality" of reported profits by rewarding lower average price/earnings multiples to public corporations.
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  Understated profits may be the result today, when the nation's finances are stable and business risks and replacement costs may actually be declining, or the quality and productivity of replacement assets may be increasing in dollar terms. The markets are responding to the increasing "quality" of reported profits by awarding higher average price/earnings multiples to public corporations. (Unless the dollar weakens, the current market downturn will provide only a temporary departure from this trend.)
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  During the 1970s - when means had to be found to deal with the inaccuracies caused by rising rates of inflation - needed changes were sometimes blocked by political action. Accounting adjustments that would reduce profits - and tax payments - in line with the impact of inflation on capital asset and inventory replacement costs - first had to gain the approval of the IRS. If we now enter a significant period of deflating capital asset and inventory replacement costs, we can assume that many businesses will be loath to make the accounting changes that will reflect the new reality, and increase their reported profits and tax payments.
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The dollar, the basic unit of measure, periodically fluctuates like a ruler drawn on a stretched rubber band.

  Substantial monetary fluctuations have perhaps the most pervasive impact on the accuracy and comparability of statistics. In the United States, the dollar is the accountant's basic measuring device, yet it periodically fluctuates like a ruler drawn on a stretched rubber band. The problem is compounded for international transactions and transnational enterprises whose assets, liabilities and activities are denominated in a variety of often rapidly fluctuating paper currencies.

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 Adjustments:

 

 

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  Index adjustments are the most obvious remedy for such inaccuracies. However, indexes are just averages, while individual enterprises usually fall either above or below the average. Furthermore, indexes are notoriously afflicted with inaccuracies of their own, and not everything is or can be indexed. Small errors in our inherently inaccurate measures of inflation accumulate over time to massive proportions, rendering statistics from one decade not really comparable to statistics from another.
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  Accountants are justifiably loath to abandon historic costs, which is the one objective measurement of acquired assets that they have, and venture forth into the process of making repeated adjustments based on subjective estimates of replacement costs and relative obsolescence.

In the 1970s, inflation caused declining price/earnings ratios, hindering the formation of new equity capital.
  The abandonment of historic costs to enable accountants to make suitable adjustments to the reports of individual reporting entities has also been suggested. However, accountants are justifiably loath to abandon historic costs - which is the one objective measurement of acquired assets that they have - and venture forth into the process of making repeated adjustments based on subjective estimates of replacement costs and relative obsolescence.
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  However, during periods of rapid inflation, if industry is unable to take inflation into account, it can become increasingly difficult to find capital for the replacement of worn or outmoded plants and equipment. To avoid this burden on productive capital, all depreciable capital assets have to be reevaluated annually, and depreciation expenses have to be correspondingly increased to reflect increasing replacement costs.
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  If done accurately (a big "if"), this would indicate the degree to which inflation undermines industry capital structure, and would tend to reduce reported profits. It also would create perhaps insurmountable accounting difficulties, reduce taxes, and arouse the antagonism of the tax gathering agencies. When such adjustments are not permitted, the market responds as it did in the 1970s - with declining price/earnings ratios that reflect the reduced "quality" of reported earnings and that increase the difficulty of raising new equity capital.
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    Supplementary reporting can provide estimates of such inaccuracies, and is widely used to cover some, but not all, of these inaccuracies. However, such supplemental data seldom finds its way into the aggregated economic statistics of whole industries, regions, or nations. Even with such supplementary reporting, the multitude of varying figures often spreads more confusion than understanding.

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 Fair representation:

 

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  Auditors strive to assure the fair representation of an enterprise's financial position and the results of its operations by assuring that its financial reports are in conformity with generally accepted accounting principles. However, management still has great leeway in choosing from amongst the generally accepted accounting principles available.
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 The investor must understand that, when he puts his money at risk, he is placing his faith in management.

 

All too often, economists make the fundamental mistake of uncritical acceptance of financial data.
  Auditors are not - and will not - become financial analysts. They do not provide - and are not going to be responsible for providing - economically valid data.
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  The accountant doesn't claim - and the auditor doesn't expect - that accounts provide an accurate reflection of the status of a complex business at any given moment. All that can be expected is that the series of reports - over time - reflect how the business is progressing, and whether progress is accelerating or declining.
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  Given the complexity and difficulties of the task, the accounting profession does a remarkable - indeed an outstanding - job.
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  However, efforts to expand the role of the accountant
- to include measurements unrelated to economic performance or not derived from market data - pose substantial risks. Accounting is a fine tool. Like a fine hammer, it performs an extraordinarily difficult task with remarkable effectiveness. However, if you want to change it to perform entirely different tasks - if you want it to chop down a tree - you will have to sharpen its head. Then, you will have a very ineffective hatchet and a hammer that is no use to anyone.
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  Each additional task added on to the accounting mechanism undermines its integrity. Regulatory requirements, tax accounting, government contracts requirements, etc., have all had their noxious impacts. Efforts to include dubious measures of environmental or sociological impacts will - if successful - further undermine the reliability of accounting figures.
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  Ultimately, it must always be management that evaluates the raw data and makes the essential business decisions. The investor must understand that, when he puts his money at risk, he is placing his faith in management. All users - including investors, economists, and government regulators - must also understand that each firm's financial statements must be interpreted in light of its own peculiarities. They cannot simply take financial data at face value.
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  Yet, that is precisely what most economists do!

Government Statistics:

 The Cheshire cat:

 

 

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  Official government statistics are among the least reliable and the most often cited. At best, using them to describe economic developments is like trying to describe the Cheshire cat when all you can see is its smile. All too often, government statistics lie to us. It is already old hat that such important government statistics as the unemployment rate, the consumer price index, the usage of industrial capacity, savings, and international trade and payments flows are unreliable.
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 Unemployment statistics:
  An appreciable percentage of reported unemployment is "soft" - not involving primary wage earners - or even fraudulent, or can mask the existence of shortages of key skilled workers. At least in today's expanding economy, the problem of the "discouraged" unemployed worker has been reduced to insignificance.
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 Unused capacity statistics:

 

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  An appreciable percentage of unused capacity lies unused for the very good reason that it has been rendered obsolete and uneconomic by shifts in technology or the regulatory or competitive environment. Floating exchange rates have their benefits, but periods of rapid currency fluctuations can quickly undermine or enhance the competitiveness of major economic sectors, increase risks, and increase the costs of raising capital.
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 International trade and payments flow statistics:

 

 The "national content" of the products and services in international commerce is impossible to accurately measure.

 

Dollars, as a reliable store of value, have become one of our most important exports.

 

 

 

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  International trade and payments flows become more unreliable every year. The "national content" of the products and services in international commerce is impossible to accurately measure.
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  The World is currently running a payments deficit of approximately $250 billion. We will simply have to get those Martians to stop blocking our technology exports.
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  Our payments statistics omit one of our most valuable exports -- dollars. In a world of vacillating and unreliable paper currencies, the ability of the United States to provide a currency that is widely viewed as a reliable store of value is a valuable service for which people all around the world are willing to trade their valuable goods and services. People in Russia and Brazil and many other places prefer to keep their savings in dollars hidden in their mattresses than to use their declining domestic currencies and unreliable banks. People all around the world accept dollars as a reliable medium of exchange, and their governments hold dollar denominated United States bonds and notes as reserve assets.
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  How much of this valuable service can world demand absorb? No mere human being can tell. But the money markets are exquisitely sensitive to the supply and demand for dollars. When the exchange rate for dollars trends downwards as against the other major currencies and gold, we will know that we have been producing too much of this "service."
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  At present, the Fed estimates that over 60% of all U.S. currency in circulation circulates abroad.
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 The gray market:

 

 

 

Sweat equity:

 

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  Hidden from the tax collector, a substantial and growing portion of the economy is not reflected in government statistics. When business taxes and regulations drive up costs, people increasingly mow their own lawns and fix their own homes rather than hire someone else to do it. The gray market grows inexorably. Recent increases in cigarette taxes in California have already spawned a thriving smuggling industry. Conservative estimates of gray market activity in the U.S. are in excess of $1 trillion.
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  Indeed, all "sweat equity" activities - so important in small business and around the home - escapes government statistics. Unless you believe that most small businessmen are crazy (and maybe they are, considering the risks and regulatory obstacles they face), the earnings of the typical small businessman must be substantially higher than can be gleaned from their tax forms.
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Currency instability:

 

 

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  Sharp fluctuations in the purchasing power of a currency or even of other major currencies render suspect all statistics stated in terms of that currency. As previously stated, during times of monetary instability, the dollar - the measuring stick of our accountants and economists - can have the accuracy of a ruler drawn on a stretched rubber band. Inflation adjustments are notoriously inaccurate - rendering statistics not really comparable from one decade to another.
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Breaking the thermometer:

 

 

 

 Hidden subsidies:

Padded sales figures:

Monopoly franchises:

Private managers and owners have an interest in properly interpreting their own books and records.
  Even worse, there are times when the government breaks the thermometer or throws away the ruler altogether to hide the truth.
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  Subsidies and unrealistic cost allocations are routinely used to make government commercial activities look considerably more efficient than they actually are. Government always wants its projects, like the TVA electric utility, to look good. Nobody in government has a personal interest in how well they are actually doing. Thus, accounts are juggled, costs are omitted, and accounting systems - the basic tool of management - are rendered useless for anything except propaganda.
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  Typically omitted are tax subsidies - the costs of the political decision making process - the interest ("time") cost of government monies invested in the project - and the costs of legal, accounting, and technical assistance from other government agencies. Sales figures are padded and rendered useless by requirements that other government agencies use these services even if at greater cost than if purchased elsewhere. Often, as with first class mail, private competition is discouraged.
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  Private enterprises also juggle accounts for tax, regulatory, credit and other purposes. However, they generally have management and ownership that has an interest in knowing how to interpret their own books to ascertain actual performance.
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Price and wage controls:

 

 

Although not sufficient of themselves, rising prices are an important part of the cure for inflation.

 

 

 

 

 

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  Price and wage controls may give the appearance of reducing price inflation, but they do that at the cost of reducing purchasing power and increasing the inflationary pressures that will ultimately drive prices even higher. See, "Understanding Inflation." Although not sufficient of themselves, rising prices are an important part of the cure for inflation. Typically concerned more with image than reality, government price controls destroy an important part of the cure for inflation in a vain attempt to hide the reality. Declines in the availability of goods - and in the variety and quality of goods available - decrease purchasing power even when not reflected in increases in controlled prices.
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  During the 1970s, energy price controls forced us to pay not only in money for our gasoline, but in lost time and opportunities while waiting in gas lines - and in limitations on the vehicles we could buy. Price controls also deterred the expansion of supplies, and were part of the mechanism by which the United States government and its energy warriors managed to double the length and cost of the energy crisis. However, only the cost of the gasoline was reflected in the statistics.
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  In addition, during times of price control, the substantial and growing portion of the economy not reflected in the statistics because it is hidden from the tax collector is swelled by a growing black market in goods and services withdrawn from regular markets and made available at prices above controlled price levels.
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 Price inflation statistics:

 

 

Gains in the quality and variety of products, productivity gains, and new products are poorly reflected.

Inflation statistics measure the results of inflation rather than the pressures that cause inflation.

 

Inflation adjustments are notoriously inaccurate - rendering statistics not really comparable from one decade to another.

 

  The measurement of price inflation is notoriously inaccurate, and has become increasingly important. People now have a vested interest in these inaccuracies, because benefits due under the social security and other government programs, or under some labor contracts and commercial contracts, are indexed to the inaccurate figure, making it almost impossible to correct. (Adjustments have, in fact, been made in recent years, but inflation is now being underestimated where before it was overestimated.)
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  On the one hand, inflation is overstated because it doesn't reflect increases in the quality or variety of commercial goods and services offered, or increases in the productivity of productive assets available. It is slow to reflect new products, which are often the beneficiaries of especially rapid increases in productivity.
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  On the other hand, inflation is understated because it measures "price" inflation instead of the pressures that cause price inflation. It also fails to reflect declines in the quality of services offered that typically accompany periods of substantial chronic inflation.
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  If government were not creating inflationary pressures, prices would decline about two percent per year to reflect the increase in productive efficiency of our rapid technological progress. Indeed - except during the years of the gold rush and the Civil War - modest rates of price deflation were the rule in the 19th century - when the dollar was tied to gold and the United States became a wealthy economic powerhouse. Today, even when there is no "price" inflation - stable prices just mean that government, by printing more money or otherwise expanding the money supply (monetary inflation) - has appropriated for itself all the benefits of each year's increase in productive efficiency.
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  As stated above, inflation adjustments are notoriously inaccurate - rendering statistics not really comparable from one decade to another.
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Tax burdens:

 

Business taxes:

 

Almost all business taxes are passed on to the consuming public along with all other costs of doing business.

 

There is never any relationship between social costs and the level of business taxes.

 

 

 

 

 

 

 

 

Dedicated taxes and bonds:

 

Dividing government budgets into discreet segments is a propaganda ploy to fool a credulous public.

Typically, the public's highest priorities become the government's lowest priorities, and are held hostage to induce the public to approve new bonds and taxes.

Social security is just another welfare program and social security taxes are just another tax burden.

 

  Tax programs and tax statistics are routinely designed to hide the true burdens and uses of the taxes.
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  "Business" taxes are presented to the public as a painless way to fund government, even though very little of the burden of business taxes actually falls on business. The classic characteristic of a business is the ability to pass costs - all costs - including the profits that justify the raising and maintenance of capital - on to its customers. Taxes are just another cost of doing business. They are either passed on to the consuming public, or business units will ultimately fail until the reduced supply of goods and services permits the surviving business units to pass the tax costs on to the consuming public.
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  Of course, businesses do use public services, and it is fair to require that their customers bear the cost of those services. However, these costs are never accurately calculated, and in practice there is never any relationship between such costs and the level of business taxes. Obviously, sales taxes more accurately reflect the use of services than business income taxes - which are not paid by unprofitable businesses or nonprofit entities.
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  To a large extent, imposing taxes on business is thus just a sneaky and undemocratic way of imposing taxes on the public as a whole. Business taxes not only increase costs to consumers, they decrease the overall efficiency of the economy and adversely affect its ability to produce goods and services, employ workers, and pay high wages.
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  Nevertheless, this segment is not an argument against taxes. They always have to be justified on the merits of how the funds are used  and the burdens they impose on the economy. It is just an argument against the myth that the public gets something for nothing - that businesses bear the costs by "paying" business taxes.
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  All business tax burdens ultimately fall on the public, as consumers and workers. To coin a phrase, ask not on whom the burden of business taxes falls - it ultimately falls on thee.
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  Dedicated taxes and bonds - such as Social Security taxes or prison construction bonds - provide another phony statistic. With some minor exceptions - as for agencies that run toll roads and similar facilities that pay for themselves - dividing government budgets into discrete segments is very misleading and useless for anything except propaganda to fool a credulous public.
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  Typical is the advocacy of new taxes, lotteries or other noxious gambling activities, or bond issues, "for education," or "for prisons," or other activities desired by the public. This artificial segmentation of the budget permits the political tactic of attaching new tax or borrowing initiatives to those activities most desired by the public.
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  Thus, the public's highest priorities become the government's lowest priorities - to be dropped first if the public refuses to support or authorize new taxing or borrowing authority. Governments have insatiable appetites for new and increased sources of revenue. The segmented budget propaganda ploy permits politicians to repeatedly satisfy this appetite by holding hostage the public's highest priority desires.
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  Basically, the government has one pile of expenses, and one pile of revenues, and all expenses add to the total of its expenses, and all revenues add to the total of its revenues. The use of social security tax revenues for general expenditures, and the decision to use general revenues to make up for future shortfalls of social security taxes, amply demonstrates the artificial nature of the segmentation of government budgets. Social security is thus revealed as just another welfare program, and social security taxes are thus revealed as just another tax burden.
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 Phony benchmarks:

 

 

Like the body counters of the Vietnam war, the government's energy warriors were only interested in evidence of success, not in evidence of failure.
  "Body counts" - the use of irrelevant or immaterial benchmarks to give the illusion of success - are a frequent characteristic of government activities.
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  A primary example is the improved mileage characteristics of the family sedan - required during the 1970s during the government's phony war on the phony energy crisis. Detroit produced lighter sedans with improved mileage characteristics that fewer people used. Increasing numbers of automobile users decided to buy station wagons, vans, fancy stretch-cab pick-up trucks and now, sport utility vehicles, because the lighter sedans lacked needed trunk space, had aluminum radiators that quickly wore out, provided less crash protection, and otherwise lacked characteristics desired by the public.
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  These side effects were not counted by the energy war body counters. Like the body counters of the Vietnam war, the government's energy warriors were only interested in evidence of success - not in evidence of failure.
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Savings:

  Savings statistics are one of the most important economic indicators for economists - especially for Keynesian economists. Yet, savings statistics are hopelessly unreliable.
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  Savings as a percentage of personal income declined 1.3% last year. However, some economists suggest that a more accurate figure would show an increase of almost 14%. This difference is hardly a minor matter for economic statistics.
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  Capital gains realized and reported to the tax gatherer impact the official savings ratio, but capital gains not realized do not make it into the official statistics. With real estate markets and stock markets and other equity values generally surging higher in recent years, this is a major defect. Pension fund benefits also don't make it into pertinent statistics. Some economists argue that spending on consumer durables like cars should be discounted over 10 years like capital assets.
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  Of course, sweat equity and gray market activities - increasing massively from decade to decade - never make it into savings ratio calculations.
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  Such adjustments would have the most impact on the savings ratio of the top 20% of households. Indeed, recent official statistics show a major savings rate decline during the 1990s in the top 20% of households while the savings ratio of the lowest 20% almost doubled - exactly as would be expected if such adjustments were valid.

The Government Sector:

 Equivalency:

 

 

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  Government economic activity - the "government sector" - cannot be evaluated as an equivalent to the private sector. However, most people - including most economists and macroeconomic econometric models - do just that. Economists still generally believe that the government sector can actually be expanded without inflationary consequences if needed to maintain economic activity when the private sector is contracting. The invalidity of this view is quite transparent.
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 Evaluation of costs and benefits:

 

 

Government infrastructure projects can vastly increase the value of affected private assets.

 

 

 

 

 

 

 

Government programs to provide goods and services generally provide far less value than their cost.

 

 

 

 

 

 

 

Socialism has frequently destroyed the capital structure of entire economic systems.

 

 

  Government input and government output are two vastly different figures.
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  Government infrastructure projects - despite the inherent inefficiency of government management - can create far more value output than even the bloated inputs typically required for government activities. All fixed assets in the vicinity of infrastructure developments often rise in value by a considerable multiple of the expense of the project.
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  For example, the announcement of the construction of the Verrazano Narrows Bridge instantly caused a massive increase in the value of all land and most buildings and businesses in Staten Island and considerable stretches of neighboring New Jersey. By the time the bridge was built, its cost appeared as an increase in the capital assets of the nation, but it took many years and many real estate and business transactions before the collateral increase in private assets was fully reflected, even though both increases were equally real.
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  When the government delivers goods and services, however, the story is quite the opposite.
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  A million dollar government housing project will produce far less than a million dollars worth of new housing, but will divert a full million dollars in economic resources from the private economy. Ten billion dollars in additional government expenditures for health care doesn't result in anything remotely resembling an additional ten billion dollars in health care for the program's beneficiaries, but does drive up the cost of health care for everybody. Today, because of government interference in health care markets and growing dependence on third party payers, about one third of all health care dollars go for administrative expenses rather than for health care.
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  The billions of dollars that the government spent during the 1970s for its energy programs actually served to increase and maintain the energy crisis long after it should have disappeared, just as various government activities were instrumental in causing the energy crisis in the first place. Frequently, massive additional sums for education cause rapidly rising costs, while achieving only very small increases in actual education. Indeed, massive additional sums granted to public school districts that provide inept education frequently disappear without a trace of educational improvement.
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  Socialist systems provide extreme examples of this phenomenon.
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  Tens of billions of dollars lent to socialist and other command economy third world governments during the 1970s achieved nothing but the bankruptcy of those nations and the enrichment of their noxious despots.. China's backyard steel furnaces during its "Great Leap Forward" were a massive economic liability rather than an asset. Despite impressive levels of investment in their five year plans, the Soviet Union's economy steadily deteriorated to the point of collapse.
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  This, of course, is just another way of explaining that government economic efforts are inevitably grossly inefficient and frequently burdensome. Failure to take the inefficiency of Soviet government investment into account fooled most economic analysts - including those at the CIA.
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Taxes distort economic activity.

  Furthermore, the taxes - or inflation - with which government economic activities are financed create substantial distortions in the private economy, penalize the nation's most productive elements, and destroy economic incentives to a degree not fully appreciated by those outside the business community.
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 The burden of government can destroy the competitiveness of the private economy.
  Moreover, overall competitiveness is reduced. With a few minor partial exceptions - mainly in the realms of military and space technology - government efforts to deliver goods and services increase the nation's imports while reducing, rather than increasing, the ability of the nation's businesses to compete in international markets. This, of course, adversely affects the nation's balance of payments and can lead to reductions in the purchasing power of the currency. The export-import trade is today up to about 25% of  total economic activity in the U.S., and constitutes a strategically vital economic segment with a disproportionate impact on the economy as a whole.
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  As Japan has found out in the last decade, government economic activity is not an alternative to private economic activity, and can become an intolerable burden on a nation's economy.

Econometric Models

  Macroeconomic econometrics is like the billiard players' hell - where the doomed are forced to play "on a cloth untrue, with a crooked cue, and elliptical billiard balls."

 Inherent weaknesses in macroeconomic econometrics:

 

 

Accounting cannot provide valid economic data.

 

 

Income reporting is purposefully inaccurate.

 

 

 

 

The dollar is a fluctuating unit of measure.

 

 

 

 

 

 

 

 

 

 

 

 

 

  

The theoretical bases of the mathematical models are broadly invalid.

 

Some elements can't be expressed as equations.

 Macroeconomic econometrics - the effort to develop a mathematical model of our complex economic system - has glaring limitations. Not surprisingly, macroeconomic econometrics has had few successes in its several decades of use. None of the econometric models has had much success in predicting the economic turning points needed by those who believe that Keynesian economic policies can render the business cycle obsolete.

  • GIGO: The most basic law of mathematical models is GIGO (Garbage In, Garbage Out). 
  • Accounting: As explained above, accounting is too nebulous a practical art to provide accurate and comparable economic statistics. At best, business statistics must all be individually evaluated in light of the unique characteristics of each business and its accounting methods. Similar weaknesses are found in most other sources of economic statistics. Thus, economic statistics cannot be viewed as anything more than evidence - general indications - of economic direction and pace.
  • Income reporting: Even beyond the limitations of accounting - until the millennium when businessmen will strive to pay all taxes due - income reports submitted to the IRS can never be considered models of candor and accuracy - and data derived from them must be considered suspect.
  • Alternative reporting methods: Financial reporting, regulatory reporting, and government contracts reporting all have weaknesses that add to the unreliability of the income statement. Increasingly, corporations are providing "pro forma" income statements that are supposedly more accurately showing how the business is actually doing.
  • The dollar: The unit of measure - the dollar - has in the recent past repeatedly swung up or down against key foreign currencies by as much as 20% in relatively brief periods, causing vast and cumulative disturbances throughout the economy. Inflation adjustments are notoriously inaccurate. While the dollar has achieved a measure of stability at present, past fluctuations make comparisons over time in excess of a decade quite inaccurate. Trying to measure the dimensions of our complex economic system in terms of dollars is like trying to measure the Taj Majal using a ruler drawn on a stretched rubber band.
  • Increases in variety and quality escape evaluation.
  • Even comparability between aggregates of the goods and services of today and of yesterday tends to diminish over time. Today's figures are not comparable with the figures of 25 years ago, when there were no personal computers, VCRs or compact disk players in the consumer market basket. There was no internet, and automobiles got half the mileage, lasted half as long, and had half the interior amenities of today's vehicles. For example, the common practice of comparing household income during the quarter century after 1973 to support the assertion that the bottom 20% suffered a decline in living standards appears ludicrous next to the substantial increase in air conditioners, microwave ovens, color televisions, VCRs, compact disk players, and even personal computers, obtained by those households over that period. The average floor space for all segments of the home and apartment markets have increased markedly in the last 25 years.
  • There is a huge gray and black market that escapes evaluation. Best estimates of the cash gray market start at 15% of measured gross domestic product for developed nations - amounting to over $1 trillion for the U.S. - and as much as 80% for underdeveloped nations. Also excluded from the statistics are such non cash activities as barter transactions, and sweat equity and other self help activities that are so important for small business operations and individual well being.
  • Government input and government output are two vastly different figures.
  • Theory: To the extent that econometric models are premised upon the concepts of Modern (Keynesian) Economic Theory, they inevitably share the invalidity and unreliability of that theory. The reliability of mathematical models can obviously be no greater than that of the underlying theory.
  • Limits of mathematical reasoning: Elements that cannot be expressed as equations - no matter how important or outcome determinative - are routinely omitted. Problems of measurability and definition are frequently insoluble.

Mathematics and the "Science" Propaganda Ploy.

 Enmeshed in the "science" propaganda ploy:

   Economics and sociology have become increasingly dependent on mathematical forms of analysis, but these efforts are rendered ludicrous by the impossibility of accurately measuring or calculating most of the pertinent outcome determinative variables.
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The effort to measure aggregates that can't be measured interferes with the essential task of professional evaluation.

  Efforts to turn nonscientific practical arts into "sciences" for propaganda purposes of enhanced professional prestige and credibility began in the 19th century and, unfortunately, will continue unabated into the 21st century.

  • WW-I - undoubtedly the most stupidly fought war in history - was the product of military "science."
  • Marxists claimed "scientific" precision for their economic theory, as did the Keynesians who led the United States into the decade of economic instability - and double digit inflation, unemployment and interest rates from 1972 to 1982. The bankruptcy of much of the third world between 1975 and 1985 was also the result of massive credits encouraged according to "scientific" socialist and Keynesian theories.
  • Political "science" and social "science" are taught in our universities without any effort to examine the gross limitations of the government decision making processes upon which policy recommendations are generally dependent. Benchmarks used to determine success or failure generally ignore the efficiency or sustainability of programs initiated or proposed, and sometimes amount to nothing more than irrelevant "body counts."
  • Even History has been absurdly presented as a "science" by a noted scholar in a recent Pulitzer Prize winning book.

  Deceptions, intentional or unwitting, by economists and sociologists engaged in the intellectual discourse on public policy will remain a major problem as long as these fields continue in thrall to the "science" propaganda ploy and to the effort to reduce professional analysis to mathematical calculation.
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  See "Ordinary lies, damn lies, and statistics" above, and "Capital as Purchasing Power," segment on "Advocacy scholars."
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  Economic and sociology statistics are too inaccurate for anything resembling scientific purposes. The appearance of precision in these aggregate statistics is a deception. These statistics are indeed very useful - but only for purposes of evaluation, not for use as actual measurements. The statistics can do no more than assist in the evaluation of trends and the determination of whether these trends are accelerating or decelerating, beginning or ending.
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   Indeed, aggregate econometric models have proven so unreliable that not even the economists who work with them will vouch for their accuracy any more. See, Hendry and Ericsson, "Understanding Economic Forecasts." In sociology, too, we see efforts to measure the immeasurable and create ludicrous indexes of sociological phenomena.
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The efforts to enhance professional prestige by the deceptions of the "science" propaganda ploy have proven to be far from harmless.

   The ability to predict outcomes is the ultimate test of scientific theory. However, the published predictions and expectations of modern economic theorists have failed so miserably that many of these economists are now reduced to the ludicrous assertion that economic theory should not be judged on the basis of its ability to predict outcomes - that economic theory is somehow different and must be accepted as valid even if it never successfully predicts anything.
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The tendency to believe one's own propaganda is one of the classic mistakes of the propagandist. All of the phony social "sciences" have suffered substantially from efforts to live up to their "scientific" image. Theories that are not based on mathematical reasoning are routinely ignored. Perfectly reasonable - and indeed clearly superior - objections to statistically and mathematically based reasoning are routinely rejected if they are not based on mathematical reasoning. Anything that cannot be expressed as an equation is ignored, efforts are made to measure the immeasurable and calculate the incalculable, and evaluations are often based on phony "body count" benchmarks and indexes.
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  Indeed, the world has suffered immensely due to the professional limitations of those authorities who limited their professional understanding to the bounds of their "scientific" knowledge and insisted beyond reason that obvious objections be rejected.
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  As pointed out above - World War I - the inflationary dislocations of the 1970s - the extensions of massive credits that bankrupted many third world nations in the 1970s and 1980s - and decades of decline and despair for billions of people afflicted with socialist and other command economy schemes were all justified and facilitated by authorities acting on purportedly "scientific" principles.
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  The efforts to enhance professional prestige by the deceptions of the "science" propaganda ploy have proven to be far from harmless.

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Copyright 2001 Dan Blatt