Special Report: May 15th 2003

The Science of the Economic Smokescreen  (Part 1 of a series)

    "The economy is falling, the economy is falling!  The unemployment rate is high, consumer confidence is low..."  Quotes like these are a dime a dozen and are present in newspapers on a daily basis.  Is this a realistic view based upon facts and historic trends or alarmist reactions?

    First, economics, is a scientific study based upon various inputs or simply, a theory.  Each economist has an "economic theory" which is derived from many (or few) sources of data. On any given day if you compare two or more business reports in publications you will find a fairly substantial divergence.  If you elect to omit (or add) figures for one reason or another you will arrive at a very scientifically accurate set of numbers which may or may not have any relevance.

    For instance if I am interested in finding out how many people at an apple pie competition like apple pie I could take a survey.  To my surprise I may find that out of those people I find some 70% or higher might like apple pie (perhaps even 90%)!  I could say, with scientific certainty that, "most people polled like apple pie by over 70%."  Is this truthful?  Perhaps in one context.  Accurate?  Maybe not.  Statistics are another tool employed by some to prove a point using "facts."  

    Statistical estimation is a science that revolves around a principle known as a "sample."  What is that? A sample is an arbitrary amount (percentage) that is supposed to provide an accurate picture of something much larger but with a few data points.  In a nutshell the "size" of the sample is calculated in various highly complex ways all based upon a type of bell curve known as a "Z-Table."  Most people that use statistics do not even know how a Z-Table is made other than the fact of it's existence.  Nevertheless, it forms the basis of the science.

    Let's see how it works.  If I want to find out how many Lakers fans there are at any given time I could survey each living person in the world and gather a number.  That is a little tough so we may want to use statistical estimation instead.  If I use the various models of statistics I may come up with a number that I need to survey to have a "confidence" of outcome.  In this case, how many Lakers fans exist.  If I go to a Lakers game and survey, or sample, 100 out of several thousand I might get a number, say 65 that like them (if the game is in L.A.).  I might then use my trusty Z-Table and formulas to then say that, "over 79% of people like the Lakers."  As the theory goes, if I sampled, say, 1000 people I would still get roughly the same percentage.  That is statistical estimation.  Does it matter that I sample only a few and that where and when I take the sample could have an effect on the "scientific" outcome?  Sure it does!  Definitely the folks in Minnesota would give quite different results!

    When you see numbers, like, "48% agree" or "81% oppose" realize that those numbers, no matter how elaborately gathered and calculated, may either be purposefully or ignorantly tainted to prove one's point of view.  These are used as scientific smokescreens and tools of scientific persuasion.

   So, back to the topic.  What is the economy really like?  Where are we at and where are we heading?  Shall I quote numbers as well?  Would they mean anything?

   It is better to examine trends to get a more accurate picture, so, back to the Lakers.  We know that the Lakers have won three back to back championships.  We know that although they have some current problems and injuries, they are in the playoffs and could win a fourth.  They are not looking their best right now but are trudging ahead.  So if I were to look at the trend or use another tool of statistics, the least squares line, I might come up with a 73% chance that they will win another championship this year for four in a row.  Could they lose?  Of course, they just lost.  Is the number accurate?  Yes, if they were to win, no since they fell into the other 27% and lost!

   There are some economic numbers that are somewhat firm and we can track them, like housing starts or similar.  There are other numbers such as the unemployment rate that comes from many sources such as new applications for unemployment but does not provide a completely accurate figure.  After all, how many people, suddenly unemployed, report it at all.  Some are laid off, some quit, and some leave to start a family or go back to school.  We can not even track illegal aliens since we do not even have an accurate number!  Do you think that those millions matter in the calculations (remember I said millions)?

  We can not discuss the current state of the economy without first addressing the single largest event that still has repercussions in the economy today; the dot coms (or dot con's or dot bombs ) of the late 90's.  First we need a timeline.  In the later part of 1991 (before Clinton was elected) is where most economists agree is the beginning of the previous boom cycle.  President Clinton inherited a perfectly primed economy which he clearly rode during his terms.  The economy steamed ahead and the concept of the "surplus" was born.  In short, and in reality the "surplus" was only a projection on paper that "might" exist in the future (about 2007) if, and only if, the current trends in the market continued at the same unprecedented and unsustainable pace that flourished between 1997 and 1999.  The dot coms, for the most part, were a self generating manic high that was perpetuated by nothing but the allure of instant wealth through uncontainable stock price escalation.  Most of the companies (some 85%) that were pushing the stock market bubble were not capable of sustained operations in any classical environment nor did they produce a service or product that was either necessary, useful, or even remotely desired.  The few companies that survived the inevitable fallout have done so through a sort of natural selection process.  Most individuals who ran off the dot com cliff had no more sense than the gambler who risks everything on the assumption that they can not lose.  There was no forethought and the companies who turned a dollar on each stock transaction did not bother warning the customers of the risks -- why rock the boat?

    Even worse, the artificial inflation of stock prices and general awareness created a large amount of jobs and pulled many into the technology career path who otherwise might not have pursued the field.  How is that bad?  The rapid expansion and the changes created a large vacuum in the job market once the collapse occurred.  This created the ripple effect throughout the economy that has skewed the unemployment rate.

    The official end of the previous boom cycle is documented to be some four months before the election of George W. Bush contrary to what most would like to believe -- the facts are clear.

    What's next?  In, California, Governor Grey Davis has focused on the abolishing of the 2nd amendment instead of spending more than a few minutes to avert the double digit billion dollar deficit in favor of his fund raising functions or photo shoots.  The trend is clear for California, the people are going to have to pay dearly through a heavy tax burden for the careless mistakes and deceitful practices by the current California leadership.  Regardless of the spin, California companies faced with an even heavier tax debt are leaving the state in record numbers.  This will damage the state's economy at an accelerated rate -- so much for the facade of competent leadership.

    What are some signs that give us an accurate picture?  Gas prices are dropping and stabilizing, stock prices are slowly but surely rising and most importantly creating an increasing value base.  The military battle for Baghdad is over and domestic travel is soon to be on the rise as Summer approaches.

    Next time, when the gloomy economic articles paint the headlines on newspapers and magazines, perhaps by using a discerning eye the truth might be gleaned through the alarmist smoke.