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Friday, August 6, 2010

Duped by Unethical Statistics?

By Ron Robins, MBA

How did the developed world economies come to be in such a mess? It seems that revisions to key US statistics over the past three decades may have played a significant role in fashioning an illusion of unbounded prosperity. Inflation and unemployment rates were lowered and a brighter spin on the gross domestic product (GDP) fashioned. Unaware of the subtleties of many statistical changes, the media, investors, and the general public believed in a new golden era of an ever increasing GDP.

This golden economic era even had a name: the ‘Cinderella economy.’ Believing in the illusory Cinderella economy, people made financial and economic decisions that many subsequently regretted as they saw their homes and stocks plunge in value. They were uneducated about, and duped by statistics that helped lead them astray. These statistics are thus, ‘unethical statistics.’

Chief among these revisionist statistics is the Consumer Price Index (CPI). Most people believe it is the measure of inflation. But the way it is now constructed makes it a ‘cost-of-living-index.’ The two are very different from each other. Inflation, technically, usually means inflation of the money supply and might be evidenced by rising prices. And rising prices are observed by monitoring the same products and services from period to period to period!

Read it all here.

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