Hogan's Alley

Tuesday, July 24, 2007

Economic Data, Of Elephants and Blind Men

A famous poem by the 19th century Englisman, John Godfrey Saxe, retells the Indian legend about the group of blind men who encounter an elephant. Each touches a different body part and concludes that he knows the true nature of the beast. Each of course, comes to a different conclusion.

I am reminded of this story by today's column by David Brooks and a response by the "progressive" economist, Dean Baker, at the American Prospect.

Brooks proposes that there are signs in the economy that indicate that things are not as bad as what he calls the "neopopulists" among the Democratic presidential candidates would have us believe. Happily for those blocked from seeing Brooks by the TimesSelect wall, Baker quotes Brooks' essential points in his rebuttal.

Baker's contention is that Brooks is essentially wrong on every point, "David Brooks Sets Record For Most Economic Errors In An Oped Column!" (Emphasis entirely Dr. Baker's.)

My humble, non-economist reading of both pieces gives me the impression that both are looking at the same data, but that one is finding the glass half full, while the other finds it half empty. Brooks is not an economist. He uses imprecise terminology, as befits the generalized audience he seeks to reach. He is making political points, not writing a dissertation. For his part, Baker seems to feel obliged to find problems in everything Brooks says, even when he cannot provide any rationale for his assertion that Brooks is wrong.

For example, Baker writes the following:

1) Brooks says "after a lag, average wages are rising sharply. Real average wages rose by 2 percent in 2006, the second fastest rise in 30 years." The Bureau of Labor Statistics shows that the average hourly wage is 1.2 percent higher than its year ago level and still below its December 2002 level. That's almost five years of zero growth. In the late 90s, real wages were growing 1.6 percent annually.

Firstly, if you follow the ostensible link to the BLS statistics, you will learn that the survey in question, "...does not exist". I presume that this is just an error in the posting of the link site, not an attempt by Baker to mislead his readers. In any event, he chooses to not directly contradict Brooks' assertion about the 2006 increase in real wages. Rather he focuses on the lack of growth over the previous five years, which Brooks acknowledged. It would be interesting to know if both men are talking about the same data that one claims shows a 2 percent growth and the other a 1.2 percent growth. In either event, some progress in wages is apparently now being made. Half full or half empty?

Then we have this extraordinary point from Baker:

2) Brooks then cites Brookings economist Ron Haskins' assertion based on data from the Congressional Budget Office that "between 1991 and 2005, 'the bottom fifth increased its earnings by 80 percent'." If we turn to the CBO study (Figure 2), we find that earnings for the bottom fifth of families with children actually increased by 120 percent (welfare reform), but this was between 1991 and 2000. Earnings for this group has fallen by about 20 percent in the last five years.
So Brooks claims an 80% increase in earnings for those at the bottom of the earnings ladder. Baker claims the same data shows 120% increase, which has now gone down by 20%. Doesn't that mean that Baker's view of the data shows better earnings for the poorest workers than even Brooks claimed? Given the new raise in the minimum wage, aren't those earnings likely to increase even more? Apparently Brooks understated his own case.

And so it goes. Baker asserts error in all eight of Brooks' points, but he only attempts to contradict some, and does that badly. Here's one where he doesn't even try:

5) Brooks tells us that the increase in inequality is due to the more frequent use of "performance pay" -- yes, like the $200 million that Home Depot CEO Bob Nardelli got paid to leave after mismanaging the company for two and a half years.

Brooks appears to be relying on some data reflecting the broader use of pay rates tied to performance. His sentence, not quoted by Baker reads, "Fifth, companies are getting more efficient at singling out and rewarding productive workers. A study by the economists Thomas Lemieux, Daniel Parent and W. Bentley MacLeod suggests that as much as 24 percent of the increase in male wage inequality is due to performance pay." Baker chooses not to contend the data, he simply grabs one example of egregious overpayment. Yet he claims Brooks is wrong.

The truth, which applies to both men, but, I think, especially to Dr. Baker, is that the nature of economic data is that it is not definitive unto itself. It requires interpretation. Interpretation is an art that is very subject to the biases and perspectives of the interpretor. Harry Truman is alleged to have complained that whenever he would pose a question for an economist, the response would be, "Well, Mr. President, on the one hand ... And then again, on the other hand ..." "What this country needs," Truman said, "is a good one handed economist."

In this current example, I think it is most illuminating to read Baker's penultimate paragraph. Apropos of nothing in particular, he writes:

It will be great when the proponents of the current trade agenda stop arguing against straw men in making their case. No one is advocating autarky. Suppose we had globalization with complete free trade in intellectual products (e.g. no more patent and copyright protection) and huge efforts to eliminate the barriers that sustain the wages for highly paid professionals in the United States (e.g doctors, lawyers, accountants, and economists). This would lead to huge economic gains and greater equality.

Well, I suppose he does have his academic credentials to uphold. Here is the Wikipedia definition of autarky for the rest of us. As for the assertion that income equality is so primal a value that it trumps intellectual property rights and demands the shrinking of pay for professionals, I think that has been tried. It was called the Soviet Union. Perhaps Dr. Baker believes that they only failed because they didn't properly inculcate the masses on their obligation to write novels and invent new processes and machines for the good of the people. Maybe the Taliban had found a more effective means of enforcing behavior that is not naturally human. They were, after all, doing just fine until the crusader armies intruded on their paradise. Perhaps if we started loping off a few overfed heads at Yankee Stadium the creative types would get the message until proper indoctrination could produce a generation of selfless workaholics to generate the economic gains Baker envisions.

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