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National Income Statistics: A Critique of Macroeconomic Aggregation
Serious critique of data aggregation because of questions about its accuracy and utility. "He noted that collectors and compilers refused to deal systematically with the issue of accuracy and that users had no way of assessing the data's validity." (from the Foreward). 44 pages.
47 pages, Paperback
Published January 1, 1979
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November 6, 2023
A CRITICAL ANALYSIS OF THE WAY THAT ‘NATIONAL INCOME’ IS COMPUTED
Editor Roger Garrison wrote in the Foreword to this 1979 book, “The critical assessment of the collection and use of economic statistics was one of Oskar Morgenstern’s major undertakings during his long and productive career. ‘On the Accuracy of Economic Observations’ first appeared in print in 1950. A second edition of this book, completely rewritten… appeared in 1963. The present volume offers an especially relevant---in view of the macro approach of many economists today---excerpt from the 1963 edition… Morgenstern’s work gives us a healthy perspective on those modern positivists who are always insisting that economic theories be ‘tested’ statistically… But it could be argued instead that positivist theory tested with statistical aggregates is a case of the blind leading the blind.”
Morgenstern begins, “In this discussion we shall examine the question of the accuracy of the national income estimates… Our concern will be primarily with data for the United States because they are plentiful; and American writers have been pioneers in the establishment of national income statistics. The problems can be most clearly seen in examining American statistics.” (Pg. 1)
He notes, “In the notion of a ‘national income,’ most difficulties of economics culminate. The ‘Wealth of Nations’ has been the prime concern of economists as long as there has been any systematic writing in economics… Neither the conceptual nor the statistical problems in this field have been resolved to anyone’s satisfaction… The two areas are interdependent, since nothing can be measured for which there exist no good concepts, and concepts… are of little practical value if the corresponding measurements cannot be performed.” (Pg. 3)
He continues, “Difficulties of this type are quite common; they become especially important when comparisons over time or among differently organized countries are to be made.” (Pg. 5) He continues, “The main problem in getting from gross national product to national income is posed by DEPRECIATION ALLOWANCES… [which] are made by corporations themselves, guided by the rather unrealistic assumptions underlying the tax laws and their own often inappropriate ideas…. Another main conceptual difficulty which leads to problems in making the actual estimates is the valuation of services performed by financial intermediaries and the imputed interest that arises therefrom… conceptual differences held among statisticians at different times and in different countries are bound to have decisive influence upon these statistics.” (Pg. 7)
He outlines, “There are three principal types of error in the statistics of national income. FIRST, there are the errors introduced in the basic data of production or expenditure for the separate industries and other economic activities… SECOND, effort may be produced independently of enumeration or sampling difficulties. These errors result from the effort to fit the available statistics to the conceptual framework of the aggregate… THIRD, since not all basic data are available, another type of error is introduced in trying to fill in the gaps for those industries and years where estimates are not known. Methods such as interpolation, extrapolation, use of imputed weights, inserted trends, and ‘blowing up’ of sample data and are used in order to fill in missing data which introduce uncertainties of their own.” (Pg. 10-11)
He explains, “It behooves us to pause in order to see what even a 5 percent difference in national income means. Taking the United States and assuming a gross national product of about $550 billion, this error equals +or- $30 billion. This is more than twice the best annual sales of General Motors, the country’s … largest industrial corporation. It is far more than the total annual production of the entire electronics industry in the United States. Yet we have seen that a 10 percent error is even more reasonable… these are amounts now used in order to estimate and predict the future performance of the entire economy and to justify far-reaching policy measures.” (Pg. 18)
He states, “There are three basic criteria by which to judge the reliability of quarter-to-quarter changes of the national income series. The FIRST is the extent and nature of ‘bias’… the extent to which the initial estimates tend to be too high or too low on the average… The SECOND is a measure of the extent of the average revision, i.e., a measure of the firmness of a given quarter-to-quarter percentage movement. THIRD, one may consider the proportion of the times the first estimates of change fail to give the ‘correct’ DIRECTION of movement.” (Pg. 27-28)
He asserts, “we conclude that while most United States national income series are relatively free from bias, there are large differences in the firmness of these series. When reliable estimates of the direction in which the economy is moving are needed and when such estimates are to be obtained from national income series, the firmer series should prove to be the better indicators.” (Pg. 34)
He concludes, “Summarizing, we can state that statistics giving international comparisons of national incomes are among the most uncertain and unreliable statistics with which the public is being confronted. The area is full of complicated and unsolved problems, and in spite of the great efforts to overcome them, the progress is slow. This is a field where politics reigns supreme and where lack of critical appraisal is particularly detrimental.” (Pg. 44)
This book will interest those concerned with how such statistics are developed.
Editor Roger Garrison wrote in the Foreword to this 1979 book, “The critical assessment of the collection and use of economic statistics was one of Oskar Morgenstern’s major undertakings during his long and productive career. ‘On the Accuracy of Economic Observations’ first appeared in print in 1950. A second edition of this book, completely rewritten… appeared in 1963. The present volume offers an especially relevant---in view of the macro approach of many economists today---excerpt from the 1963 edition… Morgenstern’s work gives us a healthy perspective on those modern positivists who are always insisting that economic theories be ‘tested’ statistically… But it could be argued instead that positivist theory tested with statistical aggregates is a case of the blind leading the blind.”
Morgenstern begins, “In this discussion we shall examine the question of the accuracy of the national income estimates… Our concern will be primarily with data for the United States because they are plentiful; and American writers have been pioneers in the establishment of national income statistics. The problems can be most clearly seen in examining American statistics.” (Pg. 1)
He notes, “In the notion of a ‘national income,’ most difficulties of economics culminate. The ‘Wealth of Nations’ has been the prime concern of economists as long as there has been any systematic writing in economics… Neither the conceptual nor the statistical problems in this field have been resolved to anyone’s satisfaction… The two areas are interdependent, since nothing can be measured for which there exist no good concepts, and concepts… are of little practical value if the corresponding measurements cannot be performed.” (Pg. 3)
He continues, “Difficulties of this type are quite common; they become especially important when comparisons over time or among differently organized countries are to be made.” (Pg. 5) He continues, “The main problem in getting from gross national product to national income is posed by DEPRECIATION ALLOWANCES… [which] are made by corporations themselves, guided by the rather unrealistic assumptions underlying the tax laws and their own often inappropriate ideas…. Another main conceptual difficulty which leads to problems in making the actual estimates is the valuation of services performed by financial intermediaries and the imputed interest that arises therefrom… conceptual differences held among statisticians at different times and in different countries are bound to have decisive influence upon these statistics.” (Pg. 7)
He outlines, “There are three principal types of error in the statistics of national income. FIRST, there are the errors introduced in the basic data of production or expenditure for the separate industries and other economic activities… SECOND, effort may be produced independently of enumeration or sampling difficulties. These errors result from the effort to fit the available statistics to the conceptual framework of the aggregate… THIRD, since not all basic data are available, another type of error is introduced in trying to fill in the gaps for those industries and years where estimates are not known. Methods such as interpolation, extrapolation, use of imputed weights, inserted trends, and ‘blowing up’ of sample data and are used in order to fill in missing data which introduce uncertainties of their own.” (Pg. 10-11)
He explains, “It behooves us to pause in order to see what even a 5 percent difference in national income means. Taking the United States and assuming a gross national product of about $550 billion, this error equals +or- $30 billion. This is more than twice the best annual sales of General Motors, the country’s … largest industrial corporation. It is far more than the total annual production of the entire electronics industry in the United States. Yet we have seen that a 10 percent error is even more reasonable… these are amounts now used in order to estimate and predict the future performance of the entire economy and to justify far-reaching policy measures.” (Pg. 18)
He states, “There are three basic criteria by which to judge the reliability of quarter-to-quarter changes of the national income series. The FIRST is the extent and nature of ‘bias’… the extent to which the initial estimates tend to be too high or too low on the average… The SECOND is a measure of the extent of the average revision, i.e., a measure of the firmness of a given quarter-to-quarter percentage movement. THIRD, one may consider the proportion of the times the first estimates of change fail to give the ‘correct’ DIRECTION of movement.” (Pg. 27-28)
He asserts, “we conclude that while most United States national income series are relatively free from bias, there are large differences in the firmness of these series. When reliable estimates of the direction in which the economy is moving are needed and when such estimates are to be obtained from national income series, the firmer series should prove to be the better indicators.” (Pg. 34)
He concludes, “Summarizing, we can state that statistics giving international comparisons of national incomes are among the most uncertain and unreliable statistics with which the public is being confronted. The area is full of complicated and unsolved problems, and in spite of the great efforts to overcome them, the progress is slow. This is a field where politics reigns supreme and where lack of critical appraisal is particularly detrimental.” (Pg. 44)
This book will interest those concerned with how such statistics are developed.
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