[MegaButts]

Out of curiosity, how reliable are all of the metrics we use for measuring economic health? For instance, how reliable is the unemployment rate when it is a highly political number with lots of incentives to misrepresent (ie the chronically unemployed are excluded from the count)? Beyond that, how much are these indicators just fudged or straight-up lied about?

Everybody is happy to agree with me when I say that China fudges their numbers, but when I say other countries are capable of the same thing they tell me I'm crazy. I am not an expert on China by any means, and I don't believe other countries report their economic health in the same way; but I also don't buy that everything the US and other western countries say is gospel.

[andrewla]

There's a name for the phenomenon, Goodhart's Law [1]. Generally, once a metric is used for decision making, it no longer reflects the phenomenon that it is attempting to measure.

Making it much more complicated is the fact that methodologies vary from year to year, and are often created by averaging data from a number of different sources. I've become fairly convinced that almost all macroeconomic measures are so flawed that using them in almost any dimension (across time, between countries) is useless. It may be that everyone involved in creating the overall measures is acting in good faith, rather than some politically motivated conspiracy, but still in aggregate create data that does not reflect reality in a useful way.

The exceptions tend to be metrics that require skin in the game to shift -- the yield curve inversion or S&P500 index, for example, are fairly real, since shifting them would cost a ton of money.

[1] https://en.wikipedia.org/wiki/Goodhart%27s_law

[jedberg]

> The exceptions tend to be metrics that require skin in the game to shift -- the yield curve inversion or S&P500 index

I agree with you on the S&P500, but isn't the yield curve fairly easily manipulated by the Federal Reserve and their rate setting activities?

[rossdavidh]

I think the idea is that would impact more than just the politics, it would actually impact the rate of interest banks and others pay, so there is incentive to disregard the politics at least to some degree.

[nickpinkston]

The unemployment rate is definitely not the whole picture and is kind of a BS metric.

I think you'll find the Labor Force Partcipation Rate gives a more accurate assessment of what you're looking for.

"Make-Believe America: Why the US Unemployment Rate Doesn’t Indicate Economic Recovery"

https://www.foreignpolicyjournal.com/2018/03/08/make-believe...

[seansmccullough]

I'd go even further and say the 25-54 year old workforce participation rate is a better metric, since the regular workforce participation rate is influenced by demographic changes (i.e. the baby boomers retiring).

https://fred.stlouisfed.org/series/LNS11300060

[kasey_junk]

The markets watch the BLS numbers like crazy and compare them to estimates from private sources that come from a wide range of methodologies. Frequently the big moves in the markets are not triggered by the bare numbers but from the difference between the expectation and the numbers.

If there was a systematic fudging of those numbers lots and lots of people would notice.

[theturtletalks]

You're right, but what if revealing the discrepancies wouldn't be beneficial to the company? Many people knew about the subprime mortgages before the 2008 recession and no-one came forward, although some shorted it.

[kasey_junk]

I worked in that industry during that time period and its just not true that no one came forward. As early as 2003 Warren Buffett straight up called them “weapons of financial destruction”. In 2005, the World Bank released a report suggesting that the derivatives the banks were holding could cause a financial crisis.

I remember the day the yield curve inverted in 2005 because I was working for a company that made risk assessment software for MBS. Our call center blew up as the reports started showing how risky balance sheets were.

It’s a nice story that Michael Lewis writes in “The Big Short” about how only a few people made money shorting the crisis but a) its largely not true and b) its more the fact that shorting isn’t nearly as easy as HN seems to think it is.

[omarhaneef]

To underscore the point you are making, part of the drama of the The Big Short was the creative ways people had to find in order to short that particular market (or those markets. I think one group shorted credit spreads and another was shorting an index of derivatives tied to the mortgages? Been so long since I read it).

[theturtletalks]

You’re right, it’s a bit much to say no-one came forward, but enough wasn’t done to catch what was going before it came crashing down. The comment I was replying to was implying people would notice discrepancies and we would be able to catch it.

[kasey_junk]

If Warren Buffet & the World Bank said that the BLS was cooking the books I bet it would be a big deal.

[graeme]

Lots of people gave warnings. I was reading warnings about it in the Economist for years.

It was a damned complex system and so is the economy. A lot of stuff is only fully obvious in hindsight.

You also have the problem of knowing who to listen to. Many people are warning about many things right now. Some are prescient, some are wrong. How to judge?

2008 could have been better predicted and better prevented, but it's false to say no one warned.

[acdha]

It’s also worth remembering just how much money was at stake: everyone who stayed in was going to make a lot more until the crash so there was an enormous incentive to tell yourself that you could time it tightly. If the people making those calls get their bonuses now with little perceived long-term personal risk, that dynamic gets even more toxic.

[rdtwo]

A lot of people do notice but it’s not something that is tradable because you don’t know when the correction will happen or how the rules will change when it does

[amayne]

One difference is that in the US and other Western countries is that these metrics don’t only come from one state-authorized authority. Investment firms, news outlets, economists routinely check these metrics and offer their own. In China, someone saying that the government is wrong, won’t get much traction. Dissenting Chinese economists are actively censored.

While information freedom doesn’t mean the official metrics are accurate, lack of freedom is a warning sign and should be treated with extreme skepticism.

[JamesBarney]

The U.S. isn't perfect, but it's not China.

Also most of the important numbers that the average person cares about such as inflation or unemployment are collected in a very rigorous way that is hard for a government officials to modify without leaving a damning paper trail. Not to mention the vast majority of private measures match up with these numbers.

These measures are by no means perfect. The unemployment rate has significantly over estimated the health of the economy since the great recession, but this isn't due to a conspiracy. It's caused because it systematically under counts people who have dropped out of the labor force, or are under employed. (This is for the most popular unemployment rate number, there are much better employment numbers to use that don't suffer from this issue.)

[rdtwo]

Inflation is super easy to game and everyone wants to push that number as low as possible. The basket used for inflation is ever changing and the percentages aren’t real. For example medical costs are intentionally significantly under counted, and how do you objectively qualify how much better a lcd tv is than a crt tv?

[navigatesol]

>the chronically unemployed are excluded from the count

This is untrue. There are various measures of unemployment, each of which includes/excludes different factors. Believe it or not, some people actually use this data for work, and sometimes not including, say, people who aren't even looking for work, makes sense depending on what you're analyzing.

>Everybody is happy to agree with me when I say that China fudges their numbers, but when I say other countries are capable of the same thing they tell me I'm crazy

I know folks who work for StatsCan and the BLS. You should provide evidence before accusing hard-working people of corruption. There's nothing intellectual about pointing to random things and saying, "could be a conspiracy!" Yeah, anything could be.

[webninja]

There are rumors that the unemployment rate is now skewed by counting people with 3 jobs as “3 jobs”. They simply divide the total number of jobs by the total number of people to get the unemployment rate. This would explain the unusual growth in restaurant and hospitality jobs. I don’t know if this is true or not but any metric that becomes a target ceases to be a good metric.

[foota]

You can look at different measures of US unemployment, the top line number I think is normally "those looking for jobs but unable to find them" but there are a number of other metrics as well.

[bhouston]

The only problem is the government first uses an estimate and the later retroactive adjusts the number I believe.