Mine of 14 December 2015

Simon Wren-Lewis's of 13 December -- "Using economic statistics in an impartial and informed way" -- is his draft submission to the BBC Trust (whatever that is) on the topic of using economic statistics in an impartial and informed way. Without going on a limb, I think I can safely say Simon is in favor of using economic statistics in an impartial and informed way.

Me, too.

I like his post. Mostly I like it because, in the opening paragraphs, when Simon needs an example he uses debt. And not only government debt, but also personal debt. That's good. That's progress. Not only government debt.

I do like the post also for Simon's position on his topic. Here, here's his opening:

I would just like to make a few specific points about the use of economic and financial data. This data should be presented in a way that informs the public, rather than in a way that is meaningless to everyone except experts, or worse still in a way that fosters some political position.

Oh.

Yeah.

Of course. But is there anyone who would say the opposite? Anyone who would say outright that it's bad to inform the public? Is there any rational (cough) person who would openly admit to using economic data to mislead people for political gain? I don't think so. That's the sort of thing people only say about other people.

I suppose it doesn't hurt once in a while to say out loud the thing that Simon Wren-Lewis is saying. But to my ear, what Simon says goes without saying. I want to talk about something else. I want to talk about debt and context. Simon says:

... I have seen a well known BBC financial journalist quote, without qualification, numbers for how much UK government debt is increasing every day, in a manner that is clearly designed to suggest that this is a very serious problem. But numbers like this are meaningless on their own...

Mistakes like this could be avoided to a large extent by applying some normalisation. To return to the debt example, numbers for debt and deficits should routinely be given as shares of GDP... An alternative normalisation that would make such figures more meaningful would be to divide them by total household income. Figures for aggregate personal debt should always be normalised with respect to household income, because only then can we really see if rising debt is something we should be concerned about, or just the result of growing incomes

Now we're talking.

Here, look at this:

numbers for debt and deficits should routinely be given as shares of GDP

and this:

An alternative normalisation that would make such figures more meaningful would be to divide them by total household income.

Simon wants to see the numbers in context. (So do I.) He explains:

Figures for aggregate personal debt should always be normalised with respect to household income, because only then can we really see if rising debt is something we should be concerned about, or just the result of growing incomes

He wants to see debt in relation to income -- government debt in relation to GDP, personal debt in relation to personal income.

But Simon says not everything should be put in the context of GDP. GDP, for example. Simon would put GDP in the context of population. "Per capita growth is much more relevant for the public," Simon says, "because it is closer to how fast average incomes are growing."

I agree with Simon when he says context is important. I agree when he says GDP (or income) is not always the best context. But for debt, oddly, Simon would "routinely" use GDP or income as the context. I would not.

"Routinely" -- That mean something like "without having to stop and think about it". That's a problem. Using GDP for context without ever stopping to think about it is just as bad as providing no context at all: just as thoughtless, and possibly just as wrong.

But you cannot know if it's just as wrong, unless you stop and think about it.


Sometimes an employer will borrow money in order to meet payroll. When the employer hands out the paychecks he is creating income. Do you think this newly created income provides a good "context" for debt? I don't. It's new debt that created the income. Use income as a context for debt and you are looking at how much of the debt was used to create new income, and how much was not. Not very useful.

If you stop the economy and look at it, all the debt is still there, but no income at all. Income is a terrible context for debt. I prefer to compare debt to the quantity of money available for paying the bills. The money doesn't disappear when you stop the economy. The income disappears, but not the money.

If you stop the economy and look at it, there is no income because the economy is stopped: There is no flow. But there is money. I still have the greenbacks in my pocket. You still have the money that you would have spent if we didn't stop the economy. That money is still there, even though there is no additional income being generated. We can add up all that money, our spending-money, and call it M1 or something.

We can take debt and look at it in comparison to the quantity of spending-money. Look at debt in comparison to the amount of money we have that we can use to make payments against debt. Use spending-money as the context for debt.

When you start the economy up again, and look at it, income is being generated again and now you might say income provides a good context for debt. But who can say? Maybe the economy will start up and run really fast, and generate a lot of income. Or maybe the economy will start up and run slowly, like our economy after the 2009 recession, and then not much income is generated. Who can say?

If the economy generates a lot of income, debt in the context of income looks smaller. If the economy fails to generates a lot of income, debt in the context of income doesn't look smaller. These are illusions arising from the use of income as a context for debt. These illusions do not arise when spending-money is used as the context for debt.

But you would have to stop and think about it.