Measuring the economy

Saturday, August 9, 2003

By Eli Fishman

A recent report issued by the National Bureau of Economic Research determined the U.S. economy went into recession in March 2001 and lasted only eight months. Thus, in the period subsequent to November 2001, we apparently were not in recession. This report was the source of considerable optimism.

The bureau's research took into account conventional factors including gross domestic product, real income, employment, production and sales.

The NBER used information from the Labor and Commerce departments. Its methodology conformed to established standards. However, as anyone breathing knows, the conclusions are a load.

To understand how this happened, it is instructive to look at the current bestseller by Michael Lewis called "Moneyball." Lewis describes the exploits of Oakland A's general manager Billy Beane.

In 2000, 2001 and 2002, Beane's team won the American League West Division. In two of those seasons, the A's won more than 100 games. The A's player payroll during this period was about $40 million. The last-place team in the division was the Texas Rangers with a player payroll of more than $100 million. The Yankee player payroll was over $180 million.

The secret to Beane's success is fairly simple. He practices the propositions laid out by Bill James, author of the Baseball Abstract, which first appeared in 1977. James' concepts, used to evaluate player and team performance, are considered revolutionary.

Based on box score developed in 1859, statistical factors such as batting average, runs batted in and errors were key performance measurements. James countered that, since games are won by teams scoring the most runs, it is necessary to evaluate talent on the basis of their ability to contribute to run scoring. The traditional measures were not useful. James' formula for runs created is based on a statistic called "on-base plus slugging" percentage. It accounts for hits, walks and total bases. Player value was based on old standards.

Consequently, Beane was able to acquire prospects using the new measure that other teams weren't pursuing. Many of them came in at the league minimum and are locked in for several years before they qualify for free agency.

Just as better analysis in baseball led to new solutions for winning games, traditional economic measurements have been rendered specious under existing conditions.

For example, the NBER report placed particular emphasis on two measures: employment and personal income. Unemployment is about 6.5 percent. Using the standard measure, those not included in the unemployment figures are individuals not looking for work and people working two days a week, even though they are looking for full-time employment.

In the past, those two numbers might not have been particularly high. When GM and IBM were among the largest employers, a look at their personnel levels was useful. Now Manpower, a temp agency, is the country's largest employer. When these two groups are added in, the unemployment rate has been estimated at 12 percent to 15 percent.

Income disparity has been growing significantly. If you average nine workers at $15,000 and one at $500,000, you get an average wage of over $60,000. This measure does not begin to tell the story of underemployment: people working 40 hours a week and living in poverty.

The real measure of the economy is its ability to provide a good standard on living for all, not just for the wealthy investor class. We must have an accurate picture of what is actually happening in order to plan necessary changes.

Eli Fishman is the owner of Cape Shoe Co.

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