Lies, Damned Lies, and Averages

The President is perplexed, yet once again. True, he can't catch a break in Iraq, but surely he's a hero on the economy. From 2001 to 2006, incomes rose 8.6% and average family net worth rose an astounding 24%. Unemployment is down to 4.6%. In the first quarter of 2006, the economy grew at a rate of 5.3%. Everywhere you look, the statistics are up, up, UP!.

Except the polls. The latest New York Times/CBS poll shows only 28% of people approved of his handling of the economy, and 66% disapproved. Is the public just being difficult, refusing to recognize good news when the see it, or do they know something the President doesn't? Let me help you out, Mr. President: you are looking at the averages, the people are looking at their own pocketbooks, and those are two very different views. When dealing with aggregates, averages aren't much help; the proper number to use is the median, the point which separates the upper half from the lower. And the median income has not moved at all. "Median household income has gone nowhere since the turn of the decade," said Mark Zandi, chief economist at Moody's

Whenever anybody is using averages in regard to aggregates, they are engaging in spin doctoring, not science. For example, if we took the average of all the readers of this blog (both of them), we would get a certain number. Then if Bill Gates were to somehow chance upon this post, the average income would go up by billions of dollars. Yet none of us would have one more dime to spend. The median wouldn't move at all, or move very little. It is the median which more accurately reflects the reality.

And the reality is pretty grim. For example, the average net worth of the American family rose 6.3% from 2001 to 2004. But for the bottom 40% of families in the same period, the median net worth actually fell. And overall, the median was only one-fourth as large as the average. So then, when the President touts the averages, he is overstating the situation for the typical American by a factor of four. This helps to continue his complete disconnect with reality (never Dubya's strong point to begin with), and, more importantly (for a politician), his complete disconnect with the voters.

There is a good use for averages, however, and that is in comparison to medians. When there is a big disparity, as there is now, it indicates that there is a pathology in the economy. The economy is indeed expanding, productivity is indeed growing, and profits are indeed increasing. However, the disparity between averages and medians indicates that all the benefits are going to an elite group. Inequality is rising, and rising fast. Normally when this happens, there is a contraction in consumer spending which slows down the economy or drives it into recession or depression. After all, the rich simply cannot spend their income as fast as the poor and middle classes; purchasing power is lost to the economy, and the equilibrium of supply and demand is broken. Think about a CEO earning 700 times what a line worker makes. He can buy the best shoes, shirts, and housing available, but he still cannot consume 700 times the shoes, shirts and housing of the average person. This kind of disaparity disrupts an economy.

So why aren't we in recession? Because there is another solution, two of them in fact. The first is that the cost of living can be lowered, or at least held steady, by cheap imports or by importing cheap labor. This allows wages to be kept low without impacting the standard of living. For a while. But it breaks down eventually, since the cheap imports have the effect of destroying local industry, while the workers in the foreign company are paid too little to buy anything you still produce; such schemes are not really trade at all, they are merely an arbitrage of labor rates. Net income goes down over the long term, and it must be made up by borrowing.

The second method is even more pernicious: Usury. The elites can simply lend money to the other classes (at ruinous rates of interest) to keep up aggregate demand. Thus, wages can be held static while actual consumption rises. But this is a ponzi-scheme, and, like all ponzi-schemes, it must eventually collapse. You can increase today's consumption by a borrowed dollar only by decreasing tomorrow's consumption by that same dollar, plus interest. Eventually the load of debt gets so heavy that the whole thing must collapse.

The economy right now is, quite literally, a house cards--credit cards. This is true at the consumer level, at the national accounts level, and at the level of trade balances. We must borrow $2B daily to stay afloat, a billion of which comes from a certain government that may not always wish us well.

But on the other hand, the averages look good. And to a President who has been more concerned with appearances than reality, this appears to be good enough.


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