Garett Jones  

Learning About the Economy: Statistics or Uncle-Asking?

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Alan Blinder left his position as a Princeton economist to serve as vice chairman of the Fed. After he went back to academia he wrote a great short book that I see as a crypto-memoir, Central Banking in Theory and Practice (GMU students: it's free here).  One big lesson from the book: Central bankers are suckers for the law of small numbers, for the unrepresentative anecdote, for the hasty generalization. In his words, central bankers do a lot of uncle-asking (PDF):

You can get your information about the economy from admittedly fallible statistical relationships, or you can ask your uncle. I, for one, have never hesitated over this choice. But I fear there may be altogether too much uncle-asking in government circles in general, and in central banking circles in particular. 

I'm glad to draw attention to the individual problems of economic statistics, and I'm glad to judge a country's economy partly by walking around and looking, especially in countries with weak economic statistics divisions.  But Blinder draws attention to something I've seen in Washington quite a lot over the years (yes, my own embrace of the law of small numbers): A willful embrace of the intimate and individual over the abstract and averaged.  

"I knew a guy" goes a long way in DC, a lot longer than it should.  If central bankers are doing it, politicians are doing it even more: So if you're wondering, regardless of which party is in power, "On those occasions, however rare, when policymakers genuinely try to get their facts right, how do they try to get those facts?"

According to Blinder, too many of those facts come from uncle-asking.  If central banking is government near its best, as Blinder has written elsewhere, then one can only imagine where the supposed facts come from in other branches of the bureaucracy.  


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COMMENTS (8 to date)
Kevin Dick writes:

Khaneman and Tversky would not be at all surprised.

Even the very best large businesses suffer the same problem. And I see VC and angels fail to invest in well substantiated startup ideas all the time because they can't see themselves or their families using the product.

In my experience, you have to make yourself terrified of your intuitions to stop trusting them. That way, the immediate fear of making a horrible mistake interrupts the cognitive process of jumping to conclusions. High status individuals are reluctant to do this. They're different after all.

Tom West writes:

My experience has been that (with a lot of noise), that despite personally being a dyed-in-the-wool statistics user, the ask-your-uncle approach may indeed produce superior results (or at least does some of the time).

Without buy-in, almost no plan, no matter how superior, is doomed to failure. And numbers by themselves rarely create buy-in. A system that is not designed to appeal to the experience and understanding of those expected to implement it will usually fail, regardless of whether their experience and understanding is flawed.

Now obviously there are numerous counter-examples, but I've learned over time that "I can't use this, all you've given me is facts" isn't always as ludicrous a response as it seemed at the time I received it.

txslr writes:

KD,

Well said. In business I call this the “myth of the gifted decision maker”.

I don’t think that the sort of numbers we are commonly able to generate for the economy are much better when applied to policy decision, however. For example, I am struck by the tediously recited claim that other countries spend less on health care and get better outcomes than the U.S. We know that the cost numbers are wrong if for no other reason than that in countries whose health care is to some degree socialized (including the U.S.) cost estimates range from systematically flawed to completely bogus (Automobiles were cheap in the Soviet Union, but you couldn’t get one.)

And on the other side of the equation, the estimates of outcomes are inevitably meaningless as they never take into account lost consumer surplus from the loss of individual decision making.

Still, even though the numbers are no good, they are what we have so we use them anyway. After all, something must be done!

Kevin Dick writes:

txslr,

Thanks.

I actually think we have much better numbers on the economy than on a random business problem because have markets! If we want better numbers, we should create more markets.

Joe Cushing writes:

The government doesn't need to look for facts because it does not try to make the world a better place for us. Government actors only do what it takes to make things better for them. Often, that means implementing an ignorant policy because the people are ignorant and want it.

Tracy W writes:

I'm with Tom West on this one, although I've also commented on the limitations of anecdotal data. Statistics are often flawed, sometimes they are deeply wrong. There's been quite a few times when I've thought that "this data must be wrong" and later on it's been revised to something more believable. (Eg, the UK government was reporting power demand dropping by about 7% one year, and most of the fall being in residential power demand which should be the most stable apart from weather effects, while GDP was falling by only 1%, and the TSO was reporting a fall of only 1.2%).

The other thing is that purely statistical relationships are not flexible, you can only use them to estimate the impact of changes if those changes occurred in the past and were captured in the statistical database the relationships draw on. If you have reason to think that the world's changed since then, then they aren't much use.

B.B. writes:

In cognitive psychology and behavioral economics, I believe what you are talking about is called salience and vividness. Akerloff used the example of someone researching a car purchase and finding highest satisfaction for, say, a Volvo, but deciding otherwise when he hears a friend speak harshly about a Volvo he owned (a sample of one).

As for wage cuts vs layoffs, consider what matters is relative status. If we could cut everyone's nominal wage by an equal proportion, no one would feel relatively worse off. This is a challenge for Keynesian economics, which views wage rigidity as an issue. If we could magicall rescale nominal wages, would we always have full employment?

Blissex writes:

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