Robert J. Samuelson wrote an op-ed in The WashingtonPost title "A Baffling Global Economy." He ask the following:
We've been having the wrong discussion about globalization. For years, we've argued over whether this or that industry and its workers might suffer from imports and whether the social costs were worth the economic gains from foreign products, technologies and investments. By and large, the answer has been yes. But the harder questions, I think, lie elsewhere. Is an increasingly interconnected world economy basically stable? Or does it generate periodic crises that harm everyone and spawn international conflict?
His question is a good one. I have long felt that the destabilizing aspect of trade has been ignored. But the reason I got hot about his column is WHY he is baffled.
These questions go to the core of a great puzzle: the yawning gap between the U.S. economy's actual performance (poor, but not horrific) and mass psychology (almost horrific). June's unemployment rate of 5.5 percent, though up from 4.4 percent in early 2007, barely exceeds the average of 5.4 percent since 1990. Contrast that with consumer confidence, as measured by the Reuters-University of Michigan survey. It's at the lowest point since 1952 with two exceptions (April and May 1980).
I am going to "coin" a new phrase for this time of cherry picking of economic data. PRO FORMA ECONOMICS. It comes from the use of pro forma accounting during the dot com bubble that allowed companies with little earning power to reach stratospheric valuation, by claiming large pro forma earnings. I know accounting is the dismal (read boring) science but this is an important development in our economy that has mostly been overlooked.
Companies that report a pro forma income statement or balance sheet usually do so because, they say, the unusual events being excluded really were unusual, so the GAAP financial reports required by law are misleading to investors and potential investors. The crisis that happened this last quarter is not going to recur in future quarters, so the pro forma results can be used by investors to forecast what a "regular" quarter might portend in the future.
Critics note that pro forma numbers always look more profitable than GAAP numbers, and state that many companies intentionally use pro forma results in order to mislead investors into believing the company is in much better financial shape than it is; that there is no defined meaning or accounting standard for "pro forma" and that it is therefore impossible to make an "apples to apples" comparison between companies with pro forma results in the way that GAAP accounting allows; and that most "unusual events" reported as such are part of the ordinary course of business and should be reported as such. Most companies in most capitalist countries restructure themselves often, for example, so, it is argued, it is dishonest to claim that restructuring charges are unusual, one-time events that investors should not anticipate in the future.
There was a boom in the reporting of pro forma results starting in the late 1990s, with many dot-com companies using the technique to recast their losses as profits, or at least to show smaller losses than the GAAP accounting showed. The U.S. Securities and Exchange Commission requires publicly traded companies in the United States to report GAAP-based financial results, and has cautioned companies that using pro forma results to obscure GAAP results would be considered fraud if used to mislead investors.
(granted I'm not Jerome a Paris with the term ANGLO DISEASE but hey...)
The reason I am raising this concern is the laughable way the pundit class has swallowed GOP/conservative talking point on the economy. They keep citing low unemployment, and moderate growth asking why are people feeling bad? I responded to Mr. Samuelson with the following critic.
Robert J. Samuelson commits one of the worse offensive of the last twenty years. It's the selective use of statistics. This became the rage in the 1990's with pro forma earnings, this is one of the ways today's MBA's have ruined America. Why do I say this?
People always judge the economy on 6 things they always have and always will.
- Can I get a job. Unemployment measures this. Yes Bush has kept this near a historic low. Mr. Samuelson is correct on this.
- Is the economy growing? A growing economy give hope for the future and allows long term planning. Bush has been in the middle on this (not bad not great)
- Are my wages growing? People look forward to raises. Productivity has gone up but wage growth hasn't matched. Bush has been bad in this area.
- Inflation is it high? Bush has been very bad here. Inflation is controlled by government more then any other factor (most other economic factors are influenced not controlled by the government). The weakening of the dollar by overprinting, lack of oversight in the housing market, run away federal spending, etc has fuel inflation. Inflation is one of the most destabilizing items. Even at 10% unemployment (the worse number of the last 40 years) at the most 20% of the population is effected (1/2 of a family of wage earners) even that is exaggerated because because not all people are married. But inflation effects EVERY, everyone feels prices going up.
- Am I getting wealthier? This is another major negative. The stock market has been flat the last 8 years. The housing market has been down. These are the two major source of wealth growing for working and middle class families.
- How much do I pay for taxes and benefits? This will be controversial by linking them. But these are both expenses that people pay before they take home their pay. Bush has been "great" on taxes, but benefits have gone up (healthcare insurance is the major culprit). I would rate this in the middle. If people want to split them then their would be on great, one bad.
So Robert J. Samuelson my tally is 1 great, 2 in the middle, 3 bad. Or if you split number #6 you get 2 great, 1 in the middle, 4 bad. This is a net negative.
Please stop using pro forma economic numbers!
By only citing POSITIVE statistics and not referensing all the available data that people use to make a judgement. Mr. Samuelson commits a classic logical fallacy. But he is not alone in this, it has been a standard conservative punditry trick. For those who would argue with my take on the Bush tax cuts, I would agree with you but since I was talking to a "centrist" audience I didn't feal it was worth argueing over the way Bush's tax cuts were skewed to the rich (you get into the endless loop argument of their beloved supply side argument and they won't tackle the rest of the arguments laid out).
To all progressive beware pro forma economic statistics and be ready to fight them. I wish more of our "liberal" guest on political shows would be ready to combat them. Conservatives come armed with prepackaged talking points, too many of the liberals ones don't.
UPDATE: One thing I forgot to add. Core Inflation is the ultimate PRO FORMA statistic.
Core inflation is a measure of inflation which excludes certain items that face volatile price movements e.g. food products and energy.
Now think what the word volatile means? Volatile means something changes in a unpredictable manner. Either it sometimes goes up, sometimes goes down (in price) or the increases (or decreases) are erractic, sometimes increasing (or decreasing) by large amounts, sometimes by small. In this type of environment, excluding food and energy makes sense.
But over the past 5 years food and energy haven't been volatile they have been following a trend. The trend has been in one direction UP! A trend alomst by definition (in finance) is the exact opposite of volatillity (yes English, and Math majors you can have volatile trends) so why does the business press still cite "excluding volatile food and energy prices"?
I wish I was one of those people who didn't need to eat, heat my home, or drive! The Fed is using pro forma economics to exclude 20%+ of the economy?