Wednesday, April 14, 2004

Kuznets and GDP

From Brad Delong, comes this reference to an article in The New Yorker.

This steady flow of data is easy to take for granted; few things, surely, are as dreary as a soybean-export-price index. But the economy depends on these numbers; they make business smoother and policy smarter. (Recessions after the Second World War, for instance, have lasted about half as long as recessions before it.) This is why, ever since the days of Kuznets, the government?s basic assumption, at least when it comes to economic data, has been: the more information, the better, no matter how dismal it may be.

Does it? There is some evidence that the moderation in the business cycle is an artifact of the poor quality data that is estimated for the days before Kuznets and the boys. Christina Romer has written:

But appearances are deceiving. The kind of statistics that economists use to measure the severity of business cycles, such as data on the unemployment rate, real gross national product, and industrial production, have been kept carefully and consistently only since World War II. Therefore, the conclusion that government policy has smoothed business cycles [Ed- Or that business's access to data has smoothed the cycles] is based on a comparison of fragmentary prewar evidence with sophisticated postwar statistics.

In some recent research, I have tried to avoid the problem of inconsistent data by comparing the crude prewar statistics with equally crude postwar statistics. That is, I have compared the existing prewar series with modern data that are constructed using the same assumptions and data fragments that were used to piece together the prewar series. These comparisons show essentially no decline in the severity of cycles between the prewar and postwar eras. They also show little change in the duration and frequency of cycles over time. Thus, much of our apparent success at eliminating the business cycle seems to be a figment of the data.

So much for trying to claim economists have become more like the dentists of Keynes's dreams.

Update: Russell Roberts on his new blog Cafe Hayek follows Friedman's lead arguing that the improved performance of the economy is due to a better undestanding of central banking. Read more here.

Keywords: ECO120, ECO305, ECO307, ECO301, ECO712, GDP, Data

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