Funny Numbers

Economic statistics might seem a dry topic, but it's actually full of colorful anecdotes. We hear a lot, for example, about how hard it is to gauge what's going on in the ever-important Chinese economy because economic reality and the numbers to support it are basically made up by Beijing. Well, not totally made up, but if the government says that China will grow by 8 percent a year, you can safely bet that the national statistics bureau will release figures showing just that in December.

But the same is true to some extent in the U.S. "American economic figures can be just as bad as China's," says East-West fellow and economist Christopher McNally, "we're just not as open about it." For example, there's an economic indicator known as "M3" which is a measure of how much debt is being created in the economy. The European Central Bank, ever worried about rising inflation and a new Weimar Republic, still tracks it carefully. But the U.S. Federal Reserve stopped tallying M3 back during the late Greenspan years – a copy of Robert Shiller's "Irrational Exuberance" goes to the first reader who can guess why.

The same hi-jinks go into inflation figures, which are tweaked by each successive administration to look more attractive. McNally notes that back in the 80s, when the price of oranges (which were included in the inflation tally) went up, government officials neatly solved the problem by substituting apples. Our current inflation tally still pegs the price of a TV to ten-year old models, when everyone is buying more expensive flat screens.

The real difference here is that the Chinese government has the power to tweak not just numbers, but reality. Of the 3,300 individuals in China who are worth more than $60 million, 2,900 have relatives high up in the Communist Party. In China, when the government asks a roomful of bankers who wants to lend money, everyone raises their hands. In the U.S., despite our semi-nationalization of the financial industry, economic reality remains a lot less clear.