Monday, February 13, 2006

Anecdotal Economics

One of my pet peeves is when commentators use their own anecdotal evidence to project/predict/pontificate about the state of the world’s economy or the state of the US economy. This is frequently true when I get into debates/discussions with people that I might disagree with politically. If we were doing a personal therapy session we might call it “transference” or “projection”—or "if it happens to me, then it must be happening to everyone."

Let me give you some examples: (real life examples of things people have said to me in the past few weeks) “My electric bills have almost doubled, inflation is out of control.” or “The cost of living has doubled in the past few years, look at gas prices” or “my buddy lost his job and he has been unemployed for 6 months, nobody is hiring…” how about this one…”if companies like Ford and GM are struggling, then we are in serious trouble.”

While there may be a kernel of truth to each of these anecdotes and the corresponding conclusions, they are all grossly over-simplified and factually inaccurate.

It would be just as accurate (or inaccurate) to say, “the company I work for has doubled in the past year, the economy must be growing at an amazing rate!” Or to say, “Wow, my laptop was less than 1k, PC’s have gotten really inexpensive!” or how about this one---“I got a big bonus this year, Americans are making more than ever before!”

There are objective statistical measurements that we can use to comparatively analyze the current state of the economy as a whole. Of course objective statistical measurements are boring and they don't make headlines. Plus it's hard to feel that personal connection with a rise in GDP, or slight increase in CPI, or an overall unemployment rate of 4.7%.

On the other hand, there is a visceral response to hearing that Ford, one of America's greatest companies is having to eliminate jobs. Sure, there were over 2 million new jobs created last year, and the jobs that Ford is eiliminating probably should be eliminated but that's not the point because I knew this one guy that worked at a factory for Ford and.....


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