25 for 25: Leave the big numbers to Janet Yellen
Former and current Federal Reserve Board Chairs, Ben Bernanke (L) and Janet Yellen (R).
There's a small problem with numbers we use to measure the economy. You know, those numbers you hear on Marketplace every day.
"One simple number is never going to capture simple reality," says Zachary Karabell, historian and economist and author of "The Leading Indicators: A short history of the numbers that rule our world."
"When these numbers were invented, largely during the 1930s and '40s, they were invented to capture a world of industrial nation states and having those as markers was incredibly helpful," says Karabell. But the world has changed since then and "these numbers remain very good at capturing that world but not the world that we currently live in."
The U.S. government first started using data to help it understand the economy in the 1930s. It was the beginning of the Great Depression and President Herbert Hoover realized he had no way to actually know how bad the economy was. He wanted numbers. To measure unemployment, for example, he helped launch the Bureau of Labor Statistics.
Unfortunately for President Hoover, Franklin D. Roosevelt was able to use those numbers as a tool to help defeat Hoover in the election.
To this day, the Bureau of Labor Statistics measures unemployment in the United States. But, says Karabell, you should keep in mind that to the BLS, being "unemployed" is not just not having a job. You have to not have a job, have been looking for a job for the previous four weeks, and then not be able to find one.
"If you don’t fit that particularly category, you are not statistically speaking unemployed you just evaporate from the labor force," he says.
Another problem is that these numbers often rely on averages. Think about the per capita income of your average neighborhood bar. Now imagine Bill Gates walks in – immediately, the per capita income rises. But it's a meaningless rise and tells you nothing about the economics of that neighborhood.
Karabell recommends leaving the big numbers like GDP and inflation to Fed Chair Janet Yellen and other government policy makers. For the rest of us, it's "much more important what the housing reality is in the 50 mile radius of where you’re going to buy a home than what the national number is."
We’re more likely to be misled by broad national numbers than correctly informed by them.