Transcript Lies, Damn Lies, and Statistics

FIN 30220:
Macroeconomics
Using Economic Data
“There are three kinds of lies; Lies, Damn
Lies, and Statistics”
- Mark Twain
Question #1: What are you trying to measure?
Example: Poverty in the US
Great Society Programs Started
“War on poverty” declared
1964
*Source: US Census
Poverty Rates in the US by
county
*U.S. Census Bureau
Poverty Rates Around the World
Problem: Different Countries Use Different Standards!!
*Source: CIA World Fact book
Poverty in the United States was defined by Mollie Orshansky of the SSA in 1964 as 3 times the cost of
the Dept. of Agriculture’s “Low cost food plan”
2016 POVERTY GUIDELINES
Family Size
Threshold
One
$11,770
Two
$15,930
Three
$20,090
Four
$24,250
Five
$28,410
Six
$32,570
Seven
$36,730
Eight
$40,890
That number has been indexed by inflation
every year
USDA Food Plans: 1964
$6.53  52   $339.30  3  $1017 (Poverty Line in 1964)
$1017 1.048   $11, 644
52
(Approximate Poverty Line Today)
Food Budget as a percentage of household income: 1964
Average
$20,000 -…
$12,000 -…
$8,000 - $9,999
$6,000 - $6,999
$4,000 - $4,999
Under $3,000
0
20
40
Lower Income Households spent around 33% on Food in
1964
60
Food Budget as a percentage of household income: Current
16.5% for the
bottom fifth of
the income
distribution
No Family Spends Anything Near 33% on Food Today!!!
Food makes up around 13%
USDA Food Cost 2016
Suppose we use current
food prices and the
current budget share
$40.58  52   $2,110  $2,110  6   $12, 660
(Poverty Line in 2016?)
Assuming Food is 16.5% of the overall budget
Actual Calculation
$6.53  52   $339.3  3  $1017
$1017 1.048   $11, 644
52
So, which is it and why should we care?
8.3%
Difference
Redefined Household Budget (Current food prices)
$40.58  52   $2,110  $2,110  6   $12, 660
A more important question: What is it that really influences our well being?
VS.
The Simpsons have a
household income of
$35,000. Median
income is Springfield
is $40,000
The Griffins have a
household income of
$45,000. Median
income is Quahog is
$85,000
Which of these two families do you think is happier?
The Europeans use a relative poverty measure that defines poverty as a certain percentage of median
household income
40% of Median US Household Income = $22,400
Median US Household Income = $56,000
Altering the definition of poverty can make a big difference when comparing across countries!!
Absolute poverty rate
(threshold set at 40% of U.S.
median household income)
Relative poverty rate (40% of Median Income)
Pre-transfer
Post-transfer
Pre-transfer
Post-transfer
Sweden
Norway
23.7
9.2
5.8
1.7
14.8
12.4
4.8
4.0
Netherlands
22.1
7.3
18.5
11.5
Finland
Denmark
Germany
11.9
26.4
15.2
3.7
5.9
4.3
12.4
17.4
9.7
3.1
4.8
5.1
Switzerland
12.5
3.8
10.9
9.1
Canada
France
Belgium
Australia
22.5
36.1
26.8
23.3
6.5
9.8
6.0
11.9
17.1
21.8
19.5
16.2
11.9
6.1
4.1
9.2
United Kingdom 16.8
8.7
16.4
8.2
United States
21.0
11.7
21.0
11.7
Italy
30.7
14.3
19.7
9.1
Country
It also makes a big difference when looking across time periods!
The common international poverty line has in the past been roughly $1 a day. In 2015, the World
Bank came out with a revised figure of $1.90 a day.
Percentage of Population Living on Less that $1.90/day
*Source: United Nations
Principle #2: How is your variable measured? Where does the data come from?
Example: U.S. Unemployment
1991 Recession
2001 Recession
12.0
2007 Recession
10.0
8.0
6.0
Current
4.7%
4.0
2.0
0.0
1990
1996
2002
2008
2014
Each month, the Department of Labor surveys 60,000 households. Each household is asked a
series of questions:
1) “Are you currently
working?” (Note: no
mention of part time or
full time)
YES
You are employed
(36,000
151.030 Million)
No
2) “Have you looked for
a job in the past 30
days?”
YES
You are unemployed
(1,800
7.436 Million)
No
You are not in the labor force
(22,200
94.374 Million)
Unemployment =
Rate (UR)
=
Unemployed
Labor Force
7.436
= .047 (4.7%)
151.030 + 7.436
Main problems with the Household Survey
underemployment (those that would like to work full
time, but only work part time)
The “discouraged worker effect”: Those that have given
up trying to find a job are counted as not in the labor
force rather than unemployed
Selection bias: those that are unemployed are more likely
to answer the survey.
Moral hazard: due to unemployment insurance, it is
difficult to tell how hard individuals are trying to find work
Over the same month, the Department of Labor surveys 400,000 businesses and asks one question.
“How many employees
are currently on your
payroll?”
(Establishment survey)
Total Non-Farm Payrolls
(143.89 Million)
Wait a minute, that’s not what
the household survey
reported??? Which is it ???
“Are you currently
working?”
(Household Survey)
YES
You are employed
(151.03 Million)
5% difference
The two surveys track each other reasonably well, but there are noticeable differences.
Since 2003, the establishment survey has been consistently below the household survey
Household Survey vs. Establishment Survey
The household survey includes agricultural workers, self
employed workers and private household workers. The
establishment survey does not.
The household survey counts people on
unpaid leave as employed – the
establishment survey does not.
The household survey only counts people over the age
of 16 – the establishment survey is not limited by age.
The Main problem with the Establishment Survey is that it will often times “Double Count” Jobs
Suppose you quit your job at company A and find a new job at company B – if this is done in
the same payroll period (most payrolls are bi-weekly) you will be counted twice!!
No Turnover
Turnover
Pay Period
Pay Period
Job at Company A
Job at Company B
count = 1 payroll job
count = 2 payroll jobs
In months with high job turnover, the establishment survey will overstate employment.
Principle #3: Is your variable in terms of current prices or fixed prices
Example: The Top 10 All Time Grossing Films (in Millions – US)
1)
Star Wars: The Force Awakens (2015): $936
2)
Avatar (2009): $760
3)
Titanic (1997): $658
4)
Jurassic World (2015): $652
5)
Marvel’s The Avengers (2012): $623
6)
The Dark Knight (2008) $534
7)
Rogue One: A Star Wars Story (2016) $520
8)
Finding Dory (2016) $486
9)
Star Wars Episode I: The Phantom Menace
(1999): $474
10) Star Wars IV: A New Hope (1977): $460
Nominal Variables are in terms of a current dollars.
Real variables are in terms of purchasing power.
Real vs. Nominal Variables
1977
Movie Ticket = $2.23
CPI = 60
2016
Movie Ticket = $8.43
CPI = 238
Consumer Price Index
250
238
200
150
100
60
50
0
1948
1958
1968
1978
1983
1988
1998
2008
Prices in 1977 were approximately ¼ of what they are today, so every dollar earned in 1977 had 4 times
the purchasing power of a dollar earned today
Inflation adjusting corrects for this by adjusting each year’s nominal
grosses to reflect a common year’s dollars (i.e. we convert each
year’s nominal grosses to reflect dollars with equal purchasing
power)
Real X = Nominal X
Target Year
CPI (2000)
2016 $s
Real
= $936M
Gross
1977 $s
175
Real
= $460M 60
Gross
175
238
= $688M
Target year Price
Current Year Price
Current
Year CPI
(2016)
= $1,341M
( 2000 Dollars)
( 2000 Dollars)
These two dollar figures are comparable because they represent the same year’s dollars!
Let’s try this again….let’s convert both grosses to current (2016)
dollars
Real X = Nominal X
Target Year
CPI (2000)
2016 $s
238
Real
= $936M 238
Gross
= $936M
Current
Year CPI
(2016)
Target year Price
Current Year Price
1977 $s
238
Real
= $460M 60
Gross
= $1,824M
( 2016 Dollars)
( 2016 Dollars)
These two dollar figures are comparable because they represent the same year’s dollars!
The Top 10 All Time Grossing Films– Inflation Adjusted (Millions of 2016 Dollars)
1)
Gone With the Wind (1939): $1,739
2)
Star Wars Episode IV(1977): $1,533
3)
The Sound of Music(1965): $1,226
4)
ET: The Extraterrestrial(1982): $1,221
5)
Titanic (1997): $1,166
6)
The Ten Commandments (1956): $1,128
7)
Jaws (1975): $1,103
8)
Dr. Zhivago (1965): $1,069
9)
The Exorcist (1973): $952
10) Snow White (1937): $948
*Note: This is done using movie ticket prices only:
Gone With the Wind (1939)
**Note: Star Wars: The Force Awakens is currently #11
*** All eight Star Wars Movies are in the top 100
earning a total of close to $7B !!!
Nominal Gross: $46,470,300
1939 Ticket Price: $.23
2016 Ticket Price: $8.61
 8.61 
$46, 470,300 
  $1, 739 M
 .23 
(1939 $)
(2016 $)
Principle #4: Annualizing
Example: Calculating Inflation in the US
The Bureau of Economic
Analysis Calculates the Price
Level on quarterly basis,
but reports inflation on an
annual basis.
Inflation (2016Q4) = 2.08%
The Bureau of Labor Statistics
Calculates the Price Level on
monthly basis, but reports
inflation on a monthly basis.
Inflation (2016DEC) = .28%
These numbers are not comparable!
Principle #4: Annualizing
Example: Calculating Inflation in the US
The Bureau of Economic Analysis Calculates the Price
Level on quarterly basis, but reports inflation on an annual
basis.
2016Q3: 111.65
2016Q4: 112.23
Without Logs
Using Logs
ln 112.23  ln 111.65   *100  0.52%
 112.23  111.65 

 *100  0.52%
111.65


To Annualize
.52  * 4   2.08%
1.0052 4  1 *100  2.10%


Principle #4: Annualizing
Example: Calculating Inflation in the US
The Bureau of Labor Statistics Calculates the Price Level on
monthly basis, but reports inflation on a monthly basis.
November 2016: 242.35
December 2016: 243.03
Without Logs
Using Logs
ln  243.03  ln  242.35   *100  0.28%
 243.03  242.35 

 *100  0.28%
243.03


To Annualize
.28  *12   3.36%
1.0028 12  1 *100  3.41%


Principle #5: Economic data can be
can be broken into 3 components:
Trend (many years)
Business Cycle (1-5 years)
Seasonal (Months)
Suppose that we were to plot GDP over time. It would look something like this.
Trend
GDP
Seasonal Cycle
Business Cycle
Time
Its important to
understand where we are
in the various cycles!
Example: Tax Cuts, Tax Revenues and “VooDoo Economics”
The Bush Tax Cuts of 2001 & 2003 lowered marginal tax rates across the board,
lowered the capital gains tax, eliminated the estate tax, and lowered the
“marriage penalty
Bracket
Old Rate
New Rate
$0 - $6,000
15%
10%
$6,000 - $27,250
15%
15%
$27,251 - $67,550
28%
25%
$67,551 - $141,600
31%
28%
$141,601 - $307,300
36%
33%
$307,301 +
39.6%
35%
The tax cut was advertised as “the largest tax cut in history”
What do we mean by the “cost” of a tax cut, anyways?
Suppose that the Griffin family has a household
income of $50,000. Currently, the income tax rate is
20% of all income earned
Under the current tax code, the Griffins
pay $10,000 per year in Taxes.
If the government cuts the tax rate to 10%,
then the Griffin’s tax bill falls to $5,000
The cost of the tax cut
is the $5,000 in lost
revenues
By this measure, the Bush Tax cuts have a price tag of around
$130 Billion per year!!
Let’s take a look at previous marginal tax rate changes to put the Bush tax cut in a historical context.
Wilson
1917
Coolidge
1925
FDR
1933
Kennedy
1964
Reagan
1981
Bush
2001/2003
100
90
80
70
60
50
Bottom Rate
Top rate
40
30
20
10
0
1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003
*Source: Congressional Budget Office
Given an income distribution in 1964, 1981, and 2001/2003, we can
estimate the per year “cost” of the three major tax cuts
Tax Bill
Cost in Dollars
(Billions)
Kennedy Tax Cut (1964) $11.5
Reagan Tax Cut (1981)
$38.3
Bush Tax Cut (2001)
$73.8
Bush Tax Cut (2003)
$60.8
What’s the problem with comparing these numbers?
When expressed in real terms as a percentage of GDP, the Bush tax cuts aren’t so big after all!
Kennedy
1964
Cost (in 1964 dollars): $11.5B
CPI: 30.9
Real GDP: $2998.6B
175.1
$11.5B 30.9 = $67.6B (2.25% of GDP)
Reagan
1981
Cost (in 1981 dollars): $38.3B
CPI: 87.0
Real GDP: $5,291.7B
175.1
$38.3B 87.0 = $79.9B (1.5% of GDP)
Cost (in 2003 dollars): $134.6B
CPI: 175.1
Real GDP: $10,301B
175.1
$134.6B 175.1 =$134.65B (1.3% of GDP)
Bush
2001/2003
Consider the following example. The Griffin family has a household
income of $50,000. Currently, the income tax rate is 20%.
Under the current tax code, the Griffins
pay $10,000 per year in Taxes.
Suppose that a drop in the marginal rate
encourages Lois Griffin to go back to
work. With the two income earners, the
Griffin family income rises to $120,000.
At the 10% rate, their tax rises to
$12,000
Could this happen?
The drop in the tax rate
caused revenues to
increase rather than
decrease!
Tax Revenues = (Tax Rate) (Tax Base)
The basic logic behind the
Laffer Curve is that the tax base
should be negatively related to
the tax rate.
Tax
Revenues
Is there evidence of a Laffer
curve in practice?
Tax Rate
0%
Revenue
Maximizing Rate
100%
Tax
Revenues
50.00
40.00
30.00
20.00
10.00
0.00
Tax Rate
0%
Revenue
Maximizing Rate
100%
-10.00
% Change
-20.00
%Change Real
Do we see evidence
of a Laffer Curve?
Annual Federal
Receipts (Billions)
Year 0
Year 1
Year 2
Year 3
Year 4
Kennedy (1964)
$116.8
$130.8
$148.8
$153.0
$186.9
Reagan (1981)
$617.7
$600.5
$666.5
$734.0
$769.2
Bush (2001)
$1,853.4
$1,782.5
$1,880.2
$2,153.8
$2,402.7
Source: Congressional Budget Office
Let’s take a look at previous marginal tax rate changes to put the Bush tax cut in a historical context.
Recession
Kennedy
1964
Reagan
1981
Bush
2001/2003
Expansion
100
90
80
70
60
50
Bottom Rate
Top rate
40
30
20
10
0
1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003
*Source: Congressional Budget Office
The Laffer effect of a tax cut should affect the trend, but not the cycle…
New Tax Code
GDP
Old Tax Code
This is what we have measured
This is what
we should be
measuring
Time
In other words, we have overstated the Laffer effect in the previous slides