What Conspiracy?

Friday, June 20, 2008 | 07:33 AM

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"All models are wrong; some are useful."

-George P. Box

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I enjoy intelligent criticism. It forces you to tighten up your analysis, more aggressively dig up facts, communicate your position more effectively. Good criticism should be challenging, eloquent, and raise the argument bar -- making you sharpen your rhetorical pencil.

Then, there is the criticism that can be most charitably described as "wanting." These come in a variety of forms, ranging from the simple ad hominem attack to the complex Straw Man arguments, to the classic taking quotes out of context.

There are many other weak, disreputable forms of argument, and they all find a ready home in the blogosphere.

Lately, I have been noticing an increase in the conspiracy accusation. In particular, our many discussions on the systemic understatement of Inflation or Unemployment gets derided as "There goes Ritholtz again with his conspiracy theories!" This one statement manages to combine all 3 rhetorical errors mentioned above above into one lazy and dishonest argument.

Today, we spill a few pixels on this, and what it might say about current society.

Let's begin with how BLS models are constructed and function in the real world. I find this complex subject to be quite fascinating. The entire statistical output from the various governmental data bureaus is like a giant crossword puzzle, Sudoku and murder mystery wrapped up in one. Dissecting the publicly available data, teasing out nuance, placing the snapshot into the context of the larger moving picture is a delightful intellectual exercise.

I can understand that these sorts of puzzles are not for everyone, but I simply cannot fathom how they can be so easily dismissed. Rather than address the gravamen of these intriguing mathematical conundrums, they are simply waved away. Conspiracy theory! Tin Foil Hats! Nut Jobs!

I began this post with a little known quote, which I will slightly modify  "All models are flawed, but not worthless." (I misplaced the author's name Thanks!).

The issue is not whether any specific model might be wrong: ALL MODELS ARE BY DEFINITION WRONG. They are approximations, a numerical depiction of a small portion of universe. The true question for interested statisticians, mathematicians and economists is "just how wrong are they?And, is there any inherent bias in the model? Are the errors random, or systemically leaning in one direction?

This is not, as some have implied, a question of nefarious cabals or governmental conspiracies. It is simply a mathematical reality.

For example, we know that the way Inflation is measured has changed over the years. The focus on the core rate, variable weighting of items in the CPI basket, the changes from the Boskin Commission -- these all end up altering the output of the monthly inflation data. All of the changes to the BLS inflation methodology are released by BLS, painstakingly footnoted, and very, very public.

An even better example is the BLS expansion of the Birth Death model. To grossly oversimplify, BLS statisticians identified a shortcoming in the way the Establishment Survey (CES) picks up new jobs from start up firms. Rather than interview people at home (which the Population Study (CPS) study does to determine the unemployment rate), CES takes data from employment tax filings at existing companies. However, economists believe that new job creation in the US comes disproportionately from new firms. In order to capture the jobs which were being missed by the old CES methodology, the BLS expanded a B/D model. Now, they use new incorporation filings by State, and a formula that deduces how many new jobs go along with these newly born firms.

My criticisms about this are legion, but none claims this is a hidden conspiracy or political manipulation by the BLS. The fix corrected an undercount in the beginning of an economic cycle, but created an over-count at the end of the cycle. But the changes to the Birth Death model are all very public, and well documented.

All of the various economic models used by the Bureau of Economic Analysis, and the inputs and algorithms involved, change the output that gets published as your favorite monthly data point. No conspiracy, just models that have inherent flaws -- and those flaws seem to have a systemic bias to make things like Inflation and Unemployment look better than they really are.

As I have said repeatedly over the years, all of the data is there -- its released in a variety of forms, raw, non-seasonally adjusted, monthly, year-over-year. You just have to fight your way through it. Here's what we said on the subject last year:

"One of the things people do not understand is a basic truth about the BLS, BEA, Commerce Department, and other government data sources. I get constant emails warning me of the dark cabals manipulating the official releases.

While I have been critical over the years of the models and methodologies employed, I do not believe this is any grand conspiracy.

Sure, the headlines are often misleadingly spun, but the data is all there for whoever wants to peruse it. Indeed, if you strap on your green visor, you can find all of the data releases for Inflation, Unemployment, GDP, New Home Sales, Durable Goods, etc. The non-seasonally adjusted, non-hedonics, no substitutions data is all right there. You need only bring a critical eye and a dollop of skepticism, and you can usually deduce the real meaning beneath the spin."

That is my long held view. You are free to disagree with it for any number of reasons. You might recognize the error, but think it is so small as to be meaningless. Maybe you think the errors are random, not systemic. Perhaps, you think there is a conspiracy. Maybe you believe the BLS models -- unlike every other model ever created by mankind -- are flawless. These are legitimate disagreements amongst people of different viewpoints.

However, if your intellectual sophistication and analytical acumen is at a level where you find it easier to claim that those who disagree with your views on inflation, employment and GDP wear tin foil hats and consort in Area 51, well that's just so much intellectual detritus, and I am calling you out on it.

Your dismissive comments are lacking in critical rigor. They are analytically vapid, and reflect a mental laziness that I personally find offensive. This is my pushback to the creeping anti-intellectualism that has been working its way into all too many fields.  And, it has no place in what was once considered a thoughtful and analytical discipline: Market analysis and economics.

There is a silver lining: They put the reader on notice that they are dealing with an intellectual lightweight, a political hack, someone not worthy of any further expenditure of your limited time and finite attention.

Its one thing to see this sort of thing on blog comments -- I expect no less from anonymous cowards; However, I refuse to tolerate this sort of nonsense on actual blog posts by authors who should better.


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Previously:
No Conspiracy Theory -- Just Data (November 2007)  http://bigpicture.typepad.com/comments/2007/11/no-conspiracy-t.html

~~~

Other Worthwhile Conspiracy Discussions:
Does the Government Understate Inflation?    http://www.fundmasteryblog.com/2008/06/17/does-the-government-understate-inflation/

Why Bears Always Have the Best Arguments  http://paul.kedrosky.com/archives/2007/12/13/why_bears_alway.html

Merrill's David Rosenberg goes postal on the inflation conspiracy theorists
http://time-blog.com/curious_capitalist/2008/06/merrills_david_rosenberg_goes.html

Statistics as a government plot
http://www.scsuscholars.com/2008/06/statistics-as-government-plot.html

~~~

Anonymous Cowards:
Area 51 coment
http://www.dealbreaker.com/2008/02/hot_ladies_talk_money_with_bal.php

JMF Comment
http://blogs.wsj.com/economics/2007/08/21/four-types-of-views-on-feds-next-move/

~~~

Hall of Shame:

Thinking About Butterflies Randomosity
http://thelearningcurve.blogspot.com/2008/05/thinking-about-butterflies-randomosity_08.html

SCOOPED BY MUCKDOG
http://oldprof.typepad.com/a_dash_of_insight/2008/05/scooped-by-muck.html

Role of proprietary trading at banks    http://finaxyz.blogspot.com/2008/01/role-of-proprietary-trading-at-banks.html

How To Understand Inflation Data  http://seekingalpha.com/article/24572-how-to-understand-inflation-data

When making money becomes too easy.......
http://stockbee.blogspot.com/2006/11/when-making-money-becomes-too-easy.html

The Conspiracy to Keep You Poor and Stupid
http://www.poorandstupid.com/

~~~


Friday, June 20, 2008 | 07:33 AM | Permalink | Comments (82) | TrackBack (0)
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Could it be George Box's "All models are wrong; some are ueful"?

Box, G.E.P., Robustness in the strategy of scientific model building, in Robustness in Statistics, R.L. Launer and G.N. Wilkinson, Editors. 1979, Academic Press: New York.

Posted by: pmorrisonfl | Jun 20, 2008 7:50:47 AM

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