What Conspiracy?
>
"All models are wrong; some are useful."
-George P. Box
>
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.
~~~
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
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Comments
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
George Box, statistician:
"Essentially, all models are wrong, but some are useful."
Posted by: midwatchcowboy | Jun 20, 2008 7:55:40 AM
Excellent! I will fix above . . .
(Wow, that was record quick)
Posted by: Barry Ritholtz | Jun 20, 2008 7:59:44 AM
Thanks for spending the time on this, Barry. As a former professor of Rhetoric and Composition, I can't tell you how much class time college teachers waste on chowderheads who think spouting logical fallacies entitles them to good grades. I used to try to point out to them that logically flawed thinking would not help them advance porfessionally, but then Bush got elected, and I gave up. Maybe they'll believe it coming from someone who's on their teevee and wears nice suits.
Posted by: Susan | Jun 20, 2008 8:11:20 AM
Boy, someone got up on the wrong side of the bed this morning :)
Posted by: Mike in NOLA | Jun 20, 2008 8:18:57 AM
"I do not believe this is any grand conspiracy"
just fluffy "allllllll is wellllllll"
Marias ad says corporate social responsibility is coming into vogue
something tells me the oil industry will short cycle an energy changeover
something tells me the markets industry will come out of all this sweetly
in Guns n Roses words "its a jungle baby"
Trekies maybe (ya) Gene had the numbers right and we'll see intelligent design in 2063
while humping 4 days and 2500 lbs of YellowBooks ... wondering how my life would be different if I was a sportsman instead of an artist
now excuse me, this dweeb needs to go turn in the spare books and paperwork for the paperpushers
Posted by: Greg0658 | Jun 20, 2008 8:24:25 AM
Can someone please explain the "conspiracy" on fair value of the dow and s & p. notice all of yesterdays gains were bogus on the day, save a few points?
Posted by: josh | Jun 20, 2008 8:29:30 AM
BRAVO. I usually stop reading the comments sections on blogs once these type people start dominating the conversation. I find them to be quite boorish and a complete waste of my time and effort to read through the tripe to get to good posts.
Thank You for all the good info you offer up on your blog BR, hopefully this will not fall on deaf ears.
Posted by: David | Jun 20, 2008 8:29:54 AM
A bit peevish there this morning. C'mon tomorrow is the first day of summer, the fish are ajumpin' and the cotton is high...relax have a cup of good coffee, eat a danish and enjoy the day....:-)
Posted by: grumpyoldvet | Jun 20, 2008 8:32:22 AM
Not grumpy, just percolating for a long time.
Its something I started writing months ago -- and put aside for a while -- and I revisited it earlier this week after reading something that just struck me as god-awfully lazy. I polished it up this morning . . .
Posted by: Barry Ritholtz | Jun 20, 2008 8:40:10 AM
Nuance is difficult. It's like the guys who put the phone number system together with the studies showing people seem to be able to remember seven digits. But once you get past that, the human mind begins to over simplify (or something.) More examples of not grasping enough digits:
More nuclear power will help with the price of oil... even though oil's not really used on the electricity grid.
We need to save the tax cuts to save the economy... even though the last tax cuts didn't really save today's economy.
The credit crisis is over... even though bank write offs continue, the Fed has rates at near-Greenspan lows, and the dollar markers, XLF and foreign central banks show otherwise.
Posted by: VennData | Jun 20, 2008 8:40:52 AM
Nope, it's not them. It's you.
Economic statistics are honest and fair. The government knows best. If formulas were changed, it was because they were previously incorrect. Oil is fairly priced and we will run out of it soon. Some people really are better than others, especially those with money, and politics helps us sort this out. People really over do all that scare stuff about pollution. Disasters only happen to people who have done something immoral in their lives. There's nothing wrong with being a little afraid all of the time. People who aren't like me seem suspicious.
Posted by: cinefoz | Jun 20, 2008 8:45:34 AM
Good Going BR. It is continually amazing to me that simple Scientific Rigor is now derided as 'Conspiracy Theory'.
You, aptly, sum them as: "intellectual lightweight(s), (a) political hack(s), someone not worthy of any further expenditure of your limited time and finite attention."
That more don't care to point this out, reveals them, and bodes ill for us.
Posted by: Mark E Hoffer | Jun 20, 2008 8:49:43 AM
the anti-intellectualism is a side-effect of right-wing rule.
If you deny science and inconvenient facts as a matter of political ideology--evolution, global warming,"abstinence only education," "there really were WMD but they got moved to Syria/Iran," etc. it is only a matter of time before the phenomena rears its head in ALL fields, not just those which are part of the so-called "culture wars" or more common political battles.
the anti-intellectualism has been running rampant from the oval office on down. academics/experts have been under assault since the dawn of the conservative "movement" back in the 1960s
My favorite part of the campaign so far was when both McCain and Clinton--pandering on the gas tax--indicated they weren't really going to listen to a "bunch of economists"
on the other hand, I totally agree re: your views on the "conspiracy" or lack thereof...
A wise man once said-- "that's the really insidious thing about the conspiracy, it's not even aware that it IS a conspiracy!"
LOVE THE BLOG
Posted by: steveeboy | Jun 20, 2008 8:50:58 AM
The more people who believe an idea, the truer it is.
Oy.
Posted by: Marcus Aurelius | Jun 20, 2008 8:51:47 AM
German Producer prices May 2008: +6.0% on May 2007
WIESBADEN – As reported by the Federal Statistical Office (Destatis), the index of producer prices for industrial products (domestic sales) for Germany was up 6.0% in May 2008 from the corresponding month of the preceding year. The same year-on-year rate of price increase was last reached in July 2006. In April 2008, the annual rate of change was +5.2%. Compared with the preceding month, the index rose by 1.0% in May 2008.
Posted by: Peter B | Jun 20, 2008 8:53:23 AM
Investing and trading are all about reading between the lines and working with incomplete information. There is no fundamental Decartian truth.
Josh - today is ex date on a lot of ETFs like the SPY. That plus triple witching is causing some confusion in the pre -market this morning. Remember most puts and calls are not adjusted for dividends.
Posted by: Vermont Trader | Jun 20, 2008 8:53:58 AM
Bill Hicks on the same anti-intellectualism in the USA
http://youtube.com/watch?v=YcPQhS8W8g4
Posted by: Bill Hicks | Jun 20, 2008 8:55:48 AM
Hmmm... I enjoyed reading this because I hear a lot of "conspiracy" talk from the guys commenting about the price of gold and I like to hear both sides of an argument.
Can I summarize your claims that there is no conspiracy as follows:
(a) The raw data is available.
(b) The method for coming up the the headline number is published every time it is revised.
Therefore its not a conspiracy.
I don't see how the conclusion follows from the premises.
I think that the fact that the method revisions keep the same name (CPI, GDP, unemployment) and yet method changes consistently make the economy look better (and, for inflation, the government social security payments lower) to be evidence that a conspiracy exists to try to spin government numbers to make it look like the government is improving the economy and to reduce government obligations.
To get the truth we need to know more about the process of revising the method for coming up with the numbers from the raw data. I don't see this addressed in your post.
I guess I'm with the conspiracy guys that it goes through some process where ultimately someone with political motives (probably with connections to one of the big wall street houses) makes the final decision on the method change.
By the way, the FED's ceasing to publish the M3 number seems like clear evidence that "they" don't want the world to see how fast "they" are ramping up the money supply. The idea is, if you can't redefine an ugly number, then just stop publishing it.
Posted by: Douglas M Dillon | Jun 20, 2008 8:59:40 AM
Roman,
Production (income) was replaced by borrowing.
Let's take the mean household for instance.
In 2000 total U.S. household debt stood at a little over $7 trillion.
By the end of 1Q08 it was just a tad shy of $14 trillion.
So you have a $7 trillion increase in debt in 7-1/4 years.
There are about 115 million households in the United States, so the mean household has taken on a little over $60,000 dollars of debt in the last 7-1/4 years, or about $8400 per year.
In 2004 the mean family income was $70,700.
$8400/$70,700 = 11.9% per year
Posted by: DownSouth | Jun 20, 2008 9:01:04 AM
Do you guys realize how many brown nose idiots on tv and the rest of the media say NUKILAR?
Sorry for being of topic :0)
Posted by: sergtat | Jun 20, 2008 9:05:41 AM
Silly! Tinfoil hats don't work. They're just another part of the alien conspiracy.
You need this:
http://www.stopabductions.com/
(Excellent post, BR. Thank you.)
Posted by: chris | Jun 20, 2008 9:06:33 AM
Your discussion on this topic, Barry, is emblematic of why yours is the first financial blog I read each morning.
When I was in graduate school in the late 70's, there were three main criticisms of the CPI that we discussed:
--infrequent changes to the "basket of goods" so that changing buying patterns, changes in relative prices, new products, etc. were only considered every several years when the basket was modified;
--improvements in quality/functionality of products were not taken into account (hedonics);
--the "shoppers" who gathered the data did not include sale prices.
(Maybe there were other issues, but these three still stick in my mind 30 years later.)
It appears that the BLS has addressed the first two in the current construction of the CPI (I don't know about the "sale" issue).
When I work with others to attack a complex problem, we spend a lot of time up front agreeing on the base assumptions; from that point on, developing an analysis or solution is usually fairly straightforward.
Keep up the great work!
Posted by: ndallasj | Jun 20, 2008 9:08:53 AM
BR, my personal favorite was when Larry Kudlow accused you of being responsible for the weak dollar.
Posted by: Chief Tomahawk | Jun 20, 2008 9:11:29 AM
Greg0658 (in reference to above):
A better, more complete quote from the same song:
"You're in the jungle, baby; You're gonna diiiiiieee!"
=)
Posted by: HCF | Jun 20, 2008 9:14:23 AM
