 We've talked a little bit about Statistics and how we can use them one of one of the important things to always keep in mind is that Statistics don't always measure what you think They're measuring Good example is unemployment, right? I mean what could be easier than Calculating how much unemployment there is so you say you know the unemployment rate is 4% that means 4% of the people are unemployed, right? It's a little more complicated than that First off when we talk about unemployment it the number applies only to people who we call Workers that is people who are in the labor force people who are in the labor force or people either who have jobs or Don't have jobs, but would like them, right? So people who are retired. They're not in the labor force people who are full-time students They're not in the labor force people who are chronically ill. They're not in the labor force We the labor force are is a subset of the population So when we say for example unemployment rate is 4% we mean 4% of the labor force does not have jobs Now that seems pretty straightforward Except it isn't Consider this case suppose you had 5 million people in your labor force and of these 5 million people 4.7 million of them had jobs and the other 300,000 did not have jobs Your unemployment rate is the number of unemployed people the 300,000 divided by the labor force of 5 million So 300,000 divided by 5 million is 6% it's a 6% unemployment rate now one of the problems with Defining the labor force as people who have jobs or people who don't have jobs But would like jobs is it's unclear what it means someone who doesn't have a job, but would like a job I mean if we could Call all of the people who didn't have jobs and ask them would you like a job if there were one available? That's okay, but we can't do that, right? We have to we have to attempt to estimate the number of people who Don't have jobs, but would like to have them So one of the things that we do is we ask questions like Have you actively looked for a job in the past few weeks, right? That is, you know You've responded to an ad or you've gone down to the local unemployment office, whatever it is And Anybody who says yes to that? We say all right. Well, you're a person who doesn't have a job But would like one so you're part of the unemployed that you're our 300,000 number, right? But now things start to get sticky What happens if you've got somebody who would really like a job? But he's just this person's just kept looking and looking and looking and not found any job at all And he's come to the conclusion that it's not worth his time to look for a job So he stopped looking So this sort of person is someone who's unemployed who does not have a job But isn't looking for one either but would take one if one came along, right? So he's rationally stopped looking because it's not worth his effort He's no longer counted on our unemployment roles as unemployed. He is what we call non-employed So interestingly, we've got now three categories of people the employed the unemployed the non-employed And the non-employed are people who don't have jobs, but we have determined You know using some metrics that we use That these people don't want jobs either We understand we might be wrong about that but given you know that we can't call up everybody and ask them their particulars As to why they don't have jobs. We've got to draw a line in the sand somewhere So we say look if you've been out of work a certain period of time or you haven't look for a job In a certain period of time, we're going to put you off the roles count you as non-employed Now Here's where the statistics get very messy Let's suppose of our 5 million people 4.7 million of them have jobs 300,000 of them don't 100,000 of these 300,000 have been unemployed for long enough that we move them off the roles We now consider them non-employed When we move 100,000 of these unemployed people off the roles or reclassify them as non-employed two things happen First the number of unemployed people has declined. It was 300,000. It's now 200,000 Second our labor force has declined. It was 5 million The employed and the unemployed people now it's 4.9 million because these these 100,000 become unemployed or sorry They've become non-employed. We no longer count them as part of the labor force So when I go to calculate my unemployment numbers I have 200,000 people who are unemployed out of a labor force of 4.9 million That's an unemployment rate of 4.1 percent So there's something fascinating Simply by these 100,000 people being unemployed for so long that we no longer count them My official unemployment rate has dropped from 6 to 4.1 percent Even though I have the same number of jobs I had before I had 4.7 million people working before I have 4.7 million people working now So this is one of the problems that we have to keep in mind as we think about statistics in this case Specifically the unemployment rate is be very careful that you understand how these things are measured Now that's a hypothetical case But it becomes real when you start to look at unemployment numbers in the u.s It starting at the great recession So around about 2009 2010 of course we have the great recession lots of people are out of work and The media would go and interview people on the street Round about 2010 when the economy started turning around and they would say things like well the economy's turning around our unemployment rate numbers are down You know people are getting back to work. How do you feel? And invariably the the man on the street that the that the media would interview would say something like no I don't think the economy is getting better And this persisted it persisted so much it became kind of a thing in the media of why is there this disconnect that Quarter after quarter the economists are saying unemployment rate is falling And yet quarter after quarter when we interview people in the street, they say that they don't believe the economy has improved Why the disconnect? Part of the disconnect is that in the great recession We had a tremendously long period of unemployment historically Historically it's the larger the median the median unemployed person was unemployed for a longer period than had ever been the case before Unemployed people were unemployed for so long that census bureau stopped counting a rear of labor statistics stopped counting them as unemployed And so we were seeing the unemployment rate drop in part because more people were getting jobs But also largely in part because some people were unemployed for so long They stopped looking and we stopped counting them and that was the disconnect in fact the people in the street were right Their their gut reaction was the economy wasn't improving and largely speaking their exceptions But largely speaking it was about the same as it was before the drop in the unemployment numbers was due to this statistical abnormality if you want to call it that of this oddness of how we calculate unemployment And if you look at the numbers in here, you have them the the blue line The blue line on this graph is the unemployment rate Which you can see rising 2008 Starts first quarter 2008 you can see it go up with this start a great recession and kind of you know tail off A bit and then the employment rate, which you see on the red It starts up high and then drops down low and the interesting thing here is you can see the unemployment rate starting around 2000 fourth quarter 2009 through 2010 The unemployment rate falling But the employment rate not rising And that's that it's this phenomenon that you would only Come to understand if you if you're looking not simply at the raw statistics of what's the unemployment numbers But rather also understanding how they're defined So some other things to be careful about We're talking about unemployment be careful how you quote unemployment statistics Because you can find contradictory numbers coming from the same from the same entity bureau of labor statistics, for example measures Unemployment numbers or how many jobs there how many people have jobs and they do it two ways They will Survey employers and ask, you know, have you taken on new employees? Have you laid anybody off? How many workers do you have in those numbers all put together? Give us a picture of how many jobs there are Bureau of labor statistics will also ask Workers, you know surveying workers how many do you have a job? Are you employed full-time these sorts of things and compile those statistics? And so on the one hand we have employment numbers coming from employers And then we also have employment numbers coming from workers And the two don't necessarily agree. In fact, they almost always disagree, right? There's some noise in the thing So one of the things we have to be careful of is, you know, when you hear Politicians, for example, touting the latest job reports and saying, well, according to The statistics we've created 100,000 jobs In the last month and this is good news. My policies are working Be careful that you understand what's going on because of The oddness in how we measure employment because of Differences in in not just how we define unemployment, but in how we're measuring it Are we asking employers? Are we asking employees? And because of random noise that I can't ask all The employees I can't ask all of the all of the employers. I have to take samples Because of these three things oddness of how we define the thing How we measure the thing and and randomness in the measurement itself There's lots of noise in the data There's enough noise that 100,000 jobs added in a month Is not very distinguishable from just the background fluctuations In other words for the politician to come out and say look, um, clearly my policies work We've added 100,000 jobs statistically speaking that 100,000 is not um is not distinguishable from background randomness It's like My saying I can command the laws of physics I say that when I flip a coin it will come up heads and I flip the coin it comes up heads and I say see my policies work What's going on is by random chance it happened, right? You've got to flip it lots of times before you see that actually I have no control over the coin Similarly here 100,000 is like the flip of the coin. It's not large enough number to really be saying much about It's randomness when the economy is is kind of affected and people choose to go to law school Maybe or when the economy is getting healthier and more people are entering the workforce How does that affect non-employment and unemployment figures? Yeah, it does affect them So when you have a bunch of people who have graduated college and then now hit the Job market you'll see on you know that would that would contribute upward pressure to the unemployment rate Because all of a sudden here were people we weren't counting before they were full-time students And now they've entered into the market looking for jobs. They now get classified They move get moved from the non-employed to the unemployed category All right, so you that would give you upward pressure on employment Then once I get jobs it comes back down again A similar phenomenon is happening now actually with baby boomers hitting retirement As baby boomers hit retirement They're exiting the labor force And now we have They're not we have a decline not only in the number of employed because they were employed people who are now Ceasing to be employed, but they're moving from employed to non-employed So we talk about unemployment another measure to be careful about that's quoted frequently is inflation We hear when we hear inflation numbers We often mistakenly assume that these numbers are attributable to all prices everywhere Keep in mind that inflation is an average Number so when we say something like in the actual number is in 2014 the the inflation rate in the u.s Was just under one percent Now what does that mean what it means is on average the prices of things that consumers buy rose by one percent on average To give you some specific examples in that same year when inflation was one percent the price of gasoline fell four percent The price of computers fell 10 percent The price of housing rose five percent So We have to keep in mind the the definition of inflation It's some it is the average change in the price level across all goods Just because we see a low inflation rate, it doesn't mean for example that you know We should expect the cost of tuition to be rising at one percent because inflation is one percent The individual prices will rise at different different rates. They'll just average out to what we call inflation So measures that that People commonly hear statistical measures people commonly hear unemployment inflation another one is gdp. So gdp we We People generally are correct in in saying well, this is a measure of the economic activity that's going on There are some details in the number, but basically that's right In as gdp rises generally speaking that means that we're better off Because increased gdp means we have increased incomes Of course technically speaking you need to adjust for inflation right because gdp could go up simply because prices rise So if I um if I buy this coffee cup for $2 this year that's $2 that goes toward gdp If I buy this same coffee cup not for two dollars, but for five dollars That's five dollars that goes toward gdp The gdp is higher now. It looks like the gdp is is it looks like we're better off because the gdp is higher In fact, we're not any better off. It's the same coffee cup. It was before all that happened is I had to pay a higher price for it So one of the things we have to be careful of is when we think about gdp over time Make sure that you're that you're looking at gdp that's adjusted for inflation That's a that's a better measure of our well-being as a whole But even gdp adjusted for inflation only tells us how well off we're doing In the aggregate it doesn't tell us much about how we're doing on an individual basis Um, you know good case in point is china's gdp is A little bit higher than united states gdp, but their population is much higher So on a per person basis The gdp is actually much lower in china than in the u.s so To look at gdp as people will quote it as this is a measure of how well how well off we are Keep in the back of your mind We need to make sure we're looking at gdp adjusted for inflation and on a per capita basis And there are problems there still but generally that's not a bad proxy for how well people are How well off people are on average One of the bigger problems with gdp is a measure of how well off we are Is that gdp simply adds up the value of all the goods and services that are sold It ignores what those goods and services are for example If I sell you An apple pie for ten dollars that ten dollars gets Calculated into the gdp and so we see the gdp is you'll however large it is in this measure of gdp Is an attempt to represent the apple pie and all the other things that you bought Okay, fine Suppose now I sell you not an apple pie for ten dollars, but a mud pie for ten dollars When I calculate gdp, it's the same ten dollars that goes in here So whether I sell you a mud pie for ten dollars or an apple pie for ten dollars It doesn't alter the statistics the gdp is the same It's ten dollars more of gdp The problem of course is nobody wants a mud pie So you are worse off even though the gdp is the same I sell you apple pie gdp is here. I sell you mud pie gdp is here But if I sell you mud pie you're worse off and all of a sudden you see the gdp doesn't necessarily always Reflect how well off we are it it moves in concert with how well off we are but there are some exceptions to this right the exceptions One source of the exceptions is government intervention in the economy Go back to the mud pie. Why would you buy a mud pie from me for ten dollars? Generally, there's no reason right? Nobody wants a mud pie But if I have a government that taxes you And has decided for whatever reason that it would be good if you had mud pies The government taxes you uses that money and buys the mud pie and puts it on the table and say here's a mud pie Notice what's happened with the government intervention The government through taxation and spending can effectively force you to buy things you would not voluntarily buy on your own And so we can have a gdp of a certain level And say well, we must be well off because we have this nice big gdp What we're missing is what Comprises this gdp. Is it generally goods that people have chosen to buy for themselves? Or is it goods that the government has chosen to buy for you? This becomes important When we start to talk about the importance of for example stimulus spending So people will say things like well, look it's good that the government spends money because when it spends money It um, you know creates jobs and this creates income for other people and lots of nice things happen None of that is wrong But there's an important point that's missing and that is what is the government spending the money on Simply because it's spending money Doesn't mean you're better off. It does mean the gdp will be higher But it doesn't mean necessarily that you're happier if I right now take five dollars from each of you and buy a pizza You'll all be happy if I take five dollars from each of you and you know Buy more paper and throw it on the table not necessarily so but the gdp is the same in both cases So given these deficiencies of gdp calculation, so are there any substitutes that are debatable or? Yeah, are there substitutes there are there's a there's a measure called gross output Which is an interesting thing it measures it measures more things than gdp does it suffers from It's free of some of the problems of gdp But it suffers from others from some of the same problems as gdp and it has some other problems that gdp doesn't have There is no There is no perfect way to do this We're talking about measuring people's well-being The reason there's no perfect way to do it is because each individual is different and things that you like aren't necessarily Things that he would like and so if I add up things that you like and say this is a measure of well-being I haven't captured him But if I add up things that he likes and say this is a measure of our well-being. I haven't captured you So there is no right way to do this. They're just competing Semi bad ways to do it, right? So the important thing here is that when we look at statistics like inflation unemployment gdp gdp growth That we understand that what we're looking at is Is not really the thing we want to see It's a proxy for the thing we want to see and it has some good points It has some bad points. It's just necessary to be aware of what those are So is there a way for us to measure things You know goods and services that aren't necessarily counted, you know as they normally would be in gdp So, you know things like black market stuff aren't necessarily, you know, traded You know, at least in any way that we could properly measure. So is there any way that we can, you know, track that? You know and measure what sort of goods and services are actually being traded outside of the regular market, I guess Yeah, that that's a good question. So there are two points here. The first is gdp Our attempt to measure all the goods and services that are produced Is not a complete measure because it ignores anything for which there isn't a paper trail, right? That includes some Goods that are, you know, bought and sold under the table Right, so you hire the neighbor kid to mow your lawn. You pay him a couple of bucks. That's a service It's being provided. It's not including gdp. There's no paper trail Um, you buy some, you know, something illegally, you know, clearly the local drug dealer doesn't is not going to give you a receipt There's no paper trail. There's no paper trail. There's no way to measure this thing Also, there there are products for which there's no paper trail that have nothing to do with being under the table or being illegal If you um, you have a rowboat and you like to go out rowing on the river On a saturday and you go out on a saturday and you row along and you do your thing. You're having a good time This is leisure You are producing something you're producing leisure For yourself and you're consuming this this has value And yet it's not included in gdp again because there's no paper trail, right? So Anything anything that that can't be tracked through through, you know, taxes or filings or this kind of thing We we don't measure economists attempt to get their heads around these things. You can imagine the problem You know estimating the value of people's leisure is is hard enough Given that A it's a hard thing to measure but b people are at least willing to answer the question when you say, you know, what do you How do you spend your leisure time? Measuring the drug trade you can imagine is is hard not only because it's there things are difficult to measure But people aren't interested in answering your question when you say how many, you know What's the value of the illegal drugs that you sold last quarter? Right So there economists attempt various ways to get at these and there are fuzzy numbers as to how the what how large those numbers might be What our takeaway here is to understand that the gdp measure that we look at that measures the magnitude of our economy Is smaller than the actual economy because of these things we've left out how much smaller we don't know But it is smaller than the actual economy How does this influence our measurement of command economies where probably most of the stuff that's Creating value for people or at least much of the stuff is happening in black markets And then a lot of the stuff that's officially counted is produced by A metagonism of central planning that's going to create lots of stuff. That's not producing value for people Should we just take any gdp measures from command economies with many grains of salt? Generally, yes you What you could what becomes a little bit easier with command economies is um, you're absolutely right We can't necessarily trust the numbers we're looking at because they aren't Measuring things in the way that we measure them in a free market So a dollar spent in a command economy isn't necessarily the same kind of thing as a dollar spent in a free market However Some things we can do is look at growth rates and to say okay Here's a command economy and they're measuring gdp and they tell me their gdp is you know 2 trillion dollars and i'm not quite sure what that means I think it doesn't come close to meaning what we say what in a free market where we say 2 trillion dollars however From last year to this year their number went from 2 trillion to 2.1 trillion That's a x percent growth Whatever that growth is they're measuring it the same way before last year and they're measuring it the same way this year Last year they got a 2 trillion number now they got a 2.1 trillion So I can conclude that there was some growth here, right? So whatever nastiness there is in the measure I know that the measure rose That rising of the measure would indicate that there's something Perhaps real going on here assuming that you can believe the numbers at all one more question Going back to kind of remaining compliant Is there any measure for like The the gdp that's created from having to go to h&r block to file my taxes or So that creates that creates gdp But then the people who buy turbo tax and spend six hours doing it themselves Don't necessarily generate that same value Yeah, that's an excellent question Because on the one hand the people who use turbo tax Suppose I can use turbo tax now cost me 70 bucks to buy it. Okay, so that 70 bucks contributes to gdp If I had gone to a tax accountant, it would have cost me let's say 150 The turbo tax is only 70, but I have to add my own labor And let's suppose when I add my own labor, I'm now up to a total of 150 70 bucks for turbo tax plus the other 80 bucks of my labor that gives me 150 same as if I went to the tax accountant If I go to the tax accountant the full 150 counts toward gdp Over here, we don't count the value of your labor because there's no paper trail So all we count is the the 70 bucks for the turbo tax So that's one that's one issue doing the taxes myself will cause the gdp to appear to be less The other thing that's going on is the doing the taxes at all Magnifies gdp erroneously right because what I'm doing is I'm sitting down and I'm spending this time or I'm paying an accountant to spend the time Going through all of these rules To figure out, you know, how much money I owe and then cut a check to the irs It's a tremendous amount of effort to do that That effort isn't producing anything Well, it's keeping me out of jail because I'm paying the irs, right But it's not producing Anything in any real sense think of it another way if the government Had a much more simplified tax code That resulted in me owing the same amount of money I do now But I could do it by filling out two lines on a card I could fill out those two lines in the card paid the government the same amount of money I'm paying them now and all of that time that I was spending doing all this nonsense is now freed up to do other things I could be more productive. I can you know go and rowing on the river with my canoe or whatever it is What the government has done by causing me to spend a tremendous amount of time doing my taxes or By causing me to pay someone else to spend a tremendous amount of time doing my taxes What the government has done is to force me to buy a mud pie Here's this thing that you would not like it doesn't help you any but i'm going to make you buy it We make jokes People make jokes about Government make work projects where you hire people to dig holes and other people to fill them back in again And you look at the dollars that change hands the way we paid these people to dig the holes We paid these other people to fill them back in that's lots of gdp But if you look at what's produced nothing was produced here Nothing it's the stuff that's produced that we care about The gdp measure is an attempt to get our heads around the stuff that was produced That's no different than the tax code With the tax code we create this very complex thing It's like saying okay dig this hole And then we have to hand it over to very smart people to figure out how we can comply with it That's like fill the hole back in At the end we really haven't produced anything