Introduction
The US government statistical agencies collect and process massive volumes of data, which are supposed to reflect the condition of the American economy. However, their tremendous effort is significantly distorted and undermined because of discrepancies emerging due to various factors. Feldstein (2017) studied the consequences caused by underestimating real GDP growth and explained the reasons for miscalculations. His findings should be taken into account by analysts since existing discrepancies heavily distort the actual condition of the national economy.
Point 1. Official Statistics Do Not Match People’s Judgment
The first takeaway for the analyst — one should not trust general public opinion. In addition, opinions of the press and politicians should also be viewed with criticism. According to Feldstein (2017), these groups often make a mistake by associating official statistics such as GDP with a real standard of living. Moreover, the press and politicians spread their misleading information, making people believe that the economic situation in the country is worse than it is. As a result, a significant share of pessimism is merely a result of incorrect interpretation.
Point 2. National Income Does Not Equal National Well-Being
Continuing the theme of misinterpretation, the analyst should not draw a parallel between national income and national well-being. Simply put, the growth of national income means that people started earning more money. However, the growth of wages not necessarily affects essential indicators of well-being. If anything, health, crime, and air pollution are not measured by economic statistics at all (Feldstein, 2017). To summarize: the analyst should relate national income to other economic data, such as national output.
Point 3. True Output of Services Is Hard to Capture
The next important issue for the analyst hides in understanding the real GDP growth. Feldstein (2017) claimed that corresponding official measures of total GDP growth produce underestimating. One of the most harmful factors in that regard is difficulty in evaluating the true output of services. For example, the Bureau of Labor and Statistics initially underestimated the 1987 to 2010 annual output growth in banking alone by 58% (Feldstein, 2017). Given that fact, the analyst should assume that the real GDP growth is higher than stated due to persistent underestimation of services output.
Point 4. Effects of New Products Are Not Well Reflected
Another issue that leads to miscalculation and understating real GDP growth is a prevalent omission of newly introduced products. Feldstein (2017) presented a case of statins, which lowered health care costs by some $400 billion in 2008 alone. However, that number which made almost 3% of GDP in 2008, was not included in the government’s estimates of increased real income or real GDP (Feldstein, 2017). Therefore, the analyst should realize that the positive impact of successful new products on GDP growth is likely omitted in official statistics.
Point 5. Underestimation of Real Growth Can Affect Monetary Policies Negatively
The problems that arise during the real GDP and inflation measurement are multifaceted and challenging to trace. Ultimately, these problems result in substantial errors, and the size of those errors often remains unknown (Feldstein, 2017). Moreover, the cumulative errors in calculating key economic data, such as the real GDP growth, affect the national monetary policies. According to Feldstein (2017), the understating of real growth can negate the gain from low interest rates policy and contribute to risks of financial instability. Consequently, the analyst should understand that miscalculation of real growth is potentially harmful to the general state of the economy.
Conclusion
Despite all issues mentioned above, one should not blame the economists and statisticians for incompetency. Feldstein (2017) pointed out that those problems are extremely difficult, and a great deal of effort and talent has been applied to mitigate the margin of error. However, the analyst should still realize that even the most detailed reports are likely to contain flaws and present information negatively. Nevertheless, the governmental reports still present a much better data source than even more distorted polls and personal opinions.
Reference
Feldstein, M. (2017). Underestimating the real growth of GDP, personal income, and productivity. Journal of Economic Perspectives, 31(2), 145-164.