Data Manipulation As Crisis: R. Pulsinelli

A simple stock-flow model indicates that if the store sells 100 cans of soup every month and replaces those 100 cans monthly, the stock will remain at 300 cans. Clearly, if the inflow of cans exceeds the outflow (sales), then the stock (inventory) rises; if the inflow is less than the outflow, then the stock falls. While this model is so obvious that it seems trivial, an understanding of this stock-flow model can help put some recently Dr. Pulsinelli is Professor ofEconomics at West ern Kentucky University, Bowling Green. He is the co-author (with Roger Leroy Miller) of Un derstanding Economics (West Publishing Co.). labeled "crises" in perspective, particularly unemployment, health care insurance, and the distribution of income. Unemployment Assume that the size of the labor force (the number employed plus the number unemployed) is 100 and assume that every month a survey is taken. The January sur vey indicates that four people are unem ployed; hence, the unemployment rate for January is 4 percent. In February, suppose those four people find jobs, but four others become unemployed; the unemployment rate is again 4 percent. Assume further that every month something similar happened: the four who were previously unemployed findjobs but are replaced by four others who have become unemployed. The unemploy ment rate remains at 4 percent all year long.

If one merely observed the unemploy ment rate, one might conclude that a crisis existed in the economy because the unem ployment rate remained at 4 percent. In deed, a problem might exist if the same people were unemployed each month, all year round. It seems to me that before we can talk about an unemployment problem, we need to know the number of heads of households who have been unemployed for longer than one year. Clearly, if the unem ployment rate were 6 percent and that num ber consisted only of heads of households who have been unemployed for three years, a serious problem might well exist. But that is hardly the problem in the United States. 620 In recent years, it is not unlikely that in any given month millions of people will become unemployed (asjob losers,job leav ers, re-entrants, and new entrants into the labor force), and millions will find jobs (or leave the labor force). Or, looked at in another way, of the 7.764 million people who were unemployed in December of 1993, 2.764 million had been unemployed for fewer than 5 weeks and only 925 thousand had been unemployed for 52 weeks or longer. The point is that before one can talk about an unemployment problem (much less a crisis) it is important to know how many chronically unemployed there are.

Understanding the simple stock-flow model helps to clear up another issue. Be cause the stock of unemployed is positive at any given moment, most people came to believe that full employment is never at tained. Hence, John Maynard Keynes' con tention that capitalism is associated with chronic unemployment-with the attendant implication that government must create jobs-seems to be vindicated month after month. The fact is that although it is possible for a surplus of labor (a shortage of jobs) to exist for some jobs (because wage rates are set by unions or governments above market clearing levels), it is extremely unlikely' if not impossible, for a general shortage of jobs to exist. Health Insurance Coverage It is widely reported that 37 millionpeople in the United States do not have health insurance coverage, and this statistic is said to reveal a crisis that justifies the Clinton health care plan (read socialized medicine).

Even if we accept that (dubious) figure of37 million, it is not indicative of a crisis. Every month, there are inflows into the stock of uninsured (people who have just lost theirjobs, who have just graduated from high school or college and are no longer covered by their parents' family plan, and so on), and, there are outflows from that stock (people who accept jobs, who became older and decide that it is now worthwhile to pur chase health insurance, who die, and so on). 621 The crucial information here is the num ber of people who are chronically uninsured and who want to purchase insurance but truly cannot afford to do so. If this number were large, it might make sense to look for radical solutions; the number of chronically uninsured Americans is probably between 2 and 3 million. Perhaps because 37 millionpeople did not indicate a sufficientcrisis, President Clinton decided to prolong the flow period and reported that 52 millionpeople were without insurance at one time or another during a one-year period.

Distribution of Income Income inequality, probably more than any other "problem," has been used to justify government encroachment on pri vate property and liberty. Data indicate (with some variability) that over very long periods in the United States, the lowest 20 percent of the distribution has received 5 percent of total income, and the upper 5 percent has received about 20 percent of total income. Let's skirt the issue as to whether such inequality is "fair" or "un fair" and merely note that such studies usually measure pre-tax income. By exclud ing incomein-kind and government trans fers (food stamps, rent subsidies, Medicaid, etc.) they overstate inequality. What is germane here, however, is the stock-flow model implications. Note that the same families do not continue to occupy the same positions in the income dis tribution; intergenerational social mobility occurs. Furthermore, such data overstate intra-generationalincomeinequalitiesas well.

Age/Earnings Profiles. An abundance of evidence indicates that most people reach relatively low incomes in their youth, rela tively high incomes in their middle years, and relatively low incomes near and after retirement. Consider now a fictitious econ omy in which the only determinant of in come is age; all 17-year-oldsearn $5,000per year, all 25 year-olds earn $12,000per year, and so on.

622 THE FREEMAN. NOVEMBER 1994 Assume that there are people of all dif ferent ages in this economy. Data taken at any given time (cross-section data) will indicate a considerable amount of income inequality in this (conjured) economy, whereas zero lifetime inequality exists. In short, income distribution studies that don't explicitly adjust for age are biased toward inequality because an age/earnings profile exists for most people, and over a lifetime there will be inflows and outflows through each age (and therefore income) bracket. Transitory Income Effects. Consider an economy consisting of clones, in which everyone has the same skills and earns the same income. Income differences result only from temporary phenomena (illness, luck, temporary periods of work strike, temporary industry-specific recessions and expansions, and so on). Using Milton Fried man's terminology, everyone has the same permanent income; measured income dif ferences result only from transitory income differences. In any given year, some people will be pushed below their permanent in come levels and others will be pushed above theirs; hence, a certain amount of income inequality exists in -a given period even if people have identical lifetime incomes. We conclude that unless income distribution studies consider only permanent (or life time) income, they will be biased toward measuring inequality; studies analyzing measured income overstate income inequal ity. Stated in another way, because of the vicissitudes of life, there will be continuous inflows and outflows through each income bracket. But because there will be (a lot of) different people in each bracket, income inequality will be overstated.

Conclusion Demagogues will always use data for their own purposes. The rest ofus need to be aware of how data can be misused and abused. Unfortunately, it is a lot easier (and the rewards are higher) to emote and shout "cri sis" or "unfair" than it is to analyze data and put them into perspective for the uninitiated. Perhaps that is one reason the story of the twentieth century is largely about "crises" that induce people to hand power to govern ments who keep that power long after the alleged crisis has disappeared. D TREmEEMAN IDEASON UBERTY The PiperWill Be Paid by Charles D. Van Eaton W hen God told Adam, "In the sweat of your face you shall eat your bread until you return to the ground, for out of it you were taken; you are dust, and to dust you shall return," He was not congratulat ing him. Maybe it's because I was a Biblical Studies major during my first tour through college, years before I returned to do it all over again as an Economics major, that I'm often drawn back to the ancient text to find economic lessons. If there ever was an economics lesson in Scripture, this early text (Bible students don't need to be told where it's located) is it. Life, it teaches, is not going to come easy. But that's OK be cause economists know that one of the good things about the hard life is that it teaches lessons to those who are willingto learn. The first lesson is this: make the right choices and there can be more bread withless sweat; make the wrong choices and there willbe less bread but more sweat.. Lesson two automatically follows from the first: deny the need to learn the first lesson and, sooner or later there will be no bread for anyone regardless of how much we all have to sweat.