Download Don`t confuse numbers with measurements

Middlesex News 7/19/89 – Don’t confuse numbers with measurements
One of the most difficult problems in economics is obtaining appropriate
measurements. Without these we would not know whether to be surprised, worried or
pleased by the events we observe. In fact, without appropriate measurement it would be
impossible to test our economic theories.
Many people, including legions in the media, tend to confuse number with
measurement. Just because we can assign a number to something does not mean that we
have an appropriate or meaningful measurement.
Sometimes it is easy to see the difference between these concepts. Persons in a
photograph, for example, can be identified by placing a number next to them; then each
name can be listed separately with the corresponding number. These numbers are
arbitrary and convey no meaningful information; they are useless for any kind of
measurement.
Sometimes, however, the difference between the concepts is ignored. If a person
earns three times as much as another, we may causally say this person is three times
better off than the other.
Yet when we say that we express a naïve view of what human welfare is all about.
Both the rich and the poor commit suicide and we have to think that all the people doing
so feel distressingly bad.
It is common in economics to take some plain number and change it in such a way
that it will yield more meaningful information. This gives rise to the distinction that is
made between nominal and real variables.
Nominal variables are numbers given in plain dollar terms. For example, your
income may be stated as $500 per week. We say that this number is a variable because
your income can change over time; it is a nominal because it does not make reference to
anything else.
Suppose, though, that we wanted to know more about this $500 figure. How
much does $500 really amount to? The answer to that depends on the prices of goods
and services.
If you could only buy an ice cream cone with $500, then your real income was
low; if you could buy a tractor with that money, your real income would be high. Real
variables make reference to something else and hence they can express some meaningful
relationship or measurement. Let’s see why this is so important.
People lend money with the expectation that they will receive more than the
original sum when they are paid back. This expectation, however, must be interpreted in
real terms. Money is a claim upon resources, and when lenders are paid back they hope
to receive not just more money but a larger claim upon resources.
Think of lending a ton of wheat, rather than money. If you get back the principal
plus a positive interest, then you will get back more than a ton of wheat. If you don’t,
then you would be lending wheat at a negative real rate of interest. No supplier of funds
or goods would like that at all.
Suppose that you went to buy apples and the seller said that they cost minus 20
cents. Ridiculous, you would say, and then grab as many as possible. No one needs a
degree in economics to figure out that the supply of apples, at this negative price, would
dry up and that soon people would have to change their eating habits.
Would the media report such an event? You would hope so, especially if the
market in question involved not billions but trillions of dollars in transactions. We would
expect the media to express concern, deep concern, for such a market would likely
collapse and could bring down the economy with it.
Sometimes the media have an excuse, if the event takes place far away. In
Argentina, for example, real lending rates have been negative for most of the last 20
years. Ten years ago the rates reached the astonishing figure of minus 84 percent.
Think of this. For every dollar that you lend, the principal plus interest would
amount to 16 cents.
Argentina is far away but it is not alone. This is a story that is repeated in many
countries. It is not surprising, then, that many immigrants are astonished that in America
one can lend money at positive real rates of interest.
For most of us, this is really incredible. No wonder that in America the economy
is strong and healthy.
But wait, what am I saying? When we look at the American experience in the last
41 years, we find that during 11 of those years American lenders also faced negative real
rates of interest. However, only once did these real rates go lower than minus 3.3
percent, which is relatively insignificant compared to the experience in foreign countries.
Negative real rates prevailed in this country from 1973 to 1979 but we have not
seen them again since. They had the potential of destroying the viability of the American
financial markets. This period was one of crisis for the American economy. From 1975
to 1978 people actually expected to “pay” these negative real rates when they borrowed
money.
Since these events took place right here, you would have expected a thorough
coverage of them. Yet, somehow, they were missed. That is the danger of confusing
numbers with measurement; when the media report plain numbers we are likely to miss
the big stories.