What Economic Journalists Need to Know

Felix Salmon of Reuters just wrote about the difficulty that most journalists have in reading economics papers :

 we generally have no ability or inclination to try to understand the details of the formulae and regression analyses, so we confine ourselves to reading the stuff in English, and work on the general assumption that the mathematics is reasonably solid.

As a long-time journalist with a Phd in Economics–game theory to be precise, so I’ve got my mathematical chops–I’ll let you into a secret. The real joker in the deck is not the mathematics, but the data.  Or more precisely, the lack of good economic and financial data in many areas.

You can analyze the economy all you want, but if you don’t have good data about leverage in the financial system (Lehman, anyone?), then all your models and forecasts are based on flawed inputs.  Meanwhile, the Fed’s Flow of Funds release doesn’t even mention derivatives. Huh?

Or to shift to another area,  what do we  know about the extent of offshoring?  One of the most important trends in the global economy, and the data simply isn’t there (maybe it’s been offshored!).   Pick your favorite company and ask…how many of their employees work overseas?  Any answer?

Or here’s another one.  Think about your local area (city, county, state). How much of the employment is from small local firms, and how much is from establishments of larger companies?  Wouldn’t that be something useful to know?

I could go on and on (as the readers of my articles and blog posts know).  The lack of good data on innovation and globalization is horrifying, given the economic importance of these topics to today’s world.

But as the saying goes, ‘problem’ is just another word for ‘opportunity’.  When the official data falls short,  the reporting by economic journalists becomes essential. We should poke our noses into all the interesting questions that people care about,  but that the available data and theory can’t answer.  And if in the end we’ve helped people understand a bit better, we’ve done our job.


  1. The reason so much mathematics is used is precisely to obfuscate the fact that there’s no data. I disagree that the data doesn’t exist though, I imagine there are many private datasets that highly data-driven investment outfits like Renaissance use, they just don’t make them public. Further, I see no point in their making them public or worse for public agencies to collect such data. The only reason for that would be for the govt to try and control the economy even more using such data. Just because you and govt economists don’t have access to that data doesn’t mean there aren’t private actors collecting it and making useful decisions based on it. As for economic journalists, if nobody is willing to pay for their reporting, such as with Businessweek being sold at a firesale price cuz it lost so much money, perhaps they should just give up. 😉

  2. Yes, like the data that Moodys and S&P used to rate CDOs or the housing data that the banks used that showed prices never fell. It is precisely because private actors only have the incentive to look at their piece of moneymaking, not the safety of the system as a whole, that others must take up this task.

  3. Mike Reardon says:

    I think this post points not just to a academic need of economists and media to gain this data, but it can also feed a social activist need to clarify and disclose this macro data. Know nothing debates and comments in media are often sans facts without recourse, propaganda of for the defense of business interests. A International Year of Economic Data Disclosure, with World Wide Business and Gov disclosure could have social impact. Taking 18 months to disclose the economic facts of the last decade would aide the future debate.

  4. tc, don’t forget all those wonderful regulators at the SEC who were poring over derivatives transactions just on the heels of Madoff. Oh wait, they were so stupid they didn’t even understand what those transactions were, even when Markopolos highlighted it all for them. But what about the wise Barney Frank and all his buddies in Congress? Well, those morons were pushing Fannie and Freddie to lend more money to subprime lenders, so that those quasi-public entities failed hardest of ALL the companies out there. Private actors made mistakes but your fantasy that public actors are going to safeguard you, rather than grab a huge chunk of the pie for doing nothing, has been shown over and over again to be wrong. It’s too bad you’re too dumb to realize who is really scamming you, and they aren’t private actors.

  5. I have no illusions about the capabilities of government agencies. But with the right information, determined outsiders can make sense of things (such as Markopolos, whose obsession led him to investigate when all the private actors on Wall Street had no incentive to). When you say “I see no point in their making them public or worse for public agencies to collect such data”, I can only conclude that you’d prefer for the public to remain in perpetual ignorance, that it doesn’t even matter if anyone can find out the truth or not.

  6. tc, you certainly seem deluded if you think they are up to your mooted task of maintaining “the safety of the system as a whole.” I agree wholeheartedly that outsiders can figure it out like Markopolis did, which is why the market is self-correcting. Some investors get burnt with Madoff or Bear Stearns, the news spreads far and wide, and the next generation of investors considers their investments more carefully. Downturns and these occasional crises have many benefits that way, reining in the credulity of investors who haven’t been through such drawbacks. Who is the public that is in ignorance and why do they matter? Individuals and other private actors are well aware of their own sectors and when they aren’t, they pay the price. If you mean the govt=public, yes, I’d prefer they remain ignorant rather than continue to muck around in the market and make things worse, as they have been doing and continue to do with these moronic laws Obama is passing.

    • Are you ignoring tc’s point that outsiders (for example, public investors) need information like the kind Mike Mandel is calling for in order to make those decisions?

    • Where did tc make that point? All he said was that they made bad decisions, regardless of the data available, as there was no shortage of useful data. I remember sitting at a buffet in San Jose at the peak of the housing bubble in 2005 and talking to some friends about how inflated real estate prices were and how we all knew it. That wasn’t even based on my testing the market, as I was far from being able to afford a house, it was based on my reading The Economist for years and perusing their charts showing how we were in a housing bubble comparable to Japan in the 80s, then showing how steeply and for how long Japan’s prices fell afterwards. The data is almost never the problem, the delusion of some investors and most govt bureaucrats is always the problem. Also, Markopolos had no problem reverse engineering Madoff’s returns and figuring out it was a scam, while most options traders in Chicago and Wall Street knew instinctively it had to be a scam without even delving into it. You cannot make the world a crib in which nobody ever gets hurt, all you succeed in doing is making all of us poorer. If people know they will get burned for bad decisions, that is all the incentive they need to do their research and if they don’t, caveat emptor.

      • Of course you cannot pad all the sharp edges in the world, but don’t minimize the dependency the financial system (like almost any set of interaction among civilized people) has on not having too many bad actors out there. If cops weren’t pulling people over for speeding and running red lights, you’d see a lot more dented fenders out there. In fact, in countries with a weaker rule of law, that’s exactly what you do see. It doesn’t matter that they don’t catch all the bad guys: they act as a deterrent. And if it weren’t working somewhat, Madoff wouldn’t be news.

      • Or maybe if cops weren’t pulling people over, insurance companies would just put speed monitoring hardware in your car and cars would use cellular and wireless mesh networks to communicate advance info about speeders and avoid them. 🙂 There are many ways to solve these problems, the point is govt regulation has proven repeatedly to be the worst way. Not only do agencies like the SEC or OFHA not act as a deterrent, they make consumers relax their guard because they assume that someone is regulating these guys, which govt regulators always do a horrible job at. Madoff bragged to potential investors that the SEC made precisely the kind of scam he was running impossible to pull of. He wanted them lulled into investing by using the SEC as a safeguard, all while knowing the true incompetence of the govt regulator. I’ve got news for you, it didn’t work at all: Madoff turned himself in because he lost a bunch of money in the crash and couldn’t keep the Ponzi scheme going anymore, not because anybody found him out. I’m not arguing against oversight, I’m arguing for market oversight by Consumer Reports-type organizations, that are incented by competition and profit, rather than the laziness and incompetence that govt monopoly inevitably breeds.

  7. Sam in Covington says:

    Dissertation in Game Theory! Send me a link!
    Have always enjoyed your column and have noted with delight that the academic snobs treat you with respect – unless, of course, they disagree with you.
    The models can be faulty, of course; but as someone who has come back into economics after a long hiatus, and has been downloading SSRN papers on all sorts of quirky areas, I have to say that, amongst other complaints, there is rarely a link to the data set.
    And, too, i agree with the poster above that more data means more governmental control. Economics, especially from the left, seems to generate “policy implications.” It is a fear inspiring phenomenon.
    I hope that you are well and enjoying the spring season, environmental and religious.
    (Say something nice about Gretl. 🙂 )

  8. Mike Mandel says:

    tc, ajay,

    I was just reading Michael Lewis’ book The Big Short, and what was striking was how little data was available about key aspects of the housing and financial markets.

  9. I watched Lewis’s interview on 60 Minutes and what struck me was how ignorant he seemed about the subject at hand, which buttressed my previous opinion, from skimming parts of his book Liar’s Poker, that he was fairly ignorant of financial matters. What key aspects did you have in mind, Mike?

    • Mike Mandel says:

      Some of the people he writes about were making billion-dollar bets, and they simply couldn’t figure out who were on the other side of the bets. These were totally non-transparent markets, even to the people who were in them.

    • I don’t see why that information would matter: every time you trade stocks, you face the same situation. It might be a market-maker like JP Morgan buying the Citigroup stock you’re selling, it might be a doctor in Idaho. You are redefining transparency to mean something far more than it’s commonly used for. All the information that was necessary to short the market was available to a one-eyed guy in Cupertino. I do think that derivatives had a level of indirection to them while simultaneously linking financial firms closer in unexpected ways, which was why Buffett got out of the market in 2002, long before most. However, nobody held a gun to anybody’s head and made them buy subprime bonds or sell credit-default swaps in 2005-7, just like nobody held a knife to anyone’s throat and made them buy pets.com stock in early 2000. You imply that systemic risk can be controlled, if only there were more transparency. I say that given that the people you want controlling that risk had more information than anyone else and still made exactly the wrong bets of spurring Fannie and Freddie to lend more, that entire premise is delusional.

      • Mike Mandel says:

        But that’s exactly the point…the people controlling the risk didn’t have enough information, as has become clear afterwards. And there wasn’t any mechanism for getting it, giving the way that CDOs were stacked on top of CDOs

      • Who was controlling the risk and what information didn’t they have? You’re being very vague. It is true that if you’re going to enter into a large derivative transaction, you want to make sure the other party has enough collateral to pay up (which is what ended up sinking AIG) but I see no indication that such large bets were being made without knowing who the counterparty was. CDOs on top of CDOs didn’t stop a lone investor from ferreting out the worst ones, as my link above to Lewis’s book excerpt shows. Buffett didn’t want to put the time into doing that so he got out. Many investors didn’t want to put that time in either and yet still bet blindly, they went under. Burry put the time in and reaped the rewards. Saying that there were people who didn’t pursue the information is not the same as the information wasn’t there to be had.

  10. CompEng says:

    Ajay, per the previous thread, you might think that would occur, but in countries where the cops don’t patrol the roads, I haven’t seen instances where the problems get solved by the insurance companies or anyone else.

    Similarly, business tends to gravitate towards places with clear rule of law and financial regular because there are countries with governments willing to provide it, and private sector alternatives and confidence in those alternatives is lacking. There’s a reason why so many big banks are in places like New York, London, etc. Of course, you could argue that it’s because banks and their larger customers can get someone else (taxpayers) to pay for a service they would otherwise have to pay for themselves.

  11. That’s because in those same countries that you mention, they’re so poor that they hardly have cars, let alone insurance. Your argument is like saying that because poor people don’t buy life insurance, nobody would buy life insurance. Business gravitates to clearly defined environments, but rule of govt law generally isn’t that clear. Hence all the uncertainty stirred up right now by all the medical and financial regulation that Obama is cooking up, including his insurance mandate that is clearly unconstitutional and that will be slapped down in court (just like his FCC was slapped down in court today for similar overreaching). That is why most “law” is made up of private contracts between businesses, the govt law that attempts to get in the way of these contracts is mostly a nuisance, reserved for whiners like Apple who are afraid of losing in the marketplace to Android, so they sue HTC in govt courts with the horribly-run govt patent system. The reason so much finance is located in NY, London, Chicago, etc is only because those were port cities where much commerce was done, which naturally also attracted scammers like Spitzer to try and impose their govt nonsense. Considering how much corporations pay in taxes, while the bottom 50% of the population pays almost nothing in income taxes, it’s the corporations and their shareholders paying for everybody else, not the other way around.

    • CompEng says:

      My claim is that you won’t find a rich country without a strong government, although you may find a rich country without a big government. Businesses don’t provide a clearly defined environment because a clearly defined environment is a public good: the individual incentive is always to try to get everyone else to behave predictably without having that restriction on yourself. When businesses muck with law you get the examples you mentioned: they try to co-opt it for themselves.

      We ought to have a much flatter tax, but that’s another discussion. The bottom line is that for any individual company, getting the government to pay for things is still cheaper than ponying up for it directly.

    • It’s probably true that richer countries tend to have more onerous tax and govt burdens, but you’re putting the cart before the horse. Read up on those countries’ histories and you inevitably find that they got rich first, then the enterprising politicians came along and cooked up taxes and regulations to become huge leeches off that wealth. In other words, you’ve got the causation wrong. Whether or not one can label a clearly defined legal environment with a nonsensical and vague term as “public good,” the fact is that businesses create such clear environments all the time with their contracts. Yes, you always want the best contract you can get, which is why when the govt makes the law, companies abuse those environments the most, because it is easy to pay off politicians for favorable treatment. The point of my previous comment is that companies and their shareholders are paying so much that they’re paying more than their individual govt “costs,” that were imposed on them by the govt in the first place and that they never asked for, they’re also paying for a bunch of other services that individual taxpayers are too cheap to pay for but insist on somebody else paying for them.

      • CompEng says:

        Wealth never predates a welfare state, but I’d be amazed to see it follow from political anarchy, either.

        “Public good” is not a nonsensical term, and it’s not even that vague: it describes a condition where the benefits of a good aren’t easily limited to an “owner” who is also responsible for that good. Who owns clean air? It’s not impossible to set up an ownership structure for it, but it’s not so simple that it’s been actually done, to my knowledge.

        “The fact is that businesses create such clear environments all the time with their contracts”
        There’s some truth to that, but it’s easy to exaggerate.

        I’ll note that if payroll taxes were lumped with income taxes (and why not, they’re probably priced in from a corporation’s standpoint), it’d be harder to argue that 50% of people “don’t pay taxes”.

    • To bring some actual numbers to this discussion, as is my wont, check out this breakdown of 2008 tax revenue. Corporate income taxes pulled in $300 billion, not counting the large fraction of payroll taxes that are actually employer contributions. In a sense, the corporate/individual separation is fairly artificial and hazy, as what are corporations but collections of individuals? Which btw is why the Supreme court correctly struck down the campaign finance laws limiting corporate speech right before an election, that Obama then decided to demagogue as he was losing every other PR battle. However, if you’re going to make the case that companies don’t pay their way, you’d have to show that their govt “costs” were more than that $300 billion they paid in, an almost impossible case to make.

      • CompEng says:

        Those are scary charts. I keep forgetting just how little of federal taxes go to truly public non-military services: transportation, education and R&D, courts, legislation, and regulation authorities. There are some fairly large corporate subsidies, but they’re dwarfed by $300B. I’m not sure everyone would find the case impossible, but I certainly wouldn’t take it up.

        And yes, the corporate/individual separation is hazy in the sense of shared interests, but given how little control shareholders actually have over corporations, I’m as wary of leaving power in the hands of large corporations as governments.

  12. I think you meant to say that wealth always predates a welfare state and given that, the conditions in which wealth develops are certainly closer to political anarchy than anything else. 🙂 Public good is a nonsensical term because it is usually impossible to sum up the costs and benefits for anything at the scale of the so-called public goods. It’s hard enough to do that for even a medium to large corporation, which is why so many of them descend into bureaucratic inertia. To take your clean air example, once you start putting in regulations over how clean the air has to be, that raises the costs of coal-fired power plants, which then raises the cost of electricity to everyone, which particularly affects the poorest the most. All costs and benefits are a complex nettle of interactions and the only way to deal with that is to let individuals pursue what is most important to them.

    You don’t need to own air to come up with ways to privately negotiate over it, just as one doesn’t need to own a river to come up with private schemes of how to share it. That’s what the recent Nobel prize in Economics was about, such private schemes that neither grant ownership nor involve govt regulation. I agree that the bottom 50% still pays payroll taxes but since that pays for Social Security and Medicare benefits for themselves, it’s not quite paying for the govt. Nobody said they “don’t pay taxes,” I clearly said they don’t pay “income taxes,” 😉 as that’s what pays for the govt costs we were discussing (except for the billions they skim off the top of the SS trust fund and waste on govt spending of course). I agree that shareholders don’t exercise as much control over the corporations they own as they should, but govt, that leeches off 40% of GDP every year and only lets you vote once every year or two, is far worse. It’s not even close.

    • CompEng says:

      “I think you meant to say that wealth always predates a welfare state”. Yes, that’s what I meant.

      “the conditions in which wealth develops are certainly closer to political anarchy than anything else”. Only if you think all government is Socialism, which I won’t accede to.

      “All costs and benefits are a complex nettle of interactions and the only way to deal with that is to let individuals pursue what is most important to them.” That’s a weak argument. If you’re so poor that it makes sense to spew toxic waste into the air, but it reduces my life span by 20 years due to asthma or whatnot, what’s my recourse? Ideally we’d negotiate a settlement, but without a strong 3rd party, those settlements tend to become violent.

      “That’s what the recent Nobel prize in Economics was about, such private schemes that neither grant ownership nor involve govt regulation.” I suppose that’s something I’ll have to read up on, but if there was a Nobel prize given on the subject only recently, it can’t be that obvious a solution. It still leaves room for respect for previous methods of approaching the problem of “public goods”.

      “Nobody said they “don’t pay taxes,” I clearly said they don’t pay “income taxes,”. My apologies: in Mark Parry’s blog, I believe “don’t pay taxes” was the common understanding: I swear half those guys are Tories.

      “But govt, that leeches off 40% of GDP every year and only lets you vote once every year or two, is far worse.” In terms of impact, that’s an interesting point, a little deeper than I want to delve into at the moment.

    • Who brought up socialism until you just did? The point is that if you look at how much govt involvement there was when any rich country got rich, it was always closer to a libertarian or laissez faire condition than anything else. You may think arguing that public goods can never be calculated is weak, but that’s the basic argument against them that you haven’t been able to counter. Your recourse is to negotiate with the polluter to stop what he’s doing and pay him if necessary, that’s what the Coase theorem was about. There will always be third parties to help out, where you go wrong is in assuming that the govt or its courts are the best third party to get involved. In fact, private arbitrators today handle far more squabbles every year than any govt courts. As for Ostrom’s Nobel prize, the truth is that the dummies in academia willfully ignore that almost all the “problems” they broach have been solved long before they ever got there. Ostrom found these solutions empirically, by looking for what people actually did for decades to solve these problems, rather than the standard academic approach of inventing a problem and then devising a “solution” unmoored from reality. The point is that the methods she found were the “previous methods” that people already used, only the academics were ignorant of.

      • My point was that a lot of our government is socialism today (as Krugman put it, our government is an insurance company with an army), but we had a strong federal government when much of America’s wealth was built that was not “an insuarance company”.

      • What was strong about it? Tax revenue was only 7% of GDP a century ago, growing 6 times since then, with two big spikes during the world wars that were never reversed. That’s what led to the libertarian aphorism that War is the health of the state, which has held true ever since.

  13. Thus my differentiation between “big” and “strong”. The government did a lot of things a century ago, just not by today’s standards.

  14. It’s tough to pay for “a lot of things” when taxes are only 6% of GDP or less. The fact is govt was minimal but unfortunately once we got wealthy, the populace was swindled into giving up their riches for govt to throw it down the drain, largely by using that favorite threat of the govt, war.

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