Lies, damned lies and statistics or how to do the benchmarking of your ministers

We might not like it, but we will always need some paper-pushers in a state…Ok, let me rephrase this one. Not always, but definitely at this point, in 2011. At least until we can create a system powerful enough to do all administrative tasks…and of course if we decide to do it (SkyNet and Matrix do make you wonder if it’s a wise step). But for now we are stuck with people which do all administrative tasks, whatever it is. We have already talked a little bit about contact persons in the first line of administrations, so let’s focus on the real sharks this time. Let’s talk about our “beloved” ministers and prime ministers and the ways we have to evaluate them.

First, let me make one thing clear – I’m not against statistics, I’m against the indicators chosen by politicians and media to control the performance of our governments. Every year you hear GDP this, GDP that – I mean, it sure can give you a warm fuzzy feeling when you hear that it’s growing… but does it really makes your life better?

Let me just say that I'm still unsure if I should just assume that our politicians are all back-warded idiots and as the owner of e-subversion page make the call for them to hit the economy books newer than 1934, or on the contrary - assume that they are bunch of sly weasels, who succeeded in convincing most of the people, that GDP grow is always a good sign and demand that they stop lying, but I tell you one thing - you don't want an indicator as this one to be used to evaluate their performance.

Imagine a following situation. You have your small business. Nothing fancy, but you make your living. Your year starts with a water flood. Bad weather conditions are not really government fault (although some environmentalist would disagree), but the poor anti-flood installation – yes. Your business gets affected and you need to look deeper in your pocket to renovate your office or shop floor. You decide that you cannot rely on anti-flood installation anymore and buy an insurance. However the insurance company came to the same conclusion about governmental anti-flood installations and charges a nice, higher than usual premium. All this strain on your money makes you accept a deal with some new suppliers, you haven’t checked yet. After some deals you realize that, yes they were cheaper, but only because they were avoiding sales taxes or VAT. You get involved in some litigation with tax authorities. You need to pay a lawyer and some fines too. To make it worse, your business partner starts to threaten you to burn your business to the ground if you tell too much and since the police is of no help you need to contract private security firm. The government also notes recent surge of companies which avoids taxes and decide to increase tax for everyone to collect the expected amount of money, especially now that its’ infrastructure got also affected by flood. Your pockets are already empty, so you go to the bank to get some money paying them nice percentage. All these series of unfortunate events starts really affect your health. You have your nervous breakdown and need some care and medication. Since public health system is of no use, you spend even more money on private health care. The money neither you nor your family have. With you in a hospital and no money, your wife decide to enter underground economy and offers sex for money…

Now imagine that many of your fellow citizens had also a Lemony Snicket’s year. You are now in your bed in hospital and the apoplexy kills you in a moment in which you hear your prime minister saying that…wait for it…due to unexpected rise in investments and in service sector the GDP actually grew (!).

And this is the main (but not the only one!) problem with the GDP:

  1. Maintenance and reconstruction increase GDP even though it does not increase your wealth
  2. Insurance services increases GDP even though it gets higher by less efficient governments
  3. Lawyer and tax lawyer services increase GDP even though they are the cost of difficult and bad law
  4. Security services increase GDP even though they are direct cost of inefficient police departments
  5. Bank services increase GDP even though they are the cost of financing your economy
  6. Private medical services increase GDP even though they are direct cost of inefficient public health system

But there is even more to it. VAT fraud, underground economy, higher tax revenues - all of them increase GDP by European rules (if you don’t believe me, check for example the European law coded 31998D0527. Once you read it and get your jaw off the floor, don’t forget to thank all VAT fraudsters for the added value to our economies).

To put a cherry on the top - of course the funeral services will now get also some boost. Finally let’s not forget public retirement spending, which just got its’ future spending reduced by your premature death. The unemployment decreases too, when someone takes your vacant place. It was truly a great year for your country main indicators so stop complaining because your ministers did a really great job…

So what to do to improve our evaluation system? First of all let’s think about alternative solutions. For once there is one small third world country which is using National Happiness Index. First when I heard about it I thought it was funny…Now I am like “Wow”…I mean, simplicity and better accuracy than GDP.

Just because it does not sound like a rocket science does not mean that it is stupid. Ask yourself a simple question - what really matters to you? Some GDP numbers or that you feel that your life is better or going in the right direction? Of course even this approach has some downsides. Happiness can vary a lot in a short period of time. Imagine your country winning World Football Championship (might be a little difficult for someone from Poland…ok let’s imagine we win Eurovision…wait, we suck in this too…uhm…oh let’s just imagine, for the sake of argument, winning of any competition) – I’m sure the National Happiness Index in this case will get some boost, even though the influence of government in the final outcome is equal zero. Now let’s imagine that 2 weeks later, your prime minister tells you that your country broke, and you need to pay more taxes (now this one, I’m pretty sure, can be easily imagined by my follow citizens) - the Happiness Index goes down. As you see the timing of survey is crucial. So for this to work you need to do frequent surveys and observe trends and not single surveys. There is however one more problem to this index – it promotes short-term thinking over a long-term one. Quick tax cut may do wonders in the short-term, but sometimes it might be wiser to use this money for something intangible in a short run like for example an anti-flood infrastructure.

Other option to consider is to base the government evaluation on the purchasing power of your earnings. What I like about it – it’s at least partly prone to most governmental tricks like printing of empty money, showing of debt-funded growth and showing of growth in local currency while all other currencies went up by bigger percentage. What I don’t like – the goods that people want change very quickly. On the long run you compare very different sets of products. You can compare how much you can buy of some very basic products but it says nothing of quality of those products. The price of PC for the last few years stays more or less the same, but what you get for your money – is not. The fruits or vegetables might get relatively cheaper, but it says nothing about their taste. In the end you need to select an average basket of goods and update its’ content very often, which affects negatively easiness with which you can compare this year to the previous ones.

Finally and if we don’t use it as “the one and only” indicator we can even go back to GDP, but if we do it we need to clean it from negative effects counted as the positive ones and from the governmental tricks to make it up. I already mentioned some governmental tricks, so let's have a closer look on them:

  1. Printing of empty money
    Actually nobody calls it this way anymore. Now it is called "quantitative easing", "supporting of economic recovery" or "banking/accounting rules easing". Let they call it whatever they want, but punish them regardless, because basically they are out to rip you off of your savings. It's all very easy indeed. Imagine the economy consisting of 5 apples and 5 monetary units. You have 2 monetary units, by which you can buy 2 apples. The central bank makes its' magic and poof, now you have 10 monetary units in the economy. The number of apples does not change, so now every apple costs 2 monetary unit. Since all these 5 additional monetary units from "quantitative easing" went to banks or their buddies, your share in the economy is now smaller - you can buy only one apple with your 2 monetary units. For those of you smart enough to point me, that GDP is already stripped from inflation effect, so it shouldn't be an argument against GDP, I remind, that inflation usually have some delay to growing of monetary base and I have a small variation of this exemplary situation. Imagine that the guys who got these 5 additional monetary units were already broke, like the banks are. If not because of of this money they wouldn't buy any apples at all. You didn't wanted to buy those apples at this time either. The GDP should have been zero, but they came and bought all 5 apples for those 5 additional monetary units so the GDP was 5. Now new period starts and you decide to buy apples, but there are none. The inflation goes to haven, and all this effect of negative GDP appears one period later and only to your money and the money of your neighbour who has remaining 3 monetary units
  2. Debt-funded growth
    It's very easy to give illusion of growing economy if you spend a money, which you don't have. It's during paytime when the things turn ugly. Since we live in a turn-based world, where government changes every few years, the ministers always try to spend on account of future administrations. My money-your problem strategy between politicians is very popular, especially before elections. On the long run every one is affected. What should be acceptable limit of debt? Some countries set limit at 60% of GDP, some others higher. For me even 60% it's too much. There is much rumour right now about Greek problems, which are put in opposition to healthy German economy. Let me say clearly - all European countries could be as bankrupt as Greece. Do you think that Germany could pay in one year it's debt which is about 80% of GDP right now if every of his creditors demanded it? Try to tax 80% of every operation in a country and you will see hunger, revolutions and tanks on the streets. Do you want to live in a country in which banks have this power? But there is more to it - it's just a state debt, but many of us have also personal debts. Would you be able to payback whole total of your mortgage right now? We have lived enough on debt. From debt and printing of money I prefer printing, because it kicks back quicker, so you are unable to doom following generations. The only acceptable debt level for me is the one which is below your or your state's one month earnings
  3. Currency depreciation
    It's not very popular to defend common European currency in the times like this, but nobody will deny that it do have some bright sides. For once it allows you to compare your ministers against those from other European countries. Let's imagine they tell you that GDP in your local currency grew 3%, but at the same time your local currency depreciated against e.g. yen 10%. Are you richer, poorer or what? How can you tell? The answer is it depends - maybe you are "buy locally"-person, which does gains with these changes. But you could be also Manga-loving, Toyota driving, Sony fan-boy, who's live just became harder. And now translate it on European countries and their old currencies. In some cases 60-70% of all international trade takes place between other countries of European Union. Without common currency it will be very hard to evaluate any monetary indicator. Of course there is also GDP based on purchasing power parity, which supposedly should eliminate these differences. The thing is - it doesn't. Theoretically it adjust GDP for under- or overvalueted currencies. Practically the actual exchange rate can be far away from these theoretical values during many many years.

I think I have started to blabber again on how bad the GDP really is (sorry folks, I get too passionate sometimes). Let's us focus on possible improvements to this indicator instead. I can think of one very easy improvement to GDP indicator, once we strip it from governmental tricks, namely we could compare relation between GDP and GDP related to mentioned inefficiencies (like inefficiency of police, public health system, law etc.). If this relation is growing - we are going into good direction. If it's going down, then either we are not growing or our inefficiencies grow faster than the rest of our economy. But I'm sure people smarter than me could came up with even better ideas.