Lies, Damned Lies, And The Dow

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In one of the most famous metaphors in western thought, Plato wrote about a man chained in a cave. Unable to see outside, all he could know of the world beyond his prison was what he was able to deduce from the shadows that were projected on the wall by whatever passed by. Plato was talking about how we all are prisoners of our own bodies and know only what our senses tell us of the world beyond.

We are still imprisoned in our own bodies, of course, and presumably always will be. But in the modern world we all are chained in caves of another kind as well, caves where the shadows on the walls are what we call statistics. We cannot see or touch or hear “the American economy.” So to get a grasp of it, and much of what depends on it, we need numbers, numbers that make an intellectual abstraction “visible” to the human mind.

Statistics are both ancient and astonishingly modern. When the shepherds of Plato’s Attica counted their flocks, they were, of course, making a statistical analysis. But the word itself entered the English language only in 1787. It is no coincidence that that was also the decade James Watt patented the rotary steam engine. As the factory system, which had evolved in the middle of the eighteenth century, and the new power source spread, enterprises could operate on a far larger scale.

This meant that seat-of-the-pants management became less efficient. The owner of a business that employs hundreds or thousands of people needs statistics. As the mathematics of statistics, and thus their power to illuminate an increasingly complex world, rapidly advanced in the nineteenth century, governments began to utilize them more and more as well.

And because politicians like to point with pride at statistics that make them look good, and view with alarm statistics that make their opponents look good, it is not surprising that they were soon making tendentious use of them. Less than a hundred years after the word statistics entered the language, Benjamin Disraeli opined that there were three forms of mendacity: “lies, damned lies, and statistics.”

Politicians are only part of the problem. Because bad news sells more newspapers than good news, bad statistics are likely to be played up in the news media. Further, while schools often teach how to create statistics, they seldom teach how to interpret them and spot the phonies. Thus political reporters and their editors often simply pass them on unvetted, so to speak.

Analyzing statistics is crucial to understanding what is really going on. Some statistics are both “hard” and easy to interpret. You don’t need to know much about baseball to be awed by Hank Aaron’s 755 home runs or Nolan Ryan’s seven no-hitters. But many statistics are soft. The unemployment number that comes out once a month counts only people who are looking for jobs, a vague concept if ever there was one. Every comedian worth his shtick has a brother-in-law who’s been “looking for a job” for years.

That is why a new book by W. Michael Cox and Richard Alm, Myths of Rich & Poor: Why We’re Better Off Than We Think (Basic Books, $25.00), is so useful. The authors, an economist with the Federal Reserve Bank in Dallas and a business journalist, tease apart the statistics that are bandied about so widely in the media to see what’s really there. The results are a revelation.

Consider the subject of wages, which have been “falling” in the United States since the early 1970s. In the last two decades the decline has amounted to fully 15 percent per capita (after inflation is factored in). Looking at the raw number, many commentators have been proclaiming the end of the American dream, sinking living standards, and coming social unrest. Yet a few other statistics give a completely different picture. In 1970 the average American house had 1,500 square feet; today it has 2,150 square feet. Meanwhile, the average number of persons per household has fallen from 3.14 to 2.64. The number of Americans who took a cruise in 1970 was 500,000; the number in 1997 was 4.7 million.

Will Rogers once said that America was the first society in history to go to the poorhouse in an automobile. Is that what’s going on here? After all, in 1970 only 29.3 percent of American households had two or more vehicles; by 1995 fully 61.9 percent did. The answer to the question is, of course, no. The problem lies in the differing meanings of the word wages .