When You Are Not an Aggregate

Why Economic Indicators Don't Boost Public Confidence

I started to pull a quote from this NYT analysis by Daniel Gross, who writes the "Moneybox" column for Slate.com. Then I realized that I couldn't choose the best and decided to quote more fully from it. Gross opens by noting how Bush extolled the ecomony when naming his new Secretary of the Treasury. Bush highlighted a number of seemingly indisputable positives, saying,

In the first quarter of 2006, the U.S. economy grew at an annual rate of 5.3 percent, the fastest growth in two and a half years. We added 5.2 million new jobs since August of 2003. The national unemployment rate is down to 4.7 percent. Productivity is high, and that's leading to higher wages and a higher standard of living for the American people.

Gross notes, " Yet in the latest New York Times/CBS News poll, only 28 percent of the respondents said they approved of President Bush's handling of the economy. . . " He then explains why statistics can mislead--and why the public has perhaps a more accurate reading of the economy:

Aggregates — big-picture figures like the unemployment rate, productivity and growth in the gross domestic product — are highly useful to economists. But to most people, they're abstractions. You can't use a low unemployment rate to pay a mortgage. . . .

In addition, aggregates generally are averages, which are of declining utility in an economy characterized by greater inequality of income and assets. In an interview with The Wall Street Journal in March, Mr. Snow took pains to point out that there had been substantial gains in per-capita income (8.2 percent, after inflation) and net worth (24 percent, before inflation) from the beginning of 2001 to the end of 2005. . . .

Consider a hypothetical country with 300 million workers. Say the chief executive of an investment bank gets a $300 million raise this year, while the other 299,999,999 workers don't get a raise. In the aggregate, the average per-capita salary has risen by $1, but only one person has more money in his pocket.

Gross then quotes Mark Zandi, chief economist at Moody's Economy.com: "If you put one foot in a tub of hot water and the other in a tub of cold water and take the average, everything is fine."

THIS dichotomy accurately describes the economy. From 2001 to 2004, the average net worth of an American family rose 6.3 percent, according to the Federal Reserve's Survey of Consumer Finances. But not everybody grew richer. For the bottom 40 percent of families by income, the median net worth fell. "It just doesn't resonate with people when the Treasury secretary says everything is fine," Mr. Zandi said. "It's fine for half the population, and it's clearly not for the other half."