Monday, November 14, 2016

Making Arguments with Made-Up Data

Economic inequality around the world has been increasing in recent decades. It’s tricky to find the right balance between sharing the wealth and reducing the incentive to work and innovate. This is an important debate, but it is filled with nonsense arguments using made-up data. For some reason, people are impressed by arguments that include some sort of numerical evidence, even if the numbers make no sense.

In a discussion of government spending and public debt, I once heard someone say that every dollar the government spends gets re-spent seven more times in the economy. The implication is that government spending provides a free multiplier effect, but just a little thought shatters this dream. If the government were to borrow and spent a few trillion dollars, it wouldn’t somehow grow and make us all rich. But this made up statistic seemed to win the argument at the time.

A widely-cited web site is the Global Rich List. It purports to tell you where you stand in the world based on either your net income or wealth. For amusement, I punched in that I was American (didn’t feel like scrolling to find Canada) and earned a net income of US$50k. The site told me that only 18,653,583 people in the word have at least this net income. Let’s round this up to 19 million.

I understand that big numbers make most people’s heads spin, but this struck me as a suspiciously low number. I wandered off to Wikipedia’s page on U.S. personal income. We have to be careful because it gives gross income figures rather than net income. The chart says that more than 35 million Americans make more than $75k. Presumably, these people net more than US$50k. And this is just the U.S. What about Canada, Australia, Europe, and the wealthiest in Russia, China, and India? The world-wide number has to be far greater than the 19 million reported by the Global Rich List.

Now the purpose of this web site is marketing. They want to drive donations to a charity. Maybe getting the numbers wrong actually helps with this goal. I’d like to think that they’ve simply made a mistake and would fix it if they knew. It’s possible that few people have noticed the problem and none have pointed it out before now. What troubles me most is that there is little incentive to fix the problem. Few people will notice the error, and charitable donations are flowing in.

Some say we’re in a post-factual world. The fact that the Global Rich list site just sits there pumping out bad data with no negative consequences seems to support this idea. I try to do my part in promoting rational discussion by rejecting arguments based on bad data whether they support my point of view or not. More of us need to think critically about the statistics we hear and reject them if they make no sense.

12 comments:

  1. I don't disagree with your greater point about bad data, but the specific examples you cite might not be the best. For example, while there's disagreement about the multiplier effect it is not a crazy notion (e.g., Moody's estimated that every $1 spent on food stamps in the U.S. generates $1.73 in the greater economy.) As for the Global Rich List, at the very bottom of their page (keep scrolling!) they say that they use 2008 World Bank data for the income statistics. So it may well be accurate within the context of 8-year-old data, and it's not fair to compare their numbers to 2015 personal income statistics.

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    1. @G: It's true that some types of government spending stimulate additional spending, just as other types of spending have little effect. My point is that the 7x "statistic" was made up and couldn't possibly apply to all government spending. But it won the argument I overheard anyway.

      The Global Rich list numbers aren't just a little off. They are so wildly wrong that it doesn't matter if you go back to 2008 or 1998. I was unable to find the2008 world bank data in the 10 minutes I spent searching. If anyone can find the data, I'd like to have it to see if I can figure out where GRL went wrong in their calculations.

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  2. Very true about people making up data and "facts". It's getting worse every year, internet seems to be a major contributor.

    On this note, what is the basis for the claim that inequality around the world is increasing? With the formally dirt poor nations like China, India and Mexico getting wealthier and developing middle class of there own, the claim seems suspect.

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    1. @BHCh: All the measures of income inequality I've seen support the assertion that it's been increasing in most countries in recent decades. However, if you go far enough into the past, income inequality was greater than it is now.

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    2. These measures are usually produced by organizations with an agenda and never ever look at the rise of level of life among billions of people in EMs.

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    3. @BHCh: I'm not bad at figuring out what data is real and what's suspect. According to Wikipedia, China's Gini coefficient has been rising in recent years. This means that the general improvement in Chinese incomes is happening slower than the production of millionaires and billionaires within China. The typical Chinese person may be getting better off, but this is only part of what income disparity measures.

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    4. Yes, but it's comparing with a few people within the country. In reality US unemployed earn more than doctors in some African countries. A real measure of disparity worldwide would be to take top 10 percent and compare to the rest.

      Top ten percent would cover US and Europe. Based on GDP alone, I would guess the world is far more equitable now than at any point since ww2.

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    5. @BHCh: OK, I see what you're getting at. The world-wide Gini coefficient rose steadily from about 1982 to 2000 and then dropped slowly from 2000 to 2010. It remains much higher than it was before 1980. This has happened while the Gini coefficients within most countries rose. So, your view of income inequality depends on how wide your view is.

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  4. Looks like the income data are super out of whack, but the wealth data seems more plausible. In US$, it takes a net worth of about $1.5M to get the same rank as $50,000 in net income.

    You'd think that people who put in $32,000 net income would be surprised to find themselves in the much maligned 1% club.

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    1. @Greg: I don't know where the real cut-off is for the 1% club for income, but it's higher than US$32k. I haven't looked at the wealth figures.

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  5. I read on this great news site called "All Made Up Crap" that soon the economy will boom when the sex robots are available to all...

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