Because the data says so!

To conduct economic policy, economists and politicians use certain metrics. This has a shortfall... when a metric becomes a target, it ceases to function as an accurate metric and to reflect reality.

Because the world is changing at an unprecedented speed, we live in a time of ever-increasing uncertainty. Things our ancestors took for granted, like what professions to follow, where to live, who to marry, how many children to have, etc. are no longer a given. We now have a vast arrange of careers to pursue, places to live, people with whom to begin relationships with, etc. Perhaps that phenomenon explains, to some extent, why anxiety disorders are at levels not seen (or perhaps not measured) before. While our lives beam with uncertainty, our body and soul crave certainty.

That’s why we try to explain everything, why we try to come up with theories about everything, and try to create measures for everything; so we can reduce (or pretend to) the unknowns in our life. Of course, we can only explain and measure what we know today, without certainty that it will remain unchanged tomorrow. Thus, in the attempt to do without uncertainties, we are often left with poor metrics and explanations. Goodheart’s law explains that “when a measure becomes a target, it ceases to be a good measure.” In other words, when we use a measure to explain or reward performance, we can more easily manipulate the measure to achieve the desired result or arrive at the desired answer. That’s precisely what economists and politicians do all the time. They establish a measure (e.g. GDP - to reflect how well an economy is doing) and reverse engineer the procedures to achieve the desired results, or nudge people and institutions into behaving in a certain way (e.g. lower interest rates to incentivize spending and artificially increase GDP) to hit the target, according to their desired measure despite the possible side effects.

Economists try to measure available economic data they deem relevant in order to determine future monetary and fiscal policy. Interestingly, because those measurements have become a target, they are no longer as telling nor as valid as they were before they became a target. Moreover, economists and politicians find numerous ways to discreetly alter the procedures to achieve the targets they desire. Case in point – inflation.

Inflation is generally defined as a general rise in prices, while it should be defined merely as a general loss of purchasing power. Over time, inflation measurements have evolved. So much so, that we now have several different measures of inflation. Which one is used to determine monetary policy, depends on which one yields the desired results at any given time. This is a clear example of Goodheart’s law, as inflation measurements became a target that supposedly reflected economic prosperity, it ceased to be a good measurement. Like this, there are plenty examples in economics, all which have an enormous impact on the middle class.

Inflation should be measured to reflect people’s purchasing power, to measure how much our dollars are worth. Economists insist that moderate inflation reflects a healthy and growing economy. In reality, deflation or disinflation are most beneficial and should be the normal trend as technology advances. Today, we can all feel inflation’s sting, a strong one. However, we are told that this is not “really true” because it is not reflected in the official data. Ex-Covid times, it has “only” risen an average of 2.7% annually since the 1990s or 3.5% since the 40s. And we have been listening and getting lectured by central banks and politicians that inflation really is too low. Even though we all see, very clearly, that our dollars can afford much less than what the metrics indicate.

This is how the middle class is getting destroyed. Because in the attempt to manage and control uncertainty, politicians and central banks devise and impose over-reaching policies that end up being destructive and causing even more uncertainty. Their policies are devised to hit certain targets based on measurements that do not reflect reality; and because we do not all have fancy Ivy League Ph.D.’s, we are told we cannot possibly know. In other words, unless the official measures say so, it is not really true. Disregarding the incredible complexity of the system, they believe a few tools and regulations will work to achieve a desired economic reality based on their chosen metrics. However, their chosen measurements are not capturing the reality of the economy and the struggles of the average citizen.

The reality is that the middle class is getting destroyed, even though it is not reflected in politicians’ and economists’ official measurements. So, the question is: if it is not reflected in the official data used by the central banks, how can we know it? By using common sense, and looking at simpler measurements.

For example, to see the extent of the loss of purchasing power we can look at housing affordability and see that it is at levels not seen in almost 40 years, or look at the share of young adults living with their parents and realize that it is at levels not seen since the 1940s, or see that the percent of women in their prime years working who are employed or looking for employment also stands at record levels (77.9%) yet are still barely able to afford having children  - an important reason why fertility rates have reached a historic low, or perhaps take a look at household debt balances and notice how it is at the historic highs and how young adults are being crushed by student debt[viii] from universities that no longer educate but merely indoctrinate, and then we would see how the picture painted by politicians and economists is unbelievably decoupled with reality.

This need to condense reality into formulas and measurements is just the result of a natural human need to reduce uncertainty. However, this decoupling from reality is not only unfortunate but dangerous. It is not the result of “capitalism” as the left claims, nor it is not the result of greedy businessmen, but a result of years of expanding government-reach, centralization, and the arrogance of central bankers who hold the imaginary belief that they have the knowledge to measure, direct, and control entire economies. The slow erosion of the middle class is the result of the destruction of capitalism, it is the result of years of misguided economic policy by those who are shielded from their consequences, as Thomas Sowell explains. The destruction of the purchasing power may not be reflected in the measurements created by those who use them as targets, nor in their analysis, but we nonetheless see it and feel it. Even though the average citizen does not have the technical economic knowledge to be able to explain and factually demonstrate with exotic theories and fancy measurements why their standard of living keeps deteriorating, it is real. There is no need for the government to control everything, the world is uncertain, yet the free market can take care of it. The only real way to reverse this decline is to return to free market principles, to limit government’s overreach and to limit the extent to which economists have control over our money and economy.

FURTHER READING

Goodheart’s law

Consumer Price Index

WSJ - Boomers Buying Houses Had It Bad in the ’80s. Millennials Have It Worse.

Bloomberg – Nearly Half of All Young Adults Live With Mom and Dad – and They Like It

WSJ - More Women Are Working Than Ever. But They’re Doing Two Jobs.

CDC – Fertility Rate Drops to Another Historic Low

Federal Reserve Bank of New York – Household Debt and Credit Report

Education Data Initiative – Student Loan Debt Statistics