Freeman

ARTICLE

Macro Mistakes

Aggregate statistics may have nothing to do with the situation of any individual.

DECEMBER 01, 1993 by ROGER M. CLITES

Roger Clites teaches at Tusculum College in Tennessee.

You and I and everyone else live, produce, and consume as individuals, but macroanalysts—economists, statisticians, politicians, and others—insist on looking at us in terms of groups or averages. They then reach conclusions, develop policies, and give advice based on statistics that may have nothing to do with the situation of any individual. No family has 2.3 children. Perhaps no one in the entire country earns the average income. Too often those who are unaware of the nature of macroeconomics are led to make decisions which adversely affect their lives. In the case of politicians they may adversely affect millions of people’s lives, even entire national populations.

The following is a personal example of how aggregate statistics may have no meaning in an individual case. Twenty years ago a college where I was teaching went bankrupt. I was one of the fortunate few who was able to dispose of a home in the depressed housing market in the small town where the school was located. A friend in another state suggested that I might base myself at his home while I looked there for another teaching position. Another person advised me not to move out of state. She noted that the unemployment rate in the state where the bankrupt college was located was the lowest in the nation at that time, 2.8 percent. The rate in the state where my friend lived was about twice that high.

But my goal was not to apply for all the job openings in the state. I needed only one job. As things turned out I located my next teaching assignment in the state with the highest unemployment rate, a double-digit figure.

The averages, the aggregate, the “big picture” were not important to me. I was looking for just one job. Had I stayed at my former location I might not have learned of it.

Just as an individual may be led by macro figures to make bad decisions, or to give bad advice, so political leaders may be caused to overlook individual situations by concentrating on averages or aggregates. Let’s take another case which involves unemployment data.

Ignoring the question of whether there should be government unemployment benefits, let’s examine the process that is generally used to extend benefits when there is an economic downturn that continues for a considerable period of time. Usually the politicians decide that a person may collect additional benefits if the unemployment rate of his state is above a certain arbitrary percentage figure. But the state unemployment rate is of no importance to the person who is out of a job. The fact that few of his neighbors are unemployed does not lessen his plight. He is just as bad off as the person in a state with a high unemployment rate who is also out of work.

Over and over we see reliance on averages as the basis of decisions that may affect individuals very differently. In fact, that is the only way government can carry out its economic policies. And, while we may not be aware of it, individuals who rely on the advice from macro-type advisers may make decisions that turn out not to be in their own best interests. Those decisions may, for example, involve whether to accelerate or delay a purchase, whether to hold or change an inventory level, whether to change employment, or any one of many other decisions that we are often led to make on the basis of macro-data that may have little or no relevance to our individual situation or, worse yet, may run counter to what we personally will encounter.

Economic activity is not a group experience or an average experience. Only individuals think, and only individuals act. A macro-economist reminds one of the story of the man who was standing with one bare foot on a block of ice and the other in a bucket of scalding water. On average, his feet were 98.6° comfortable.

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December 1993

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