August 31, 2015
The sequester put in place as part of the 2011 budget agreement is continuing to bite, as most areas of discretionary spending are seeing their budget cut in real terms. One of the areas slated for the biggest proportional cuts in the Bureau of Labor Statistics (BLS). Ready to head for the barricades?
Okay, I know that the data produced by the BLS doesn’t sound especially sexy. After all, we aren’t talking about children going hungry or pregnant women being denied medical care. But on a per dollar basis, I would argue that BLS funding is among the best investments out there.
The purpose of the data collected by the BLS is to let us know how the economy is doing. Based on the data it produces we can know who is getting ahead and who is falling behind. We can know whether college degrees are really paying off, or paying off equally for everyone. We can know how long people spend being unemployed after losing a job or how much less they are likely to make when they find a new job.
Yes, we all have common sense understandings of these issues. We have friends, neighbors, and co-workers all of whom have experiences in the labor market, dealing with health care insurance, planning for retirement. These impressions are valuable, but sometimes our impressions are wrong. Our immediate circles of contacts may not be typical. The data from BLS lets us get beyond these impressions to get a fuller picture of the economy.
This matters hugely for important policy decisions. Right now there are many people who are anxious to have the Federal Reserve Board raise interest rates to slow the economy and the pace of job creation. The key factors in whether this makes sense are the pace of inflation, the pace of wage growth, and the extent of unemployment or various forms of under-employment.
We should want the best possible data on all of these items. It would be an enormous tragedy if the Fed raised rates and prevented hundreds of thousands of workers from getting jobs, and millions from getting pay increases, because it thought the inflation rate was higher than it actually is.
The BLS budget in 2015 was about $90 million less in real dollars than the 2010 budget. (That’s roughly 0.002 percent of the total federal budget.) The BLS is looking at still further cuts in 2016. Suppose it would take another $100 million a year to keep BLS funded adequately. If a mistaken Fed decision on interest rates costs us just 0.2 percent in GDP growth, it would imply a loss of $36 billion in GDP and mean roughly 300,000 fewer people have jobs. (It probably also means some number of children are going hungry and pregnant women are being denied health care.)
If it sounds far-fetched that the Fed may make a wrong decision because of bad data, consider the fact that the consumer price index (CPI) overstated the inflation rate that would be shown using current methods by roughly 0.5 percentage points annually in the early and mid-1990s. This means that if the current BLS methodology showed a 2.0 percent rate of inflation, the methodology used to construct the CPI in the early and mid-1990s would have reported the inflation rate as 2.5 percent.
The Fed did in fact raise interest rates from 3.0 percent to 6.0 percent over the period from February of 1994 to March of 1995. This proved to be unnecessary, since inflation remained well-contained and the Fed eventually lowered interest rates in the second half of 1995. It’s hard to say whether the wrong data on inflation contributed to the Fed’s mistaken rate hikes. The problems with the CPI were known at the time and hopefully the Fed was able to adjust for them, but we can’t know for sure if they did.
There is a real cost to mistaken policy decisions. While the folks at Fed and other policy making bodies are perfectly capable of making bad decisions even when they have the right data, we should want to do everything we can to avoid preventable mistakes. This means ensuring that they have good data, which means giving the BLS the money it needs to do its job.
One last point, this is not a partisan issue. There are plenty of economists across the political spectrum who support full funding for BLS. We all like to think that our arguments are based on data, but we can’t know that is the case if the data are not available.
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