The last time US statisticians tweaked the measurements in 2013, they wound up increasing US GDP by more than the entire economic output of Sweden – without any additional goods actually having been produced – according to Jacob Assa, an economist at the United Nations. They did it by declaring patents and licenses, which had previously been treated as an advance payment on a good, as investments instead. In statistical terms, that meant they now contributed to economic growth.
Something similar happened in Germany in 2014, when citizens suddenly found themselves about €1,000 richer. Welcome to the crazy world of statistics – one that can have a massive impact on how an economy is perceived. That’s because industries and sectors can have an interest in making their contribution to economic output appear higher than it actually is.
Nowhere has this been truer than in the world of finance. Income in this sector was originally regarded as a “transfer” from consumers to bankers – something that didn’t actually contribute to growing an economy – but since 1968 the sector has gradually been declared “productive.” This meant that the “output” of the industry, which was expanding rapidly in the West, led to bigger and bigger increases in GDP, as Mr. Assa explains in a book and various papers.
In Germany, the federal office of statistics for years opposed such statistical tricks, but eventually wound up partially adopting them in 2005. For companies, bank loans are considered an advance payment that is deducted from sales in order to calculate the value added. But when the government or private households pay a bank interest, that notional service has been regarded as consumption, which increases GDP, since 2005.
Wolfgang Eichmann from the federal office of statistics estimates this has led to a rise of 1.5 percent in German GDP – all for what critics see as the fictitious contribution of bankers.
Economists say this could explain how low to medium incomes can stagnate for decades despite apparently strong economic growth.
It also creates some rather bizarre incentives: If a bank cuts the interest rate it pays out on deposits before cutting the rate demanded for loans, this leads to a growth in GDP, Mr. Eichmann explains. In other words, even though the public and government will be paying more interest to banks and have less pocket money, statistics will show that the economy grew.
This is absurd, says Mr. Assa. “The financial sector in its various forms ultimately revolves around the transfer of money,” he said. Money is not a good or a service, but an abstract buying power with which goods or services can be purchased. Money cannot be consumed, as it has “no intrinsic value.”
It also has actual consequences for policy. Economists say this could explain how low to medium incomes can stagnate for decades despite apparently strong economic growth. Banks don’t necessarily boost employment when they make money through higher interest margins.
Mr. Eichmann suggested that he agrees. The German agency is legally obliged to follow the rule, but he warned to treat the growth figures with a grain of salt. Perhaps in an sop to the rule, the agency itemizes the “imaginary” banking services for anyone who might want to take them out. In 2016, €27 billion ($31.4 billion) of private consumer spending, almost 2 percent of the total figure, related to interest payments.
It’s not just the accuracy of growth that gets Germans’ blood boiling. Getting the inflation figures right also arguably matters more here than elsewhere. The country’s collective consciousness has long been affected by a period of hyper-inflation that the country suffered in the run-up to the Second World War – a crisis that is in part to blame for the rise of Adolf Hitler.
Some German economists complain that too little has been made of the advances in technology over the past decade, which has made goods cheaper.
The experience of hyperinflation has made German statisticians hypersensitive, if you will, to price changes. Every month, statistics employee Annemarie Schaaf heads for the clothing racks in the women’s department of a local department store in Frankfurt. She notes the price of the trousers and types it into her tablet, making sure it’s exactly the same model as in the previous month. The process normally takes only a few seconds. On the next floor up, her colleague Otto Dillenberger is looking for pajamas in the children’s department. But he’s out of luck because the store no longer carries the item. Instead, he has to find a comparable model that customers would presumably choose instead. The pajamas, he types into his tablet, are now €12 instead of €17.
Around 600 investigators scour the prices at specialty retailers and discounters, restaurants and supermarkets across Germany. The price detectives compile a list of more than 300,000 individual items in about 600 different categories of goods and services ranging from shoes, schnapps and potatoes to sewage disposal, package tours and pizza delivery service. Some of the information is gleaned from the Internet, the rest through visits to stores. What ends up on the news is a single number: the aggregate rate of inflation.
It’s a crucial indicator across the world. The European Central Bank, for example, sets interest rates for the euro zone based on whether annual inflation is above or below its target of 2 percent. The rate of inflation is also used to determine a country’s real, or price-adjusted, economic output. And it’s also relevant for daily life. For instance, leases contain stipulations that landlords can adjust rents when inflation increases by a specific percentage.
Getting the number right is no mean feat – nor is it any less controversial than growth figures. Statisticians need to keep up with the latest technology and changes in the world of consumers. In the case of notebook computers, for example, adjustments need to be made when prices rise because of a more powerful processor, rather than simply because a retailer thinks they can charge more for the same product.
That may seem obvious, but it’s really not. Some German economists complain, for example, that too little has been made of the advances in technology over the past decade, which has made goods cheaper. For them, it explains why inflation has stayed relatively low – and why central banks like the ECB should ignore it rather than pump money into the economy to push prices higher.
Florian Burg, who heads the consumer price division at the federal statistics office in Wiesbaden, is currently in the midst of an elaborate process of revising the basket of goods and the calculation methods they use to gauge prices across the economy, a review that takes place once every five years. “It’s a compromise,” said Mr. Burg. On the one hand, the results should remain comparable for as long as possible. On the other hand, German consumption habits are constantly changing.
Statisticians like Mr. Burg are trying to make the process more foolproof. The long-term goal is to have prices from retailers’ register systems sent directly to the government price investigators, together with information about the volume of sales. Until that happens, the services of price scouts like Annemarie Schaaf and Otto Dillenberger will remain in demand. But no one is about to get rich as a price collector – they get 50 to 75 cents per documented item. Perhaps most surprisingly, the pay scale hasn’t been adjusted for inflation for years.
Christopher Cermak is an editor covering finance and economics for Handelsblatt Global in Berlin. Norbert Häring leads Handelsblatt’s economic coverage out of Frankfurt and Stefan Reccius is a correspondent for Handelsblatt’s sister publication WirtschaftsWoche. To contact the authors: email@example.com