Economic Literacy Problems With Journalists
28 August 2006I occasionally harp on how various people need to educate themselves about personal finance. One of the things many people don’t know, however, is that the people you’re reading advice from often have no clue themselves. It’s very hard to separate the wheat from the chaff - and that can have big impacts on people making personal finance decisions for themselves. I ran across a particularly bad example in the field of economics and had to spotlight it - precisely because this sort of economic illiteracy can lead other people to make investment decisions based on reading the article.
The one I’m referencing is from Newsweek, on the “economic miracle” in Europe in which Europe is now growing faster than in the United States. Why does the author conclude Europe has an economic miracle? Because:
In nothing less than a minor miracle, the euro zone is back. The Continent’s major economies beat GDP expectations in the second quarter of the year, resulting in the strongest growth in six years. The euro zone grew almost 1 percent last quarter, outperforming the United States, Britain and Japan. The upshot is that the euro zone will likely grow about 2.5 percent this year—up from 1.3 percent in 2005. What’s more, Slow Europe is now creating jobs faster than the United States: France and Germany in particular saw strong jumps this spring and summer.
This is probably the least informed paragraph I’ve run across in awhile. Right off the bat, anyone who has a passing familiarity with economics should know that these numbers aren’t miraculous. In fact, they’re pretty bad. 2.5 percent annual economic growth is not that great, and 1 percent is pretty awful. For example, this academic article comparing the U.S. and Europe points out that the U.S. has grown at 3.3 percent on average over the last ten years and Europe has grown at 2.1 percent. 2.5 percent is better than they’ve been doing, but no miracle.
Then there’s the idea that 1 percent economic growth in the last quarter is better than other major countries. I can’t tell whether this is just a typo or a failure to do basic research. The most recent official estimates for the U.S. are a 2.5% annual growth rate in the second quarter, down from 5.6% in the first quarter. One percent growth doesn’t beat either of those. The author is right about Japan, which only expanded .8 percent in the second quarter of 2006. But again, basic economic knowledge would tell you that this isn’t exactly impressive - Japan has been in a funk since the early 1990’s, and it’s only a recent trend for their economy to be growing at all.
I had to go elsewhere to find actual information on the job numbers that are being reported. This article in the International Herald Tribune pegs overall European job growth at 200,000 a month - and it’s also a much more balanced and sensible take on the upswing in the European economy. Those numbers look better than the U.S., which created 113,000 jobs in July. But then we run into that pesky problem of “research” again. The EU also has a population of about 460 million - whereas the U.S. has a population of about 300 million. Which means if you compare for population, the U.S. growth is the equivalent of about 173,000 jobs in the EU - not all that much of a difference.
Why go after some random reporter? Maybe she had a rough day, or a short deadline, or got assigned to write on something she’s not an expert on by an editor. But real people make financial decisions based on this stuff. How would you feel if you put a bunch of money into investments in Europe based on a fluff article that got the numbers wrong? The important thing to take away from this is that no one you read is infallible, even if they’re claiming to be an expert or if you see the statistics in a popular magazine with a nice glossy cover. You need to educate yourself - and if a blog or a newspaper or a book says something, you can’t just trust it. You have to check out multiple sources and know some background material about the subject - because if you rely on something that’s wrong, it’s going to cost YOU money - not the person who wrote it.
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