Economics has a lag problem

Every szn is lag szn if you economy.

Something that doesn’t get talked about enough is economic lag. It probably doesn’t get talked about enough because it’s not particularly interesting, but, as you know, that hasn’t stopped me before.

“Economic data = lag, economic data ≠ swag” —

Robert Reich

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A strangely overlooked detail about economic data is that it lags. And it lags… a lot. Like a lot a lot. You’ve probably never thought about it (and it would be kinda weird if you had) but economic data doesn’t just… appear. Economic data trickles in at varying intervals, which is exactly what trickle-down economics is all about.

“A lagging tide lags all boats.” —President Ronald Reagan, July 1981

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Let me explain. On one hand, there’s stock market data, which is updated daily, or hourly, or every second-ly (I wouldn’t know, since I keep all my money in lean hog futures). But there’s also unemployment data, GDP, trade data, household income data—and all that data can take months or years to update.

Collecting, cleaning, and analyzing this stuff takes time, and economists are tired, slow, irritable old men. Ever watch your grandpa log into his email? Imagine that, but instead of typing one email password, your grandpa is running a STATA panel analysis across ten billion data points.

So economists make projections

While economists wait for all this lagging data to come in, they make projections to serve as a sort of placeholder.

“But they don’t just base their projections on feel, do they?” —you, in horror

Ehhh. They kinda do.

Economists will use historical data and past relationships to make these placeholder projections—there’s obviously economic theory, a ton of prior data, and sophisticated math

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involved, but vibes are also important.

TL;DR: economic theory is all about the vibes.

Here’s an example—imagine you’re an economist and you’re trying to project fourth quarter GDP. As an economist, you would first explain that GDP (or gross domestic product) is equal to C + I + G + (X – M), where C = personal consumption expenditures, I = gross private investment, G = government spending, X = EXTREME, and M = imports. GDP is closely related to VDP (vulgar domestic product), but GDP doesn’t include all that super nasty/obscene stuff.

and—as an economist trying to project fourth quarter GDP, you might be trying to get a measure for X (the EXTREME part of the equation). But because X is a complicated number that takes time to figure out, you instead need to forecast what this number will be based on things like—what the number was last year or last quarter, changes to other numbers it’s related to, and what relationship it has to those other numbers. This placeholder for X is frequently revised as more data comes in (and these revisions continue over the following months, for years

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).

GDP in the fourth quarter of 2008 is a good example of how big a swing these revisions can be. The first growth estimate for 2008 Q4 was minus 3.5%, before ultimately being revised to minus 9%. For context, that goes from oh that’s bad bad to holy f—k are you laminating my fucking balls right now bad.

Errors like this have consequences. Sometimes it’s death. Sometimes it’s policy implications, like who gets to Twitter dunk on whom. And sometimes a narrative can take shape even though it’s relying on old and incomplete data

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.

“Economists have successfully predicted nine of the last five recessions.” —Paul Samuelson

Economists are often the first to admit that it’s really hard to predict a recession (or even know if we’re currently in one). There are a lot of reasons why this is the case, but a big reason why it’s so difficult to predict the macroeconomy is because: Economic. Data. Lags.

The world is complex and the global economy moves really, really fast. Everything and everyone is always go!, go!, go!, and that’s… well… that’s kind of a shame. I think it’s pretty clear at this point that we (collectively, globally) need to slow down. We all need to take a breath. We all need to relax.

Economists understand this—they understand the importance of slowing down. Economists don’t hurry. Economists are deliberate. They’re patient. Being an economist is all about living in the moment—it’s about giving oneself grace.

It’s about perseverance.

Economics is about perseverance.

Economists know they’re not perfect. Nobody’s perfect. Some days are good days, some days are bad days, and that’s okay.

When life gets tough, you need to take a deep breath. You need to slow down.

When life gets tough, be an economist.

Remember—data lags.

Life doesn’t.

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This post is dedicated to Ed Prescott. I don’t exactly know what “dedicated to Ed Prescott” means, but this post is officially/legally/constitutionally/vibes-wise dedicated to the legendary Edward C. Prescott. Ed was one of my college professors—he was an insanely accomplished, super dope, Nobel Prize-winning macroeconomist. Just a genuinely brilliant guy—wildly quirky—but absolutely brilliant. RIP, Ed.

Robert Reich

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1. This is a joke.

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4. Specifically two years, I think—but not sure.

5. I’m firm in my beliefs that the only reason political discourse is a shit show is because of slightly outdated macroeconomic data. I’m sure of it.