Easy to Lose, Hard to Restore: Trust in US Data at Stake

The Importance of Trust in U.S. Economic Data

Donald Trump's decision to remove the head of the U.S. Bureau of Labor Statistics has raised serious concerns about the integrity of data reporting mechanisms in the United States. This move comes at a time when accurate economic data is more crucial than ever, as it serves as a vital tool for policymakers, businesses, and investors to make informed decisions.

The credibility of data is easily compromised and difficult to restore. A key example is the case of Erika McEntarfer, who was accused by Trump of manipulating job numbers after weaker-than-expected growth and significant downward revisions were reported. Michael Strain, director of economic policy studies at the American Enterprise Institute, expressed concern over the implications of such an appointment, stating that it could lead to a whole new set of problems.

Policymakers, businesses, and investors are now trying to understand how Trump's actions might impact prices, employment, and household wealth. Central banks, which once guided market expectations based on long-term forecasts, have shifted to a "data-dependent" approach. However, this shift presents challenges, as data collection itself is becoming increasingly difficult.

Challenges in Data Collection

Governments with heavy debt have been cutting resources in their data departments, making it harder to gather reliable information. Phone surveys, traditionally used for macroeconomic research, are struggling to obtain adequate samples as more households lack fixed phone lines. These issues highlight the growing difficulty in maintaining accurate and timely data.

Trump's accusation that McEntarfer is a "Biden Political Appointee" introduces a political dimension that is typically associated with countries where there are broader doubts about democratic checks and balances. This adds another layer of complexity to the situation.

Lessons from Past Experiences

History shows that losing trust in data can take years to recover from. In Argentina, for instance, skepticism surrounding inflation figures persists due to past underreporting. Similarly, Turkey's frequent changes in leadership at its TUIK statistics institute have led to a gradual erosion of investor confidence.

Greece's experience during the 2000s, where concealed public deficits contributed to a sovereign debt crisis, underscores the importance of transparency and accountability in data reporting. The country had to overhaul its ELSTAT statistics agency and establish an international panel of experts to regain credibility.

China's data reporting has also faced scrutiny, with former Premier Li Keqiang acknowledging in 2007 that output figures were "man-made." Despite efforts to improve data quality, such as introducing a new measure of youth unemployment, doubts persist among foreign investors.

Alternative Data Sources

In response to inconsistent official data, analysts and researchers have turned to alternative sources. Capital Economics' China Activity Proxy uses 18 indicators, including freight traffic and electricity consumption, to gauge economic activity. Independent researchers also provide data and sentiment surveys, though these often rely on subjective measures like people's feelings and perceptions.

Erik Weisman, chief economist at MFS Investment Management, noted that these methods lack specificity, as they do not ask for detailed production figures. However, the sacking of McEntarfer could force analysts to rely more on these alternative sources.

Political Appointments and Concerns

Enrico Giovannini, former chief statistician for the OECD, pointed out that the U.S. has a greater scope for political appointments in key statistical roles compared to other advanced economies. This practice, known as the "spoils system," allows party supporters to gain government jobs.

The International Statistical Institute criticized Trump's move, stating it violated U.N. principles aimed at protecting fact-based statistics. They called for steps to restore public confidence in U.S. federal data.

William Wiatrowski will serve as acting commissioner until a successor to McEntarfer is named. However, concerns remain about potential dangers from a Trump executive order on federal hiring, which could reserve posts for candidates deemed "dedicated to American ideals."

Aaron Sojourner, a senior researcher at the W.E. Upjohn Institute, warned that such a move, if not blocked by Congress, could turn many jobs in federal economic statistical agencies into political positions. This could lead to the firing of individuals who displease a political leader.

The current situation highlights the critical need for transparency, accountability, and independence in data reporting. As the U.S. faces these challenges, the role of Congress in ensuring the integrity of statistical agencies becomes even more important.