The fire this time

 

If Space X impresses you, wait until you see inflation in Kazakhstan.  In October the annual consumer rate hit 18.8%, up by more than one percentage point from the previous month.  If prices rise continuously at that pace, they will double in less than four years.

Consumers and the government are egging on inflation.  So far this year, government spending has raised the money supply at the annual rate of 18.9%, reports the National Bank. (The money supply here is M3, which includes savings accounts as well as cash and debit accounts.)  Retail turnover for the first nine months of 2022 was up 15.7% over the same period last year.  The economy is white hot.  

A Keynesian folk legend says inflation matters less than unemployment, because if you have a job, you can pay high prices. But wages often lag consumer prices.  Unskilled workers have little bargaining power, and they cannot raise their pay to keep pace with inflation as torrid as Kazakhstan’s.  Their purchasing power will plummet. They may have jobs, but not much else.  And as prices keep rising, choking off aggregate demand, pretty soon they won't have jobs, either.

Last week the Bank raised the base annual interest rate, a benchmark for the economy, to 16%, from 14.5%, a huge leap. The Bank is grappling with the public’s sizzling expectations of inflation for the coming year of 16.9%.  When people expect prices to rise, they buy more now, creating inflation immediately.  To lower expectations, the Bank must cool off the economy by raising interest rates, which will discourage spending fueled by loans.  

And the Bank drily notes, “The overwhelming growth of budget expenditures in the current year requires a compensating reaction….”  This statement is remarkable.  When Nursultan Nazarbayev was President, the National Bank was a creature of the government. Indeed, under the Bank's charter, its governor serves at the President's pleasure.  Governor Galymzhan Pirmatov may be exerting a bit of welcome independence.  

The vise-like tightening of monetary policy may bring on recession.  Indeed, it is hard to see any other way that the Bank can lower inflationary expectations in a country that has never seen a rate of inflation below 5% since becoming independent in 1991.  Inflationary expectations have been building for more than two years, and the majority of respondents in a September Bank survey said they expected inflation to hold constant or rise.   But Astana may respond to recession by spending even more, aggravating the Bank’s headache.

The Bank has courage.  Will courage be enough?  –Leon Taylor, Baltimore tayloralmaty@gmail.com       

 

References

National Bank of Kazakhstan.  2022.  Inflation expectations: September 2022.  Report.  nationalbank.kz

National Bank of Kazakhstan.  2022. The base rate was raised to 16%.  Press release, October 26. nationalbank.com 

Smoke and mirrors at The New York Times

Sometimes the critical detail in a news story is invisible.

Consider polling, one of the few areas where the news media still have the edge over other purveyors of information. Since anyone can text a message or post a cell-phone picture, the newspapers and newscasts no longer have a monopoly on even foreign news. But John Q. Public cannot afford to run a legitimate nationwide poll.  (He can post an online survey and invite responses, of course.  But this won't produce a random sample, since only the most motivated will reply, which skewers the sample.)  Only a few newspapers and TV networks can afford good polling.  

Traditionally, articles and newscasts about polls in political races gave the sampling error.  This measures the mistake that you can make by drawing, from the sample, larger conclusions.  For example, a newspaper may survey a few hundred likely voters in a Senate race to infer what all likely voters will do in that election.  The reason for publishing the sampling error is to enable the reader to check the reporter's claims, although I am not sure that today's journalists realize this. One double-checks because reporters are not exactly experts on statistics.   

Anyway, The New York Times, which sets the pace for US news media, has stopped publishing sampling errors in the main text of its new stories.  

In the past week, it failed to mention sampling errors in two stories about its polls concerning United States elections.  The co-author of both stories is Ruth Igielnik, a polling editor for The Times. Previous stories had given the sampling error at the end of the article.

The reader and the leader

In one of the stories, The Times declared a slight lead for one candidate when in fact the lead was less than the sampling error.  This was in the Georgia Senate race (a lead of 3%; the sampling error was plus or minus 4.8%).  In the other story, on four gubernatorial races, the comparison of the lead to the sampling error is less clear, as I'll explain.

The reported leads in the gubernatorial races varied:  0% in Arizona (Democrat Katie Hobbs versus Republican Kari Lake); 4% in Nevada (Republican Joe Lombardo); 6% in Georgia (Republican incumbent Brian Kemp); and 13% in Pennsylvania (Democrat Josh Shapiro).  The polling leads were rounded. I think we can agree that the Democrats are winning in Pennsylvania and that the Arizona race is anybody’s guess.  The question concerns Nevada and Georgia.  The Times finds a “narrow” preference for Kemp and a “slim lead” for Lombardo.   

The story on the gubernatorial races is linked to The Times/Siena College poll for the midterm elections.  For example, one question is: “Thinking ahead to the November midterm election, are you almost certain that you will vote, very likely to vote, somewhat likely to vote, not very likely to vote or not at all likely to vote?”  The Times treats the Senate and gubernatorial races as part of the same election. But a respondent may well interpret "the November midterm election" as applying to only national races.  In any event, the distribution of likely voters in Senate elections is likely to differ from that for state offices.

If we accept The Times's assumption of the same distribution for state and national races, then the sampling error in Nevada, plus or minus 4.2%, slightly exceeds Lombardo's edge.    

Why does the comparison of the reported winner’s edge to the sampling error matter?  One reason is that it affects campaign finances.  When the newspapers report a toss-up in the final weeks of a campaign, donors judge a fifty-fifty chance that the favored candidate will win.  When the papers report a slight edge for that candidate, the donors perceive a better-than-even chance of a successful donation and hence are more likely to pony up. When the newspapers ignore the sampling error, they overstate the candidate’s perceived chances of winning and thus can cost the donors money.

Covering up

Why then would the newspaper understate, or ignore, the sampling error?  Perhaps it thinks that the traditional criterion for the error is too rigorous.  The rule of thumb is that you don’t declare the candidate as winning unless there is less than a 5% chance that you will be wrong. (I’m not certain that The Times applied this rule, because its polling link nowhere specifies the confidence interval, another violation of basic rules for statistical reporting. Basically, the confidence interval states the chances that you will be right to declare the candidate a winner. The usual confidence interval applied is 95%.  In other words, you won't declare the candidate to be winning unless chances are at least 95% that you are right.) There is no particular reason for the 5% rule.  The newspaper may be willing to tolerate a larger chance of being wrong, because the news value of a clear conclusion from the poll (“Smith is winning!”) exceeds the likely cost to the newspaper of a mistake, since people will probably never discover its error (“Suddenly, the dynamics of the race changed!”). 

An alternative to this Machiavellian reasoning is that the newspaper regards political races as a sport. It is entertainment, and an error about its outcome won’t matter much.  Finally, of course, maybe the newspaper doesn't have a clue.  

Whatever.  If the newspaper doesn't know what a sampling error is, it should find out.  It should explain how it is handling the error and why.

To see why, suppose that it adopts a smaller confidence interval than the traditional 95% (that is, it permits a larger chance of an error than 5%) but does not tell the reader. Donors will think that the usual 5% rule still holds, and they will overestimate the candidate’s chances of winning.

Trumptistics

A larger question looms.  The historical purpose of the newspapers has been to promote democracy by enabling readers to think for themselves.  They reported both sides of an issue, even when one side struck the reporter as much weaker than the other, because they thought the reader should decide for herself. But since the 2016 election of former President Donald Trump, and especially since his accusations of fraud in the 2020 election that he lost, the newspapers have increasingly discounted the ostensibly weaker side of an issue, often as “baseless.”

Of course, the 2020 election was legitimate.  My point is that the newspapers should enable the reader to decide. They don’t have to repeat the evidence against Trump’s charges in every story; just provide a link.  Ritually characterizing the claims as groundless makes the characterization a shibboleth. Eventually, people forget the reason for calling them groundless, and they may then suspect that the charges were correct.  John Stuart Mill pointed to this danger in his 1859 essay “On Liberty.”

The same reasoning applies to statistical reporting.  Times readers are highly educated, and they would take an interest in the newspaper’s statistical analysis. The Times should provide a sidebar or link explaining sampling errors, with examples that the general reader can follow.

I wrote The Times yesterday morning asking why its story failed to report the sampling errors. I received no reply.

--Leon Taylor (gingerly climbing down from his soapbox), Baltimore, tayloralmaty@gmail.com

 November 6: This update corrects a mistake about The Times's omission of sampling errors. In its link to detailed results, The Times assumes the same sampling error for gubernatorial races as for Senate races.

References

Lisa Lerer and Ruth Igielnik.  2022.  Senate control hinges on neck-and-neck races, Times/Siena poll finds.  The New York Times, October 31.  Retrieved from nytimes.com

Reid J. Epstein and Ruth Igielnik.  2022.  In close, crucial governor’s races, poll finds sharp split on elections.  The New York Times, November 1.  Retrieved from nytimes.com

  

Who's really winning the US Senate races?

 

The New York Times correctly reports that, judging from its surveys of likely voters in Senate races in Arizona, Georgia, Nevada, and Pennsylvania, Democratic control of the Senate is on “a knife’s edge.” But in the Georgia race, it says Democrat Senator Raphael Warnock “leads narrowly in a tight race” (a redundancy) by a rounded margin of 3%, although the margin of sampling error (not reported in the story) is larger, plus or minus 4.8%. That race is actually a toss-up.

In the other races, the margin of advantage was, in Arizona, 6% (margin of error, 4.4%); Nevada, 0% (4.2%); and Pennsylvania, 6% (4.4%). So there is solid evidence of a (small) lead in only Arizona and Pennsylvania, at the time of the survey. In both cases, the Democrats have the edge.

Why doesn’t The Times report the sampling errors in the story rather than relegate them to a link? That said, The Times deserves kudos for detailed statistics in that link.  Even if it doesn't share them with the general reader.

After the poll, in Pennsylvania, the Democrat contender, Lieutenant Governor John Fetterman, who had a stroke several months ago, delivered a substandard performance against Republican Mehmet Oz.  “In calls made on Wednesday,” The Times reported, “a plurality of voters said Mr. Fetterman was not healthy enough to do the job—though Mr. Fetterman still maintained a slight lead over Dr. Oz among all Wednesday respondents.” The Times did not report the exact statistics from that phone survey.  But to say that Fetterman maintained a lead “among all Wednesday respondents” is a cop-out.  The reader cares about the race, not the survey. The Times should interpret the survey for the reader. Does it confirm that Fetterman is in the lead, or doesn’t it?  –Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Reference

Lisa Lerer and Ruth Igielnik.  2022.  Senate control hinges on neck-and-neck races, Times/Siena poll finds.  The New York Times, October 31.  Retrieved from nytimes.com

More numerology from The New York Times

In a story today on Elon Musk’s $44 billion purchase of Twitter, The New York Times writes:

“Dealogic, a data firm, compiled for The New York Times a list of the top 10 biggest tech deals since 1995 by deal value. By that measure, Mr. Musk’s purchase of Twitter is No. 10. Microsoft’s $70 billion-plus acquisition of Activision Blizzard, which is pending, has garnered a fraction of the attention despite being No. 2.” 

The Times adds that “deal value is the price paid by buyer.”  The top deal listed was America Online’s purchase of Time Warner in 2000 for $112 billion.

Three questions for The Times:

(1)               Do the estimates adjust for:

a.       Inflation?

b.      Discounting—i.e., the fact that a dollar received today is worth more than a dollar received next year, because today’s dollar earns interest?

(2)               Is it kosher to compare pending deals to completed deals?

(3)               Why doesn’t The Times explain how it arrives at such figures?

--Leon Taylor, Baltimore tayloralmaty@gmail.com

 

Reference

David Streitfeld.  2022.  Elon Musk takes Twitter, and tech deals, to another level.  The New York Times.  October 28.

 

  

Flunking Econ 101

KIMEP University, a major research institution in Central Asia, has just proposed reforms to Kazakhstan President Kassym-Jomart Tokayev for his seven-year tenure.  Its blueprint vividly illustrates common mistakes by non-economists about economics.

“This strategic plan provides a realistic agenda for political, education and economic reforms that will (1) build a full-fledged democracy, (2) modernize the education system and (3) double per capita income within seven years.”  Per capita income means income per person.  Further down the page, “we estimate that a government investment of $12bn annually in priority areas will put Kazakhstan on a growth path, which in turn would double national income within seven years.”  What do we want to double?  National income, or per capita income?

Wait, there’s more. “We estimate that, if the government directly invests $12 billion per annum to remove infrastructure bottlenecks and promote growth sectors of the economy and if, in addition, it provides advance finance to set up a nation-wide house-building program and to set up a venture capital fund, the GDP would be doubled in 2030 in nominal terms.”  If the goal is to double nominal GDP by 2030, we don’t need a blueprint. Kazakhstan is doing that already.  The annualized growth rate in nominal national income is about 21%.  At that rate, nominal income will double in less than four years.  The miracle economy! 

Just one problem: Of the 21% growth, 18% is in prices and only 3% in output.  Unless the authors are advancing the novel proposition that consumers enjoy skyrocketing prices, they mean not nominal income, which is measured in tenge (the currency of Kazakhstan) and hence reflects increases in both prices and output, but real income, which is measured in output.

Moving right along, the plan would build “1,000,000 new apartments in seven years.” Not to worry: “Only a fraction of the overall necessary investment of $100bn will need to come from the government purse: The government will be able to sell land to developers and to recuperate its cost by selling the housing stock to private homebuyers.”

 A few naïve questions:

 (1)   Does the government already own the land? If not, then to save on that $100 billion, it will need to buy private land at below-market prices, by condemning it. In 2014, public protests over a proposal to lease land to foreigners (read: The Chinese) so rocked the government that it put a moratorium on the lease. Would condemning tens of billions of dollars of private land be less controversial?

(2)   So, the government will sell condemned land to developers at market value and then sell “the housing stock to private homebuyers.” (I thought that these were apartments, but never mind.)  What do the developers get?

KIMEP has an excellent economics department that regularly publishes in world-class journals. The authors may wish to take it seriously.  --Leon Taylor, Baltimore, tayloralmaty@gmail.com

Disclosure: I taught economics at KIMEP from 2006 until this year.

Reference

KIMEP University.  A platform for political, education, and economic development in Kazakhstan: How to leave a legacy of transformation in seven years.  Policy paper. Almaty, Kazakhstan.

       

When will they learn?

Newsbreak from The New York Times!  The Republicans are edging out the Democrats in next month’s Congressional elections!

The GOP has a “narrow but distinctive advantage” according to a poll from the Times and Siena College, confides Shane Goldmacher.  “The poll shows that 49 percent of likely voters said they planned to vote for a Republican to represent them in Congress on Nov. 8, compared with 45 percent who planned to vote for a Democrat.”

Next paragraph, a parenthetical comment: The poll’s “unrounded margin is closer to three points, not the four points that the rounded figures imply.”

And at the end of the story, in fine print: “The margin of sampling error is plus or minus 4.1 percentage points.” 

In other words, the race may well be a dead heat.

Why can’t the leading newspaper in the English language get a simple statistic straight?  A lead in a poll is not necessarily a lead in the population. Stuff happens.  Polltakers write down the wrong answers, people change their minds in mid-response.  The sampling error estimates the share of the poll responses that may mislead us.  In this case, the error in either direction is as at least as large as the “distinctive” advantage of Republicans over Democrats.

Landslide Donald

More technically, we cannot be 95% confident that the reported edge of the GOP exists outside of the sample.  To understand this, suppose instead that the edge had exceeded the sampling error.  Then, had we rerun the poll 100 times, we would have found that the Republicans led the Democrats at least 95 times. That would have been convincing evidence that the GOP was winning. Of course, we cannot actually rerun the poll a hundred times, so we rely on statistical theory to infer whether a 4% sampling lead is credible. Here, it’s not.

We could argue about whether a confidence interval of 95%, which is the usual one for political polls, is needlessly stringent. This standard means that we would not conclude that the Republicans were winning unless chances that this was wrong were less than 5%.  Is such rigor necessary?  What would be wrong with a 15% chance of an error in a recreational sport like political races?  How costly would such an error truly be for society?  If we allow for a 15% chance of a mistake (that is, we would use an 85% confidence interval), then we would be willing to live with a sampling error much larger than 4% and thus, in this case, with the conclusion that the GOP is winning.  

I grant these subtleties. What worries me is that the Times can't get even the obvious stuff right.  Goldmacher writes, twice, that “in a hypothetical 2024 rematch, Mr. Trump led Mr. Biden in the poll by one percentage point.” I don’t know of any national political poll with a margin of error below 1%. Anyway, it is common sense that a poll reporting a 1% lead connotes a race that is too close to call.  The Times should point that out to readers who know zilch about statistics.

If it helps, you can think about the problem generally. We want to know about a group of people; call it the "statistical population." For the Times, the population consists of all likely voters in the Congressional elections next month.  We can't canvass everybody, so we take a "sample" -- the Times's poll. No sample perfectly reflects the statistical population.  The problem in statistical inference is to decide whether you trust the sample enough to draw conclusions from it about the population anyway. In the poll, the Republicans surge ahead of the Democrats; can we conclude that this holds for likely voters in general?  The answer depends on how large of a probability of error you are willing to accept to use the sample to characterize the population. No, it doesn't do any good to say, "I will accept no chance of an error," because there is always a chance that the sample will mislead you. The usual maximum error that people are willing to accept is 5%, but there is no reason why that has to be the magic number.  In any event, the Times's mistake is to assume that all samples are perfect.    

The moral of the story, as usual: When the papers report a poll, flip down to the end of the story, and click on the link to the actual survey. Because you can be 95% confident that the news media, including in Central Asia, will screw it up.  --Leon Taylor, Baltimore tayloralmaty@gmail.com

 

Reference

Shane Goldmacher.  2022.  Republicans gain edge as voters worry about economy, Times/Siena poll finds.  The New York Times.  October 17.

Spending your way to political glory

 

A major institution in Kazakhstan reportedly will unveil a proposal in a few days that the government spend $12 billion more each year for seven years.  This is supposed to create income and jobs over the presidential term of Kassym-Jomart Tokayev.

The idea is that the economy is growing too slowly because people aren’t buying enough.  So the government should give them more money to spend. It need not give them a lot, because they will re-spend what they get.  For example, suppose that the government spends $1 at the grocery. The grocer will take the dollar and spend (say) nine-tenths, or 90 cents, at the drugstore, saving the rest. The druggist will spend nine-tenths of the 90 cents that she receives, or 81 cents, at the newsstand. So far, the dollar from the government has generated another $1.71 in spending, and more rounds of spending will ensue.  That’s the multiplier.

In the 1920s and 1930s, liberal macroeconomists led by John Maynard Keynes developed the multiplier model to help the economy spend its way out of a depression. Under such conditions, the model is fine. People are not buying all that the economy can produce, so unemployment is high.  Spending more can create jobs.

But that is not the case in Kazakhstan. The average rate of increase in prices, or inflation, is a sizzling 17.7% per year. Prices are rising because people are demanding more than firms can provide.  The economy is not in a recession; it is overheating. If the government feeds the flames by spending more, prices, not output, will rise. The tenge will weaken, because foreigners won’t pay those high prices for exports.  And the public will protest the high prices: Remember the fuel-price hikes of January.

Kazakhstan’s economy produces $273 billion per year of goods and services (gross domestic product). At the moment, $273 billion is a generous measure of its capacity to produce.  A boost in public spending of $12 billion would be 4.4% of this amount. That is, demand would overshoot capacity by more than 4%, in addition to the overshooting that already occurs.  More inflation would follow.

Defenders of such boosts in public spending say the central bank can cope with inflation by “fine-tuning.” They’re passing the buck, and for no good reason.  The National Bank of Kazakhstan can only raise interest rates to lower demand, thus undoing the attempt to raise it. And it may accidentally raise rates too high, setting off a recession. So this approach of the big spenders to leave it to the Bank to fix their inflation gains nothing in the end.  And it may lower income and raise unemployment, the opposite of what they want to do.   Yes, the Bank should stabilize prices, but there is no point to getting in its way. It is already doing a miserable job: Its alleged target for inflation is 4-6%.

Those who plan a fiscal stimulus in Kazakhstan don’t understand the problem. The lack is not of demand but of supply. The country needs more capacity: More workers; machines, equipment, and buildings; and knowledge about how to produce (technology). It should invest in education, health, and infrastructure, raising capacity in the long run for Kazakhstanis and their children—not resort to delicious, but dangerous, sugar highs.

--Leon Taylor, Baltimore  tayloralmaty@gmail.com

Note: This update corrects the estimate of 2022 GDP by expressing it in 2022 dollars.

Update, October 11: The International Monetary Fund has marked down its global forecast for 2023.  From the 3.2% growth predicted for 2022, growth would fall to 2.7% for 2023.  Its July forecast had called for 2.9% growth in 2023.  

The IMF's chief economist, Pierre-Olivier Gourinchas, gave remarks that may prove prescient for Kazakhstan.  Governments must borrow less, he said. “Doing otherwise will only prolong the fight to bring inflation down, risk de-anchoring inflation expectations, increase funding costs, and stoke further financial instability, complicating the task of fiscal as well as monetary and financial authorities...."  

If Astana adopts the proposal discussed here to spend a lot more, it will be at loggerheads with the National Bank, which seeks to cut inflation by raising interest rates.  In an interview with The Financial Times, Gourinchas compared a clash between fiscal and monetary policies to two fighting drivers of the same car.  Markets will ask:  "Which way is that car going? Are we really fighting inflation or are we really stimulating economic activity?”     

  

 References

Chris Giles and Colby Smith.  2022.  IMF forecasts "very painful" outlook for global economy.  The Financial Times.  October 11.

International Monetary Fund.  2022.  World economic outlook report October 2022:  Countering the cost-of-living crisis.  

Good reading

Jeanna Smialek.  2022.  Inflation is unrelenting, bad news for the Fed and White House.  The New York Times.  October 13.