Evidence-Based Policy

A funny coincidence occurred recently—yet another week when the Fed is hinting, signaling, screaming (but probably lying) that they will raise interest rates. A colleague asked me if I would review an article she has written for an encyclopedia on research methods. Her article explains “Evidence-Bassed Policy” and discusses how political and community leaders use this method to make wiser decisions, to solve problems and plan for the future. Actually, I don’t think that coincidences are usually coincidences, just like the “sometimes” thing with cigars and Freudian obsessions. So I’d like to muse about the FED’s decision-making methods here in this short essay, and contrast them with the theory behind their rationale.

My esteemed statistician colleague wrote:

Evidence-based policy emerges from a comprehensive, non-partisan investigative process of evaluating and prioritizing the relevant empirical data to support claims regarding the best course of action to solve a societal problem.*

That actually makes a lot of sense. In fact, I think I actually use a form of this when I look at stock charts, draw trendlines and use Fibonacci levels to make stock decisions. I even use this in my spreadsheets for my personal budget each month. But as I look at he ideal behind this concept, then examine the definition, and and consider the FED’s public statements , I smell something utterly rotten.

But is this how the FED determines public policy? Note the key terms in this definition, and then consider

  • Comprehensive: No—their primary data is provided by a couple of key government agencies like the BLS who use flawed or opaque methodologies to derive their results, then must revise each month as actual data is added to the mix. While the FED employs its own team of finance staticians, these folks are never cited in their bi-monthly minutes or by their jawboning governors.
  • Non-partisan: No—Eployees of said government data agencies appointed by and beholden to the current administration.
  • Investigative process: Not really—they investigate a limited range of economic activity with flawed methods.
  • Evaluating: No—not when the FED governors who do this “evaluation” regularly use terms ilke “believe and metaphors like “headwinds” Just a few days ago, Kaplan, from the Dallas FED stated, “We still believe the consumer will be strong in 2016”.
  • Priortizing: Not really—The jobs reports seem to be the sole data point they rely on.
  • Relevant empirical data: No—data not empirically derived with birth-death jobs model.
  • Support claims: Perhaps the flawed data support claims… Hmmm… They have to have a scapegoat standing by somewhere.
  • Best course of action: Are you kidding—QE, Operation Twist, ZIRP, NIRP, and helicopter money.
  • Solve societal problem: Well, according to Obama, all is solved, the economy is strong, and we should keep the Democrats in power.

The Fed claims that they use Evidence-Based Policy to guide their handling of the economy. They make decisions on whether or not to raise or lower interest rates based on “the data” on the economy—quarterly GDP, Jobless claims, job additions, etc. But the gorilla in the corner is the data. We have talked at great length about the validity of this data, noting that the unemployment rate is far higher than officially claimed, recognizing that the inflation rates have been typically higher. The “birth-death model” for job growth is an indirect, and flawed, method, of counting the number of jobs. Then the News media dutifully reports all these weeky and monthly “estimated” statistics that are continually revised by the BLS while other government entities keep the precise numbers (not estimates) tucked away somewhere.

The DJIA number is the primary data point that Americans use to gage the health of the economy. When it crashes, they look at their IRA portfolio bottom line and get nervous. So do the politicians. And they act fast. Since 2008 they have kept stock indexes moving higher, intervening with the PPT every time investors head for the exits, coaxing them back in with the fear of missing out. But you will never hear the FED or anyone say "Stocks are tanking, bonds are in the toilet, so we better do something to keep these sheep from getting restless and heading to the streets to protest." Seems that this is one of the only data streams the FED pays attention to... and of course whatever Kuroda says over at the BOJ.

What gets my goat is that the Internal revenue service keeps accurate, detailed and up-to-date records of how much money every citizen is paid each month (jobs). For that matter, the social security administration also keeps precise records on who has an employer paying benefits on their behalf. The city governments know to the penny how many new goods were sold in their locales every quarter. But does anyone in the government offices aks these sources for their data—data that is not statistically derived, but simply counted up as the receipts roll in? Oh, that would be too easy for these federal agencies to do. They gotta make it complicated to justify their budget and high-salaried directors.

Ring, ring.

"Hey Koskinen. Janet here. We have a meting tomorrow to decide whether or not to raise rates. I need to know how many people in this country have a job." (pause) "What? Why not?" (pause) "You mean that you know to the penny how much tax was collected from every paycheck, but you didn’t program your computer to count the number of paychecks?" (pause) "Yes, I understand. Things are tight. But where did Ben get his data?" (short pause) "OK. I’ll call Erika Groshen over at the BLS. She’s got a 632 million budget to estimate that number."

So they have at their disposal accurate data for their evidence based policy from tax records, yet they choose to use the BLS data which is derived with complicated mathematical models by statistical experts. And they they have to revise it every month. And THIS is the “evidence” used by the fed to determine what they will do—the most powerful organization on earth uses flawed data on which flawed, fallacious, falsified, and simply F’ed up “evidence” is used to base their decisions with this “evidence-based policy that is the buzzword of governmental leaders at every level.

Incredible! We have the blind leading the blind. We fell into a ditch in 2008 and have never gotten out.

Can the Fed really be that incompetent?

I don’t think so! I think they know precisely what they are doing and can explain it to anyone. The problem is that we would not like their explanation, if they were truthful. and they want the world to think we are out of the ditch already. NIRP says otherwise.

So, no. The FED is not incompetent. But they are not leaders. They are employees who dutifully and diligently follow instructions of their superiors. And all this time they claim they are using “evidenced-based policy” to make their decisions. But in reality, they follow orders of leaders who fear the masses and have to keep the bread and circuses flowing—retirement accounts, green stock indexes, and the constant stream of entertainment.

I am feeling cynical again and should stop writing.

  Image cannot be displayed

*Ah Yes, you are looking to check on my esteemed colleague and a citation ... I’ll withhold her name here since she may not want to be associated with a goldbug like me and probably doesn't want her name soiled by such a “radical” blog. Besides, the article is still “in press.” Once it is published, she is fair game.

About the Author

Subscribe or login to read all comments.

Support TFMR

Donate Buy Silver

Access Subscriber Benefits

Listen to TFMR on the go in your favorite podcast app, and join our member-only forum discussions!

Key Economic Events Week of 12/5

12/5 9:45 ET S&P Services PMI
12/5 10:00 ET ISM Services PMI
12/5 10:00 ET Factory Orders
12/7 8:30 ET Productivity
12/7 8:30 ET Unit Labor Costs
12/8 8:30 ET Initial Jobless Claims
12/9 8:30 ET PPI
12/9 10:00 ET UMich inflation exp.

Forum Discussion

by Titus Andronicus, Dec 3, 2022 - 1:57am
by Titus Andronicus, Nov 26, 2022 - 10:18pm
by Island Teal, Nov 26, 2022 - 2:54pm
by Titus Andronicus, Nov 14, 2022 - 10:32pm