FROM BOSTON FINANCIAL GUIDE | MARCH 25, 2014
Zachary Karabell recently appeared on The Stu Taylor Show to discuss his new book, The Leading Indicators: A Short History of the Numbers That Rule Our World. The author of 11 previous books, Karabell has written for Reuters and The Atlantic, and regularly provides commentary on CNBC and MSNBC. A successful money manager, Karabell is the Head of Global Strategy at Envestnet, and the President or River Twice Research and River Twice Capital.
Karabell identifies numbers that are used as “leading indicators” in the American economy. (e.g., inflation rate, unemployment rate, gross domestic product or “GDP”, housing starts, etc.). Before the 1930’s, these numbers didn’t exist. They were created during the Great Depression and World War II to quantify and understand what was happening at the time, and to help a post-war American measure where it stood economically in the world. These numbers were very good at doing what they were supposed to do at that time, and were established as leading indicators of the American economy.
Karabell argues, however, that these indicators do not act as effectively in today’s American economy. Significant changes in the underpinnings of the American economy have occurred since the indicators were created, without any changes in the indicators themselves. Specifically, Karabell discussed in detail the distortions in the GDP numbers as the US has evolved into a more service-based economy. He also discussed distortions in the traditional concept of “trade deficit” numbers, which were largely based on the outdated assumption that goods would be made entirely in one country. Although that is rarely true in today’s globalized economy, the way we are quantifying trade deficit and an economic indicator has not changed.
Karabell also points out that, as indicators for the American economy are based on national averages, local variances are not taken into account. The national, average numbers are the drivers of the government’s economic policy, however. For instance, based on national housing start numbers, one can perceive that there is a housing crisis at a national level. The government sets policy to react to that perceived crisis. But a closer look at the numbers shows the problem is concentrated almost entirely in four states (California, Arizona, Nevada and Florida). In this way, relying solely on a national average is not only somewhat misleading, it gives rise to a governmental response that is not targeted sufficiently to resolve the problem.
Karabell notes that governments around the world base a good deal, politically and economically, on what the foundational indicators say. He believes it to be the responsibility of those in the broadcast media to accurately report on them and explain their inadequacies. It is this belief that that inspired him to write his latest book.
To learn more, or to hear Karabell’s full interview on The Stu Taylor Show, please click here.