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The Road to Recovery: How and Why Economic Policy Must Change by Andrew Smithers

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9

Misinformation as a Barrier to Sound Policy Decisions

I showed in Chart 12 that profits as published by US companies have recently become far more volatile than those published in the national accounts and pointed out that it is likely to amplify the dangers which a fall in profits poses to the US economy. The volatility arises from published profits being habitually overstated and for this to be partly offset by periodic bouts when they are understated through write-offs. Other examples of misinterpreted data are Japanese accounts, in which profits are seriously understated, and claims that company leverage is low in both the UK and the US. These are examples of a more general problem, which is that there is a great deal of misinformation that gets widely circulated. This poses many problems for the management of economies in two ways. One is that much of the misleading information is widely publicised by those who benefit from it. Another is that policymakers naturally tend to assume that they can rely on published data. But as the data often differ from one source to another, it is easy for policy decisions to be based on misleading data. A general problem is that the users of economic data are seldom driven by the pursuit of truth. Investment bankers are in pursuit of business, politicians in pursuit of votes and journalists in pursuit of news.

Probably the single most significant source of misinformation today is to be found in the balance sheets and profit and loss accounts ...

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