Between official government statistics, industry surveys, and Wall Street forecasts, it often seems like we’re drowning in data, often of uncertain value. But consider the alternative. In the early years of the Great Depression, it was clear that things were awful, but the government had few good figures to go on; there was no official G.D.P. number, and no solid information about unemployment. As a result, policymakers persistently underestimated the severity of the crisis. In June of 1930, relying on some anecdotal evidence of an upturn, Herbert Hoover announced, “The Depression is over.” And in his State of the Union address that December he said that two and a half million Americans were unemployed. But, as Hoover acknowledged, that number was eight months old. At the time of the speech, five million people were out of work, and a hundred thousand more were losing their jobs every week. Washington was making policy in the dark.
The government learned from experience, though. In 1934, a team of economists came up with the first measurement of national income, which developed into what we now know as G.D.P. The late thirties saw a more rigorous and systematic collection of unemployment data. And in the years after the Second World War—which accelerated the trend toward quantifying things—the amount of economic information available to policymakers grew exponentially. Today, our picture of the economy is more detailed and sophisticated than ever, and that makes it easier for businesses and the government to react quickly to changes in the economy.
And yet our picture of what’s going on is far from perfect. The government continues to track inflation, for instance, by gathering price data much as it did in the nineteen-fifties: it surveys consumers by phone to see where they buy, surveys businesses to see how much they charge, checks out shopping malls to price goods. This leaves out consumers who have only cell phones, and it probably overstates inflation by not fully accounting for things like the impact of big-box stores. The larger problem, though, is the time it takes: the Consumer Price Index’s figures don’t come out until a month after the fact. In turbulent times, that’s too slow.
A new venture called the Billion Prices Project may help change that. The B.P.P., which was designed by the M.I.T. economists Alberto Cavallo and Roberto Rigobon, gathers price data not via survey but, rather, by continuously scouring the Web for prices of online goods around the world. (In the U.S., it collects more than half a million prices daily—five times the number that the government looks at.) Using this information, Cavallo and Rigobon have succeeded in building what amounts to the first real-time inflation index. The B.P.P. tells us what’s happening now, not what was happening a month ago. For instance, after Lehman Brothers went under, in September, 2008, the project’s data showed that businesses started cutting prices almost immediately, which suggested that demand had collapsed. The government’s numbers, by contrast, didn’t show this deflationary pressure until that November. This year, there’s been a mild uptick in annual inflation, and again the B.P.P. detected the new trend before the Consumer Price Index did. That kind of early heads-up could help governments make more timely decisions.
The B.P.P. can also help keep governments honest. In much of the world, as a 2010 study of developing countries found, governments regularly manipulate economic data—downplaying inflation, overstating job growth, and the like. The B.P.P. makes that more difficult by providing an independent check on the official numbers. And, while there’s no evidence that this kind of thing happens in the U.S., if you’re a conspiracy theorist you can now look to the B.P.P. rather than to the regular inflation number to see what’s happening.
The B.P.P. doesn’t offer a complete picture. In particular, it doesn’t cover most services. But, even if it’s unlikely to replace the C.P.I. anytime soon, it will almost certainly make the C.P.I. better. Indeed, it wouldn’t be surprising if the Bureau of Labor Statistics, which has already said that some of its methods are out of date, begins to move toward a real-time model. The B.P.P., in its rough-and-ready way, is part of a data revolution. Cheap computing power and the Internet have made it possible for companies to do what previously only the government could. The Case-Shiller Index of home resale prices, for instance, has become the benchmark for U.S. house prices. The most concrete result of all this is that policymakers will be better informed than ever before. It also means that they’ll have fewer excuses when they mess up.
That’s the catch, of course. Giving policymakers more information doesn’t mean that they’ll believe it or act on it. In the years leading up to the financial crisis of 2008, after all, there was a lot that people didn’t know, but the fundamental problems were obvious: housing prices were rising too fast and banks were flinging loans at unqualified borrowers with reckless abandon. Yet the Federal Reserve and banking regulators failed to take any action to try to pierce the bubble before it brought the economy crashing down. These days, all the available numbers, including the C.P.I. and the Billion Prices Project, suggest that inflation is under control. Still, politicians and some Fed members are fretting that a huge price spike may be imminent, and are pushing to make monetary policy tighter, even in the face of unacceptably high unemployment. An enormous amount has been done lately to make sure that policymakers have the numbers they need. The question is whether they’ll use them. ♦
