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Where Dick Morris’s “271%” came from (maybe): a statistical story

Maybe because I spend so much time working with numbers, I’m as interested in the process of statistics as much as in its outcomes.

A couple months ag I told you about my struggles with the GDP of Russia and how I had inadvertently become entangled with the question.

More recently, I heard about Dick Morris’s claim that, “In the last five months, according to the Federal Reserve Board, the money supply in the United States has increased by 271 percent.”

271%??? Where did that implausible-looking number come from? Bill Peterson traced this to a 27.1% (note the decimal point) annualized rate of growth in M1 reported on a Federal Reserve website. So it sounded like a simple case of innumeracy (compounded by some partisan foolishness on Morris’s part that, I argued here, doesn’t do the Republican Party any favors).

But then an anonymous commenter wrote, “Dick Morris was referring to the Federal Reserve Adjusted Monetary Base which did, in fact, grow by a multiple between 2.5x-3x in the five months spanning October, 2008 through March, 2009.” The commenter provided a couple of links and concluded,

In short, Dick Morris is right and you are wrong. I believe it is called a cruel irony when you publicly mock someone’s intelligence only to find out subsequently that they are correct and you, well, you stepped in it.

I’ve made mistakes before and so it hardly shocked me that I got something wrong again! Apparently I’d been too quick to believe the Chance News entry that had gotten me started on this. In retrospect, it seemed pretty silly that I was so quick to trust the zero-budget Chance News while disparaging the well respected newspaper, The Hill (where Morris’s column had originally appeared).

At this point, I really wanted to see the “271%” so I could issue a full-throated retraction. Unfortunately (or, maybe, fortunately, in the sense that it led to this story), when I followed the links supplied by the commenter, I could not find a 271% growth in the money supply anywhere! Which led back to the original puzzle of where the number came from. Was it simply a mis-transcribing of the 27.1%, or was there something else going on?

I was reminded of a legal consulting project I once worked on, where the statistician on the other side had done an analysis which I had then replicated, getting completely different results. But I didn’t feel confident about my own claims until I tracked down how the other guy had done it wrong. It took me 2 hours to get the correct answer myself and to check it to my satisfaction [amusingly, I first typed "statisfaction" there], and 6 hours to get into the problem in enough depth to figure out what the other statistician had done wrong. (I bill by the hour so I remember these time totals. And, believe me, the other guy billed lots lots more than 8 hours to get his wrong answer!)

OK, back to Dick Morris’s 271%. The latest insight came from Robert Waldmann, who commented as follows:

I [Waldmann] think I understand how he missed the damned dot, overlooked the concept of “annualised” and decided to call a 271% increase “tripling” not “almost quadrupling”.

He mixed up H and M1. The monetary base has roughly tripled I think (and if I’m wrong well Morris is ignorant too).

If he didn’t know about money multipliers, the money supply process, fractional reserve banking and my mother’s maiden name (all equally certain) he might think this meant the money supply tripled. So he sends his long suffering research assistant to find the proof that the money supply tripled. The poor unfortunate guy came back with the number which Morris miss read due to the fact that “He puts ideology first and the [data] a distant second.”

This story has the ring of truth to it: the research assistant was sent to do an impossible task, and Morris’s ideology blocked him from realizing the mistake. (And, presumably, nobody edits his column at The Hill.) Interesting.

I remain ignorant regarding the money supply. One of the few things I remember from economics class in 11th grade is that “the money supply” is not well defined because of the presence of nonmonetary assets such as stocks, bonds, real estate, etc., as well as checking accounts and the like.

P.S. I’m still waiting for the anonymous commenter to come back to me with more data. I still think it’s possible that there’s a 271% in there (or, at least, “a multiple between 2.5x-3x,” as the commenter claimed) that makes sense and that I just didn’t know where to look.

14 Comments

  1. Justin says:

    I think the 271% may be in reference to the assets of the Fed.

    http://www.econbrowser.com/archives/2009/03/the_f

  2. Keith O'Rourke says:

    The value of "get[ing] into the problem in enough depth to figure out what the other statistician had done wrong"

    is likely highly valued in adversarial procedures (such as legal consulting)

    and perhaps undervalued in other areas as it seems like a lot of work to exactly come up with a wrong answer…

    (I was taught though that this was good academic practice when you disagreed with others)

    Keith

  3. PunkToad says:

    Even if the money supply had increased by 271% that does not mean that spending has has increased. Based on the simple formula M x V = Spending you can see that the Velocity of the Money supply determines demand. With a frozen credit market the velocity of the money supply is sluggish and has less effect on spending.

  4. David says:

    This is what I gathered after I read that anonymous comment. The monetary base reflects the cash in public circulation. When the Fed bought the debt owned by the banks, they traded cash for something less liquid. I don't know jack about the M* money supplies, but it looks like it was basicallyand economic zero-sum transaction [except for the risk transfer, which is another story].

  5. Anonymous Coward says:

    Swallowing hard and ignoring the strangeness of referring to the monetary base as the money supply, the monetary base data from the Fed
    http://research.stlouisfed.org/fred2/data/BOGAMBN
    shows that the money supply rose about 46% from October 1 to March 1. If it rose at the same rate for twelve months rather than five, my math (provided it is correct) shows that the monetary base would be about 2.5 times larger. Thus, a near tripling.

    So I think Robert Waldmann is correct, depending on how the calculations were done and exactly which series was used.

    It's impressive that you still remember the difficulties with measuring the money supply after all these years. Few professional economists even remember that, if they ever learned it in the first place.

  6. Daniel Lakeland says:

    I believe the various M* supplies are an attempt to see what the effect of some kinds of "nonmonetary assets" are. But M3 is no longer calculated, and I don't thing anyone ever calculated the effect of (for example) Home Equity.

    http://dlakelan.livejournal.com/136910.html

    Gives a personal view of cause and possible (partial) cure for current economic condition.

  7. Donald A. Coffin says:

    The (narrowly-defined) money supply (M1) is the total of cash in circulation (outside banks) and checking account deposits (well, and travelers' checks, but there are so few of them…).

    The monetary base is cash in circulation and in bank vaults plus bank deposits at the Federal Reserve.

    The monetary base has nearly tripled. mostly because bank deposits (which are part of banks' reserves) at the Fed have increased tremendously. Neither currency nor checking account deposits have increased that fast (fast enough–at a 15% annual rate between July 1 2008 and April 1 2009). If anyone is obsessive about this, the easiest-to-navigate dtatbase is maintained by the Federal Reserve Bank of St. Louis, at

    http://research.stlouisfed.org/fred2/

  8. Andrew Gelman says:

    Thanks, everyone, for the comments. Nobody has yet found a 271%, so I think the best theory is still that somebody (maybe Dick Morris's research assistant?) found the 27.1% and dropped the decimal point.

  9. Ken Williams says:

    We should be glad the figure wasn't originally given as 27.13% or we'd be looking at a really big increase.

  10. David says:

    This is what I gathered after I read that anonymous comment. The monetary base reflects the cash in public circulation. When the Fed bought the debt owned by the banks, they traded cash for something less liquid. I don’t know jack about the M* money supplies, but it looks like it was basicallyand economic zero-sum transaction [except for the risk transfer, which is another story].

  11. Squanto says:

    P.S. I'm still waiting for the anonymous commenter to come back to me with more data.

    ===========

    I wouldn't hold my breath.

  12. wcw says:

    It is true that the continuously compounded annual rate for M1 currently is running around 300% (http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id=M1&s1transformation=cca#), but what Morris wrote at the beginning of March was that "the money supply" had increased 270% over the 'past five months.' I can't find any money-supply or monetary-base series up exactly 271% over those five months.

  13. ZBicyclist says:

    @wcw: [as you probably know] You can't take a continuously compounded annual rate for a brief period of time and assume it's going to continue. That's completely bogus.

    Heck, I spent 5% more on groceries this month than I did last month. That's an 80% SAAR!

  14. Dr. Stock says:

    You are correct David, in that the monetary base reflects the cash in public circulation. When the Fed bought the debt owned by the banks, they traded cash for something less liquid. Th S&P also greatly affected by this cash flow. Good article on devaluation of US dollar and Euro: http://www.stocknod.com/stock-news.aspx