Posts Tagged ‘CommSec National Performance Gauge’

Hoodwinked by Craig James’s “CommSec National Performance Gauge”

Thursday, March 25th, 2010

Just this week, CommSec’s Chief Economist, Craig James released a CommSec National Performance Gauge that purportedly declared that Australia have never had it so good (as at end of 2009). According to this news media article, Craig James was quoted as saying,

The CommSec National Performance Gauge attempts to fill the void by focusing on issues that matter to ordinary Aussies. That is, financial decisions like buying a car or house, filling up the car with petrol, the state of the job market, wages and confidence levels.

That gauge takes seven measures, of which four of them involves spending capacity. Among the four, one of them is on car affordability. As that article reported,

The gauge shows that car affordability is the strongest in 35 years, taking a person on the average wage just under 30 weeks to buy a new Ford Falcon, down from 36 weeks five years ago.

The idea is that as the number of weeks an average worker earns to buy a car decreases, the ‘better’ and ‘more’ well-off’ this measure indicates. A car is probably chosen because it is representative of the material well-being of Australians. According to our friends at FN Arena (please note that the original article has an overall air of sarcasm against Craig James’ gauge),

But in the wider cohort, income per capita is up 6% over five years and retail spending up 7%. Today it takes 30 weeks of average wages to buy a new Falcon, down from 36 weeks five years ago and the most affordable level in 35 years. It takes 1.58 weeks of average wages to make one average mortgage payment, which despite ?unaffordability? cries is the same level of five years ago. And despite rising oil prices, drivers can afford 7% more petrol from the average wage than five years ago.

That sounds correct right?

Unfortunately, if you’re not careful, you can fall for a mental pitfall here. Even Craig James was reported to qualify his exuberance by saying, “that is probably a big call and one that would attract a lot of discussion.”

So, what is the mental pitfall trap hidden within this performance gauge that can lead you astray?

Remember there’s a mental pitfall called Lazy Induction in our report? There, we wrote,

The trouble starts when the sample that we used for our observations is drawn from our own personal bias. Then, from the observations of the biased sample, we make generalisations based on our flawed observations.

In Craig James’ CommSec National Performance Gauge, what is the basis for including or excluding specific consumer goods for use in the measure? For example, why is the price of Falcon (relative to income) used as a measure and not, say, your insurance premium (which is going up)? Or food & groceries (which are going up and arguably more important than a Falcon)? Or house prices (which are going up relative to income in Australia)? Or how about notebook computers, which are steadily falling in prices over the years (which will certainly boost the affordability measure). Or your electricity/gas/water bills (which are going up)? In other words, improvements in these seven measures of the gauge cannot be generalised into improvements in the standard of living of Australians in general. Some of the included measures are important only to some Australians. Some of measures that are not included in the gauge are important to some Australians. Therefore, depending on which measures to include in the gauge, bias can be introduced.

The issue with Craig James’ CommSec National Performance Gauge is the same with the construction of the consumer price inflation index. As we quoted Ludwig von Mises in How much can we trust the price indices (e.g. CPI)?,

People began to devise methods for working up complexes of commodity units to be contrasted to the monetary unit. Eagerness to find indexes for the measurement of purchasing power silenced all scruples. Both the doubtfulness and the incomparability of the price records employed and the arbitrary character of the procedures used for the computation of averages were disregarded.

A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell. She has little use for computations disregarding changes both in quality and in the amount of goods which she is able or permitted to buy at the prices entering into the computation. If she ?measures? the changes for her personal appreciation by taking the prices of only two or three commodities as a yardstick, she is no less ?scientific? and no more arbitrary than the sophisticated mathematicians in choosing their methods for the manipulation of the data of the market.

In the same way, Craig James’ gauge is as ‘unscientific’ as a housewife’s gut feel. That’s why Craig James conceded that his own findings was a “big call.”