Economic stats not always what they seem


By Michael Hicks

I often read about a community boasting about good news and am left puzzled. Maybe it is news of a reduction in poverty or the fact that some website listed homes in that town as especially inexpensive. I’m puzzled because these aren’t necessarily good news; in fact, it may be very bad news. Here’s why:

Households and businesses tend to do things that make them better off. This includes moving to places where they are happier, wealthier or more profitable. Because we possess a variety of tastes and preferences and businesses create a multiplicity of goods and services, many different places are occupied by people and businesses.

Over time, our tastes change. Maybe we get tired of shoveling snow or wish to move to a suburb because we’re expecting twins and need more space. Businesses also move, mostly to places where they can find workers or can sell to more customers.

This reallocation of people and businesses cause changes to home prices, population and wages. As we move to cities and surround ourselves with better-educated people, our productivity rises; though, we don’t know exactly why this is the case. Cities become more crowded, as wages will tend to rise with higher productivity. At the same time, home prices rise, and we see a proliferation of restaurants, cultural attractions and other features that draw people to cities. All the while, the city becomes more congested, noisy and busy.

Some forces pull people to cities, while others move them out in a never-ending ebb and flow of people and commerce. It is at once both wondrous and gritty, predictable and sublime. Moreover, it is fun to study and try to understand. But, it is a mistake to pull one little feature out and proclaim it an important element of future success. Housing is a prime example.

Home prices are the quickest and easiest adjustment factor in a region. People move slowly, wages depend on productivity, but home prices change in an instant. So, low home prices are almost certainly not evidence of vibrancy and a cheerfully low cost of living. They are most likely a barometer of the general economic health of a place. While high home prices might act to move households out of a city center, they are likely signs of economic success.

Households are not attracted to cheap housing; they simply settle for it. So, cheap homes are not something to trumpet in celebration of a town. Rather, it is evidence of a problem.

Poverty, too, is an elusive metric. Most people are poor for short stretches of their lives, and those who are transiently impoverished might be some of the most important people to attract to your city. I offer as evidence that Bloomington, West Lafayette and Muncie suffer the three highest poverty rates in Indiana. But, it’s not just colleges that attract temporarily poor people; so, too, do dynamic cities with lots of opportunity. Poor entrepreneurs move to cities to strike it rich and remake their world, so cities that attract lots of ambitious but poor young people might really be the most dynamic places in the world.

I note these things to point out that for any individual city, low-priced homes may not be an attractive feature, and rising poverty may not be bad news. Where these features combine to be a problem lies entirely in what is happening to population growth.

If population is growing, low- priced housing and a growing poverty rate may be signs of a healthy future. If population is declining, then low home prices and a rising poverty rate are likely ominous warnings of a weakening economy and long-term stagnation.

Clearly, communities want to tell a happy story about themselves and so may ignore my warnings about what these data mean. The problem comes not so much when you try to deceive other folks, but when you trick yourself into believing something that is not true.

Although it is often attempted, self-deception is not a good economic development strategy.

Michael Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected].

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