“Textbooks describe economics as the study of the allocation of scarce resources. That definition may indeed be the “what,” but it certainly is not the ‘why.'”
On Monday Ben Bernanke, Chairman of the Federal Reserve, gave a speech about economic measurements. This speech was unusual because he was not focusing on indicators such as GDP, inflation, and unemployment rates; the Chairman instead took a philosophical approach and questioned the relevancy of these traditional statistics to happiness.
Before I continue, it is important to note that the Federal reserve focuses on the aforementioned numbers because our Central Bank has a dual mandate – to keep inflation within a standard range while maximizing employment. (note that the European Central Bank does not have a dual mandate, and focuses exclusively on inflation).
Bernanke details a number of other economic indicators which might be able to guide the Federal Reserve towards making more informed economic decisions: How secure do Americans feel in their jobs? How confident are they in their future job prospects? How prepared are families for financial shocks?
This is an interesting and exciting development, and I firmly believe that our economy could use more detailed and thoughtful economic analysis. The amount of data available to Economists today is mind-boggling. Innovative Central Banks, such as Israel’s, have been utilizing Google Search Results to inform their decision making. According to a paper by Google Chief Economist, Hal Varian, adding Google Trends to traditional indicators leads to an 18% improvement in predictions for ‘Motor vehicles and Parts’ and a 12% improvement for ‘New Housing Starts’.
The Federal Reserve works in a deliberate fashion, but I’m excited for the potential of leveraging the vast amounts of data produced by internet users to improve economic decision making.