Statistics Makes Liars And...

Liars Make Statistics.

I found this tidbit on the the Freakonomics blog. By adding illegal economic activities (or at least estimates of them) to the GDP, Italy will increase their GDP and, therefore, make their debt a smaller percent of GDP. It's magic! Without reducing real debt or growing the actual economy they will instantly improve their debt to GDP ratio. If Italy gets away with this I expect other countries to follow suit.

Imagine what incentives this provides for a government. As long as the activities remain illegal you don't have clear data on their economic impact. You have only estimates. Therefore, you have an incentive to:

1. Estimate higher rather than lower. I've already posted about how political incentives to report lower crime rates can create havoc with government data. Adding illegal activities to GDP would reverse that incentive for some crimes.
2. Don't legalize currently illegal activities. Once an activity is legal, there's much better data on its economic impact. Nevada has much more accurate data on prostitution's economic impact than California does. Therefore, California can more easily get away with overestimating prostitution in their state (see point 1). Soon, California and Colorado will have more accurate data on the marijuana economy than Illinois and New York. 
3. Make more activities illegal. If you want to boost your GDP by using high estimates of illegal economic activities (point 1)  and you accept that legal activities can't easily be over-estimated (point 2), then there's an incentive to make MORE things illegal. Perhaps you'd want to drive the alcohol and tobacco industries underground and exaggerate the size of those markets. 

Imagine trying this in your personal life. Suppose that you have a low-income job but a thriving, unreported side income (eBay, Craigslist, off-the-books handyman service, etc.). You want to buy a house but your income is too small to qualify for a mortgage. Wouldn't it be nice if you could tell the bank to boost the reported income by $20,000 for unspecified activities without the IRS or local police getting involved? I guess governments can do things that individuals can't.