Escorts, Gambling And One Man’s Journey Into The Outer Limits Of Economics

Andrew Zatlin of the economics consultancy group, South Bay Research, isn’t merely at the top of his profession – he’s probably among the most fearless economists working today. [Check out this great profile in the Wall Street Journal from back in October] While zillions of analysts spend their days cranking out complex (and usually WRONG) quantitative models aimed at predicting everything from stock market performance to the effect of weather patterns on emerging economies, Zatlin has never been afraid to take things in what one might politiely refer to as a more “provocative” direction: specifically, he exclusively studies expenditures on escorts and gambling and then compares his findings both to the broader economy and to specific sectors. It’s no exaggeration to describe his results as the economic equivalent of sexy.

Zatlin’s chief product, the “Vice Index,” has an almost 90% statistical correlation with personal consumer spending and even leads it by approximately 4 months. In other words, he has found a way of predicting personal consumption expenditures far more accurately than the overwhelming majority of competing indices (indeed, most likely, outperforming ALL of them).

The other great thing about Zatlin is that he has no shame in acknowledging that his approach isn’t based in some abstruse theory or series of impressive-looking calculations. Rather, unlike far too many of his colleagues, Zatlin chose a laser-like focus on what he calls “the wealth effect” – That is, he relentlessly questioned what behaviors are most likely to change FIRST whenever the economy begins shifting one direction or the other.

One clear answer? Decisions to purchase “products” that produce a zero or near zero chance of economic return, possess a negative stigma and are therefore only seen (at least by most consumers) as options when their concerns about personal finance are extremely low or non-existent. And, of course, not all vice fits this description. Illegal drugs, cigarettes and alcohol (all of which have been tested in other indices), because of their potential for addiction, can induce purchasing even despite unaffordability. Sex addiction and gambling addictions do exist but: (1) are usually not clinically diagnosed as “physical addictions”; and (2) are relatively much less prevalent.

vice and pce 2

By isolating out spending on escorts and gambling, therefore, Zatlin is essentially able to see into the future attitudes of both vice AND non-vice consumers. When vice spending begins to slow, it’s more than a good bet that broader consumer spending will soon slump also – and vice versa. People stop buying what they REALLY don’t need (and what society tells them they shouldn’t be buying anyway . . .) well before they stop eating in fancy restaurants, purchasing new clothing or upgrading to the latest model of iPhone – let alone cutting back on essentials. And because those eventual broad-based consumer decisions lead to aggregate changes in unemployment, inflation, investment decisions and government spending (in addition to a host of other factors), the Vice Index has lot to say about topics well beyond hookers and roulette wheels.

One question Zatlin is repeatedly asked (and always refuses to answer) is how he collects accurate data on the “underground economy” of escorts . . . But as someone who has been “doing it” for 18 years and achieving a remarkably accurate level of prognostication, his followers don’t tend to press the issue.

In a recent interview with Business Insider Zatlin put it this way: “During events like the furlough and Sandy you had escorts saying that their phones had stopped ringing. Now I’m not saying that government workers are clients for prostitutes, but when you have 800,000 people out of a job, that affects spending.”

When the revised unemployment and consumer confidence numbers come out, I’m guessing Zatlin’s predictive abilities will prove as prescient as ever. Never underestimate the raw power of simply acknowledging the obvious: after all, there’s a reason the Bible opens with a story about two naked people being tempted by the devil.

Vice has been there from the beginning and surely isn’t disappearing anytime soon. Not that I’d know anything about that . . .

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