Tag: unemployment

No, the ‘Real’ Unemployment Rate Isn’t 17.3%

Nearly every economic commentator from Fox News (on the fair and balanced side) to Paul Krugman (on the unfair and unbalanced side) is eager to tell you that the “real” unemployment rate is not 10% but 17.3%.  The latter figure is the largest of six offered by the Bureau of Labor Statistics.   But that does not make it more meaningful.

Many people believe (incorrectly) that unemployment is a measure of how many jobs were lost.   But people can also be unemployed because they quit their job, or because they never worked before, or haven’t worked in a long time.  Job losers accounted for 63.7% of the unemployed in December, down from 66.1% in September.  If we counted only those who were unemployed because they lost their jobs, that measure of unemployment was 6.3% in December — down from 6.7% in October.

The 17.3% figure, by contrast, starts with those looking for jobs during the past month and adds “all marginally attached workers, plus total employed part time for economic reasons.”   That phrase “marginally attached” means people who looked for work at some point during the past year, but not lately. Contrary to press reports, relatively few of the “marginally attached” are those discouraged about job prospects.  Adding discouraged workers would only push the unemployment rate up by half a percentage point, to 10.5%.   And even that small number of discouraged workers is not simply those who could not find work, but those who simply “think” no work is available, or think they are too young, too old, or that they lack the necessary schooling or training.

The rest of the “marginally attached” don’t even think they can’t find work.  Instead, they are not looking for work “for such reasons as school or family responsibilities, ill health, and transportation problems.”  To describe such people who are not available for work as “underemployed” (much less unemployed) is an abuse of the language.

As for those “working part-time for economic reasons,” only a fourth say they could only find part-time work.   Those who normally work a 9-to-5 schedule (35 hours a week) are counted as working part-time for economic reasons if they miss even one hour “for reasons such as holidays, illness and bad weather.”   That isn’t really underemployment, much less “real” unemployment.

What is unique about last year’s unemployment was its typical duration — doubling the number of weeks people remain on the dole.   Because those who have been unemployed 12–18 months do not leave the ranks of the unemployed until their benefits are about to run out (after an unprecedented 79 weeks or more), it doesn’t take many newly unemployed to push the rate above 10%.  Congress tripled the number of weeks people collect unemployment benefits (describing that and other transfer payments as a  “stimulus”) and now wonders why so many people take so long to accept a suitable job offer.   If you subsidize something, you get more of it — and that applies to unemployment too.   Many of those same clueless  legislators may be equally surprised to find themselves out of a job next November.

It’s the Obama Economy Now

Undoubtedly President Obama inherited an economic mess.  Also undoubtedly, he’s made it worse.  Barring substantial revisions to recent job loss estimates, we have now crossed the line where as many jobs have been lost during this recession under President Obama as under President Bush.  From the start of the recession, in December 2007, until President Obama took the oath of office at the end of January 2009, there have been 3.36 million nonfarm payroll jobs lost.  From February 2009 until now there have been about 3.36 million nonfarm payroll jobs lost (estimates from ADP employment report).

Even during the best of times, the economy experiences substantial job loss.  However, we consider those times good because the labor market is also creating lots of jobs, so that job losses are offset by job gains.  The early parts of a recession are generally characterized by large increases in job losses, with minor declines in job creation.  Eventually the job losses moderate and job creation picks up, bringing us out of the recession.  We are arguably past the worst of the job losses.  What has escaped us is job creation.

And it is on the job creation front that Obama takes ownership of the economy.  While there are certainly problems in the credit markets, the major reason behind the lack of job creation is the massive uncertainty being generated by Washington.  For any employer today, it is almost impossible to estimate what the future health care costs of new hires will be.  It’s impossible to gauge what your environment costs are going to be.  Same with the costs of the 90 new workplace rules that the Department of Labor promised would be forthcoming over the next year.

Sadly this administration learned the wrong lesson from the defeat of the Clinton health care plan.  The history lesson they should have learned is that Clinton inherited a recession as well (as did Bush for that matter), but that job creation was weak until the Clinton health care plan stalled. 

Until employers and investors feel it is safe once again to put their businesses and investments at risk, and Washington ends its war on the productive elements of our society, we will not have significant private sector job growth.

Government and GDP

The expansion in government and poor state of the economy got me thinking about how government growth is reflected in measured gross domestic product. So here is a wonky look at the treatment of government in the Bureau of Economic Analysis GDP data.

Data notes: By “government,” I mean total federal, state, and local. For 2009, I’m using the average of second and third quarter data. All data from BEA Tables here.

GDP measures total production. In 2009, government production was 20.7 percent of U.S. GDP.  Government production is roughly the sum of government value-added (the stuff it produces itself) and government purchases. The first item, government value-added, was 12.4 percent of GDP and mainly consists of employee compensation. For example, the Pentagon produces output by adding together fighter pilots, which it hires, and fighter jets, which it buys.

A more commonly cited measure of government is total government spending. In 2009, that was 38 percent of GDP. The difference between this number (38 percent) and the production number (20.7 percent) is 17.3 percent, and represents the sum of government interest payments and transfer payments to individuals and businesses.

Figure 1 shows how the three measurements of government size have changed over time. Government production has remained fairly stable as a share of the economy, but total government spending has soared. The growing gap between these two lines mainly represents the massive growth in transfer (or subsidy) programs, such as Social Security.

12-10-09 edwardschart

How Does Government Growth Affect Measured GDP?

Consider how the recent rise in government spending might have affected measured GDP. First, let’s look first at the production part of government spending. The important thing here is that we don’t know how much government workers actually produce because their output is generally not sold on the market. As a consequence, the BEA measures their output as the sum of their compensation amounts. Also, we know the dollar value of the things the government buys, but we don’t know how much those intermediate goods actually produce when in the hands of the government. So the government production portion of GDP seems kind of shaky, despite the superb efforts of the BEA to assemble all the data.

Anyway, let’s say the government adds a new worker with pay of $100,000, the BEA measures GDP being boosted by $100,000. But it might be that the worker doesn’t actually produce anything useful, and he adds zero to the economy’s actual output.

If the government hires that worker away from the private sector, private GDP would go down by about $100,000. As a result, overall measured GDP would be unchanged. But that would be incorrect because the economy’s actual output fell by $100,000.

So let’s say the government spent $100 billion to hire a million new government workers. Let’s say half of those workers produced as much value as their salaries, but the other half produced nothing of value. The result of this government expansion would be that the BEA would overestimate U.S. GDP by $50 billion. (I am assuming that the government’s hiring doesn’t change the unemployment rate. I’m also ignoring the distortionary effects of higher taxes).  

Now let’s look at the transfer or subsidy portion of government, which equals 17.3 percent of GDP.

Let’s say the government increases transfers by $100 billion, perhaps by increasing Social Security benefits, and funding it by higher taxes on wages.

If there are no behavioral responses among taxpayers and benefit recipients, measured GDP would be unchanged, which would be the correct answer.

But of course there would be behavioral responses. The higher taxes would induce people to work less and the higher Social Security benefits would induce people to save less and retire earlier. The results would be that output would fall, and that would be accurately reflected in measured GDP.

In sum, my purpose here was not to explore how a growing government affects the economy, which is a huge subject. Instead, it was to explore whether measured GDP accurately reflects changes in the size of government. The answer appears to be that the transfer part of government spending (17.3 percent of GDP) would be accurately reflected in a shrinking GDP, but that the production portion of government spending (20.7 percent of GDP) may not be. If workers produce less output when they work for government than when they work in the private economy, the latter portion of measured GDP will be overstated.

Is Keynesian Stimulus Working?

In his Brookings Institution speech yesterday, President Obama called for more Keynesian-style spending stimulus for the economy, including increased investment on government projects and expanded subsidy payments to the unemployed and state governments. The package might cost $150 billion or more.

The president said that we’ve had to “spend our way out of this recession.” We’ve certainly had massive spending, but it doesn’t seem to have helped the economy, as the 10 percent unemployment rate attests to.

It’s not just that the Obama “stimulus” package from February has apparently failed. The total Keynesian stimulus is not measured by the spending in that bill only, but by the total size of federal government deficits.

The chart shows that while the federal deficit (the total “stimulus” amount) has skyrocketed over the last three years, the unemployment rate has more than doubled. (The unemployment rate is the fiscal year average. Two months are included for FY2010.)

200912_blog_edwards17

The total Keynesian stimulus of recent years has included the Bush stimulus bill in early 2008, TARP, large increases in regular appropriations, soaring entitlement spending, the Obama stimulus package from February, rising unemployment benefits, and falling revenues, which are “automatic stabilizers” according to Keynesian theory.

The deficit-fueled Keynesian approach to recovery is not working. The time is long overdue for the Democrats in Congress and advisers in the White House to reconsider their Keynesian beliefs and to start entertaining some market-oriented policies to get the economy moving again.

Spending Our Way Into More Debt

Huge deficit spending, a supposed stimulus bill, and financial bailouts by the Bush administration failed to stave off a deep recession. President Obama continued his predecessor’s policies with an even bigger stimulus, which helped push the deficit over the unimaginable trillion dollar mark. Prosperity hasn’t returned, but the president is persistent in his interventionist beliefs. In his speech yesterday, he told the country that we must “spend our way out of this recession.”

While a dedicated segment of the intelligentsia continues to believe in simplistic Kindergarten Keynesianism, average Americans are increasingly leery. Businesses and entrepreneurs are hesitant to invest and hire because of the uncertainty surrounding the President’s agenda for higher taxes, higher energy costs, health care mandates, and greater regulation. The economy will eventually recover despite the government’s intervention, but as the debt mounts, today’s profligacy will more likely do long-term damage to the nation’s prosperity.

Some leaders in Congress want a new round of stimulus spending of $150 billion or more. The following are some of the ways that money might be spent from the president’s speech:

  • Extend unemployment insurance. When you subsidize something you get more it, so increasing unemployment benefits will push up the unemployment rate, as Alan Reynolds notes.”
  • “Cash for Caulkers.” This would be like Cash for Clunkers except people would get tax credits to make their homes more energy efficient. Any program modeled off “the dumbest government program ever” should be put back on the shelf. 

  • More Small Business Administration lending. A little noticed SBA program created by the stimulus bill offered banks an “unprecedented” 100 percent guarantee on loans to small businesses. The program has an anticipated default rate of 60 percent. Small businesses need lower taxes and fewer regulations, not a government program that perpetuates more moral hazard.

  • More aid to state and local governments. State and local government should be using the recession to implement reforms that will prevent them from going on another unsustainable spending spree when the economy recovers. Also, we need fewer state and local government employees – not more – as they’re becoming an increasing burden on taxpayers.

The president said his administration was “forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve.” Mr. President, nobody has forced you to do anything. You’ve chosen to embrace – and expand upon – the big spending policies that were a hallmark of your predecessor’s administration.

Today’s White House ‘Jobs Summit’

Today’s Politico Arena asks:

The WH Jobs Summit: “A little less conversation? A little more action? ( please)”

My response:

Today’s White House “jobs summit” reflects little more, doubtless, than growing administration panic over the political implications of the unemployment picture.  With the 2010 election season looming just ahead, and little prospect that unemployment numbers will soon improve, Democrats feel compelled to “do something” – reflecting their general belief that for nearly every problem there’s a government solution.  Thus, this summit is heavily stacked with proponents of government action.  This morning’s Wall Street Journal tells us, for example, that “AFL-CIO President Richard Trumka is proposing a plan that would extend jobless benefits, send billions in relief to the states, open up credit to small businesses, pour more into infrastructure projects, and bring throngs of new workers onto the federal payroll – at a cost of between $400 billion and $500 billion.”  If Obama falls for that, we’ll be in this recession far beyond the 2010 elections.
 
The main reason we’re in this mess, after all, is because government – from the Fed’s easy money to the Community Reinvestment Act and the policies of Freddy and Fannie – encouraged what amounted to a giant Ponzi scheme.  So what is the administration’s response to this irresponsible behavior?  Why, it’s brainchilds like ”cash for clunkers,” which cost taxpayers $24,000 for each car sold.  Comedians can’t make this stuff up.  It takes big-government thinkers.
 
Americans will start to find jobs not when government pays them to sweep streets or caulk their own homes but when small businesses get back on their feet.  Yet that won’t happen as long as the kinds of taxes and national indebtedness that are inherent in such schemes as ObamaCare hang over our heads.  Milton Friedman put it well:  “No one spends someone else’s money as carefully as he spends his own.”  Yet the very definition of Obamanomics is spending other people’s money.  If he’s truly worried about the looming 2010 elections (and beyond), Mr. Obama should look to the editorial page of this morning’s Wall Street Journal, where he’ll read that in both Westchester and Nassau Counties in New York – New York! – Democratic county executives have just been thrown out of office, and the dominant reason is taxes.  Two more on the unemployment rolls.

California Illustrates Need to Revive Federalism

The state of California recently received $60 million in U.S. Department of Labor stimulus funds to upgrade its 23 year-old unemployment benefits system. But according to the Associated Press, California is yet to spend $66 million it received from Labor in 2002 to upgrade its system. The price tag isn’t whopping by federal standards, but it is another reminder of the need to return to fiscal federalism.

Apparently, the Department of Labor couldn’t care less:

The federal government has no plans to sanction or fine California for not completing the original technology upgrade. The Labor Department said it was more concerned that new stimulus funding is used in a way that will allow more workers to qualify for unemployment assistance.

At the same time, California’s unemployment insurance fund is $7.4 billion in the red, which has forced it to “borrow” $4.7 billion from the federal government. According to an editorial in the Oakland Tribune, California increased the generosity of its unemployment benefits when the economy was healthy, but now that the economy is stagnant spendthrift policies are creating a fiscal crisis.

Alan Reynolds reminds that the federal stimulus package “bribed states to extend benefits — which have now been stretched to an unprecedented 79 weeks in 28 states and to 46 to 72 weeks in the rest.” When you subsidize something you get more of it—federal subsidies prompt more state subsidies to the unemployed, which generates more unemployment. Alan concludes that “the February stimulus bill has added at least two percentage points to the unemployment rate.”

California’s unemployment rate of 12.5 percent is the state’s highest since the end of the Great Depression. Once again we see that when the line of responsibility between federal and state government is blurred, the result is more of both and poor policies compounded.