Economics

The All-New Failure of the New Economics

Unemployment rates and other useless measurements

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If you've been pinning your job-search hopes on the conventional wisdom that employment gains follow an economic recovery, you have a problem right now. The so-called Great Recession has been over for almost two years, but unemployment remains about where it was before the National Bureau of Economic Research (NBER) declared that the recovery had begun.

In June 2009, the month the NBER has pinpointed as the end of the recession, the Bureau of Labor Statistics' unemployment rate stood at 9.5 percent. In early 2011, the unemployment rate was 9 percent. To put this feeble recovery into perspective: Just eight months after the job-loss peak in the 1948 recession, which saw unemployment increase by 5.2 percentage points, all of those jobs had been replaced. Less than a year after the trough of the 1958 recession, the economy had reversed an unemployment spike of more than four percentage points. In 1981–82, job growth more than erased a 3.1 percentage point increase in unemployment within 11 months, leaving the rate lower than it was before the recession.

The numbers today get even worse when you look beyond the Bureau of Labor Statistics' top-line figures. As of January, the government was reporting a rate of 16.1 percent for U-6, its measure of "total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force." The U-6 number, sometimes referred to as the "real unemployment" rate, has improved since January 2010 by less than half a percentage point, and not in a straight line. In fact, U-6 dropped early in 2010 before ticking back up in the summer—a year after the NBER's declared end of the recession, when you would expect job growth to be at its strongest.

Even that 0.5 percentage point improvement in official unemployment contains more bad news than good. Much of the increase comes from "discouraged" workers who reach the end of their unemployment benefits and have stopped looking for work. The Bureau of Labor Statistics reduced its estimate of the civilian labor force by 504,000 in January, which, along with some changes to its estimates of total population, helped make the unemployment rate look a little better. 

The economy would need to be creating about 150,000 jobs a month just to keep up with population growth. Instead, nonfarm payroll job creation averaged 94,000 per month from January 2010 to January 2011. At the beginning of this year, the Franklin & Eleanor Roosevelt Institute, analyzing Bureau of Labor Statistics numbers, calculated how people are leaving unemployment. It found that more (22 percent and rising) are going from "unemployed to not in labor force" than are going from "unemployed to employed" (17 percent and falling).

And all of the above numbers are arguably better than they would have been without various one-off interventions—hiring for the 2010 Census, the first-time homebuyer tax credit, the $800 billion stimulus package of 2009—that have now run their unrepeatable course.

Economists have rolled out an alphabet soup of justifications and neologisms to explain all this: the "w-shaped" or "l-shaped" recession, the "double dip," the "jobless" or "job-loss" recovery, and so on. But there are really only two possible explanations: Either the recovery isn't happening, or there's something wrong with our assumptions about the economy. Unfortunately, nobody seems to be interested in using the Great Recession as an opportunity to get rid of a pile of macroeconomic hoodoo that has consistently failed the test of outcomes. 

We are meant to understand, for example, that the Federal Reserve manipulates interest rates through its federal funds rate, which is what banks charge each other for loans. Since December 2008, the fed funds rate has been kept between 0 percent and 0.25 percent, a historically low rate. Yet long-term interest rates keep going up. As of this writing, the yield on the 10-year Treasury bond was 3.7 percent; on the 20-year Treasury, 4.55 percent; on 30-year Treasuries, 4.75 percent. With very little fanfare, the Fed's vaunted power to "heat up" or "cool off" the economy has vanished. 

Keeping the fed funds rate negative relative to inflation has succeeded in pushing prices upward at a time of economic slack. Between December 2008 and December 2010, commodity prices went through the roof. The price of gold rose by 89 percent, compared with 1.8 percent consumer price index (CPI) inflation over the same period. Crude oil went up 107 percent. Copper went up 230 percent. Sugar went up 154 percent. Soybeans went up 65 percent. Wheat went up 60 percent. Corn went up 102 percent. Coffee went up 113 percent. Describing these numbers in a December article for Asia Times, commodity specialists Hossein Askari and Noureddine Krichene coined a new term—"Bernankeism"—to describe how endless currency creation and low interest rates produce inflationary bubbles. Not that you'd know about inflation if, instead of buying things you needed, you were studying the popular "core" CPI, which leaves out energy and food costs and bases its estimates on a cherry-picked basket of goods that tells us increasingly less about the well-being of Americans. 

While we're discarding economic terms, we should reconsider the centrality of GDP growth (which, as the Harvard economist Robert Barro has demonstrated, can look deceptively healthy because of the way government spending is counted), along with the idea that "housing traditionally leads the recovery" (it isn't today), and the idea that Wall Street reflects the overall economy (which the Reuters financial journalist Felix Salmon argues is less true than ever, due to the decreasing number of new companies listed on stock exchanges).

Given the novelty of a recovery you keep hearing about without actually seeing, maybe we should even rethink NBER's measurements of business cycles. Right now we're supposed to believe the political truism that the "economy is recovering but people are hurting." You could just as easily remove the disjunction and conclude that people are hurting because the economy isn't recovering. 

Tim Cavanaugh (tim.cavanaugh@reason.com) is a senior editor at reason.

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65 responses to “The All-New Failure of the New Economics

  1. Either the recovery isn’t happening, or there’s something wrong with our assumptions about the economy.

    Starting with the assumption that the Economy is something that can be “managed” just by a combination of tweaks and econometrics, or that can be modeled with cool-looking equations.

    Unfortunately, nobody seems to be interested in using the Great Recession as an opportunity to get rid of a pile of macroeconomic hoodoo that has consistently failed the test of outcomes.

    That’s because the hoodoo serves to conveniently shift the blame away from the people that caused the economic problems; has been ever since the General Theory[…]

    1. As I’ve been saying since I first read an introduction to macro and micro:

      The purpose of macroeconomics seems to be to contradict the whole of microeconomics.

    2. I have decided to carpet bomb the economy. I don’t need congressional approval. My supporters will unconditionally support me.

      1. A shovel ready project?

      2. A shovel ready project?

  2. This spot reserved for future complaints

    1. I should like to register a complaint…

      1. Duly noted. Unfortunately due to the state of the economy we are currently looking for replacement staff to address your complaint. We hope to have this need filled and get back to you sometime this decade.
        Thanks for your time.

      2. Your parrot is just pining for the fjords. That’ll be $24.50.

        1. Norwegian Blue, beautiful Plumage.

      3. That parrot’s not dead!

        1. Just resting after a prolonged squawk.

  3. “plus all persons marginally attached to the labor force”

    So nice you had to say it twice?

  4. […]we should reconsider the centrality of GDP growth (which, as the Harvard economist Robert Barro has demonstrated, can look deceptively healthy because of the way government spending is counted)[…]

    Nooo!

    […]along with the idea that “housing traditionally leads the recovery”

    Only termites would agree with that assumption….

    […]and the idea that Wall Street reflects the overall economy.

    … which only the Fed’s and Wallstreet’s scam artists would continue to peddle…

    1. Seriously, people pay too much attention to the stock market. It’s not like it’s the god of the economy. Its just a way to trade parcels of companies that choose to sell of aforesaid parcels for a quick cash influx.

      1. Over past ~35 years, the stock markets have been great indexers of real inflation vs. real growth in scale and productivity.

        There is interesting thesis in there breaking down the ‘real’ numbers for those three components of stock prices in a given sector like automobiles and comparing that to say, digital circuits. It would also be interesting way to ask if current prices are ‘rational’ or not. It really would be interesting endeavor.

        Unless your Krugman’s class, then your thesis should be on building Xerox Document Center that can crank 1000’s of pages a minute.

  5. I know this belongs in the morning links, but it’s too brilliant not to share.
    Rebecca Black’s “Friday”: A Libertarian Allegory

    When she finally announces, elatedly, that “I don’t want the weekend to end,” she is expressing more than just the desire to be permanently relieved of educational tasks; it is a cry for the civic order to recognize the human right of liberty itself. The video ends with that hope that there will be no return to the twelve-year sentence but rather that “partying” could become a permanent state of being, not just for her but for everyone.

    1. OK, it was worth it. But did he really need to go on, for, like, 50 paragraphs?

      1. Wait’ll you see the doctoral dissertation!

    2. Partying endlessly is inreconciliable* with reality. Partying is a consumptive activity, and you can’t consume what hasn’t been produced. Work is required.

      However, the view that school is a state of slavery is rather correct. I think that there should be much more choice in what sort of education (if any) the student partakes in.

      Also, her singing stinks. (Not a challenge to the theme, it just needs to be repeated.)

      *Is that spelled right?

      1. It’s hilarious that even Autotune couldn’t make her sound good.

  6. And all of the above numbers are arguably better than they would have been without various one-off interventions ? hiring for the 2010 Census, the first-time homebuyer tax credit, the $800 billion stimulus package of 2009 ? that have now run their unrepeatable course.

    Meaning: Those programs just represent a cocaine shot given to an addict who is suffering the shivers…

    1. Sometimes you need a bump.

      1. Why? You got one?

  7. Commodity prices have followed a V-shaped pattern and Cavanaugh cherry picked the bottom of the V when he chose Dec 2008.

    Fact is – oil, natural gas, rice, wheat, etc were all higher BEFORE Bernanke enacted QE1 or QE2 so, therefore, QE has had no discernible effect on commodity prices (other than stirring up the goldbugs) proving monetary policy need not necessarily lead to inflation.

    Bernanke knows what he is doing – dollar hawks do not. Even so, the FOMC last voted 10-0 with Ben and the last hawk – Hoenig, is retiring.

    I look forward to nutty Ron Paul’s investigations though – love good comedy.

    1. “QE has had no discernible effect on commodity prices”

      If, as you stipulate, printing money has no effect on prices, then 1) what drove prices higher prior to QE1 and QE2, and 2) what is driving them higher now?

      1. Supply and demand.

        Or, if you prefer, China, India, South America, all newly prosperous and thirsty for energy and food 2000-2007.

        A US/Europe financial collapse interrupted the pattern and now it has resumed and been exacerbated by severe drought in Russia/China (Russia forbids wheat exports) and increased populations – India will soon surpass China. Oil will continue to rise as production capacity cannot keep pace with demand.

        1. Phew! I’m going to save this and refer to it in the future when gas and heating oil are $_.__ and $_.__, and bread is $_.__.

          Speaking of supply/demand relationships, what does the supply of dollars do to equilibrium the price of a good?

        2. That answer only covers part of the data. The 1970s saw big a big oil spike as well, but the 1980s and 1990s did not. Here’s a chart. Now, as you can see, the big spike in oil that began 2002 corresponded with the deliberate policy decision to create the housing bubble.

          So, yes, you are correct that commodities dropped and reached a trough in December 2008, only to resume their trend. But what was really happening? You had a panic, banks were teetering, the velocity of money dropped, etc. People felt less wealthy as their homes were worth less. Banks felt less wealthy as they realized they might not be able to resell their toxic assets quickly enough. In other words, you saw the sort of monetary contraction that you would expect during this part of the business cycle.

          Once we had pumped up the markets back up with monopoly money, things appeared to go back to normal. Core inflation was stable, and we saw GDP and job growth. The problem is this: commodity prices were growing faster than the economy as a whole. This wasn’t a problem initially, as margin compression hid the costs from consumers. Now, though, the fiscal and monetary “stimulus” we indulged in is starting to catch up to us in the form of higher prices. Ultimately, this is going to choke the “recovery,” and we’ll see unemployment higher than the 10.1% we saw in 2009.

          1. You’re looking at this though a US centric lens. Individually your points are plausible but neglect the real creation of wealth and demand throughout the world that drive real demand and price increases where production has proven flat.

            Did copper double in price 2004-06 because of US housing policy or real building in China/India/SA?

            Fed critics like Ron Paul want to give away a great tool of the US (reserve status with the dollar) to whoever can produce the most gold? Maybe Russia? Maybe RP’s gold miner holdings? No thanks.

            The world loves the dollar. Lets keep it that way.

            1. I don’t think that economic growth outside the United States explains the whole story. Economic growth in China during both the 1990s and the 2000s proceeded at an approximate 10% annual pace. Yet, we didn’t see the commodities move up until around 2002. Why not?

              If your hypothesis is correct, I would expect to see the trend begin in the 1990s, and then pick up some steam in the 2000s. That’s not what I see. Rather, commodities mostly dropped during the 1990s. Copper went from $2700 per ton to $1700 per ton between 1990 and 2000.

              Now, ceterus paribus, your hypothesis about emerging market demand should be valid. My problem with it is that it doesn’t seem to be the dominant factor here. I’m sure it must be a factor — logically it has to be — but I just don’t see the empirical evidence.

              1. In other works, nobody knows nothin.

    2. proving monetary policy need not necessarily lead to inflation”

      You keep using that word. I do not think it means what you think it means.

      1. What Inigo said

        1. Right….. its not the greatly increased commodity consumption among the four billion people in the emerging markets, is it?

          No, its the Fed buying $600 billion in Treauries! Put that fucking copy of Creature From Jekyll into the nearest trash can where it belongs.

            1. Fed assets have tripled as well. The balance sheet looks great.

              1. What all this has to do with “proves” escapes…everyone. Inigo’s orig comment stands.

              2. It’s nice to count debt as assets…perhaps my school debt is really an asset…hell, I’m rich now…you don’t understand fractional reserve banking…perhaps if I had a money making machine, I could create assets out of thin air

                1. Go look at the Fed balance sheet before you spout off.

                  Assets include a trillion in housing, at least a half trillion in gold, $600 billion in Treasuries, and more.

                  1. Assets include a trillion in housing

                    Which isn’t worth jack shit unless it’s sold for that price

                    at least a half trillion in gold

                    Well, shit, if FRNs are so great, they wouldn’t need to maintain holdings in the barbaric metal, now would they?

                    $600 billion in Treasuries,

                    You do realize that this is a net drain on taxpayers, yes?

                  2. Except that the Fed used accounting fraud on its balance sheet to cover negative capital assets. This January, the Fed sneaked in a new voodoo procedure called a “negative liability” to cover up its negative balance. They now list their liabilities AS DEBITS ON THE TREASURY’S BALANCE SHEET, and voila, the Fed covers its liabilities. So sorry, looking at the Fed’s balance sheet means fuck-all when it’s listing its liabilities on someeone else’s balance sheet.

    3. Bernanke knows what he is doing

      Citation needed.

      I look forward to nutty Ron Paul’s investigations though – love good comedy.

      As do I, shrike.

    4. Hoenig got kicked off, and was the only reasonable one there. Even TIME gave him an okay review, hard as that is to believe.

  8. My bloomberg stock app keeps crashing this morning. Coincidence? I think not.

  9. the “w-shaped” or “l-shaped” recession,

    The recovery’s gone a bit pear-shaped.

  10. A good chunk of the persisting high unemployment can be traced to one of the first things the Democrats rammed through when they got power: raising the minimum wage.

    As long as they persist in the economic lunacy of denying employment to people who currently don’t have the skills that would justify a minimum wage salary, those people will tend to remain unemployed and unable to start acquiring the skills to move up the wage ladder.

    Unfortunately, the Republicans in the House don’t seem to be willing to try to fix this, either.

    1. Min wage at the fed level is at 7.25. When was the last time you seen a job offer just that outside of a McDonald?

      1. While that may mean that the minimum wage is irrelevant (though unemployment rates are highest among those 16-24), to the degree that’s true it also means that cutting it would be no problem either.

    2. To put it another way, the minimum wage give X amount of dollars to those already employed. It does not prevent the employer from firing some of those employees to balance the books. It does prevent the hiring of more people a Y dollars an hour (X>Y).

      The minimum wage perpetuates unemployment.

  11. Either the recovery isn’t happening, or there’s something wrong with our assumptions about the economy.

    Tim, what’s wrong with you. The correct answer is “All of the above.” Get with it. You’re the Lone Ranger of Economics these days.

    While we’re discarding economic terms, we should reconsider the centrality of GDP growth (which, as the Harvard economist Robert Barro has demonstrated, can look deceptively healthy because of the way government spending is counted),

    So doesn’t that mean “Need better definition of GDP, Kemosabi” than “Jettison concept of GDP”?

    along with the idea that “housing traditionally leads the recovery” (it isn’t today),

    Need more termites, Kemosabi.

    and the idea that Wall Street reflects the overall economy (which the Reuters financial journalist Felix Salmon argues is less true than ever, due to the decreasing number of new companies listed on stock exchanges).

    Ah ha. Now we might be onto something.

    Measures-smeasures. We can all smell a rat (except Shrike, whose smell sensors were surgically altered at birth by unknown demons). The big question is, why is this happening? Possible explanations (most of which are probably wrong because I’m just Tonto):

    1) The problem is not “economic uncertainty about the future”. It is “economic certainty that the future sucks the big one”, because

    a) The Fed is convinced that inflation doesn’t matter. Everybody just wants more dollars, yippee skippy.

    b) The government regulatory environment gets better every day. ObamaCare isn’t just free, it’s going to save us all money. And environmental regulatory compliance gets easier to deal with every day too. It has zero impact on what product ventures are, and are not, profitable to engage in.

    2) The whole corporate-legal structure in this country is all hosed up. Corporations are too big in general and need to downsize. But regulations give big corporations a huge legal advantage.

    We could go on down this trail all day….

    1. b) ?
      I’m sorry, Fantasyland? it may sell tickets for Mickey but not in the Obamanation…

  12. Any measure of inflation that excludes energy and food is ipso factor a lie.

  13. The recovery is not about the past and going back to it. Different world now. Asia trains 7 engineers for every one the US does. The myth of the “service sector” saving everybody is over. Free trade isn’t.
    @shooteyeout

    1. I will create more high-paying government jobs so we can compete with Asia.

    2. Doesn’t Asia have about 7+ times the population of the US?

  14. Maybe it’s time we stopped putting bald guys in charger of the fed.

  15. Government stats are designed to cushion politicians, regardless of the fact that bureaucrats tally them. Some, like CPI (excluding energy and food – I mean who uses those, right?)and unemployment are unrealistic.
    Yes, the new economics gurus tell us that this is the new norm. Likes of Krugman would also love to make people believe that if only we spent a few trillions more, our troubles would all be behind us. All this is Vodoo economics (the real one)

    1. like CPI

      Manipulating the CPI would be one way to effectively decrease Social Security payments (and anything else tied to CPI) while deceiving the voters into voting the same bums back into office. By understating the CPI, you’d get a defacto reduction. By the time a large enough number of people to matter figured it out, the politicians would either be retired (or dead) or the issue would have been forgotten.

  16. Well, here’s my solution to the ongoing high unemployment problem:

    I’ve written a proposal that uses entrepreneurship on a massive scale to tackle the ongoing high unemployment problem, which has left millions and millions of Americans grasping at the last vestiges of the American Dream. Long-term unemployment is at record levels and the pace of the tepid “recovery” from the Great Recession will require years to return the country to full employment. In the mean time, government coffers are depleted while straining to address the extreme hardship, and tax revenues are greatly diminished because so many jobless folks cannot pay taxes.

    My proposal describes an entrepreneurial mechanism through which we can fund a massive number of new business ventures (to create a massive number of new jobs) by tapping the financial power of Wall Street. It is a private-sector proactive approach to remedy the high unemployment problem. Titled “A Modest Proposal to Save the American Economy: Entrepreneurial Blitzkrieg as Job Creation Vehicle,” the proposal has been published online at Salem-News.com (and various other places):

    http://salem-news.com/articles…..nt-jpb.php

  17. “housing traditionally leads the recovery”
    It always has and most likely always will. It is NOT a dispelled truism, it’s definitely a truism. Ergo the recovery is no where in sight.

  18. This movie has some nike sb skunk dunks for sale of the same flaws I saw in another attempt at a faithful adaptation of a work of fantastic literature long thought unfilmable, Zach Snyder’s 2009 version of Watchmen…That is, it kobe 7 for sale struck me as a series of filmed recreations of scenes from the famous novel

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