The All-New Failure of the New Economics

Unemployment rates and other useless measurements

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 ([e-mail]) is a senior editor at reason.