Archive for August 27, 2009

“Real Unemployment” at 16%? Color Me Skeptical

You may have seen the recent headline “Real US unemployment rate at 16 pct: Fed official. A snippet:

“If one considers the people who would like a job but have stopped looking — so-called discouraged workers — and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4 percent to 16 percent, said Atlanta Fed chief Dennis Lockhart.

UPDATE: Commentor Tom M. takes note that Mr. Lockhart is probably refering to the U6 numbers and this fact was simply not reported appropriately. He says:

When economists, such as myself, talk about the “real” unemployment rate, we are usually referring to the U6 unemployment figure, which is the U3 rate (the published/official rate) plus people that are “part time for economic reasons” among other groups.

If that is the case, it makes most of the rest of what I have to say pretty much void, but I’ll leave it up anyway. Thanks Tom!

A little while back, I called “discouraged workers” the “despair numbers” (basically, they say they want a job, but they aren’t looking for one).

My conclusion was that we’ve always had despair or discouraged workers, so suddenly adding them in now seems like a dishonest tactic to artificially inflate unemployment to some scary level. In good times, we saw unemployment at about 4-5%, so we’re used to thinking about that range as being good. But if you add the “discouraged workers” in those good times, you’re looking at a “good” unemployment rate of about 7-8%.

As for the “wants to work more hours” crowd, I’m open to considering that group in some way, shape or form, but I don’t know how to add them in a way that is honest. Frankly, as a small business owner and contractor, I don’t work as many hours as I would like. But I don’t go around calling myself “unemployed” or even “underemployed”.

If you look at the Bureau of Labor’s stats on part time workers, you can see that the number has jumped about 3 million in the past year. If we add those workers plus the increase in the “discouraged workers” (about 1 million), we get a rate a little over 12%.

But the problem in my mind is that you can’t simply add part time workers to the “unemployed” list to get any kind of meaningful data. Maybe, for the sake of argumentation, you could could cast an involuntary part time worker as half a worker. Then the unemployment rate is a shade over 11%. This is, I think, a not-unreasonable number to use, given that it shaves off the standard number of “discouraged workers” and uses a dampening variable to account for the fact that part-time workers aren’t really “unemployed”, but “underemployed”.

But I could be easily convinced that crunching the numbers in a new and interesting way is basically statistical cheating and we should just use the standard definitions.

Overall, I’m really uncomfortable with the whole “let’s crunch the numbers so the situation look really terrible” methodology because all it does is try to cast the current situation in a bad light by changing the metric. But you can’t use one metric in the good times and another metric in the bad times.

As such, I think the 16% number is really more of a scare tactic than anything else.

How Big is $9 Trillion? – Willful Omissions From Paul Krugman

You may have seen the Paul Krugman post “How Big is $9 Trillion” in which he attempts to defend the Obama administration’s recent announcement that they expect that their policies will increase the national debt by $9 trillion. His tack is to “explain” that $9 trillion isn’t really all that much when you understand it in context.

it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t.

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP.

Right now, federal debt is about 50% of GDP. So even if we do run these deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II.

I defer to Paul Krugman on a lot of things because he is transparently smarter than I am. But it is precisely because of this fact that I know he is conscious of the obvious reasons his analysis is hogwash.

First of all, the national debt in WWII was initiated by an existential threat to the very continuation of our country. Mr. Krugman does not make even attempt to make the case that we have a similar crisis that justifies this kind of debt.

Second, implicit in his observation is the concept that since we did fine after WWII, we’ll do fine now. But the years after WWII saw drastic reductions in the inflation-adjusted debt driven by drastic reductions in spending. Mr. Krugman points to no similar possibility in the post-Obama world.

Third, we have something now that we didn’t have in the 1940′s. Back in the 1945, at the height of the spending that saw our national debt rise so dramatically, entitlement spending and interest on the national debt made up a meager 5% of our total budget.

By the end of President Obama’s term (if he runs two terms) we’ll be looking at a federal budget that is 70% mandatory spending. (I assume for the purposes of consistency that mandatory spending includes interest on the national debt because we don’t really have a choice in not paying it.)

Here’s a quick visual of the difference in the budgets in 1945 and 2016. (Ugly, because I did it fast… I’m on vacation.)

1945 vs 2016

If you look at the 1945 budget with the single question “How are we going to reduce our debt?” you can identify the major problem. It’s the defense budget, which is almost 90% of the budget. Interestingly, reducing the defense budget is exactly what we did in order to reduce the debt, cutting it over 80% in 3 years (it helped that we won the war).

As a contrast, President Obama’s solution to reducing overall spending is… well, I don’t think he really has a plan. His projected budget in 2016 has reduced the defense budget as a percentage of the overall budget from 20% to 14%, but military spending isn’t what is killing us. The president has no plans to reduce mandatory spending whatsoever. In fact, his only change to entitlement spending is to increase it.

My problem with Mr. Krugman’s “How big is $9 trillion?” is that he is aware of all the problems I pointed out. He didn’t explain how much $9 trillion is; he obfuscated it. By comparing the debt load in the heart of a world-shaking war to a debt load that was accumulated in (relative) peacetime, he has misled his readers to the real significance of the data.

(By the way… if you would like to blame the debt load on the Iraq war, you should know that those costs have raised our debt by 5% of the GDP. Comparing this to WWII, which raised our debt by 70% of the GDP, is a pretty weak argument.)

Is Despair Deflating Unemployment Numbers?

Is despair deflating the unemployment numbers?

Spoiler Alert: The answer is not much.

In my previous post, I talked about how the unemployment for July decreased from 9.5% to 9.4% mainly on the merits of people leaving the labor force altogether. Basically, the number of people employed dropped, but the number of people who are unemployed dropped too (and dropped faster). So… if the unemployed people didn’t move into the “employed” column, where did they go?

Some people have suggested they are giving up in despair. Let me explain:

A person is “unemployed” for the purpose of labor statistics only if they have looked for work in the last four weeks. If they stop looking, they’re simply not in the labor force anymore. So, in theory, if people are at home sobbing uncontrollably because they can’t find a job, they’re not unemployed, they’re just not in the labor force.

Fortunately, I discovered that the Bureau or Labor Statistics has been gathering a very useful statistic for the last 15 years called “Persons Who Currently Want a Job”. This is basically a count of people who have given up looking, but would still like to have a job. I suppose you could call this either the “despair index” or the “laziness index” depending on how cynical you are.

Here’s  a graph of the “Want a Job” number over the last 5 years.

WantAJob5years

So the number of people who wish they had a job but have stopped looking has increased dramatically this year, which is somewhat reducing the unemployment rate.

The number of people who aren’t looking for a job but still want one has increased about 1,000,000 in the last year, representing by far the largest increase in since we started tracking the data.

HOWEVER!

If you look at the unemployment rate with and without the “Wants a Job” crowd, they look pretty much the same. In other words, there’s not really that much hiding in the numbers here. There’s maybe a .3-.4% increase in the unemployment rate that can be attributed to despair. Or at least, attributed to new found despair, since we normally have between 4.5 million and 5.0 million people in this category anyway.

What is really weird is that it looks like a lot of people are just up and leaving the work force, either through retirement or due to going back to school. Only a quarter of the decrease in the work force over the last couple months is attributable to an increase in the “Wants a Job” demographic. Even if you added them back into the labor force… the labor force is STILL decreasing.

So… while there is a case to be made for the “despair thesis” (as I’m now calling it), it looks like we’re also just seeing a good number of people who don’t much care for work anymore, thank you.

What The July Unemployement Rate Means (And Doesn’t Mean)

Today the unemployment rate for July 2009 was released by the Bureau of Labor Statistics. The rate dropped from 9.5% in June to 9.4% in July.

Before I explain why this might not be as awesome as it looks, let me just say “hooray!” for what seems like a slowing in the rise of the unemployment rate. I am ecstatic to see that the economy is not accelerating downward.

Stupid Moralizing (skip if you don’t care)

Some people seem to almost be cheering the decline of the economy for political purposes. Before last November, those people were mostly liberals. After January, those people were mostly conservatives. It is an activity I find creepy and slimy.

The decline of the economy means people losing their jobs, losing businesses that they’ve spent years trying to painstakingly build. This can be devastating on every level, personal and professional. The pain it brings is almost unspeakable. When someone cheers or hopes for a decline in the economy simply so that their political team can come out ahead, they reveal themselves to be without the basic human emotion of sympathy.

I don’t give a crap who is in office… I prefer to have a reduction in human misery if possible.

End of Stupid Moralizing

So… now that I’ve gotten all self-righteous and morally irritating, let’s talk about the numbers. (If you get bored by this discussion, feel free to skip to “The Point” at the bottom)

The unemployment rate is… well, it’s exactly what it says it is: a rate, a percentage based on two numbers. Your average non-economic American might think that the two numbers are as simple as “people employed vs. people unemployed”. Under this definition, you might think that a lower unemployment rate means that there are more jobs.

Sadly, you would be wrong.

The numbers actually start with the US population*. From that number, we take out children under 16, prisoners, those in mental institutions, those who require nursing care and the military and we get the “civilian non-institutional population”. From that number, we take out those who, for whatever reason have not tried to find work for 4 weeks. This is important because you don’t want to count housewives and high school seniors in the unemployment numbers. Remember that, because it’s going to be important in a second.

That brings us to the “civilian labor force”, which consists of the employed and the unemployed. It is from the civilian labor force that we calculate the unemployment rate. Therefore, there is a good way and a bad way to reduce the unemployment rate.

  1. Increase the employment number (good)
  2. Decrease the number of people in the labor force (bad)

The reason decreasing the number of people in the labor force is bad is that it means that people are extracting themselves from the labor force by:

  1. getting arrested in alarmingly huge numbers (unlikely)
  2. joining the army in alarmingly huge numbers (unlikely)
  3. getting younger in alarmingly huge numbers (that would be awesome)
  4. deciding that they’re just not going to look for a job anymore

And among the people in section 4, there are several options:

  1. deciding to stay home due to a lifestyle change (staying home with the kids)
  2. going to school to train for a new job
  3. retirement
  4. despair

So, let’s cut to the chase. We’re not seeing new jobs. The employment number in July continued to decline (though at a much slower rate than it did in June). What we saw instead was a decrease in the labor force. More and more people are just not looking for jobs anymore.

The Point

On the surface the unemployment rate going down seems good, but when you dig into the numbers, we can see that it has nothing to do with an increase in the number of jobs and everything to do with the fact that the labor force is shrinking.

Is this good or bad? I tend to think bad, but the economy also tends to be really complex, so I could be misreading something or I could be just plain old ignorant. I’m not an economist, so I won’t make a pronouncement on that issue. All I can do is show the numbers and wonder what the hell is going on.

IMPORTANT UPDATE:

@D_B_Inman on Twitter pointed out that I was looking at the unadjusted numbers in my analysis and that the unemployment rate is based on the adjusted numbers. When taking that into account, my charts and extra analysis are strikingly ignorant. This is actually comforting, because it means things aren’t as out-of-whack as I thought they were. I’ve adjusted my “Point” accordingly.

* The Bureau of Labor Statistics lays this all out in more detail, if you want to check it out for yourself.

** There is something a little weird in this because the historical data at BLS doesn’t match up with their current press releases. According to their historical data, we saw an increase in the labor force in the last couple months. But according to their historical data, the current unemployment rate is 9.7%, which is not the number being currently reported. I took the numbers from their current press release and I substituted them into the historical data, since I’m assuming that their current press release is more accurate. If you think I’m wrong, please let me know why.

I’ll Be Speaking at Drive the Discussion

I’ll be speaking at the Florida GOP’s “Drive the Discussion” event in Orlando, Florida in a couple weeks. The event is August 22 at the Gaylord Palms Resort and among the speakers will be (according to the website) “Olympic Gold Medalist, motivational speaker, and television personality Bruce Jenner, Former Miss California and Miss USA first runner up Carrie Prejean, author and political commentator Jonathan Krohn and Washington Times columnist and political blogger Amanda Carpenter.”

The event is free, but you do need to sign up at the link above. I’m not listed as a speaker… probably because I don’t have a Wikipedia page. Or, more likely, because I’m neither super hot nor some kind of child genius.

I’ve got a basic presentation put together, but I’d love to hear what my readers are interested in and use that to… well… drive the discussion. So… how about it? More interested in talking about videos? Talking about understanding numbers? Talking about “new media”? Talking about Carrie Prejean? Let me know and I’ll use your input as I put together my talk.

Also, if you’re a reader or Twitter follower, let me know and we’ll “tweet-up” (which is the somewhat bizarre terminology for meeting twitter followers in real life).