A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Monday, February 7, 2011

Transcript: Forecast Part 3: Unemployment drops to 9.0 -- What's wrong with this picture?

Listen to this episode


Doesn't sound too bad. That's Mr. William Dunkelberg from a January 12 presentation to the National Economists Club. Mr. Dunkelberg is today's Ronald Reagan memorial Idiot of the Week. In this clip he is constrained by the facts and their most obvious ramifications. Later it will not be so. That's after the forecast section of our podcast.

One of the secret pleasures of economic forecasting is to make outlier calls with equanimity. Why? Because the predictions of professional economic forecasters do not correlate well with what actually happens. I am nonplussed when our local and state forecasters assemble the blue chip estimates and draw a line through the middle. The blue chip estimates are not even a good approximation of the range of possibilities.

I guess most notably is the Great Financial Crisis and the Great Recession. Of the thousands or tens of thousands of forecasts, according to a paper by Bezemer, only twelve got it right. Random chance would have produced more than that.

Still, I was disturbed when I opened my Global Economic Intersection posts and found the following:

EMPLOYMENT SOARS http://econintersect.com/wordpress/?p=5528

And we remember one of our misses, when we said during the middle of 2008 that twelve percent unemployment was baked in.

What's going on, that we haven't thrown in the towel?


It hasn't changed.

Today there are 5.6 percent fewer jobs since the peak. The employment to population ratio has dropped 6.0 percent. People part-time for economic reasons is at 8.5 million, nearly double the 4.5 million at the start of the recession. More than double is the number of wokers uneployed for 26 weeks or more, now at 6.1 million. Major states like California, Florida, Colorodo, and Minnesota, as well as some smaller states, are at or near historic highs in post-war unemployment.

Pick any two months between September '08 to July '09 -- one month into the supposed recovery, and you will see more job losses in those two months than gains in the entire period since then. Put more simply, since the start of the quote recovery unquote, the economy has netted a loss of 228,000 jobs. To illustrate the chronic weakness of the Bush-Greenspan housing bubble economy, in the past ten years, since January 2001, the economy has netted a loss of 2,220,000 jobs. A LOSS.

Compare this to the previous decade, when more than 23 million jobs were created. This is including the recession years of 1990 and 1991.

I'm not making these numbers up.

So. Employment Soars? Not so much.

The Wall Street economy is a C. Montgomery Burns economy. And Homer is about to get fired.

Before we get to the forecast, we should mention the U-6 measure of the unemployment rate. This is a rate that more closely matches that of the Depression years. At 16.7, it is still above the level at the start of the recovery -- 16.5 percent. And this counts the part-time for economic reasons as fully employed.

So, the unemployment rate dropped to 9.0 as the result of adding 36,000 jobs.

For Wall Street this was great news. For the objective observer, however, it seemed to be confusing. The key to this confusion is that we have been accepting as fact propositions that are, at best, hypotheses. One, we are in recovery. Maybe it is not a self-sustaining recovery or a traditional recovery, but it is recovery ... is the hypothesis.

The drop in the unmeployment rate to 9.0 is evidence for, but the addition of 36,000 that supposedly made the dramatic drop possible is not. The key here is that the drop in unemployment is evidence of decay, not strengthening of the job market, driven by the discouraged workers and lower participation.

The forecast is:

So, our forecast on unemployment and employment. Employment numbers will be flat to down, probably a modest loss of employment over the year, maybe down 200,000. The unemployment rate. Charts are up on the blog. Until we see demand pick up, we won't see investment or hiring or inflation pick up.

Bouncing along the bottom with the likelihood we will bounce through a hole by Q3 and begin exploring new lows. A sick economy being talked up in Orwellian fashion by a Wall Street ever anxious to play with cheap chips from the Fed. Austerity about to kick in, or perhaps kick our teeth in.


Profitable companies will hire. This is another widely held belief proposed as fact, when it has been disproven over these past two years, when corporations are very profitable, but on the back of cost-cutting. That cost-cutting means job cutting. Profits are not creating jobs, they are the result of cutting jobs.

A corollary is that there is a virtuous cycle which begins with profitable companies hiring, the employees buying stuff and driving up demand, and profits increasing, causing companies to hire. There may be a virtuous cycle, but it does not begin with profitable companies, it begins with demand. On the other hand, the downward spiral may well begin with corporate hiring decisions, as corporations have become profitable by cutting costs -- which means workforce -- which is driving down demand and leading to further weakness in hiring.

It is not companies realizing profits who hire, it is companies who see or anticipate demand who hire and invest.

With collapsing state and local governments and no impact from tax cuts for the rich, we are going to see negative demand, so we will see continued weakness in the economy.

At one time, we said twelve percent unemployment was baked in. That proved not to be the case. Our excuse is as above, the numbers were skewed downward by the dramatic drop in the participation of people in the workforce. With a constant 2001 employment to population rate, headline unemployment would have topped out at 11.1 percent, using Bureau of Labor Statistics numbers. If we count even half of the people who have a part-time job because they want to be doing something rather than nothing, we still only get to 11.5 percent. That in October 2009. We said, also, that we would get to twenty percent on the U-6 measure. Our defense is likewise.

And if we could note in our typically ungenerous fashion, this was when the Fed governors were predicting, let's see. Well, I guess I don't have that right here. Noting a few months earlier, though, At the first of May, 2008, every fed governor was predicting unemployment below 6.1 percent for 2009 and lower than that for 2010. That's a little bit of a cheap shot, since they were migrating to higher ground very quickly.

So, twelve percent was not baked in. We may still get there, but there is no doubt it could have been avoided.


And this is the happy birthday, Joe Stiglitz, edition of the podcast. February 9 is Professor Stiglitz birthday. I always like to call him two-time winner of the Nobel Prize, mostly because the economics prize from the Riksbank in memory of Alfred Nobel, not one of the original prizes, has been the province of the market fundamentalists and reactionaries. When John Kenneth Galbraith lived ninety years and didn't get the award, you knew it was full of hooey. Other notables like ... I'm getting off track.

In any event, Stiglitz won the Nobel Prize in Economics, and also as lead writer, shared the Nobel Peace Prize with other members of the Intergovernmental Panel on Climate Change in 2007. One of the great minds in economics, Stiglitz ranks ahead of other February economists like Joseph Schumpeter, Thomas Robert Malthus, Frank Ramsey, Irving Fisher and Paul Krugman, because Stiglitz has participated in public policy in substantial ways (being chief economist to Bill Clinton and later chief economist at the World Bank), has led in theoretical work (his exploration of asymetries of information essentially blow up the theory of market efficiency), and he has taken the message to the people, advocating against the Washington Consensus and for reining in the predatory financial sector.

But let's go as far as we can from Professor Stiglitz' clear thinking and enter the realm of


Idiot of the Week,


But up front, let's be sure you understand Idiot of the Week is a device at Demand Side which we use to expose the dreadful state of economic theory and analysis. We do not really think these people are idiots, and you will see that we do not attack them personally. We are out to lay bare an intellectual vacuousness that is shared. Our idiots are symbols and spokesmen for ideas that deserve the maximum disrespect. Aside from these ideas, they are as noble as your grandparents.

On the other hand, Mr. Dunkelberg, today's featured performer, and one we will continue to feature over the next month or so, spares no effort to strain our patience and to parrot the Reaganism, "Government is the problem, not the solution." To do this, he has to ignored the financial sector meltdown, the collapse of the housing bubble, plus serial collapses in the past thirty years connected to private sector malfeasance or incompetence. The suffering of tens of millions of Americans in the current crisis, including some of Mr. Dunkelberg's constituents, comes as a problem of government. The solution? I'm afraid euthansia is the only one left.

1 comment:

  1. If you listen to the podcast (and I do) Mr. Harvey states Dr Stiglitz has “no corporate sponsor.”
    Anyone who has taken the time to read FannieMae Papers Vol 1, Issue 2 (March 2002) “Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard,” where Dr. Stiglitz and the brothers Orszag state that the risk of default of GSE’s is “effectively zero.”
    In the lower left hand corner of the front page it states: “This study was commissioned by Fannie Mae as an independent analysis of the risks posed to the government by Fannie Mae and Freddie Mac….”
    They paid these three to do a study.

    BTW, as Mr. Harvey will be quick to point out “this is old news” as the paper has been brought to his attention before. Mr. Harvey should be congratulated when his forecasts are correct; it’s tough to do as any review of past macro-economic forecasts demonstrate. But his statement about Dr. Stiglitz having no corporate sponsors is factually wrong. Sorry, “commissioned” means he was paid for this report.
    Perhaps I have misunderstood Mr. Harvey. Maybe what he meant was that Dr. Stiglitz no longer has corporate sponsors because they’ve blown up in the taxpayers face.