2.5 Million Jobs

http://www.nytimes.com/2009/07/01/business/01leonhardt.html?_r=1&emc=eta1

David Leonhardt writes frequently and brilliantly about the economic scene especially as it relates to the "labor" side of the equation. I have supplied today's NY Times article as an attachment that I suggest you read. He is basically commenting on the optimism shown by the Obama administration's economic advisors when, just before he took over, they "projected" that without the stimulus package the unemployment rate - then 7.2% - would rise above 8% in 2009 peaking at 10% in 2010. With the stimulus, the advisors said, unemployment would probably peak at 8% late this year.

Whoops! The jobless rate is already at 9.4% with forecaters expecting that it will rise further. So, as Leonhardt says, the difference between the situation that the Obama advisors predicted and the one that has come to pass is about 2.5 million jobs.

Leonhardt concludes that the stimulus package does seem to have helped but its impact so far has been minor in comparison with the harshness of the Great Recession. He quotes Mark Zandi (a favorite economist in both houses of congress and one who writes in "English") as saying that
"Early results suggest the stimulus is performing close to expectations." But, obviously, the economy is not performing close to expectations.

Getting back to the 2.5 million jobs, the Obama economists made one avoidable mistake that led to their overoptimism: they relied on the same forecasting models that had failed to see the ww financial crisis coming. These models, used by Wall Street and various research firms, do a decent job most of the time, but they are "notoriously bad" at forecasting turning points because they are based on an assumption that the recent past will more or less repeat itself.

So, what do those same models say for today? Answer: that the recession will end in the next few months. That is roughly what the administration is saying and I hope it's true. But, as Leonhardt says, the larger point is that, even if the optimists are right this time, the economy is not going to feel even remotely healthy anytime soon. Since jobs (and incomes) are a "lagging indicator", the unemployment rate will probably surpass 10% this year and remain above 9% well into next year.

Given this, I look back at Krugman consistently saying that we are not spending enough on fiscal stimulus and he is, again, right. This makes his debate with Taylor (see a previous blog here) kind of one sided: Taylor reminds me of the builders of the Titanic: what would it take for him to believe in "fiscal stimulus"? Perhaps a depression with 25% unemployment? But, the problem with that is that, once you are in a depression, it's already too late. As for the Obama economists, they need to get with the folks who participated in the Wharton Forum on "The New Role of Risk Management: Rebuilding the Model" (see a previous blog here) where they've got to get beyond "...looking for their lost car keys under the street lamp." As the folks at Wharton pointed out, the "modelers" have no idea of how things interact at the systemic level - even those who understood the subprime crisis were "totally amazed" that it brought down vitually the entire international financial system.

As some of you know, I am no big fan of Lawrence (don't call me "Larry") Sommers, the former president of Harvard who is Chairman of the President's Economic Task Force. Not to get personal, but my son has a favorite saying: show me who you're with and I'll tell you who you are. I believe in the President's economic team but my hope is that they will find a way to reasonably overcome the "ego" of their chairman whose biases extend beyond economics. This would include taking a careful look at their forecasting models and paying more attention to economic "lagging indicators" like the 2.5 million jobs Leonhardt has brilliantly calculated that they "missed by" in their projections.