In the Long Run We Are All Voted Out of Office

Predicting that an average of 95,000 jobs will be added each month of 2010:

WASHINGTON — The Obama administration projected Thursday that the unemployment rate would fall this year by only a little, if at all, and would remain well over 6 percent until 2015.

The forecast was the most closely watched element of the annual Economic Report of the President, a 458-page document outlining the White House’s outlook and policies on areas as diverse as savings and investment, health care and climate change.

The report projected that an average of 95,000 jobs would be added to the payrolls each month this year — barely enough to keep up with the normal number of jobs the economy would have to create to meet the growth in the labor force and keep the unemployment rate steady.

as President Obama’s advisors have done sounds like good news. It would certainly be better than if jobs were to continue to be lost at the pace at which they have for the last year or so. However, it’s not as good as it sounds. 125,000 to 150,000 jobs on average need to be added every month just to keep up with what is called “the natural increase”, the net number of new workers coming into the market. The prediction is that the unemployment rate will remain about where it is now.

Even that seems remarkably rosy to me. The U. S. economy barely added an average of 95,000 jobs per month between 2002 and 2006. How will it do so now? The prospective engines of that growth, e.g. retail sales, exports, home construction, business investment, are not apparent to me. At any rate it is a prediction and I think we should hold them to it. I’m betting a shiny new dime that they’re wrong.

The quotation I found most interesting in the article cited above was this:

The president’s Council of Economic Advisers, which prepares the report, was criticized last year for failing to foresee that unemployment would reach 10 percent, as it did in the fall. But Christina D. Romer, chairwoman of the council, said last year’s report had been “remarkably accurate” in its G.D.P. forecast.

“The usual relationship between G.D.P. growth and the unemployment rate has broken down somewhat,” Ms. Romer, who is on leave from the University of California, Berkeley, told reporters at the White House. “The unemployment rate has risen much more than one would have predicted.”

I would interpret that as saying either their measurement of GDP growth is wrong, their measurement of unemployment is wrong, both, or their understanding of the relationship between the two is wrong. I suspect it’s a combination of the last two.

For one thing I think we need to re-think how GDP is calculated in an environment of globalization. If a company imports an automobile into the country it subtracts from GDP. When it sells it, it adds to GDP. If, however, the company imports the same automobile into the country without, say, a front bumper, imports the front bumper into the country, brings them in as parts, and assembles the parts here, the value of the finished product is not subtracted from GDP (or, at the very least, it’s not subtracted in nearly the same amount). However, when it sells the automobile, it adds at the same level. I know this to be the case because I used to work for a company that pulled just this sort of shenanigans. Inter-company transfers are handled differently than ordinary imports.

And, of course, we know they’re jiggering with unemployment figures, too. If they were including discouraged and underemployed workers, the figures would look much, much worse.

In reaction to the report and the jobs bill making its way through the Congress James Pethokoukis remarks:

Aside from the bill’s limited potential effects, short-term fixes are not what’s needed. America’s job machine didn’t suddenly break down in 2008. It has been sputtering since the Internet bubble burst. Some economists now think a decline in education, innovation and other former U.S. advantages means the realistic minimum unemployment rate has gone up from 4-5 percent to as much as 7 percent.

I would date the sputtering to somewhat earlier than that. My interpretation of the growth of the 1990’s is that it was a combination of the air of the sort we’ve seen go out of the balloon in the present recession and a pay-off from thirty years of government and business investment that hadn’t shown much in the way of ROI for all of that long period.

As Confucius said, “If your plan is for one year, plant rice. If your plan is for ten years, plant trees. If your plan is for one hundred years, teach children.” We need a little of all three. Without effort in the short term, there is no long term. However, we can’t wait a hundred years for the economy to recover. We need some ten years plans, too, and we can’t expect those to come from the government.

If our legislators plan for anything other than one year, they’re afraid of being voted out of office. That’s why the only plans we make are for one year and rice just isn’t enough.