Friday, April 8, 2011

More Nonsense on Ryan's Economic Forecasts

Annie Lowrey has an good article up reporting on the question I was curious about yesterday: how could it be that the Heritage economic model that Paul Ryan used for his economic forecasts could change its unemployment rate prediction without changing anything else?

Here's the answer, of sorts, from Heritage's Bill Beach:
Beach says it is an unusual bug of the model at use: The unemployment rate remains fairly independent from other variables. "The normal way of doing unemployment statistics or rates is to take the civilian labor force and find out the number of people who are working—then to calculate the unemployment rate from there. That's the way the BLS does it," he says. But the Heritage model calculates it differently.
The model derives the unemployment rate from two variables: a wage-price variable (essentially, how much workers cost) and the full-employment unemployment rate (essentially, the lowest the unemployment rate can get without spurring inflation). Beach says he felt that latter variable had been set too low. He set it higher, re-ran the whole shebang, and came out with new, higher unemployment rates—with no impact on the rest of the model. Total employment, public employment, and private employment were never affected, he says.
So there's your answer: in the Heritage economic model, total employment is not related to unemployment rate.

Let me try that again: the number of people with jobs is not related to the percentage of people with jobs.

Is there any way at all to reconcile that?

I'm pretty sure there isn't. It is possible, however, that the unemployment percentage figure is merely an ornament; that is, the projection does all its work using the employment figures, and then entirely separately spits out an unemployment percentage number that has no further effect on anything.

Remember, this matters because fewer people with jobs means fewer people paying taxes, which means that revenues are lower. So, normally, a significant change in unemployment is going to be associated with a significant drop in federal tax revenues (and, since there are also costs to the federal government when people are out of work, there should be an increase in spending, also).

So I guess the next question is: how many other parts of the Heritage "forecast" are just ornaments that could be arbitrarily changed without any effect on the rest of the model?

Of course, that's still not as important a question as why Paul Ryan is taken seriously even though he went shopping for his own economic forecasts instead of using CBO and the Joint Committee on Taxation like everyone else (that is, every Democrat) does, or the question of why anyone should believe supply-side voodoo about deficits when it failed so spectacularly in the 1980s and 2000s.


  1. . . . why anyone should believe supply-side voodoo about deficits when it failed so spectacularly in the 1980s and 2000s.

    Perhaps for the same reason people believe Keynesian voodoo after it failed spectacularly in the 1970s and in the past two years.

  2. Yeah, pretty telling that you had to leave out the biggest Keynesian policy period of all, the New Deal.WWII/Eisenhower era. But even if you wanna talk about the last two years, we've seen unemployment drop more than a full percentage point and six straight months of job creation. I'm sure you're gonna say, "yeah, well, what were the 18 months BEFORE that?" (and the answer is: the fallout from the Recession, before the full effects of the stimulative policies could be felt), but the bottom line is, we could use more "failures" like that.

  3. Oh, and BTW- it's really hard to separate Reagan and Bush's tax-cuts based economic policy from straight up Keynesian ideals (indeed, Bush explicitly made Keynesian arguments in 2001). Both were about pumping money directly into the economy, and yes, both worked to some extent.

    (The "Voodoo" thing is different, though often conflated; it refers to the now-thoroughly discredited Laffer curve, which said that governments can actually INCREASE revenues by cutting taxes. I see what he was going for, and I think in a very targeted way there's some merit there, but by and large, it only created the massive deficits of the 80s, before Bush Sr. and Clinton tried to reign them in).

  4. The idea behind the Laffer curve is sound: at some point, taxes are so high, that increasing them brings in more revenue per GDP, but GDP also goes down because there is less incentive to invest. The effect of the GDP decrease on revenues, when taxes are high, is large. Logical.

    However, the tax rates in the US are so low that increasing them doesn't kill off the incentives to invest. And, to the extent that they do, you're looking losing 35% of the GDP decrease translated into revenue losses.

    The insight of the Laffer curve is that there exists some tax rate which maximizes government revenues, and that tax rate is lower than 100%. But, decades of experience teach us that that point is certainly higher than US tax rates are.

  5. "Perhaps for the same reason people believe Keynesian voodoo after it failed spectacularly in the 1970s and in the past two years. "

    And in the 1970's (a) politicians decided that if one Keynesian pill was good, two would be better - no matter what the economists said and (b) the Oil Shock.

    I'm amazed at how many people can discuss economics in the 1970's without mentioning the most important change. It'd be like discussing a period of history and not mentioning a long, lingering, severe drought.


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