Built on Facts

The Dismal Science?

Somewhat apropos of yesterday’s entry in the perennial “what’s science?” discussion comes this graph from Innocent Bystanders. The graph is originally from a report put out in January by the government’s Council of Economic Advisers and the (then) Office of the Vice President-Elect, projecting the level of unemployment with and without the proposed stimulus. The stimulus was duly passed.

Innocent Bystanders plonked down two data points on top of it in Photoshop: the actual unemployment figures that have since resulted. The result:

i-f899e96220c27059934bd45acdda62fa-recovery.png

I’m told economics is the dismal science. I’ll grant that it’s dismal.

Comments

  1. #1 Bob O'H
    May 14, 2009

    They should have put some error bars on the plots. This isn’t physics, you know.

  2. #2 Paul Johnson
    May 14, 2009

    But even physics requires error bars.

    If we included error bars though we might trick people into thinking that the theory behind it actually works

  3. #3 bobn
    May 14, 2009

    The graph put out by the government shows clearly their assumption that this is “just another recession” – wrong!

  4. #4 Uncle Al
    May 14, 2009

    Suppose Washington had adopted policies aimed at maximizing unemployment – would we all be working double shifts?

  5. #5 matt
    May 14, 2009

    I realize this is a bit tangential but the funniest thing about the source for this graph was how the vast majority of people focused their comments on: “See I knew it all along look how rotten Obama and his stimulus plan were for the country.”

    It is as though TARP has disappeared. Out of curiosity I did check the relative effect (on the DJIA) from when TARP was enacted to roughly three months later (-14.2%) versus when the stimulus plan (by the by where is it’s goofy acronym) was invoked to about three month’s later (+10.3%). Also checked how far the DJIA fell until the second stimulus (-26.8%).

    Not that it is really fair given the complex dynamics involved and it is certainly silly that the two plans account for all (any?) of the change but it is a relevant counterpoint to those who would say the Obama stimulus was much worse than the TARP (or for those who would pretend TARP didn’t happen).

    Of course I still would of preferred to not have had either stimulus.

  6. #6 Eric Lund
    May 14, 2009

    Are you surprised that economists have been playing with Miss Rosie Scenario again?

    A lot of people don’t have money to spend on discretionary items, and they can’t borrow that money the way they could as recently as 2007. So people who sell discretionary items lose their jobs, meaning that even more people don’t have money to spend on discretionary items, despite lower prices on same. It’s called a deflationary spiral, and it’s what happened in the US in the early 1930s and in Japan in the early 1990s. The few people who actually have significant cash benefit because they can buy more stuff. People with debts and non-cash assets (e.g., stocks and real estate) lose big because they have to pay the debts with ever more precious cash, which in some cases they raise by selling assets at a loss. Lenders and bondholders lose because too many of the debtors cannot pay and the loans/bonds become worthless.

    Note: the above argument only applies to discretionary purchases. Necessities like food and gasoline can still go up in price because the sellers of these things are better able to pass on price increases.

    The Fed and the Treasury Department have been trying to induce inflation to stop the deflationary spiral (needless to say, they risk setting off a Weimar-style hyperinflation if this works too well). The models seem to have assumed that the attempt would succeed. So far, it hasn’t.

  7. #7 Bob Hawkins
    May 15, 2009

    ‘”Worst case scenario.” You keep using that phrase. I do not think it means what you think it means.’

  8. #8 Tybo
    May 16, 2009

    That whole graph seems oddly optimistic in the first place. I thought employment was a lagging indicator of the economy, and would be one of the last things to show change after a recovery plan?

    On a more positive note, at least the second derivative of the unemployment numbers went down!

  9. #9 Tyler DiPietro
    May 16, 2009

    Keep in mind that the graph was made by someone with the specific goal of selling a policy in mind. Using it to implicate the entire economics profession is a bit of a stretch. Most of the commentary I’ve encountered has made it clear that we’re not going to see unemployment drop until we’re well into the recovery.

  10. #10 CCPhysicist
    May 18, 2009

    I went back and looked at the original document, produced by two members of the Administration Elect.

    -1) Everyone should know that unemployment is a lagging indicator, and should know what that term means. Chartists are looking at the inflection point in unemployment, and hoping that next month’s data confirm that we just crossed it. See also my point #2 about the unreality of the “no change” prediction. This is not 1975.

    0) The appendix has a footnote spelling out the substantial margin of error. From where I sit, the assumption that only 30% of state bailout money would be used to avoid tax increases by states is wide of the mark. Much of it is being used to avoid tax increases, and spending is still being cut. Ditto for the 3 month lag time, which is quite an underestimate. Since the plan did not take effect in January (due to opposition by people like that blogger) and will not show up in our state until July at the earliest, one should not expect to see any effects until the 2nd or 3rd quarter of the year. For example, my withholding rate only went down at the end of March, so I did not have any of that “extra” money during the first quarter of 2009.

    1) The data points are plotted incorrectly. Either 1Q2009 starts October 2008 (fiscal year) or it starts January 2009 (business year). The latter is most likely given the discussion in the article and the actual unemployment rate. Either way, the March 2009 value is plotted incorrectly. It belongs as part of the average rate for 1Q2009, and April will be part of the average for 2Q2009.

    The starting value of 7.5% for 1Q2009 is quite wrong, plotted assuming that unemployment would not increase during the first quarter from the January rate of 7.6%.

    2) Dismal indeed. The “worst case” prediction, which includes the TARP and other Bush administration actions late in 2008, looks like a run-of-the-mill recession to me. I’ve been through several of those. Unemployment reached 10.8% during the Reagan Recession in late 1982 that started under Carter. That was nothing like this one.

    This is, without question, a run-of-the-mill depression, aka the Great Recession, not one like 1982 or the one in 1975 with a 9% peak like this forecast showed. The “do nothing” graph should probably go to 15%, but publishing something like that last January would have spooked the markets a’la Jerry Ford and his Whip Inflation Now plan in 1975.

  11. #11 geoff
    May 21, 2009

    The data points are plotted incorrectly. Either 1Q2009 starts October 2008 (fiscal year) or it starts January 2009 (business year).

    Because the absicissa on the graph provided by Obama’s team was vague, I spent some time trying to decide where exactly the March and April data should go. Based on the point at 1Q09, which corresponded to the Dec ’08 unemployment rate, I decided that the ticks represented the beginning of each quarter. Hence the March ’09 point should fall midway between 1Q09 and 3Q09, as it does.

    That is the most favorable interpretation for the economists who wrote the report. Any other interpretation moves the data to the left, making their predictions look even worse.

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