Despite The Attacks, Partisan Bias Doesn't Factor Into My Economic Analysis

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In a post over at Economix, the economics blog of The New York Times, my friend Bruce Bartlett writes about how political or ideological leanings can affect economic forecasts. And he singled me out:Economists belonging to a particular political party often produce forecasts that tend to suit the needs of their party.

This is especially evident right now in the case of Republican economists, who appear to have decided that the best way they can help Mitt Romney is by predicting a recession next year.

I first noticed this trend on Sept. 27, when the former Reuters and U.S. News columnist James Pethokoukis, now employed by the conservative American Enterprise Institute, said that the United States economy was “running out of steam” and that there was now a 50 per cent chance of a recession within a year.

“It may be several years before we see unemployment below 8 per cent,” he said in a post on the A.E.I. Web site.

On Friday, the Bureau of labour Statistics announced that the unemployment rate in September was 7.8 per cent.

Brother Barlett left out a few things:

1. My analysis was not based on ideology. It was based on two studies, one from the Federal Reserve and one from Citigroup, looking at what happens to the U.S. economy historically when it grows at a very slow rate for an extended period.

Like it is doing right now, for instance.

Slow growth, both studies conclude, sharply raises the recession risk. And if we did have another recession with unemployment above 8% — where it was when I wrote that blog post — the unemployment rate might well move above 9% or even 10%. Thus it would be some time, under that scenario, before the U-3 rate moved back below 8%

2. I was hardly alone in my belief about the unemployment rate. JPMorgan, for instance, also saw 8% unemployment through next year at least. What I did not foresee was the freakish rise in jobs as measured by the labour Department’s volatile household survey, an increase that many economists think was a one-off or statistical aberration. 

3. The two-percentage point drop in the unemployment rate over the past two years has surprised many economists because growth during that period has been very weak. But the drop can be explained by another economic variable that many economists also misforecasted: the labour force participation rate. The LFP rate has declined from 64.5% in November 2010, when unemployment was 9.8%, to 63.6% last month, when unemployment was 7.8%. If the LFP had stayed steady during that period, the unemployment rate today would be 9.1%.

But wait, isn’t that decline in the LFP unsurprising? Doesn’t it naturally reflect the ageing of the U.S. population, Baby Boomers hitting retirement age and all? Well, before the Great Recession, the Congressional Budget Office predicted what the LFP would be in 2012. This was a forecast that explicitly took into account such demographic changes. For 2012, the CBO predicted the LFP would be 65.4%

In other words, the decline in the LFP rate greatly exceeds — at least according to the CBO — what can reasonably be attributed to demographics. Indeed, it the LFP were 65.4% today, the unemployment rate would be 10.4%.

4. Know who else got fooled by the LFP drop? The Obama White House. In August 2009, White House economists made two predictions relevant to this discussion. They predicted a significant upturn in GDP growth to 3.8% in 2011 and 4.3% in 2012. They also predicted a big drop in the unemployment to 7.5% by the fourth quarter of 2012.

This creates a conundrum. GDP growth has been much slower than the WH forecasted, just 1.8% last year with this year not looking much better — if not worse. So how come we still got that big unemployment drop?

Here’s why: Because of the continued collapse in the LFP rate. If you had told Team Obama in August 2009 that GDP growth was going to be as miserably slow as it has been, they almost surely would have forecasted a much higher unemployment rate. So because they got both the GDP rate and LFP rate wrong, they got the unemployment rate kinda-sorta right.

Bottom line: Bruce Bartlett and The New York Times are wrong. Partisan bias is not a factor in my economic analysis. I look at the evidence and then give it my best shot, serving only the truth. Sometimes I am right. Sometimes I am wrong. But I always call it straight. That’s AEI’s way. And that’s my way.


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