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Posted at 8:34 AM ET, 03/ 2/2011

Getting used to high unemployment

By Ezra Klein

Political Correction had an amusing item yesterday noting that Sen. Mark Kirk has gone from touting economist Mark Zandi's support for extending the Bush tax cuts to dismissing his concerns about short-term spending cuts by calling him "a fairly discredited person" who "predicted that unemployment would top out at 8 percent if the stimulus was passed." Notably, Zandi made his unemployment predictions about two years before Kirk brandished him as a respected expert in the tax-cut debate. What appears to have discredited him is his subsequent disagreement with the likely effect of Kirk's preferred policies. That's politics, I guess.

But the issue of the unemployment projections that reigned in the days when the stimulus law was being written is worth exploring further. That eight percent prediction is, without doubt, one of the costliest errors the administration made. At the moment they made it, real unemployment was vastly higher than their preliminary data said it was. But in making a prediction at all, they set a flawed benchmark by which the stimulus was later judged -- and judged harshly.

The administration has long protested that the prediction they used was based on the consensus of respected private-sector forecasters -- forecasters like Zandi. So yesterday, when I spoke to Zandi for a piece outlining the two poles in the stimulus debate, I also asked him about the early unemployment predictions he and other forecasters had made. Why had they been so far off the mark?

"In late 2008," he told me, "the economy was falling apart, but no one knew to what degree. We didn't yet know we were losing three-quarters of a million jobs a month. We just didn't have that data yet." So far, you'll recognize his response as fairly standard: Good forecasting requires good data, and good data about the economy was hard to come by in November of 2008. But what Zandi said next chilled me a little, as it's a stark reminder of not only how far we've fallen, but how complacent we've become.

"Nowadays," he continued, "nine or 10 percent unemployment sounds normal. But we'd had so many years of around five percent unemployment that we just couldn't believe it would go that high." In other words, the unemployment we're experiencing now was so hard to imagine in 2008 that most forecasters didn't even consider it as a serious possibility until they actually saw it happening to the economy. But three years later, we don't like nine percent unemployment, but fairly few people have their hair on fire about it. The Obama administration is talking about winning the future; John Boehner is saying that if his policies cause further job loss, then "so be it." We've acclimated. We're moving onto other issues. And that's a bad thing.

By Ezra Klein  | March 2, 2011; 8:34 AM ET
 
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Comments

"In late 2008," he told me, "the economy was falling apart, but no one knew to what degree. We didn't yet know we were losing three-quarters of a million jobs a month. We just didn't have that data yet." So far, you'll recognize his response as fairly standard: Good forecasting requires good data, and good data about the economy was hard to come by in November of 2008."

The same data that's always available was available in November 2008. The problem was that his model couldn't forecast the *present situation* in November 2008.

Posted by: justin84 | March 2, 2011 9:33 AM | Report abuse

""Nowadays," he continued, "nine or 10 percent unemployment sounds normal. But we'd had so many years of around five percent unemployment that we just couldn't believe it would go that high." In other words, the unemployment we're experiencing now was so hard to imagine in 2008 that most forecasters didn't even consider it as a serious possibility until they actually saw it happening to the economy."

This reminds me a lot of how the risk models for mortgage backed securities failed when they couldn't concieve of a significant fall in property values throughout the entire country at once. As justin84 points out, this isn't a data problem, it's a modeling problem.

No matter how much economists would wish it otherwise, economics is not a science like physics that can be modeled mathematically.

"The quantitative aspirations of economists and financial analysts have for many years been based on the belief that it should be possible to build models of economic systems - and financial markets in particular - that are as predictive as those in physics. While this perspective has led to a number of important breakthroughs in economics, "physics envy" has also created a false sense of mathematical precision in some cases. We speculate on the origins of physics envy, and then describe an alternate perspective of economic behavior based on a new taxonomy of uncertainty. We illustrate the relevance of this taxonomy with two concrete examples: the classical harmonic oscillator with some new twists that make physics look more like economics, and a quantitative equity market-neutral strategy. We conclude by offering a new interpretation of tail events, proposing an "uncertainty checklist" with which our taxonomy can be implemented, and considering the role that quants played in the current financial crisis. "

http://arxiv.org/abs/1003.2688

Posted by: jnc4p | March 2, 2011 9:43 AM | Report abuse

Can you imagine the unending screeching from the Left if McCain had been elected and unempoyment were still at it's current level? "It's just as we predicted...we now have to tolerate four more years of failed Bush-era economic policies" would have pasted dailey from WaPo to The Huffington Post. Thankfully, the right person was elected and we've been able to climb out of this mess.

Posted by: ANCLvr | March 2, 2011 11:01 AM | Report abuse

Zandi's not just wrong 2 years ago, but just several months ago when he predicted on CNBC that unemployment would go back over 10%.

Nothing personally against Zandi, but the prediction business is a tough one in this environment. He should do what Krugman does and just ignore real world economics and concentrate on politics.

Posted by: johnmarshall5446 | March 2, 2011 11:28 AM | Report abuse

"But what Zandi said next chilled me a little, as it's a stark reminder of not only how far we've fallen, but how complacent we've become."

It only chilled you because you don't read your comments section. I told you last year that unemployment was now systemic, not episodic, and that Obama needed to hold the line at 8% for his re-election next year.

Below, and he's in, above and it's a crap shoot. Betting on on anything like a sustained 7.5% next year would be wildly optimistic.

Posted by: johnmarshall5446 | March 2, 2011 11:33 AM | Report abuse

investors invest and workers spend. workers, by nature of their income, spend to maintain their homes, buy food, insure the car, send the kids to college. investors invest in companies that sit on the money. when corporations do not use their money to expand, hire workers and grow the economy unemployment stays high until even the corporations have no one left to purchase what they sell.

corporations and their investors are counting on holding out until large countries like china and india have a large enough middle class to replace the american middle class they destroyed. corporations have become like the young man brought to the dance by one young lady only to ditch her when another one alluringly presents herself.

Posted by: sbvpav | March 2, 2011 11:37 AM | Report abuse

When I mention around 10% unemployment in USA, friends back home in India laugh at me. They say 20% has been the norm in India for decades and still growth rate has been 8%. Clearly for 'haves' not growing because there are more unemployed is not acceptable in India, China or in Asia at large. In other words, all the prosperity in Asia is fundamentally increasing the inequality. Unemployment is hardly a concern. Market is happy as long as their bonuses are going to increase every year. Everything else is dispensable, including lives of folks.

Posted by: umesh409 | March 2, 2011 11:54 AM | Report abuse

Ezra says:

"We've acclimated. We're moving onto other issues. And that's a bad thing."

It is downright surreal.

Posted by: Patrick_M | March 2, 2011 12:37 PM | Report abuse

Erza,

Forecasting the unemployment rate is much like crap shoot because you have to consider other factors at play that can cause it to go up or down. Many economists use the rosy figures to make the politician's policies look good when it, in fact, can create problem down the road. Among the examples are trade, jobs and tax rate can magnify the disparity but takes longer to see the effect.

Another factor is the shift in way it is reported that has changed over the years. Shadow Stat website by John Williams gives a better picture of the real unemployment rate by utilizing the government's statistics.

Posted by: beeker25 | March 2, 2011 1:40 PM | Report abuse

beeker:

Using the U6 number works pretty well also.

Posted by: johnmarshall5446 | March 2, 2011 2:21 PM | Report abuse

Ezra got his marching orders from his liberal overloads to start telling people 9% unemployment is now "normal".

The liberal policies have completely failed so now we must lie to the people.

Heck of a job Ezra.

Posted by: manbearpig4 | March 2, 2011 3:13 PM | Report abuse

Responsible leadership was lost with the continuation of the Bush era tax cuts, which helps the GOP to starve the government of revenue so that it would be forced to cut support for the poor, the elderly, public safety, border protection and children.

Boehner wants to cut 700,000 federal jobs, (which would also cut over 325,000 support jobs) and waste $3 Billion taxpayer dollars for an alternative F-35 engine which the Pentagon does not want or need to save 7,000 jobs in Ohio. Typical GOP bang-for-the-buck scenario: kill a Million jobs to save 7,000 in their home coal polluting district.

Posted by: Airborne82 | March 2, 2011 4:31 PM | Report abuse

I'm surprised that Zandi didn't remind you that unemployment was already 8% when the Recovery Act was passed in February 2008-- we just didn't know it because of the lag in the data. The first time I heard this was when I read the intro to Zandi and Blinder's report from last year. Why don't Democrats make that point whenever this "prediction" is mentioned? Maybe at this point it's too late to correct the public's overall impression -- another example of poor communications strategy.

Posted by: juliecon | March 2, 2011 5:09 PM | Report abuse

I completely agree with Patrick M, it is surreal.

10% unemployment may be the new normal for people like Zandi, and the rest of the Washington bunch, who can ignore it because they have a job, but for the 10% it is not the new normal. Furthermore,for the 20% who are underemployed it is anything but. I would wager that number is only increasing as this may be the first year that graduates who attempted to hide from the recession come back only to find it still here.

Washington is ignoring the plight of 20% of the country and instead having chats about health care and budgets, like it's 1996... absolute craziness. Let me know when Obama and Boehner break out the violins, because at the moment Rome is burning.

Posted by: comma1 | March 2, 2011 7:10 PM | Report abuse

Ezra obviously you don't do any volunteering because the stories I hear are disheartening. It's not just people who do manual labor that are unemployed it's architects, teachers, construction workers, etc. I'm tired of listening to hard luck stories from people who have been without a job for a very long time. All have lost their homes and all their savings. 9 or 10 percent unemployment isn't "normal" it's obscene. Even worse many in America think the actual unemployment rate is 17-25% and something has to be done. It's sad that you can even write an article suggesting the idea.

Posted by: Desertdiva1 | March 2, 2011 8:53 PM | Report abuse

If you are over 40 and unemployed right now, there is a very real chance you will never work again, at least not in any job making anything close to the salary you used to. And you probably have aging parents, kids getting ready to go to college, and no money to pay for any of it. Nobody is hiring anyone over age 40. Not even in Washington, the only place in the country where there is a decent economy thanks to all of Obama's borrowing and spending. If this is "the new normal," we should be terrified.

Posted by: kkinney01 | March 3, 2011 12:47 AM | Report abuse

@kkinney - you are right about age discrimination making things worse. to say nothing of the taint of long-term unemployment. I hope Ezra continues to highlight this.
the D.C. community, buoyed by my tax dollars, is in a bubble. the rest of the country is staggered under unemployment and housing default & foreclosure.
why isn't this top news, day after day? surely as important as Egypt, once the situation there was well-known?
could it be because it was easy to make headlines with fresh photos and footage, and not so much with middle-aged and older workers, whose plight is less easily translated to living color, so to speak?

Posted by: FloridaChick | March 3, 2011 8:06 AM | Report abuse

"The administration has long protested that the prediction they used was based on the consensus of respected private-sector forecasters... "


... which is, unfortunately, not the same thing as "forecasters with a track record of getting it right."

Where's a Keynesian when you need one?

Posted by: Traipser | March 3, 2011 9:26 AM | Report abuse

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