It's election season, and the economy is a mess. Sounds like a perfect time for accusations that are light on fact and heavy on folly.
Cue Harvard economist Robert Barro's recent op-ed in The Wall Street Journal, which boldly states that had President Barack Obama and his economic team not extended unemployment benefits to 99 weeks, today's unemployment rate would be just 6.8%, rather than 9.5%. (Although if we're going to make this a political matter, as Barro has, it's worth noting that the benefit-extension program passed 98-0 in the Senate). His reasoning: "the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment."
To begin with a historical perspective, in the 1982 recession the peak unemployment rate of 10.8% ... corresponded to a mean duration of unemployment of 17.6 weeks and a share of long-term unemployment (those unemployed more than 26 weeks) of 20.4%. ...
These numbers provide a stark contrast with joblessness today. The peak unemployment rate of 10.1% in October 2009 corresponded to a mean duration of unemployment of 27.2 weeks and a share of long-term unemployment of 36%. The duration of unemployment peaked (thus far) at 35.2 weeks in June 2010, when the share of long-term unemployment in the total reached a remarkable 46.2%. ... The dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit.
That last little nugget, that extended benefits are "almost surely" the culprit, is pretty good proof that Barro isn't relying on analysis, but blind conjecture. Lucky for us, others have done the analysis on this issue, and the results are clear: Extended benefits almost surely are not to blame for long bouts of unemployment.
The Federal Reserve Bank of San Francisco, for example, crunched the numbers and found that those receiving unemployment benefits only remain unemployed for a bit over a week longer than those who do not. Its analysis shows that extended unemployment benefits have raised the unemployment rate by 0.4% -- a fraction of Barro's assumption of almost 3%.
Speaking of which, how did Barro calculate that 3-percentage-points higher figure? Here's how:
To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and -- I assume -- the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.
It's simply pitiful that this passes muster as analysis from a Harvard economist in the nation's most prominent business newspaper.
First, there's the math. According to Barro's assumptions, the economy would employ 4.2 million more people if we ditched extended unemployment benefits (14.6 million that are currently jobless minus the 10.4 million he assumes would be otherwise.) That sounds nice. But the most recent data from the Bureau of Labor Statistics shows there are only 2.9 million job openings nationwide. So according to Barro's reasoning, if we just cut unemployment benefits, every single job opening in America would instantly be filled by 1.5 workers each. I hope you like sharing cubicles.
Then there's the logic. All Barro is saying here is that if you close your eyes and assume the economy hasn't changed since July 1983, then today's long-term unemployment rate should look exactly as it did in July 1983. This is almost inspiringly bad analysis, and reminds me of the joke about three economists stuck on an island with lots of canned food but no way to open the cans. One finally says, "Guys, this is so easy. Let's just assume we have a can opener!"
In reality, the differences between the 1980s and today are thick. The '80s downturn was cyclical; today's is structural. Back then, a brutal recession came about from inflation and sky-high interest rates. People were smacked silly as business investment plunged and purchasing power sank. But it was temporary. The underlying structure of the economy was still vibrant and viable. Once inflation was tamed, things bounced right back. Businesses that had slashed payrolls during the darkest days rehired with force during the recovery.
It's not like that today. The original driver of our recession was the financial crisis of 2008, which by almost any metric is long over. Yet the economy is still a mess. Why? Because the financial crisis wasn't a short-term illness, but a symptom of deep structural problems, namely too many businesses that relied on debt and leverage. From carpenters at KB Homes (NYSE: KBH ) and Pulte (NYSE: PHM ) to mortgage bankers at Wells Fargo (NYSE: WFC ) and Citigroup (NYSE: C ) , millions of jobs revolved around a credit Ponzi scheme that's no longer viable. Plenty of these jobs are dead. They're not coming back. Ever. What we're going through is not a classic downturn as much as it is a reconfiguration of the economy -- and that takes a long time to complete.
Paul Seabright, professor at University of Toulouse, does a great job explaining this:
In the same way as some of the passengers on a railway system will be waiting at the station, in between trains, any labor market will have a number of its active participants in between jobs even when it is working well. ... But this recession, more than most, seems likely to have produced a great increase in the mismatch, due to the unsustainable patterns of consumption and investment induced by the credit boom that preceded the financial crisis. It's as though the passengers on the rail network need a whole new pattern of travel to different combinations of destinations, for which the connections are no longer optimized and for which there are too many trains in some directions and too few in others.
David Leonhardt in The New York Times gets a little more technical: "The nation's pool of jobless workers has ... been relatively stable -- mostly because the hiring rate of new workers plunged in 2008 and still has not recovered. The drop in hiring has actually been steeper than the rise in layoffs."
Those whose marketable skills were mainly valuable only to the past bubble will have a very, very tough time finding new work, and will be stuck in the traps of long-term joblessness, extended benefits or not. That's what happens when a downturn is structural, not cyclical.
You know the saying: There are lies, damned lies, statistics, and really bad, politically driven inane accusations designed to scare people. Barro's op-ed is almost entirely the latter.
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