Larry Lindsey picks cherries, ignores jobs

October 5th, 2016 at 3:12 pm

I tend not to bother with the WSJ’s editorials and op-eds; they often read to me like news from an alternative universe, one where the facts are whatever you say they are. More interesting are pieces, such as this one by economist Lawrence Lindsey, that gets some facts right, but portrays them in a misleading way that deserves to be corrected.

In the course of producing their budget, presidential administrations generate economic forecasts of GDP growth, unemployment, interest rates, and price growth. Lindsey went through a bunch of these forecasts by team Obama (of which I was once a member) and showed that they’ve consistently overestimated GDP growth. From there, he concludes that President Obama failed to learn from his mistakes and that any “plan to continue the same failing policies for another four years while expecting a different result is simply insane.”

First, it’s notable the Lindsey says not a word about jobs. The figure below replaces GDP with the unemployment rate and performs a similar analysis as that in his piece. Here, the administration’s forecast were generally on track; if anything, they were too pessimistic, as the actual jobless rate fell faster than they expected. In fact, as the Obama economists love to remind us, “U.S. businesses have now added 15.1 million jobs since early 2010…the longest streak of total job growth on record.”

Source: Obama admin's Office of Management and Budget (OMB)

Source: Obama admin’s Office of Management and Budget (OMB)

Some of that is due to ongoing weakness in labor force participation, but there’s no question that the job market is closing in on full employment. And thanks to the tightening job market, real wages are rising, middle- and low-income households are posting historically large income gains, and the Fed is poised to raise rates to slow the economy down, all of which is completely inconsistent with Lindsey’s conclusion.

To be clear, I’m much less quick than Lindsey to link everything that’s happening in the economy to the president. After all, congressional dysfunction has got to be in the mix here, too, not to mention demographic trends and technological developments that are far less blown about by the winds (mostly hot air) of politics. But that said, given recent gains in jobs and middle-class incomes and declining poverty rates, building on this progress seems as far from “insane” as you can get.

Adding in the sharp decline in the share of Americans without health coverage—a clear outcome of an Obama policy—only further bolsters my point, as does this recent assessment by Obama’s economists of the extent to which his policies have reduced income inequality. And let’s not forget that any useful economic policy the administration has been able to implement, like health care reform or progressive tax changes, has been achieved in the face of hurricane force political headwinds.

Second, while it’s certainly true that the Obama Administration has overestimated GDP growth, so has almost everyone else, including the Fed, CBO, and the IMF, which has overestimated GDP growth in most other economies as well. (As a snarky side-note, I’ll add that when Lindsey was a top economist with the GW Bush team, they forecast GDP to go up 2.6% in 2001 when the actual change was a recession-induced 0.2%.)

What’s really going on here is revealed by simple arithmetic: relatively low GDP growth coupled with strong employment growth implies weak productivity growth, a real problem which we see across all advanced economies.

Serious economic analysis must take up this challenge of understanding the slowdown in productivity growth, as I’ve tried to do in various places. But if we’re too busy cherry-picking the data to whack the administration while ignoring any positive developments on the plus side of the ledger, we’ll never learn anything useful.

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3 comments in reply to "Larry Lindsey picks cherries, ignores jobs"

  1. Peter K. says:

    I’m not going to bother to read the piece but my first thought is why doesn’t he blame the Fed; the Republican in Congress who are overly focused on deficit reduction and the strong dollar rather than Obama? The IMF’s forecast has 2016’s annual growth rate coming in at 1.6 percent. Seems like a mistake for the Fed to have raised rates last December and send somewhat hawkish signals ever since. Maybe Yellen was managing her hawks, but still.


  2. Smith says:

    I take serious issue with the notion “real wages are rising” or “the job market is closing in on full employment.”
    Regarding the statement below in the above post:
    “Some of that is due to ongoing weakness in labor force participation, but there’s no question that the job market is closing in on full employment. And thanks to the tightening job market, real wages are rising, middle- and low-income households are posting historically large income gains, and the Fed is poised to raise rates to slow the economy down, …”
    Real average hourly earnings do show a very healthy increase over last years metrics, rising 1.3% for all workers, and 1.8% for non-supervisory employees. Table A1 and A2 “Over the Year Percent Change” in link below
    http://www.bls.gov/news.release/pdf/realer.pdf
    However, the question must be asked, are wages increasing or is inflation decreasing? Obviously the latter, especially for a non recession year, reaching historic low measures of 1.1 percent for everyone, and .7 percent for non-supervisory over the last 12 months (again Table A1 and A2). How historic is this? Before the Great Recession annual inflation dipped below 2% only twice in the last 50 years, in 2002, and 1986.
    Since the Great Recession:
    2009 -0.4
    2010 1.6
    2011 3.2
    2012 2.1
    2013 1.5
    2014 1.6
    2015 0.1

    This shows even the 1.1% and .7% is a huge anomaly (along with 2015’s .1%)
    There is no mystery, global economic weakness and fracking lowering oil prices: http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=4y

    The momentum of 2 to 2.5% nominal wage increases, similar the effect of DNWR (downward nominal wage rigidity) is causing real wage increases. Unless oil drops another $50/barrel to roughly $0 (free oil), this can not continue.

    Workforce participation tells a story of continued slack in labor market, as does weak nominal wage gains.

    The slack economy, and and weak but recovering labor market totally explains productivity (two effects, there is a excess capacity, and new hires of recovery tends to reduce productivity)

    I understand the need for Democrats to point to encouraging trends, especially in an election to fend off Trump and Republicans, but there is too much whitewashing and optimism of a still underperforming economy. People want change, not more of the same.


  3. John Robinson says:

    “But if we’re too busy cherry-picking the data to whack the administration while ignoring any positive developments on the plus side of the ledger, we’ll never learn anything useful.”

    As I’m quite sure you are completely aware, “we” may not be interested in learning anything useful. “We” may only be interested in advancing a particular ideological position, using any method at (under)hand.


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