Put down your Sargent textbook and step away from the econometrics!

The confusion among mainstream economist is amazing. Mark Thoma in his recent post on our under-performing economy highlights this fact. While going through various models illustrating the GDP gap he makes this statement:

“One way to think of these models is that variation in the red line arises from supply shocks, and variation around the red line -- shown by the blue line -- represents demand shocks. Thus, under this interpretation, the first two models assume that all variation in the economy is due to demand shocks. This is clearly incorrect -- certainly supply shocks matter too -- and therefore these models may not give a very good measure of the gap.”

What is simple amazing about this post and statement is that it is wrong on so many levels. The red line (GDP trend) Thoma is referring to is his trend generated from a regression run on the blue line (actual GDP). If the blue line represents demand, the red line is an average of that demand over the whole data set, not supply! Yes! it is a lack of demand in the economy. What supply shock is Thoma so concerned with capturing in his models? Supply is fine; there are 12.8 million people currently unemployed (officially). This is from a guy who is supposed to be “Keynesian”.

His last model attempts a RBC trick of allowing the trend to be stochastic. So the blue line is still the variations in the actual demand in the economy, and the red line is just a more elaborate average of that demand and still not supply. It’s great to see that the mainstream of the profession has such a firm understanding of theory and basic statistics!

Lipstick on a Pig

While I understand the title may be culturally specific, almost surely the metaphor isn't.

The American Jobs Act, unveiled fairly vigorously by President Obama last night to a joint session of the Congress, is an attempt to dress up the employment disaster the US and other advanced economies are needlessly enduring.

The metaphor presumes that you share in the general notion that pigs lack pulchritude. The current lack-of-jobs status is about as ugly as it gets. And the address last night leaves it barely improved at best. This is the biggest economic crisis of the last four generations, and we get....lipstick?

It is conceivable that, if the program manages to survive the worst Congress in my memory, it could help. The various early modeling returns have it adding between 500K and 3 million jobs over three years. So Mark Thoma and Paul Krugman say it positively surprised them. How low have our expectations sunk? These normally very good economists know how to do much much better than this. C'mon guys, this practically stinks.

This is at least a 15,000,000 jobs BIG pig, and getting bigger every day.

Mr. President, this economy must have at least 400K net new jobs per MONTH to fulfill both the economic potential and the moral imperative to reduce the totally needless suffering of the unemployed. C'mon Mr. President. 400K net new jobs per MONTH, hell or high water.

Put away the lipstick. We need jobs. Lots of them, private and public.

Update: via Jared Bernstein, Mark Zandi's model speaks and we strain to listen: AJA => 1.9 million net new jobs. While better than no jobs, folks, this is a crisis, and requires crisis-worthy action. I realize the political challenges, but as soon as we have whatever crumbs can be pried from agreements with the 'pubs, it will be time to put maximum political pressure on them to do the right thing -- 400K jobs a month. C'mon Mr. President, less lipstick, more jobs.