Government as Co-Conspirator in Financial Meltdown

Interesting op-ed piece in today's WSJ. Am busy so no time to comment today but will do so soon.

More on "Jobs Saved"

Former colleague Victor Claar sent me a link to a news story about errors in the counting of saved jobs, including the treatment of raises as equivalent to saved jobs.

There is another dimension I had not considered as yet. There has been a disruptive construction project on an intersection in Holland through which I often drive. Signs indicated that funds came, at least in part, from the stimulus package. The firms that worked on the job then must estimate how many jobs the project saved or created. The project lasted three months. Will the companies report these jobs saved or created as if they were year-long jobs or will the length of the project be considered? In earlier blogs I wrote about how the methodology used by the government to estimate jobs created or saved focused on job-years. I believe the average citizen reading about jobs saved or created believes that the number of unemployed falls or at least doesn't increase by the number of jobs saved. But, that clearly is wrong, and there is really no way to tell by how much.

Things That Can Be Explained by the Bell Curve

My previous post on Ed Lazear brings to mind a lecture I often give in class on the Bell curve. The tails of the Bell curve never touch the axis. So, if intelligence is measured on the axis and a pretty intelligent person is two standard deviations above the mean, there are still some people farther out--three, four, five standard deviations. In percentage terms, the probability of someone being five standard deviations above the mean is small, but when you consider that we live in a country of 300 million people, there can be a number of people at that level of intelligence. No matter how smart I may think I am, there are lots of people a lot smarter.

What if we measure something like sexual deviency on the axis? In a country of 300 million people there may only be five or six people at five or more standard deviations away from the mean. But that is enough people to fill up an episode of Jerry Springer. And, they all want to be on TV. So, some of these TV shows don't prove that the country is going to pot; they just verify the Bell curve.

Are Economists Insensitive?

I posted yesterday about an op-ed piece by Ed Lazear. I met Lazear over twenty years ago at Lousiana State University. A colleague had visited at the University of Chicago and was able to bring a couple of economists from Chicago to LSU for a few days. Lazear came the day after he ran in the Chicago Marathon. He was hobbling around quite a bit. We took him to lunch at a restaurant in the student union, which was in the middle of campus. It was about a ten minute walk. The next day as we got ready to go to lunch, he asked if we could go somewhere by car. No one thought to take into consideration the obvious pain he was in when walking after the marathon. So my answer to the question in the title is, "Yes."

He presented a paper on "Sales". He began by talking about paying the bills and noticing that his wife's shoes were more expensive than his. She said that women's shoes tend to be more expensive. But why? he wondered. His shoes had more material in them, were more durable, and one would think would cost more. This is someting I had discussed with my wife on more than one occasion. Men's shoes should be more expensive but are not. What is going on? Lazear went on to develop a model to explain why, other things equal, women's clothes had higher prices than men's clothes. It made sense when he went through the model. It was published later in the American Economic Review. This anecdote illustrates one of many differences between economists who end up at the University of Chicago and economists who end up at places like LSU.

Salieri is my patron saint.

Jobs Again

There is an op-ed piece by Ed Lazear in today's Wall Street Journal. Lazear was chair of the Council of Economic Advisors under Bush. He writes that his final economic forecast while a part of the council predicted the economy would begin to recover in the third quarter, and this was without considering a stimulus plan. Of course, his forecast could have been overly optimistic, but it could also mean that the GDP growth in the third quarter was not due to the stimulus plan we have.

He also talks about the estimates of jobs created and the jobs retained as due to the stimulus. Recipients have to fill out a report providing the data. Lazear notes two problems with the reports. The first is reporting bias. A construction firm wanting additional funds may believe that it needs to err on the high side of estimates of jobs created or retained. Second, these programs are likely to count people who switch jobs as new hires.

I have written before on the methodology used by the government to estimate the jobs created and saved by the stimulus. It is a direct link to the spending, assuming so much money equates one job. It also measures job-years and not individuals. That is, a person who is hired as part of a two-year project would count as two jobs--one for each year. The Administration has been criticized for the way they are trying to estimate jobs created or saved, but they keep doing it. The process gives the illusion of precision that is only an illusion. The concept of a job saved is ok--grants sent to states that use the money as a stop-gap in cuts in schools will save some jobs of teachers. But to think we can measure these in a meaningful way is not legitimate.

Perhaps the members of the administration think that if you repeat something often enough, people will believe it must be true.

Is the Recession Over?

The Bureau of Economic Analysis issued a statement today reporting that GDP increased in the third quarter. Normally, that would mean the recession is over. Obviously, the pain is not over yet, and we are no where near a level of output that we had before the recession began. Another concern is that the third quarter may be something of an anomoly because auto sales surged with the "cash for clunkers" program. Real personal consumption expenditures rose 3.4 percent while durable goods increases 22.3 percent.

The figures are preliminary and may be adjusted when more data become available in late November.

Low Rating for U.S. in Health Care

A column in yesterday's Wall Street Journal discusses the often-used ranking of the U.S. health care system as 37th in the world. Experts know that the ranking system is seriously flawed, yet politicians keep citing it to demonstrate how bad the U.S. system is, and to justify the call for reform. A number of years ago, I organized a conference at Hope College on health care. In the research I did preparing for the conference, I learned that many European countries don't count the births of very premature babies as a live birth. The U.S. does. Since many of the very premature babies die shortly after birth, there will be a difference in the infant mortality rates from this difference. Now, it is unlikely that the difference in definition accounts for all the differences between the U.S. and Switzerland, but it accounts for some. There are numerous other differences in definitions, life-style choices, incidence of smoking, violent crime, and ethnic diversity across countries to make international comparisons difficult. Add to the fact that much of the rest of the world free rides on U.S. spending on research and development, and much of the differences across countries can be explained.

This is not to argue that changes in our system may not be advisable. It is meant to suggest that merely copying what some other countries are doing may not be optimal for the U.S.