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Thursday, June 24, 2004

The Party Of Job Creation

In previous blogs, I've raised the issue of how robust economic growth is strongly associated with Democratic Party control of government, and outlined how a Democratic administration typically stimulates job growth in contrast to how Republicans have approached the issue. Well the proof is in the pudding as they say. If the Democrats are better at job creation, then we should see it in superior job growth through different administrations, business cycles and economic situations.

And see it we do. Since World War II, the Democrats have held the White House for 27 years and the Republicans for 31. According to Bureau of Labor Statistics data, during the Democrats' 27 years in power, over 59 million nonfarm jobs were created. During the Republican's 31 years, only 31.3 million jobs were created. You have to go back to 1950 to find any Democratic President presiding over an annual net job loss. By contrast, Republican administrations have presided over net annual job losses eleven times. On average, Democratic administrations oversaw a monthly gain of over 182,000 jobs, while the Republicans have averaged only 84,000 per month.

This of course has a profound effect on unemployment rates. Since World War II, again according the Bureau of Labor Statistics unemployment data, on average unemployment rates went down by 5% every year during Democratic administrations while unemployment rates rose a yearly average of 9% under Republicans.



This is not due to a single aberration. As this chart shows, the overall record of each Democratic administration is profoundly different than Republican performance.

As to why this is so, one could argue that Republicans being the party of the affluent and the major corporations are less interested in full employment than the Democrats since a high unemployment rate makes for a cheaper and more compliant labor force. You could also argue that the ideology of the Republican Party makes it impossible for them to embrace the kinds of Keynesian economic solutions that have been proven to work for a century or so. Regardless of the reasons for the difference in performance, no one can possibly doubt that there is a statistically significant difference in the parties' relative success in promoting job creation. An additional 28 million jobs created under Democrats is about as significant as it gets. If you want a full employment economy, you really have no choice this November.

Welcome to the Democratic Party.

Thursday, June 10, 2004

Most of Those New Jobs Reported Are Imaginary

John Crudele's jobs commentary in the New York Post caght my eye last month. He reported that a huge number of the new jobs being reported by the Bureau of Labor Statistics were actually the imaginary invention of a statistical method known as "birth/death modeling". This model attempts to correct the notion that the employment figures don't account for jobs created by new businesses that haven't reported in to state Unemployment Insurance agencies yet. So long term studies showed that the rate of dying business was very similar to the rate of new businesses formed - on average, over the business cycle. So, the birth/death model imputes a number for new businesses based upon the number of old businesses that died that month. (If population rates were calculated this way, we would 'discover ' that, among other things, fatal traffic accidents cause babies.)

Intrigued, I looked closer. To their credit, the BLS publishes their entire methodology online. All you have to do is wade through explanations of statistical number crunching as described by Washington bureaucrats. What I found suggests that Crudele may have been understating the problem. When you actually reproduce the BLS methodology described in the BLS Handbook of Methods (Chapter 2), you arrive at the conclusion that fully 85% of the new jobs claimed to have been created since March 2003 are imaginary.

To arrive at a monthly estimate of nonfarm payrolls, the BLS creates a benchmark universe of jobs through compiling Unemployment Insurance records from all 50 states and the District of Columbia. This benchmark is updated each year, about eleven months after the fact. The latest benchmark data is March 2003, which was compiled in February 2004. Then, each month the BLS takes a random sample of the universe and counts the jobs found within. They then compare that figure with the corresponding figure from the prior month's sample. So if the latest month's sample found 26,000 jobs, and last month's found 25,000, then the conclusion is made that the job market grew 4%. They then multiply that percentage growth against last month's estimate of total jobs. But that's not where it stops. They then arbitrarily add a figure for jobs created by new businesses they imagine were created, based on the number of businesses went dead that month (which are signified by the number of businesses in the sample that either reported 0 employees or didn't report at all.) The assumption here is that a dead business in the sample automatically means another business was created that month that hadn't gotten around to report to the state unemployment insurance agencies. Of course this doesn't account for all those businesses who laid off their employees because their jobs were outsourced to India, but I'm sure that's not a problem. Right.

The insidious thing about this is that these imaginary numbers appear to be cumulative. That is, if BLS imagined that 1,000 jobs were created in one month by businesses they can't see, then that 1,000 gets added to next month's total as well. Here's the formula:

(Last month's Total Jobs X Growth Rate of Sample) + New Jobs Imagined By BLS = This Month's Total Jobs


So this month's imaginary figure gets rolled into next month's figure, and next month's etc.

Applying this method to the actual nonfarm payroll data, we find that 1,104,000 of the 1,303,000 new jobs reported by the Department of Labor since March 2003 are basically made up out of thin air. Here's how it translates graphically:



When this birth/death model was created in 1998, it was expected that it would change the results to a modest "small and stable" degree. Indeed for the 11 months from March 2003 through January 2004, a modest 37,000 average jobs per month were added by this technique. Something happened though after that. Over the last four months (February through May 2004) this modeling technique padded the total job growth by over 730,000 jobs, about 183,000 per month.

In February 2005, there will be a new benchmark calculated from universal UI data that will reconcile these figures to the real world at least through March 2004. Most likely, what will be found is that job growth came in somewhere in between the 1.3 million announced and the 199,000 jobs actually detected. This is because there should be SOME new business creations adding jobs. However, how many of those businesses reported zero jobs to BLS did so because they outsourced to India instead of creating a vacuum where a new company grew domestically? When given other well known measures of employment showing no movement at all through this period, we are likely to be surprised how bad things really have been all the while our leaders were telling us how lucky we are.

(Thanks to comments shown in the comments page for this post, the numbers are slightly revised. See comments for full discussion.)

Sunday, June 06, 2004

If You Want to Live Like A Republican, Vote Democratic (part II)

In a recent blog I laid out the fact that economic growth under Democratic Party controlled administrations is significantly higher than under Republican administrations, at least for the last 52 years. Further, the highest average growth rates have occurred under Federal governments with a Democratic President and a House of Representatives controlled by Democrats. (Budget/finance bills originate in the House, not the Senate, by order of the US Constitution. So Party control of the House is much more important on economic issues.) Well, 2003 data has been added to the mix, so we now have 53 years of data to look at. We've had 17 years where we had a Democratic President working with a Democratic House. In those years, inflation-adjusted real GDP growth averaged 4.5% per year. In the 6 years when a Democratic President had to contend with a GOP run House, GDP growth averaged 3.9%. In the 26 years when we had a Republican President and a Democratic House, GDP growth averaged 3.0%. Finally, in the five years when the Republicans controlled both the House and the White House, GDP growth was a tepid 2.1%.

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My reasons for reposting this topic are two fold. First, I wanted to update the numbers with 2003 figures, which, by the way, come straight from the Bush administration's Office of Management and Budget's FY2005 Budget report. Included in the historical tables is an Excel spreadsheet that lists each year's GDP along with a "GDP Deflator" that, when multiplied against GDP, gives you an inflation adjusted constant dollar GDP. A little spreadsheet work from there gives you averages under different regimes. The second reason is to test Blogger.com's new support for imbedding images with the chart above that graphically illustrates how much more profitable it is for the country to go Blue.