Attempting to understand the state of the economy using one economic indicator alone is like using your child’s A in gym class to predict his success in life.
In the past month alone, the Dow reached a record high only to plummet the next day, while job growth increased even as unemployment remained the same.
Even this small amount of evidence suggests that while election-year rhetoric will likely exploit one economic indicator or another to describe candidates’ performance, reliance on a single indicator as a harbinger for economic growth is misleading. Instead, voters need to understand the underlying details of these measures, and the full set of measures that describe the current economic condition.
Like examining your child’s report card, understanding the American economic report card involves looking at all subjects and understanding the details of the measurements.
Unemployment, for instance, measures the number of unemployed workers actively seeking a job divided by the total labor force. An unemployed worker who has stopped looking for a job due to hopelessness will in fact help to decrease unemployment.
Given that the largest mass of unemployed workers have been unemployed for a long period of time, decreases in unemployment in the near future may simply be a sign that the longer-term unemployed have given up rather than that the economy is actually improving.
Furthermore, we are at the very beginning of the process of retirement of the largest demographic cohort, namely baby boomers. The retirement of the baby boomers represents a significant reduction in the labor force, thereby decreasing unemployment simply by virtue of how the measure is calculated.
Additional statistics regarding changes in job growth and the jobless need to be examined. It will be important to understand how government policies are impacting structural unemployment in the U.S., the issue that the skills employers are looking for do not match those of the unemployed.
Statistics such as a wage recapture parameter which measures the portion of the old salary the new job pays will help illustrate whether policies will have a long term effect or are serving as short-term band aids for unemployment.
In addition to understanding the details of the macroeconomic indicators, it is important to examine the costs of investment in the recovery. Costs that are of the fixed overhead nature, which increase the deficit, will represent fiscal burdens well into the future. Yes the stimulus has created jobs, but what size of a deficit legacy will it leave?
In particular, the Congressional Budget Office predicted in the fourth quarter of 2011 that without the stimulus, unemployment would have been .5 to 1.1 percentage points higher, representing 600,000 – 1.1 million jobs. With an $825 billion estimated cost of the stimulus, simple division shows us that in the most conservative case, we paid $750,000 per job, not including the interest we will need to pay on this debt in the future.
Attention should be focused on whether this should be considered “a lot” or “a little,” which will depend largely on the type of job the stimulus created on average. Are these temporary positions that will fade in the short term or more permanent positions? After all, at this cost, the government could have instead provided each unemployed person a lump sum transfer of $750,000, tax their new income at 30%, and receive the tax revenue.
Economic growth, especially in uncertain times is a complicated concept which no one measure can fully describe. While election-year rhetoric or just our desire to see a positive future puts undue attention on one indicator or the other, doing so creates a blurry picture of the true economic health of the country.
Sharon Poczter is an assistant professor of Applied Economics and Management at Cornell University.