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Thursday, October 8, 2015

Employment and Dynamic Scoring


Mike Smitka

Economics, Washington and Lee University

Here are quick notes on my WREL Lexington AM 1450 radio show of October 8, 2015. There's the employment update. I also did the calculations for last week's topic, whether tax cuts could boost revenues, and add those graphs. Plus a United Way of Rockbridge update.

The latest (un)employment data for September 2015 were released at 8:30 am sharp on Friday morning. The numbers were discouraging, lower than the growth of the potential workforce. This is in line with a gradual decline since the beginning of the year. Consistent with that, interest rates remain low, under 3% for 30-year bonds and 1% for 3-year bonds. Clearly bond markets don't anticipate rapid growth in the next year or so, nor do they see any increase in inflation down the road.

Graphs above show the growth of jobs relative to trend growth of the working-age population, corrected for the gradual retirement of the baby boomers. While the data are volatile (so I use a moving average in the graph), the trend since January is for a slowdown in the number of new jobs. On the other hand, the number of workers on involuntary short hours has fallen a lot, and the employment-population ratio for prime-age workers is improving. Bit by bit the economy is moving in the right direction.

Some 2.1 Americans have been unemployed for 27 months or more. By that point, many households will have exhausted their savings and find it hard to make mortgage payments... This number has been falling month by month, but it should be a sobering reminder that our economy has yet to fully recover from the collapse of the housing market and the rise in unemployment that began in early 2007.

Host Jim Bresnahan asked about consumer spending; that will be a topic for next week as I don't have data at hand. At the same time, Ben Bernanke's book will be out; you can already find excerpts on the web from reviewers who have pre-release copies, while Ben himself is doing PR for it, with an overview of some of the content.

Here is the bottom line in graphs for "dynamic scoring." Groups such as the Tax Foundation continue to argue that cuts will produce a burst of growth. Their argument is based on sophistry: after noting that demographics and lower productivity have slowed potential growth while improving labor markets limit the upside, they then argue that a big boost to growth is possible because that happened in the 1950s and 1960s – when population growth, productivity and women joining the labor force did permit higher growth. In any case, the fact remains that the cost of tax cuts is up front, while growth – if it speeds up – will not start immediately and will be gradual. So I ran a little simulation, with a 10% tax cut from 20% to 18%, giving a 20% boost to growth, from 2.5% to 3.0% in real terms starting immediately. That's a very, very optimistic assumption, given that we've already had a series of large tax cuts under Reagan, Bush Jr and Obama – that diminishing returns thing.

The graph on the left shows the boost in growth (the starting point is the most recent level of real chain-weighted GDP in US$ trillions). Over time, it adds up. However – as illustrated in the graph on the right – the decline in tax receipts is immediate, and it takes over 20 years for that to catch up. In the interim it adds to Federal debt – we don't get back to even for 40 years. A lot can go wrong in the interim. Furthermore, I did not do this in net present value terms. That makes the calculation even less favorable. In other words, I've tried to skew the case to favor tax cuts by choosing a large boost to growth and ignoring the time cost of money. Even so, I can't make the case.


United Way of Rockbridge: On October 8th I featured the Blue Ridge Autism and Achievement Center in Buena Vista. They help youth afflicted with autism, a very labor- and love-intensive task that requires staff knowledgeable in how to interact and teach/train young people with autism. Their pupils range from individuals with severe autism, who interact very poorly with the outside world, to individuals whom they can help transition into public schools. UWR helps with training their staff.