Monday, April 8, 2013

Hot Air and Powerline: Not Exactly the Sharpest Tools in the Economic Tool Shed

I think it was Paul Krugman who same up with the phrase "zombie meme:" an idea that -- despite being debunked numerous times -- continues to come back from the dead.  If not, I apologize to the phrase originator.

However, there are two memes that we keep seeing pop up -- almost always from political writers masquerading as economic writers -- that are wrong.  The basic problem with their "analysis" is that they fail to consider nuance, making their statements at best incomplete and at worst deliberately misleading.

Let's start with the declining labor force participation rate argument.  This was noted by John Hinderaker at Powerline last week in discussing the latest employment report: "The real story here is the steadily declining labor force participation rate." Then there is Ed Morrissey over at Hot Air, who stated, "The new civilian workforce participation rate of 63.3% is the lowest seen in almost 35 years, since the fall of 1978 — an era not exactly known for a robust American economy."  And there is agreement on this point from Hot Air writer Erica Johnsen.

To explain why both are wrong in their statements, let's start with a chart of the data:

Well -- that does look bad, doesn't it? 

Before we hyperventilate into a partisan hissy fit, let's back up a bit and look at what exactly is the "labor force participation rate?"  Thankfully, for those inclined to actually use it, there is a glossary at the BLS.  The participation rate is "[t]he labor force as a percent of the civilian noninstitutional population."  This requires us to define two more terms.  The labor force "includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary."  While the the non-institutional population is defined thusly, "Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces."

Putting all of this information together, we get the following.  The labor force participation rate is the percentage of people who are employed or unemployed as a percentage of the population that, for all practical purposes, is probably available to work if they want to.  The information is derived from the month household survey, which is one of two employment reports issued by the BLS every month.

Now that we've gotten that out of the way, here's where the nuance comes in.  First, the noninstitutional population has no upper age limit.  Hence, it includes people over the age of 65 -- the traditional retirement age.   What would happen if your population was getting older?  What if there was this demographic group called the baby boomers?  And what would happen if they happen to start retiring, say, over the last 10 years, but their retirements really kicked into high gear over the last few years?

You see, oh promoters of the "labor force participation rate decline means all things are bad and we're going to hell" meme, the labor force participation rate starting rising in the late 1960s because of two trends: the baby boomers entering the job market and women entering the labor job market.  These two trends increased the number of people who were either employed or unemployed, hence increasing the labor force participation rate.  And, as the baby boomers start to retire -- as we are now seeing at the pace of approximately 10,000 per day -- we're see that number decrease.   Ultimately, this analysis is based on definitions, math and fractions and understanding them in a bit more detail will increase your economic acumen.

For those who would actually take the time to research the issue (that means asking people who know what they're talking about) there is actually some very good research on the issue.  Take this report from the Kansas City Federal Reserve:

This article presents a variety of evidence—including data on demographic shifts, labor market flows, gender differences, and the effects of long-term unemployment—to disentangle the roles of the business cycle and trend factors in the recent drop in participation. Taken together, the evidence indicates that long-term trend factors account for about half of the decline in labor force participation from 2007 to2011, with cyclical factors accounting for the other half.


The steady decline of the LFPR since its peak at the turn of the century is also related largely to demographic factors. The primary factor behind this decline is the rising share of older workers in the population as the baby-boom generation ages and life expectancies increase. The rising share of older workers pulls down the LFPR because older workers have lower participation rates than prime-age workers. A second factor behind the gradual decline of the LFPR has been a steady  reduction in labor force participation among young people over the
last decade, resulting in large part from rising school enrollment

There is also this analysis from the Chicago Federal Reserve

Labor force participation has fallen significantly over the past decade. At least some of this decline is due to the recent deep recession and lackluster recovery. Additionally, for quite some time, economists have forecasted that shifting demographics, particularly in the age structure of the population, would put downward pressure on labor force activity. We estimate that just under half of the decline in LFPR since 2000 is due to such factors. We expect these demographic patterns to continue for at least the next decade, and likely far

Put another way, the research on the issue indicates that about half of the decline is due to demographic factors, primarily younger workers leaving the labor force and staying in school (isn't that a good thing in the long run?) and older workers retiring.

Now, that does mean that the other half of the decline is due to the current economic situation, which is not good.  But, let's ask the Powerline and Hot Air authors what their solutions to that problem are and and you'll get "austerity" as the answer -- a plan that is a primary cause of Europe's current problems and now 12% unemployment rate.  In short, their "solution" would exacerbate the problem.

Let's turn to "the recent upturn in disability payments are actually stealth unemployment benefits, making the increase a sign that the 47% are actually mooching off the government .... blah, blah, blah.  These meme was bolstered by a recent story on NPR about the rise of disability benefits over the last 5 or so years.  Powerline approvingly cited the NPR story here and Hot Air here (but isn't NPR a liberal news source not to be trusted?) 

The problem with this concept -- and the NPR story -- is a lack of  nuance.  Let's start with the raw data: how many of these claims are actually accepted?  According to the facts, it's actually a little less than half the claims:

Now, there has been an increase in the total number of applicants.  In 2005 we see total applications of 2.3 million and in 2010 we see total applications of 2.8 million.  However, also remember: we're getting older (see discussion above).  And as we get older, our bodies start to break down.

To get a more complete feel for the nuances of the issues, read this great interview over at the Post's Wonk Blog (this involves reading, which will probably prevent most people from actually, you know, reading the data).

In fairness to Powerline and Hot Air, they are both political blogs not economic blogs -- and both are quite skilled in that arena.  And  neither are known for their penetrating economic analysis or financial acumen.  In fact -- as a heads up to both  -- quoting Zero Hedge as an authoritative economic source is pretty much the last thing you want to do if you want to be taken seriously in the economic world. However, the above errors are large and should be corrected or addressed to clarify the point to their readers -- an act that won't ever happen.