Wednesday, February 9, 2011

Another Day, Another Journalist Embarrasses Himself

It appears that each day we can find some website publishing an intellectually embarrassing screed from someone who tries to pretend they actually know something about economic or statistics. For today, I would like to highlight this piece by Charles Hugh Smith that is featured on CNNFN. Not only (as I will show) does Mr. Smith have no idea what he is talking about, but his conclusions show that he was much more interested in pushing his (wrong) worldview than pursuing any actual academic rigor with this opinion piece (it has to be called an opinion piece because it is almost completely bereft of facts).

Let us begin with Mr. Smith's complete misunderstanding of the Household Survey , which is exactly as the name implies, a survey of households (60,000 to be precise) from which the BLS gets the numbers for the labor force, unemployed, employed, the unemployment rate, etc. Mr. Smith states:
"This ongoing adjustment of who gets counted as part of the labor force leads statisticians to lower the unemployment rate -- even though the number of employed people has barely ticked up."

Of course, this statement is completely wrong, as those surveyed determine whether they are in the labor force or not, not some magical BLS adjustment. Mr. Smith then goes on to state:

"Given this substantial increase in population every year, we might reasonably expect the civilian labor force to expand proportionally, as students graduate and new immigrants enter the workforce."

Of course, what Mr. Smith misses completely is that while we do have an increasing population, we also have an aging one, with about 10,000 people a day turning 65 in this country and retired people are not counted in the labor force (again they have to self select as being retired age alone doesn't put them in this category). And when we couple the number turning 65 with all those turning at least 62 (the point at which one can take early social security benefits), we may (and I say may) have some explanation of why the labor force could be shrinking.

Now, for the most glaring error that Mr. Smith makes, which showcases that he neither understands how the Household Survey works nor has any desire to do so:

"When unemployed people stop looking for jobs at their local unemployment office, the government no longer counts them as unemployed. That's how the number of unemployed can drop from 15 million in November 2010 to 13.8 million in January 2011, a decline of 1.2 million, even though the economy created only about 400,000 jobs in those three months."

Anyone who has even remotely studied the Household Survey knows that unemployment insurance/benefits have absolutely nothing at all to do with determining the number of unemployed for purposes of the Household Survey. The Household Survey is exactly that, a survey and so long as you say you are currently looking for work you count as unemployed (regardless of benefit status). Also, we must note that even those who are no longer looking, but would still like to have a job are broken out from the generic "not in the labor force" category and this breakout category actually decreased (by a little) last month, which means that while the number not in the labor force jumped a lot in January, the number of those who would still like a job did not (which pretty well flushes Mr. Smith's thesis down the toilet). But we aren't done here just yet.

The final error Mr. Smith makes is in his chastisement of the infamous birth/death adjustment about which Mr. Smith states:

"Depending on what the "black box (he is referring to the birth/death adjustment - SilverOz)" issues every month (the BLS does not reveal its methodology), the government may report that the economy has created hundreds of thousands of new jobs -- that are often revised away in estimates a few months later."

I want to just say that it took me less than 30 seconds to find the methodology for the birth/death adjustment on the internet, again showcasing Mr. Smith's research skills. I also want to point out that the BLS has always made adjustments for the birth and death of businesses just that prior to the publication of the birth/death adjustment as a separate number, they were simply included (unattributed) in the normal data/seasonal adjustments.

Finally, I would like to point out the extreme flaw with the basis for Mr. Smith's article: that the unemployment rate cannot really be going down because all we are seeing is a decline in the labor force and number of unemployed, but not job creation. To which, I point Mr. Smith back to December-March of 1982-83. Between December and March of 82/83 the unemployment rate fell .5%, while the labor force lost 496,000 people (the number "not in the labor force" grew by 953,000 during that period), the number of unemployed shrank by 643,000, yet the number of employed only went up by 147,000. And somehow, that recovery seemed to end up being fairly decent if my memory serves me correctly.