Making Astrology Look Respectable
By Arnold Kling
On the Internet, it is easy to find the John Kenneth Galbraith quip, “The only function of economic forecasting is to make astrology look respectable.” Does anyone have a genuine citation for it? A page number somewhere?
Anyway, they’re back at it. Mark Zandi assures us of a significant increase in jobs and GDP if we just “pass the bill,” so to speak.
Steve Allen looks at Zandi’s analysis and says,
The numbers are sobering: $233k per job for the payroll tax cuts and $350k per job for the infrastructure spending. And these jobs would only be around for the duration of the new stimulus package!
Thanks to Greg Mankiw for the pointer.
Here is some old-fashioned back-of-the envelope. You take the stimulus and assume a multiplier of 2. That gets you, with a little upward rounding, $2 trillion. Compared to GDP of $15 trillion, that is about 1.3 percent higher. Pretty much what Zandi gets.
[UPDATE: oops!! Thanks to Daniel Kuehn for catching my error. A multiplier of 2 would get you to $1 trillion, which still is more like 6 or 7 percent of GDP than 1.3 percent. So Zandi’s multiplier is a lot lower. Less than 0.5, in fact. ]
Zandi says you get 1.3 million new jobs. If you get
$2 trillion $200 billion more in GDP with 1.3 million new jobs, then at the margin, these 1.3 million workers are adding over $150,000 per worker to GDP. This is quite a bit higher than average GDP per worker, which is just over $100,000.
Now, read Steve Allen’s next paragraph.
My plan for zero unemployment: There were 14m unemployed workers in August. The $447b stimulus package could be used to generate a check of almost $32,000 to each and every one of them. As a condition of receiving that check, they would be asked to work at some organization, for profit or nonprofit, for one year. These jobs would last just as long as the stimulus package and some of them would no doubt turn into real jobs. Isn’t this a plan everyone could support?
Steve Allen is saying that we could get to full employment if we could get people to work for $32,000 a year. Note that this does not include any benefits. If they wanted the insulation that we call health insurance, it might cost half of their salary.
The average GDP per worker is $100,000. If $100,000 is the bogey, is it any wonder that a lot of people cannot get jobs?
Zandi says, in effect, that using stimulus to put people to work requires that they produce $150,000 of GDP per worker. But that is an even higher bogey. [note: the “cost per job” is higher because the multiplier is less than 1. Unless I am making another mistake.
Tyler Cowen says that the marginal product of today’s unemployed workers is zero. That is needlessly melodramatic. But considering the costs of health insurance, taxes, and so on, the marginal product probably has to be at least $50,000 before you could say that entrepreneurs are leaving money on the sidewalk by not hiring. In any case, I think it is unlikely that there are lots of unemployed workers walking around sporting a marginal product of $150,000, and that is just one reason I find Zandi’s astrology unconvincing.