The element of the new Ryan/GOP budget which has received the most condemnation and in some cases mockery are the unemployment figures. Specifically, the Ryan budget touts analysis from the Heritage Foundation which argues that the unemployment rate will reach 2.8% by 2021. (For comparison, ‘natural’ unemployment is estimated to be around 5%) FrumForum contacted the Heritage Foundation’s Center for Data Analysis to ask about this figure.
Heritage responded that they came to this conclusion using a CBO baseline they were requested to use, and that they view this baseline as one which was too optimistic to begin with. Critics contend that the real flaw is in running their model continuously out until 2021.
Heritage’s Center for Data Analysis uses a macroeconomic model developed by IHS Global Insight for its forecasting. The Center’s director, William Beach, explained to FrumForum how it arrived at the figure. Heritage made their assumptions on what the unemployment rate will be from the CBO’s own estimate and applied what they think the effects of the Ryan plan will be on top of that. So if the CBO estimates that in a certain year, the unemployment rate is 5%, and Heritage calculates how much Ryan’s plan cuts off, for example 2%, then they would estimate that an unemployment rate of 3% is happens if the Ryan plan were enacted.
Beach told FrumForum that their projections further out from the 2021 figure actually showed the unemployment rate rising again: “In the period from 2022 to 2041, the unemployment rate is back to what we would call, more normal levels.”
Beach expressed a great deal of concern that the main culprit for the unusually low unemployment figures was the CBO estimates they were asked to use, noting that “CBO has been criticized for predicting particularly strong decreases in the unemployment rate.” “I think the CBO has given us a scenario that is pretty rosy, how can you have unemployment rates of 5.2% in a world where we have a financial crisis?”
Beach said that the focus shouldn’t be on the new baseline unemployment rate which is generated by the model, but by the magnitude of job creation that comes from the Ryan budget (the percent figure that brings the baseline down.)
When asked why he included the unemployment figures at all if he was concerned about the baseline, Beach responded, “I could have chosen not to [have] chosen the unemployment rate, but then people would have asked for them” suggesting that Heritage was in a damned if you do, damned if you don’t situation.
Critics assert that simply blaming CBO numbers is not sufficient, and that the deeper problem is in assuming the Ryan budget keeps working on the economy out to the 2020s.
Chad Stone of the Center on Budget and Policy Priorities described Heritage’s analysis as “mechanically applying changes from their model … it doesn’t make sense that far out, when the economy is back to full employment, that the Ryan plan can still cut two points off unemployment.”
According to Stone, it’s Heritage’s insistence that the Ryan plan constantly knocks down the unemployment rate that is problematic: “Most people’s analysis of an economy coming out of a recession is that the impact of any policy on the unemployment rate five years out is close to zero.”
According to Stone, normally, once the economy reaches full employment, the Fed responds to prevent the economy from overheating. According to Beach, the Ryan budget did not generate a response from the Fed in their modeling.
Stone also took issue with the assumption that a dramatic cut in spending can immediately decrease the unemployment rate.
Making projections within a ten year budget window is challenging. The further out the projection goes the more the predictions become straight-lined assumptions which can account less and less for the inevitable changes in the economy that come from the business cycle.
This is where the debate currently is: Ryan is touting analysis which assumes that the benefits from his plan will stretch out into the 2020s. The analysts were instructed to look that far out by Ryan but they think they are working from an optimistic baseline, and critics are wondering why they assume that the plan continues to keep reducing unemployment even after the recession ends and natural unemployment is assumed to have been reached.
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