Jobs Created or Saved…Again

It looks like the Obama Administration’s brilliant political jujutsu move of using “jobs saved or created” is making its way around some of the economics blogs again. First up is Brad DeLong’s attack on Allan Meltzer. Meltzer wrote the following,

There is no greater recognition of the failure of the stimulus program to create jobs than the efforts to mislead the public into believing the program had saved thousands, or millions, of jobs. One can search economic textbooks forever without finding a concept called “jobs saved.” It doesn’t exist for good reason: how can anyone know that his or her job has been saved? The Administration can make up any number it pleases. The number has no meaning…

Brad points to this partial quote by Milton Friedman,

Suppose the [Federal Reserve] System… had accompanied the measure by purchase of government securities [for cash]… as called for by the “classic” remedy for an internal drain…. [L]et $1 billion be the amount…. What would have been the consequence?… Reserve purchases of $1 billion… would have meant an increase of $1,330 million in high-powered money… would have permitted a multiple expansion of deposits…. Even if… the deposit ratios would have fallen as much as they did–and for the deposit-currency ratio, the fall in so short a time was the largest on record–the result would have been to cut in half the decline in the stock of money…. Only a moderate improvement in the deposit-currency ratio–a decline from 8.95 to 7.10 instead of 6.47–would… have enabled the stock of money to be stable…

You might be wondering, “What the….?” Well, what Friedman is saying is that if the Fed had taken expansionary policy with regards to the money supply it would have stopped the Great Depression, or at least it wouldn’t have been Great, and probably not even a depression. In other words, isn’t Friedman doing the samething that Meltzer is saying is impossible?

Well it depends. The above quote it from The Great Contraction and I haven’t read it and so I don’t know the context in which Friedman couched his argument or what is missing in the ellipses in the quote Prof. DeLong has quoted. But, if Friedman is making an analysis given a specific model, then his argument might be valid…in the context of that model. In fact, Prof. DeLong writes,

You can critique models. You can critique parameters. You can critique parameters. You can critique how the calculations are done, but you cannot deny their existence, for the kind of counterfactualcalculations [sic] that Milton Friedman does are, of course, the steady diet of what economists and other policy analysts do every day.

This leads me to believe that, indeed that Friedman is making his statements within the context of a specific model.

Paul Krugman decides to pile on by making the following comments,

But it’s not just Meltzer — Greg Mankiw has done the same thing.

They should be ashamed of themselves.

The Obama administration’s “jobs created or saved” is just a way of saying “other things equal” in non-economese. Of course it makes sense to ask how many more people are working than would have been the case without a given policy — and every administration makes assertions along those lines. During the 2001 recession and its aftermath, how many times did the Bush administration claim that the recession would have been worse without its tax cuts? And while many of us quarreled with that claim, I don’t think I ever argued that other-things-equal arguments are nonsense on their face.
The willingness of conservative economists to fall in line behind such cheap shots says something sad about them, not about the Obama administration.

Mankiw responds,

Here is what I wrote on the topic last February:

The 4 million job number is a counterfactual policy simulation of what the stimulus will do based on a particular model of the economy. As such, I have no objection to someone citing it in a policy discussion. In fact, macroeconomists use models to generate figures like this all the time. I have even done it myself.

But as an answer to the question “how can the American people gauge whether or not your programs are working?… What metric should they use?”, citing the 4 million job figure is a non sequitur, or more likely a diversion. A metric has to be measurable, and the actual number of jobs “created or saved” by the policy will never be measurable from any data source.

That is, I do not object to claims such as,

A: “Based on our models of the economy, we believe there would be X million fewer jobs today without the stimulus.”
But it is absurd to suggest that you can say,

B: “We have measured how many jobs the stimulus has saved or created, and the number is X.”

Economists are capable of making statements such as A, but it is beyond our ken to make statements such as B. Statement B is,of course, much stronger than statement A, as it purports to be based on data rather than on models. Unfortunately, we are hearing statements like B much too often from administration officials. A good example is here, where can you “learn” that 110,185.36 jobs have been created or saved in California alone.

Yes that is right, because of Obama’s brilliant policy there is a 0.36 person employed now that otherwise wouldn’t be employed. Of course, the use of the phrase “jobs saved or created” is baloney. If the President or his spokespeople had said, “Well, according to our analysis we think it is likely that 4 million jobs will be saved or created with this stimulus package…” they’d be home free. But that isn’t what they say. This is what they say,

Question: The American people have seen hundreds of billions of dollars spent already, and still the economy continues to free-fall. Beyond avoiding the national catastrophe that you’ve warned about, once all the legs of your stool are in place, how can the American people gauge whether or not your programs are working? Can they — should they be looking at the metric of the stock market, home foreclosures, unemployment? What metric should they use? When? And how will they know if it’s working, or whether or not we need to go to a plan B?

Answer: I think my initial measure of success is creating or saving 4 million jobs. That’s bottom line No. 1, because if people are working, then they’ve got enough confidence to make purchases, to make investments. Businesses start seeing that consumers are out there with a little more confidence, and they start making investments, which means they start hiring workers. So step No. 1, job creation.–emphasis added

Whoops.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. odograph says:

    I remember that one of the newspapers ran a story about a DC area nursery (the plant-growing kind). They said that with the housing and construction downturn in the surrounding suburbs, the nursery had pared back operations and laid off employees. This was told in context of one of the stimulus items (one I didn’t really approve of) to replant the National Mall.

    I think we can make fun of the macroeconomics(*) used to calculate “create and save” numbers, but we can see in microcosm how it works. Some number of contractors were hired to do the landscaping, they ordered plants and preserved jobs as some number of suppliers.

    The problem is in calculation and the huge number of assumptions that need to be made. How many suppliers received indirect stimulus monies and how did that affect their staffing plans? No one knows. If you can’t count them directly you have to compare relative to an unstimulated economy and jobs lost. Nobody knows that either.

    So, put in whatever numbers you like.

    * – we can always make fun of the macroeconomists.

  2. floyd says:

    “jobs saved or created” is dishonest.
    It is on par with claiming that a spending increase is a spending cut , by saying…
    “We woulda spent more, so it’s a cut”.
    This too is dishonest… and common.
    C’MON NOW

  3. Drew says:

    LOL These claims of “jobs saved” are convenient false precision on steroids. We all understand the politics. Let’s hope no one on this blog actually believes a word of it.

    The Obama administration made claims of what their program would do……..and it failed miserably. Their excuse? We didn’t know how bad it was. It is not often that such cluelessness is so easily proffered.

    But, we are to believe their judgments now. Right.

    As for Krugman, his blatant partisanship is, once again, duly noted.

    But is anyone surprised?

  4. #270
    Life’s highways are bi-directional:
    The road you travel out on today may be the same road you travel back on. So if you litter along the way with negative statements and disrespect for America your return trip will not be a pleasant one.

  5. Spoker says:

    Looks like the voters of VA & NJ were not buying this mickey mouse droppings either.

  6. anjin-san says:

    I guess the right has to complain about something to help them deal with there fury as the economy recovers from the Bush Bust…

  7. sam says:

    The Obama administration made claims of what their program would do……..and it failed miserably. Their excuse? We didn’t know how bad it was. It is not often that such cluelessness is so easily proffered.

    I can’t read Drew’s comments anymore without immediately thinking of this.

  8. G.A.Phillips says:

    I guess the right has to complain about something to help them deal with there fury as the economy recovers from the Bush Bust…

    lol. Dude their have been millions of people on unemployment for going on 2 years, it’s been like 10% for most of this neocom first term, 50% for young people, and who can tell how many people can’t file any more or have stooped looking or have never looked, what’s it really like 25%, 30%???? And the only reason wall street is showing any signs is because they were bailed out, and their always gowning to find a way to get suckers to invest and lose their money to them, and because your Master is melting the presses because he is printing money so fast!

    Can you say 3rd world poop hole?

  9. odograph says:

    So Drew, if you are going to say that Obama’s macroeconomists were political, can you name any who were not and were accurate?

    The problem with your one-sided attack is that the other side is just as biased and just as inaccurate. It is actually part of the continued failure of macroeconomics that everyone again splits along ideological lines, picks numbers suiting their side, wash-rinse-repeat.

    There is not actually a non-political dataset or analysis to go to.

    Shorter: “down with Krugman, up with Mankiw” is not a demonstration if impartial economics in action.

  10. anjin-san says:

    Can you say 3rd world poop hole?

    Yes I can. Bush/Cheney ’00.

    But, hey. We built some groovy infrastructure in Iraq, and Halliburton made billions. Life is good.

  11. anjin-san says:

    Can you say 3rd world poop hole?

    Yes I can. Bush/Cheney ’00.

    But, hey. We built some groovy infrastructure in Iraq, and Halliburton made billions. Life is good.

  12. odograph says:

    See also this good rant by Barry Ritholtz at The Big Picture:

    The Hubris of Economics

  13. Steve Verdon says:

    Ritholtz is being a twit.

    Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.

    […]Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

    No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.

    No, people are not rational profit maximizing actors. No economist assumes this. They do often assume that people are rational utility maximizing (subject to various constraints) actors. But what exactly does that mean and where does the assumptions have problems.

    One place is with probabilities. People are often bad at evaluating probabilities. Many people often make the following error:

    Prob(A|B) = Prob(B|A) (this is only true if Prob(A) = Prob(B)).

    So much of economics built around expected utility maximization is on shakey ground.

    But does this mean people are irrational? Exactly what does that mean? So long as one’s behavior is following some sort of logic it is actually rational. Maybe it isn’t smart, maybe it could be self-destructive, but that doesn’t mean the behavior isn’t based on some sort of logic (that may very well be peculiar to a given individual).

    And the “hard” sciences make assumptions. Look at biology. Are organisms driven to spread their DNA? Are they driven to preserve their own existence? What? Somewhere, somehow scientists start with assumptions. Physics has its assumptions too. That there are a few, understandable laws that govern the universe. Physics relies on mathematics which is based on axioms…much like economics. In fact, the axioms in economics are a type of mathematical logic.

    And Ritzholt is also likely out of touch with more recent research. There have been challenges to the old assumption of Homo economicus. If you search the site you’ll find an old post of mine on a new “assumption” of Homo reciprocans and if you look at the work of Herb Gintis you’ll see how biology is having an impact on economics.

    Further Ritzholt confuses an implication of theory with assumption, namely,

    No, markets are not perfectly, or even nearly, efficient.

    That is an implication of the theory given a set of assumptions that economists have relaxed, it is not an assumption.

    Is this due to dishonesty or ignorance or both?

    And the “real” sciences move at glacial pace. Go read up on Lynn Margulis and her struggle to bring in a novel idea (endosymbiosis) to biology. She started on her new idea in 1963 and it took quite sometime to get it accepted. However, Margulis was not the first to put forward these ideas, they go back to researchers who suggested such ideas back in 1905!

    Science is not about revolution, but about evolution, and evolution can often be linked to a key event. Maybe this crisis will induce new thinking about economics and markets and take research in directions absent the crisis wouldn’t have been explored, but to say that economics is the polar opposite of science is freaking stupid.

    Ritzholt’s picture really isn’t that big.

  14. sam says:

    So long as one’s behavior is following some sort of logic it is actually rational. Maybe it isn’t smart, maybe it could be self-destructive, but that doesn’t mean the behavior isn’t based on some sort of logic (that may very well be peculiar to a given individual).

    There might be problems with this model if one doesn’t observe the distinction between “following a rule” and “acting in accordance with a rule”. That is to say, it doesn’t follow from the fact that we can describe someone’s behavior as action in accordance with some rule, that the person actually has that rule in mind as a predicate of the action. Someone can be acting in a way that we would describe as rational, but his thought processes, if indeed he has any at all with regard to the action, may be confused to the point of psychosis.

  15. odograph says:

    Kid A buys a VW Golf, Kid B goes down to buy a Golf but comes away with a crazy GTI VR6 for almost 40 grand (I heard of this happening a couple years ago).

    Did they both optimize utility, or did one poor kid only think he did?

    I think “utility” is a punt, and that our motivations are actually so weird and human that they’ll thwart any effort to extract “economic man” from “human nature.”

    (Sometimes utility is used in very dangerous ways. Why did the man keep going to the payday loan joint? Utility? Bad answer.)

  16. Steve Verdon says:

    Kid A buys a VW Golf, Kid B goes down to buy a Golf but comes away with a crazy GTI VR6 for almost 40 grand (I heard of this happening a couple years ago).

    Did they both optimize utility, or did one poor kid only think he did?

    Must be great being a mind reader. And did both have the same budget? Do they both have the same “utility functions”–i.e. preference ordering.

    Lets change it up a bit. I go out and buy a Mini Cooper. I like the Mini, have for sometime. I test drove it and found it was as fun as I thought it would be. Another person goes out and buys a BMW. He spends 2x what I spend. Who is the idiot? He actually uses his car for some aspects of his business. Does that change the calculus?

    Your above anecdote Odograph has one person seemingly irrational too you. And you call me arrogant (by implication).

    I think “utility” is a punt, and that our motivations are actually so weird and human that they’ll thwart any effort to extract “economic man” from “human nature.”

    You had better never ever use the concepts of supply and demand ever again or I will summarily delete said comment.

  17. Steve Verdon says:

    Someone can be acting in a way that we would describe as rational, but his thought processes, if indeed he has any at all with regard to the action, may be confused to the point of psychosis.

    Sure, but I think it is asking a bit much to have a theory that can handle suce outliers. All theories are simplifications, even in the “real” sciences like physics and biology (don’t tell Ritzholt he’d likely become depressed).

  18. sam says:

    Well, what I was driving at is, absent some philosophically crisp account of what it means to say of someone that he is acting rationally, so-called rational action theory, as wielded in economics, seems pretty murky to me. See, Action, in the Stanford Encyclopedia of Philosophy.

  19. odograph says:

    Must be gear to be a mind reader Steve, you missed that the kid was on his firt job, no savings, high college loans, and that he went for a lease.

    What YOU illustrate is the “everybody’s rational” and “everybody understands both their utility and their opportunity costs” Econ presumption.

    Was it Larry Summers who wrote a paper “There are idiots”? That’s the worst case, but short of that … Oh, another from the Econ lexicon, we are (at best) satisficers.

  20. G.A.Phillips says:

    Yes I can. Bush/Cheney ’00.

    But, hey. We built some groovy infrastructure in Iraq, and Halliburton made billions. Life is good.

    Yes I can. Bush/Cheney ’00.

    But, hey. We built some groovy infrastructure in Iraq, and Halliburton made billions. Life is good.

    lol, what, do you think your some kind of Jedi?
    mind tricks don’t work on me, only low taxes….

    And jobs…

  21. odograph says:

    ^ i let my iphone mangle some of the words in that last post, but i suppose if you consider alternate words for “gear” and “firt” it makes sense.

  22. Steve Verdon says:

    Must be gear to be a mind reader Steve, you missed that the kid was on his firt job, no savings, high college loans, and that he went for a lease.

    Of course I missed it you dingbat, you didn’t tell us that.

    What YOU illustrate is the “everybody’s rational” and “everybody understands both their utility and their opportunity costs” Econ presumption.

    Was it Larry Summers who wrote a paper “There are idiots”? That’s the worst case, but short of that … Oh, another from the Econ lexicon, we are (at best) satisficers.

    Satisficing is really nothing more than utility maximization with additional constraints.

  23. odograph says:

    Must be [great] to be a mind reader Steve, you missed that the kid was on his firt job, no savings, high college loans, and that he went for a lease.

    Of course I missed it you dingbat, you didn’t tell us that.

    The presumption was just amusing, especially after you had gone after me with “must be great…”

    Satisficing is really nothing more than utility maximization with additional constraints.

    Ah but Steve, you said above:

    No, people are not rational profit maximizing actors. No economist assumes this. They do often assume that people are rational utility maximizing (subject to various constraints) actors. But what exactly does that mean and where does the assumptions have problems.

    When the constraints become high the assumption becomes less valid, no?

  24. odograph says:

    Maybe I’m just agreeing with, but putting more weight on your statement:

    So much of economics built around expected utility maximization is on shakey ground.

  25. odograph says:

    A long quote from a book review:

    But in “You Are What You Choose,” Hamilton and de Marchi discuss the six core traits that shape our decisions. The six TRAITS attributes are:

    Time: Do you have a shorter term view or a longer-term view of life? Scoring high on the “Time” trait means that you forgo short-term gain for long-term value.

    Risk: A lower score on the risk attribute means that you are more risk averse, while a higher score means that you can tolerate more risk.

    Altruism: To what degree are your decisions driven by your focus on the welfare of others? A low score means that you may simply have a lack of action or low interest in charitable activities and a high score means that you are “other centered.”

    Information: If you are an information junkie, then you probably score high on this trait. A lower score means that you do not seek out as much information to drive your decision-making.

    MeToo: A high score on this attribute puts you in a sort of “status-seeker” category. Think in terms of “keeping up with the Joneses.” A low score means that you are more individualistic about your choices and not so influenced by what others are doing or not doing.

    Stickiness: This attribute measures what role loyalty plays in how you decide. A high score in this area points to being loyal to a brand or value while a low score means that you can switch easily to an alternative. Think about being in a restaurant and having the waitress as “Is Pepsi OK?” If you score high on Stickiness and love Coke, you might answer “NO! Get me a Coke!”

    It doesn’t sound one-size-fits-all enough to support normalizing consumers to utility maximizers or even satisficers.

  26. Steve Verdon says:

    When the constraints become high the assumption becomes less valid, no?

    No. The notion of “satisficing” or bounded rationality is really nothing more than applying economics to the aquisition of information. That is, you aren’t going to know everything, you gather information up to a point. Rational ignorance if you will. Or to put it another way, information is another constraint. This is why economists have done lots of research on learning, imperfect information, and so forth.

    It doesn’t sound one-size-fits-all enough to support normalizing consumers to utility maximizers or even satisficers.

    Wrong.

    Time: Do you have a shorter term view or a longer-term view of life? Scoring high on the “Time” trait means that you forgo short-term gain for long-term value.

    One way to incorporate this into dynamic economic models is the individuals rate of time preference. Could be some interesting research, what happens in an economy where people have different rates of time preference? Does that have any kind of implications for efficiency?

    Risk: A lower score on the risk attribute means that you are more risk averse, while a higher score means that you can tolerate more risk.

    Nowhere in economics does it say people have to all have the same degree of risk aversion. Some might even be risk loving.

    Altruism: To what degree are your decisions driven by your focus on the welfare of others? A low score means that you may simply have a lack of action or low interest in charitable activities and a high score means that you are “other centered.”

    This does not make people irrational. You might think it does, but it doesn’t. In fact, IIRC, Herb Gintis had something on this in his book, Game Theory Evolving.

    Information: If you are an information junkie, then you probably score high on this trait. A lower score means that you do not seek out as much information to drive your decision-making.

    See my comments above.

    MeToo: A high score on this attribute puts you in a sort of “status-seeker” category. Think in terms of “keeping up with the Joneses.” A low score means that you are more individualistic about your choices and not so influenced by what others are doing or not doing.

    First, does nothing to the claim of rationality. Second, it would require a change in the consumer’s utility function to capture this effect. Again, not a horrible idea for possible research.

    Stickiness: This attribute measures what role loyalty plays in how you decide. A high score in this area points to being loyal to a brand or value while a low score means that you can switch easily to an alternative. Think about being in a restaurant and having the waitress as “Is Pepsi OK?” If you score high on Stickiness and love Coke, you might answer “NO! Get me a Coke!”

    Not sure, but again, not irrational. I like coke, dislike very much pepsi. So is it loyalty or merely preferences? Do my preferences put a really low value on pepsi, or am I crazy loyal to coke?

  27. Steve Verdon says:

    BTW, if people are truly irrational–i.e. decisions follow absolutely no internal logic, then you can’t say anything. You can’t say anything about stocks, bonds, prices, etc. Nada, zip, zilch, nothing…ever. Ritzholt’s entire blog is then bullshit…even irrational. So you shouldn’t read it, and nothing he writes is valid save by accident.

  28. odograph says:

    Here’s what I wrote on my blog:

    “I was just having a blog discussion (comment war) off in the aether, about the successes and failures of economics. The bottom line for me is that while we have an economic nature, it isn’t all of our human nature. What economics offers, in the best of times, is a perspective. If we choose to look at some decision economically, it gives us the tools. That’s a really good thing, but we can’t (or shouldn’t) reverse the perspective and try to look at all of human nature as economic.”

    That’s early-morning text, not that ideal … but I think what runs through your reply is that folly of reversal.

    You want to view human nature as economic, rather than as having an economic component.

    I think it’s a folly rife in the discipline.

    (After extensive reading on the neurobiology of human nature, I wouldn’t trade “irrational” too glibly. As an insult in only means “too emotional” .. implicitly acknowledging that everything seemingly “rational” is really just calibrated at the right level of emotionality. See Demasio’s description of patients who after brain trauma score perfectly on every test of rationality … but then drive their lives into a ditch because they’ve lost emotion.)

    Finally “wrong” as an argument is pretty weak. To show that you can model human nature on average, you’ve got to show that it is a narrow bell curve. That’s obviously not true. Engineers don’t act like artists and neither of those act like salesmen.

  29. odograph says:

    (I think you hew to an old convention, Steve. We have better science of brain and mind these days.)

  30. odograph says:

    Does your view even incorporate what we now know of proto-economics in monkeys and apes?

  31. Steve Verdon says:

    Nice strawman odograph. I haven’t argued for Homo economicus as being literally true. I have argued that people are (largely) not irrational and that economics is more than the silly characterizations by you and Ritzholt.

  32. odograph says:

    I think by sticking by old-line “rational or irrational” you illustrate my point.