## Dean Baker Completely Unaware How BLS Calculates Unemployment Rate

Holy crap, how did Dean Baker from the Center for Economic and Policy Research get a job writing about economics?

The unemployment rate fell to 9.7 percent in May, primarily as a result of 411,000 temporary Census jobs.

Mr. Baker is apparently unaware of how we calculate the un2employment rate. Let’s help him out here.

First we take the number of people who have jobs. This is not the “non-farm payrolls” number, which increased by 431,000. It is the “Employed, 16 years and over” number which decreased 35,000 (from 139.455 million to 139.420 million). Mr. Baker seems to have those two numbers confused, so I thought I’d clarify.

Then we take the number of people who are looking for jobs but can’t find them. This is where we get the “unemployed” number, which decreased from 15.260 million to 14.973 million.

Then we add the employed number to the unemployed number and you get the Labor Force number. In order to calculate the unemployment rate, we divide the number of people unemployed from the labor force.

139,420,000 + 14,973,000 = 154,393,000 people in the labor force

14,973,000 / 154,393,000 = 9.7% Unemployment rate

Let’s try to prove Mr. Baker’s statement that the unemployment rate dropped to 9.7% “primarily” due to the 411,000 census jobs. We’ll subtract 411,000 from the “employed” number.

139,009,000 + 14,973,000 = 153,982,000 people in the labor force

14,973,000 / 153,982,000 = 9.7% Unemployment rate

We get the exact same unemployment rate with or without the census jobs. That is because unemployment rate dropped due to people leaving the labor force. And most of the people who left the labor force came from the “unemployed” category. Otherwise known as “discouraged workers”.

This is part of the reason that economic understanding is so dismal among the general public. An economic reporter should be able to get the simple facts right about a job report.

## What Does the Federal Budget Freeze Look Like?

The first part of this post is just an overview of the data I used to make this video, so if you don’t care about that, you can skip over it to the part where I talk about what the budget freeze means.

First, I’ve got a new video up called “What Does The Federal Budget Freeze Look Like?”

Here is the data summary of this video:

I got the budget numbers (budget, discretionary, mandatory) from the overview of the 2010 budget which includes projections for 2011. I did this because the 2011 budget is not available yet (although I understand that those projections are a bit low and the real budget will be bigger than the projection).

That gives us the following numbers:

• 2011 Federal Budget – \$3.7 trillion
• Mandatory portion of federal budget – \$2.322 trillion
• Discretionary portion of federal budget – \$1,380 trillion

I’ve seen it consistently reported that the freeze will affect \$447 billion of the budget, although I imagine that number is subject to change. The amount saved from this freeze has been consistently reported as \$15 billion in the first year and \$250 billion over 10 years.

The stimulus funds as reported by recovery.gov at the time of this post are:

That leaves:

• \$195 billion in tax cuts that have not been applied
• \$202 billion in contracts, grants and loans that haven’t been spent
• \$121 billion in entitlements (what a creepy name) that haven’t been spent

If we left the tax cuts in place, but canceled the rest of the spending, we’d save \$323 billion… which is a shade less than what I said in the video. Apparently, that is the result of some rounding errors in my spreadsheet, but the \$4 billion comes out to about one and a half teaspoons, which isn’t enough to make a difference in the visualization.

As for the water part of it… If we assume that the budget is 192 ounces of water that we’ve split into 4 oz cups, then all the math in the video works out. I actually under-counted the unspent stimulus (it would be 17 ounces instead of 16). I measured my ice cube tray and found that each ice cube was 1.5 ounces and I used 1 and a half tablespoons of water to measure out the .75 ounces that would be equivalent to \$15 billion.

## <End of Boring Math Things>

OK… now to comment on what I think about the budget freeze to anyone who cares what I actually think.

First of all, I hate the “we’re saving \$250 billion over 10 years” line. It is a piece of crass political rhetoric and I’m disappointed that the administration would use it. If they actually implement a three year freeze on the portion of the budget they’re talking about (which is a big if, but let’s assume the best), why measure the effects in the space of 10 years?

The answer is “To make the freeze look bigger”. They’re basically just basing the extended savings off of projected interest payments and “savings” due to the fact that the baseline on that portion of the budget hasn’t moved. It is setting a dangerous data precedent where politicians realize that all they have to do is calculate a projection out as far as they need in order to get the numbers they want. It would be like giving an employee a \$5,000 bonus, but saying that you gave them a \$8,000 bonus based on a 5% return of that investment over the course of 10 years.  They might as well say that they’re saving a trillion dollars over the next 25 years or a hundred trillion over the next 300 years. It is a data statement designed to trick people.

Second, I hate the “We’re saving all this money by not spending it” line because it is similarly political. If a future politician wants to play this stupid numbers game, all they have to do is “project” that they will spend like a crazy person next year and when the next year comes, they decided to spend like a half crazy person. Then they can claim that they have “saved” all this money because they “reduced” their projected spending.

As a slapdash example, a politician could project that they will increase spending by 5% next year and then decide at the last moment to increase it by 3%. They could then spin that decision to increase by a smaller amount as a decision to “cut” their spending (which wasn’t real spending, only projected spending) by 2%.

Last, my attempt to visualize the scale of the budget freeze does not mean I don’t support it. I really like to see cuts to the budget and I personally think this is not an insignificant one.I think it is worth our energy to do exactly what the Obama administration seems to be doing…freezing increases and looking around for crappy programs to cut.

Keep in mind the hypocrisy on both sides of the aisle. The Republicans are hypocrites for claiming that this is a totally inconsequential budget cut. In 2005, George W. Bush proposed a 1% cut (not a freeze, a cut) in discretionary spending that wasn’t Department of Defense or Homeland Security. Translated to today, Bush’s cuts would have “saved” \$33 billion using the calculation metric for the current freeze; more than twice the amount that this freeze would save us. At the time, John McCain called it a “very austere budget” and Dick Cheney went out pushing their credentials as cost cutters. I find it strange that they were ecstatic about saving the equivalent of \$33 billion but think that \$15 billion is a drop in a bucket.

Of course the Democrats blasted Bush’s cuts as a gimmick too small to make a difference, but seem to have lost much of their skepticism over these new, smaller “cuts”.

Overall, it looks like both sides are more interested in political gain than in having a frank discussion about the numbers and what they mean. This should surprise no one, but I confess to finding myself somewhat dismayed that the Obama administration, for all their hype about being pro-science and pro-data, has no problem spinning the numbers in a way that decreases clear comprehension in order to increase message potency.

## The National Debt Road Trip – Debt-To-GDP

I’ve gotten a number of people asking some permutation of the following question:

“Why don’t you give the national debt as a percentage of the GDP as a whole? Isn’t that more meaningful/relevant?”

My answer the the latter question is “Yes and no.”

The answer is “Yes”… in the sense that if you made \$50,000 per year and you had \$80,000 in debt, you’re more screwed than if you make \$100,000 per year and you have \$80,000 in debt.

But the answer is “No” for the purposes of making a visualization for the following reasons.

First, I didn’t frame the debt in that way is because it fundamentally hides some really important things that shouldn’t be hidden. I’ll go ahead and give the game away… I’m in the business of communicating numbers clearly. And using the debt-to-GDP ration feels too much like trying to hide the real meaning of the numbers.

It feels like a car salesman who refuses to talk about the raw numbers of the car you’re buying because when he talks about monthly payments, it’s easier to screw you. Because, really, what’s the difference between \$287.87 per month and \$359.60? It’s not that much, is it? And if you’re already spending \$300, you might as well spend \$350, right?

In the same way, talking about the debt in a percentage manner is hiding the true cost. So we increase the debt-to-GDP by 2.2%… big deal, right?

But that 2.2% is the same amount as everyone in the state of Washington makes in a year. Every. Single. Person. Go look at a Google street view of Seattle and try to count how many people live in a high-rise apartment building. Take a stroll down some of the swankier neighborhoods. Look at the obscenely expensive houses that line the bay. Everything every one of those people makes in a year. The more thought you apply to the real meaning of the number, the more you see that, while 2.2% might be an accurate number to describe an increase, it doesn’t even begin to communicate the scope.

That’s the first reason I didn’t use debt-to-GDP… becuase it violates the core principle of what I’m trying to do: give a clear understanding of the scope of the issue. When people use it, it feels like they’re looking around for the best possible way to represent the problem so that it doesn’t feel as big as it is.

Make no mistake, the problem is huge. Huge in a way almost none of us understand because our brains don’t process that kind of huge very well.

There are other problems with framing the issue this way too. One is that comparing the federal debt to the GDP is something of a misnomer because the government doesn’t own the GDP. The GDP is “owned” in part by everyone in the country. And all those people and business have their own debt (mortgages, credit card debt, student loans, business loans).

Quick, off-the-cuff example using very rough numbers: Sam makes \$100,000 per year, but he spending \$150,000 per year. As if that weren’t bad enough, he is \$500,000 in debt already. But he tells himself it’s not a big deal because his kid is in college and that will only last a couple years and, besides, he has a business protecting houses and mowing yards for a living and if you combine everything his clients make in a year, it comes out to be almost  \$750,000 per year.

So if you look at how much he owes compared to how much his clients make, it’s only about 70%. And if his clients make \$1,000,000 next year, he could owe \$666,000 and there would be no change whatsoever in his “how-much-I-owe to how-much-my-clients-make” ratio. No problem!

Except that Sam’s clients are probably a little nervous about Sam comparing the truly absurd scope of his debt to the amount of money they make every year. Shouldn’t he be comparing his debt to the money he makes every year?

I could go on at length, and perhaps I’ll make a visualization about this, but right now I’ve got to work the day job.

## The National Debt Road Trip – Complaint 1

I had a commenter for the National Debt Road Trip call BS on some of my numbers, so I wanted to run some sample numbers to make sure that I’m being as transparent as possible.

Complaint: “Obama’s projected to add about 9 trillion. That isn’t three times as much as Bush’s nearly 5 trillion.”

First of all, let’s get the numbers right. In raw unadjusted dollars, Bush increased the debt from \$5.674 trillion to \$10.024 trillion. That is \$4.35 trillion, not five. And Obama has projected that he will increase it from \$10.024 trillion to \$20.004 trillion, which is \$9.979 trillion… far closer to \$10 trillion than to \$9 trillion.

(Because I’m using the numbers from the TreasuryDirect site, I’m calculating from two months before Bush was elected (September 2000) until two months before Obama was elected (September 2008) for Bush’s data. I know that these calculations are somewhat clumsy, but I don’t think it is fair to assign Bush the debt responsibility for the Stimulus bill, which was entirely Obama’s baby.)

But still, \$10 trillion is not three times \$4.35 trillion. But that’s where inflation adjustment comes in. According to this inflation calculator, \$5.674 trillion in 2000 dollars is the same as \$7.035 trillion in 2008 dollars. This makes the inflation adjusted difference between the 2000 debt and the 2008 debt \$2.94 trillion. It’s not pocket change, but it is certainly a downward revision.

I gave Obama a break by assuming that his team didn’t adjust for future inflation, so I made adjustements to his numbers, which meant cutting about \$1.6 trillion off the debt leaving us with \$18.4 trillion. This means he plans on increasing the debt by about \$8.2 trillion (rounding down).

8.2 / 2.94 = 2.79 (the coefficient determining the speed calculation)

64 mph * 2.79 = 178.37 mph

Which is actually a shade faster than I said Obama was going.

I know most liberals aren’t going to believe this, but I really am trying to give the president the benefit of the doubt. In this video alone, I underestimated the inflation adjusted debt and I rounded everything down for him. If he doesn’t look good, it’s not my fault.

I know these kinds of posts are exceedingly boring for most people… even if I find them interesting. I’m doing them in the interest of transparency… so if someone says that my math is full of s***, they can look at this and do all the math themselves.