Posted Wednesday, April 6, 2011, at 10:08 AM
One of the big eyebrow-raisers in the Path to Prosperity was the appendix citing research from the Heritage Foundation's Center for Data Analysis. Ryan had asked the center, an arm of the conservative think tank, to crunch the numbers and compare the outlook if tax policy and entitlement spending did not change to the outlook if Ryan's budget passed. And the analysis found that unemployment would plummet to historic lows quickly, falling to 2.8 percent within a decade of Ryan's budget passing, falling to pre-recession levels by mid-decade even if Ryan's budget didn't pass.
I talked to Bill Beach, the director of Heritage's CDA, about the surprisingly low unemployment number.
"It's a model based result," said Beach. "We used the Global Insight Model."
Beach was referring to the
equation the CDA
uses to project economic growth over 10 years; according to Heritage, the model "guarantees that short-run cyclical developments converge to robust long-run equilibrium." It's the model Heritage uses all the time, but this time it produced an eye-popping unemployment number.
"Some of these results are pretty dramatic," Beach said. "The unemployment rate is difficult* to interpret. First off, this model has an automatic function of the fed raising interest rates. If we get inflation, the Consumer Price Index goes up, and they're raising interest rates to cool off a heated economy. When the CPI does not go up, that reaction's not triggered."
All of that is to say that the model might be off on job numbers.
"Am I comfortable with a 2.8 unemployment rate?" asked Beach. "It's pretty low. The model's predicting a low unemployment rate -- that's how to take it. The thing is that the model stops in 2022. If it had continued into 2022-2031, then the unemployment rate would start to rise again. The productivity gains are ephemeral, and they dissipate unless you have the policy changes seen in the model." What he means is that even if the unemployment number looks too rosy, Heritage CDA finds that it's good for job numbers on the longer horizon.
Beach was more than aware of how strange the mega-low unemployment number looked. Had the number-crunch started with a higher baseline, he said, the number might have only dipped to 4.2 percent at the lowest, "and then it wouldn't have jumped out."
*I originally wrote the wrong word here -- I blame myself and the auto-correct on the processor I was taking notes with.