Jon Hilsenrath Is Scratching His (And The NY Fed's) Head Over The Job Number Discrepancy And Okun's Law

Tyler Durden's picture

A month ago Zero Hedge, based on some Goldman observations, asked a simple question: is Okun's law now terminally broken? Today, with about a one month delay, the mouthpiece of the New York Fed (which in itself is nothing but a Goldman den of central planners, and Bill Dudley and Jan Hatzius are drinking buddies), Jon Hilsenrath shows that this is just the issue bothering his FRBNY overseers. In an article in the WSJ he ruminates: "Something about the U.S. economy isn't adding up. At 8.3%, the unemployment rate has fallen 0.7 percentage point from a year earlier and is down 1.7 percentage points from a peak of 10% in October 2009. Many other measures of the job market are improving. Companies have expanded payrolls by more than 200,000 a month for the past three months, according to Labor Department data. And the number of people filing claims for government unemployment benefits has fallen. Yet the economy is barely growing. Many economists in the past few weeks have again reduced their estimates of growth. The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012. The economy expanded just 1.7% last year. And since the final months of 2009, when unemployment peaked, the economy has expanded at a pretty paltry 2.5% annual rate." Hilsenrath's rhetorical straw man: "How can an economy that is growing so slowly produce such big declines in unemployment?" The answer is simple Jon, and is another one we provided a month ago - basically the US is now effectively "printing" jobs by releasing more and more seasonally adjusted payrolls into the open, which however pay progressively less and less (see A "Quality Assessment" Of US Jobs Reveals The Ugliest Picture Yet). After all, what the media always forgets is that there is a quantity and quality component to jobs. The only one that matters in an election year, however, is the former.  As for whether Okun's law is broken, we suggest that the New York Fed looks in the mirror on that one.

As for the rest, here is a guest post from early February that went over all the "outstanding" issues on Okun.

Submitted by Jeff Snider, President & CIO, Atlantic Capital Management

It's Far Deeper Than Broken Okun

ZeroHedge’s post on the apparent breakdown of Okun’s “Law” ( highlights the ongoing tragicomedy of how the science of central economic planning eventually confounds, and then consumes itself.  Economics is, after all, a social “science”, an elaborate study of human beings and, most importantly, human interactions.  Robert Okun, for his part, merely observed in 1962 that when “output” (whatever statistical measure is en vogue) rises by 3%, the unemployment rate seems to fall by 1%.  For some reason, economics assumes that if it is true in the past, it will be true forever, so it was written into the canon of orthodox economic practice.

Economics has inferred causation into that relationship, giving it a layer of permanence that may not be warranted.  Econometrics has always had this inherent flaw.  The science of modern economics makes assumptions based on certain data, and then extrapolates them as if these assumptions will always and everywhere be valid.  There is this non-trivial postulation that correlation equals causation.  In the case of Okun’s Law, it seems fully logical that there might be causation since it makes intuitive sense – more economic activity should probably lead to more jobs, and vice versa.  But to assume a two-variable approach to something that should be far more complex is more than just dangerous, it is unscientific. 

In fact, Okun’s Law has already been adjusted somewhat, most famously by Ben Bernanke and Andrew Abel in their 1991 book.  It was upgraded to a 2% change in output corresponding with a 1% inverse change in unemployment.  Apparently with the economic “success” of that period, Okun needed a re-calibration.

Any such academic exercise means a careful review and study of the time series of economic data.  Most of these academic papers focus on finding a new regression or other statistical relationship that better “fits” erstwhile independent variables into each other’s gravity.  As it was with Bernanke and Abel, Okun’s law in 2000, updated by the new data set of the Great “Moderation”, needed to harmonize with the new data series of the 1980’s.  Bernanke and Abel were not disagreeing with Okun, rather they were measuring some of the additional complexity that goes into the relationship between output and employment.

The academic sense of understanding the economy requires ceteris paribus.  In order to make econometric models manageable and statistically meaningful, complexity has to be trimmed and managed.  It is far easier to incorporate simple relationships that appear to work over specific periods of time than to try to estimate the massive and dynamic complexity that the real world exhibits.  The grand mistake of economics is this sense of permanent simplicity.

In terms of broken Okun, simplicity has meant that it only measures the quantity of jobs.  Okun’s practitioners assume, ceteris paribus, that a new job is a near-perfect substitute for an existing job (or a lost job from the current dislocation).  In the case of job growth since the recession trough in 2010, though, “new normal” jobs are not perfect substitutes for lost bubble/artificial jobs.  Newly created employment just does not produce the same wage income as the previous bubble paradigm (a lot of this disparity can be seen by the greater proportion of part-time jobs, far more than economic models predict).

This complexity and nuance extends even beyond wage income.  A job in the preceding artificial period also meant easy access to cheap credit money.  So job growth during the twenty plus years previous to 2007 meant both wages and available credit money (NINJA were not marginally significant until the very late bubble period).  New jobs in 2010, 2011, or 2012 (and likely beyond) not only produce less wage income, there is no additional boost through credit, and therefore less marginal economic activity per new job unit.  So numerically, the number of jobs, unqualified by any additional measurements, has grown without living up to the expected output growth (of course there are other factors as well, especially the negative effects of ZIRP on savers and the corporate preference for financial innovation over productive innovation, as well as the negative effects of commodity prices acting out central bank inflation expectations, but those would mean that money itself has changed in terms of how it relates to the economy – the academic sense of velocity – which should lead to all sorts of soul searching among monetary policy planners).  On an apples-to-apples basis, new employment simply does not and cannot match the artificial boost of the preceding period, so a simple number quantification is less than useful.  

Instead of questioning these simplified relationships and laws, mainstream economics attempts to explain all of this through a hugely negative output gap (in other words, the theories are correct, the results are flawed).  Believing that past relationships still hold on largely untransformed terms, they believe that the economy should be growing much faster than it has.  To make up that massive gap, the Fed embarks upon its real dual mission of making sure no large credit creators ever fail (money elasticity) while pushing investors into “risk” (and out of the supposed paradox of thrift) by making safety or saving expensive.  The Fed keeps banging its head against the wall, trying greater and more costly interventions all in the vain attempt to close the theoretical output gap that does not really exist (results over theory).  If economics would see that the previous paradigm of leveraged wage income is what is permanently broken (along with economic circulation through asset inflation, commonly known as the wealth effect), it might be able to conclude that the Great Moderation was really nothing more than artificial growth that won’t be returning.  Then punishing the economy through intervention might be seen as counterproductive as it has really been.

If that artificial paradigm is now past tense, then so many of the “laws” upon which the social science of economics rests should also be rethought.  This is particularly true since mainstream economics (especially econometrics) “grew up” during the Great Inflation and Great “Moderation” – the very periods of over-active central banking and credit production.  Just because a relationship held during that specific time period does not mean it should then be extrapolated through all time.  Economics is not physics, what seems to hold today may not hold tomorrow (this should be very apparent when a theory or set of beliefs fails to exhibit predictive ability).  The real economic world is one marked by dynamic processes that are not well understood by academic theories wedded to their elegant, but ultimately static, mathematical constructions.  Structured finance and securitizations, as an example, worked extremely well under static assumptions (such as real estate prices only move in one direction), but once the dynamic world moved beyond statistically assumed financial tolerances it was a total disaster.  The paradigm shifted but the theories and causal assumptions did not until after it was all over – again, not a very scientific result.

Economics should be undergoing a more rigorous examination of its philosophical bonafides, especially since it has shown very little predictive capacity (hard science needs to be both predictive and replicable, a standard economics has not, nor will ever, meet).  The foundations of mainstream economic thought should be shuddering at the prospect of being so wrong so often.  Every assumption and relationship should be re-evaluated as to whether it was really true in the universal, timeless sense, or whether it was simply captured by a specific pattern in a defined and limited data series (such as the over-worn trope that low interest rates are always stimulative).

For impartial observers, there was a rather clear demarcation between the “new normal” of this recovery and the artificial bubble period, turbo-charged by trillions in securitized debt, that preceded it.  Okun’s law is not broken, it was simply never a law or rule of thumb to begin with.  Bernanke and Abel were probably correct that a 2% output change led to a 1% inverse change in unemployment at the time they wrote their book.  The hubristic mistake of modern economics is believing Okun, and every other economic law, to be a universal property of all economic systems at all times.  The world is more complex than that, and capable of changing in ways that cannot be oversimplified.  Sometimes correlations are coincident to larger interactions and patterns, and not causation at all.

Real estate prices do, in fact, go down as well as up.  Low interest rates do not always stimulate economic activity.  Most importantly, economic potential is not simply a measure of economic output from 2003-2007.  Every economic and monetary intervention (all that ails this current economic age) flows from this mistake of oversimplification and pattern bias.  There would be no need to punish savers.  There would be no special place afforded to the oversized behemoths of credit production and finance.  Hell, there would be no place for the overgrown financial economy to begin with if economists would admit that the world does not easily fit within the Garbage In Garbage Out confines of mathematically modeled oversimplifications. 

The biggest simplifying mistake in economic history was believing that a centrally planned, debt-based economy was a near-perfect substitute for a real capitalist economy, working bottom-up through unfettered price discovery, that values real production.  That such soft central planning apparently worked during the Great Moderation is nothing more than pattern bias, a flawed theory captured by a unique data set of oversimplified variable relationships.  The fact that it is all breaking down now is solid evidence of that paradigm shift, an invalidation of previous assumed causal relationships, not some ephemeral headwinds. 

Economics is really nothing more than opinionated interpretations and analysis.  But this kind of subjectivity does not jibe with central planning.  Economic control is much easier to accomplish if it is conducted under the veneer of objectivity and science, especially when your marginal goal is historic impoverishment through debt.  Although, that might be too harsh for most economists since they simply believed their own theories, including the idea that the marginal pace setter of artificial economic activity, asset price inflation, only moves in one direction.  Their scientific observations of the Great “Moderation” told them so, and so they remained captured by their own work.  The fact that an entire asset class had collapsed during all that moderation should have been a huge and unmistakable warning to economists to truly observe and learn the dangers of extrapolation and the short-comings of trying to create a science out of pattern bias and oversimplification before deliberately charting a course for historic impoverishment.  But even that oversimplifies what might really be the problem here – that modern economics is not only not a science, it is an ideology.

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GetZeeGold's picture



Let me help you was BS.


Just slap some numbers together and publish.....just make sure this number is lower and it's all good.


King_of_simpletons's picture

In the land of fakery, superficiality and magic numbers nothing will make sense. Once can go bald scratching the head. It's best to sit back and enjoy the train wreck in real time.

battle axe's picture

I would say it looks like a comedy of errors, but it is just a tragedy with out end. 

resurger's picture

it will come to an end battle, be patient we are enjoying this sleazy farce..

Poor Charles Biderman, lol!

Badabing's picture

It’s the new day and age of fake numbers and I am complying with my avatar.

Have they fudged the income tax numbers yet?

1913 to 2011 nice drop off they must think we be dicks!


economics1996's picture

Taxes are not as important as actual government consumption of resources.  The top tax rate can be 90% like in the 50s but if the federal government consumes 16% of the GDP, 24% today, then the economy will perform much better.

economics1996's picture

Economics taught in high school, college, and grad school is nothing more than propaganda supporting the federal government and Federal Reserve.  Pure bull shit that needs to be thrown out.

Badabing's picture


Federal income tax collection reflects how many jobs are paying into the system.

The BLS only counts the unemployment benefits, if less people are out of work than the tax collected should go up. BUT NO it’s going down because the people “not” being counted as unemployed and are unemployed don’t pay an income tax.  

economics1996's picture

Translation, unless everything stays the same the economic models are not worth a crap. 

The big difference between the early 60s is that the federal, state, and local government consumption as a percent of the GDP was about 26%.  Today that number is 45%.

Government is a drain on the economy, wasted useless misallocation of resources.  Simply put in 1960 more money was going into the productive private sector creating productive, renewable jobs.

WonderDawg's picture

Exactly. In the econ classes I took in college, they used the term "ceterus peribus", meaning all things being equal. The problem is, the real world isn't static, so the models are pretty much useless with regard to predictive ability.

Woodyg's picture

Its not a tragedy - it's a drinking song:

Wasting way again in Obamaville
looking for that last good paying job
Some people say that there's a poor man to blame
But I know it's a central banksters fault.......

lincolnsteffens's picture

Please be more concise with your analysis. You tend to ramble on quite a bit.

Problem Is's picture

"Once can go bald scratching the head"

Do you think that is what happened to Cue-Bald Bennie The Bernank???

Jefferson's picture

In college, I puked a gallon of vomit for every quart of tequila I chugged. Does that mean I can be a Noble prize winning economist?

economics1996's picture

Yes as long as you believe in fairy tales.

Jefferson's picture

Sometimes I believe in as many as six impossible things before breakfast. Where's my prize money?

SheepDog-One's picture

GOLDEN SLACKS the crooks who ran the '08 market collapse for their own benefit now are scratching their heads wonderin 'Sumpin just dont add up here with economic numbers'?

Oh give me a break.

kito's picture

yeah, exactly what is the point of their pathetic charade?......

Antifaschistische's picture
, where
  • is past GDP
  • is actual output
  • is the natural rate of unemployment
  • is actual unemployment rate
  • is the factor relating changes in unemployment to changes in output

from Wikipedia.

Here's what I see, or don't see.

 is just a body count...while Y is is measured in USDollars.  Unless there's an adjustment for the value of the dollar then this formula will not work. 

Momauguin Joe's picture

What I'd like to know is who are the top 30 shareholders of the FRBNY.

WonderDawg's picture

The information is out there if you dig a little. Here's one place to start:


the not so mighty maximiza's picture

They are running into a problem.  No cook booking can overcome the reality people see.



SheepDog-One's picture

Thats how I see it, theyve cried wolf too many times no ones buyin it anymore. 

kridkrid's picture

I think you're overestimating people.  People are buying it, in general.  Even if their situation isn't improving, they assume that they are the exception in the face of "positive economic data".  Just my limited observation.

Flakmeister's picture

Law of Diminishing Marginal Returns is more like the reason....

espirit's picture

Really common sense prevails here.  The Govt "pays" for those numbers, and a provider knows which side of the bread has butter.

Hell, I wouldn't doubt the numbers get better until everyone is unemployed in Bizzarro World.

SheepDog-One's picture

Their problem now seems to be one of thinking they can fool all of the people all of the time. 

Bunch of egghead PHD's who think whatever they say will be believed always, no matter how ridiculous and against reality it is.

alexwest's picture

Robert Okun, for his part, merely observed in 1962 that when “output” (whatever statistical measure is en vogue) rises by 3%, the unemployment rate seems to fall by 1%. For some reason, economics assumes that if it is true in the past, it will be true forever, so it was written into the canon of orthodox economic practice.

I wonder do those idiots understand that THERE'S NO FUCKING RECOVERY IN USA..

for last 4 years USA fed gov spent 8-10% of GDP of additional money.. its not the growth.. it jsut printed money ,,

idiots who come w/ GDP formula somehow put 'GOV spending' in equitation. from GDP standpoint it doesnt matter where GOV gets money : taxes(aka real economy) or printed $$$.. well.. its s theory .. in real world it DOES MATTER..

last figure: during deep deep Great Depression BIDGET DEFICIT was never biger than 5% of GDP (excl WW2).. so you do understand why there's no real growth..?


mick_richfield's picture

Whom the gods would destroy, they first make to believe their own bullshit.

Dre4dwolf's picture

GDP grows because of Government spending.

Unemployment falls because they stop counting people who have either died from starvation or given up looking for a job.


GDP growing in its current fasion is of almost no benefit to the average america, this "growth" only helps corporations and share holders of the federal reserve.


GDP calculation needs to be adjusted to negate / remove government spending from the equation so that you can see a clear picture of the economy.


I suspect that if you re-calculated GDP to remove Govt spending (which lets face it ... is wasted money akin to building tanks and throwing them into the ocean).... and you adjusted Unemployment numbers to include the average of people who stopped looking or took a break from looking for a job .... Okuns Law would PROBABLY still hold....


You can't base a theory on fabricated data points, unemployment and GDP are purely fictictious non-sense numbers to go by at this time because they are too busy skewing the way they are computed in order to make the economy look good wihile it self destructs.


kridkrid's picture

Great post... though I would go even further.  It's not just that the theory is up against fabricated data points... but money itself, in our current monetary system, is a fabrication.  Even if you were to do what you suggest... remove gov't spending from GDP and more accurately measure unemployment (clearly two steps to better understand what it actually happening in the real economy... i.e. a better reflection of life) you are still making measurement based on "money" that isn't an asset, actually, but is itself debt.  Virtually all money is debt with interest attached to it which requires an ever expanding issuance of debt to merely roll debt forward.

Anything in modern economics is little more than mental masturbation as we wait for the debt burden to overwhelm the productive economy... then we get to crash.

LawsofPhysics's picture

Precisely.  The moral hazard in the system has been growing exponentially.  There were several opportunities back in the 70's when we could have insured that the rule of law and the gold standard were both enforced.  We didn't and since then the crimes and criminals have only become more empowered and more brazen.  Any currency will only have value if it is backed by something fucking real.  It does not have to be gold, but it sure as hell at minimum better be a system where fraud is fucking prosecuted and the rule of laws and contracts are upheld so the people have some confidence in knowing that the value of their labor will NOT BE STOLEN!!!

Okay, now I am yelling.

RockyRacoon's picture

Beware gold making the mainstream.   Some will see it as the indicator of the "top" -- sell, sell, sell!  Others will see it as "about time" -- buy, buy, buy!

Make your own decisions.

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Whatta's picture

well, lying is a whole lot cheaper than printing trillions of inceasingly worthless $US. maybe we can lie our way to a vibrant economy. Keynesian Truthism. those are not tears...I am merely allergic to intense idiocy.

Dre4dwolf's picture

Better to lie than print? probably.

Cheaper? not really... in the long run all these lies will catch up with us, and printing money costs nothing because its purely digital.


There is an actual limit to how much money they can print BTW, because say you printed 100 trillion dollars... in digital currency... you would hit a point where inflation kicks in really bad and there wont be enough paper currency around to complete simple/small transactions.

A carton of milk could cost 1000$ most small grocery stores dont take credit cards for the most part in a lot of places.... and making change is going to be annoying.... they wont go out and print 1000$ bills because people will be paying off all their old debts which are now completely devalued to a few dozen cartons of eggs (you might endup with people paying off their mortgages with a piece of gold jewelery), and we cant have that happen! now can we? because the bankers would lose ALL control over their debt slaves.




The enitre system is so close to collapse its not even funny , all because of the expoenential growth of Government Debt, Currency in circulation and energy cost.

I dont think this system can handle another doubling of the world population.... too unstable.


LawsofPhysics's picture

"all because of the expoenential growth of Government Debt, Currency in circulation and energy cost."

Hey idiot, guess where most of that "government debt" came from?  Ever hear of the "socialization of losses"?

The private debt of failed corporations has been passed on to the government.

Know the real value of your labor?  You fucking better.

GeneMarchbanks's picture

'Economics has inferred causation into that relationship, giving it a layer of permanence that may not be warranted.  Econometrics has always had this inherent flaw.  The science of modern economics makes assumptions based on certain data, and then extrapolates them as if these assumptions will always and everywhere be valid.'

'Economics is really nothing more than opinionated interpretations and analysis.  But this kind of subjectivity does not jibe with central planning.  Economic control is much easier to accomplish if it is conducted under the veneer of objectivity and science, especially when your marginal goal is historic impoverishment through debt.'

Procrustean economics has now entered the terminal phase. The machinery now serves some abstract virtual reality growth while the people teeter on the brink of irrelevance.

chunkylover42's picture

Also not occurring to Jon (at least according to his writings) is that government measurement of the data in question - GDP and unemployment rate - are pretty much bogus and almost without meaning.

BrotherBroGo1's picture

Maybe we rely too heavily on the USD as our standard of economic output?


kridkrid's picture

Bingo.  The meaningless of the dollar makes all economic data remarkably suspect, at best.  When the rug gets pulled out, the meme will be "nobody could have seen this coming"... but it's not so mysterious.

azzhatter's picture

US is becoming emblamatic of a third world country- high quantity, low quality jobs

HD's picture

Thank you. Come again!

azzhatter's picture

US is becoming emblamatic of a third world country- high quantity, low quality jobs

fuzed's picture

Decline in US household debt (overspending?)