The quip “There are three kinds of lies:  lies, damn lies, and statistics” is variously attributed to Benjamin Disraeli or Mark Twain.   What should the public make of government statistics, such as the monthly employment report released today, Thursday, July 2, by the U.S. Bureau of Labor Statistics (BLS)?  

There is no lying in US government statistics.   But there are always commentators who will use the numbers to make whatever point they want.     One should learn enough to be able to interpret the numbers for oneself.     That is the only way to prevent being misled.

Of the many numbers contained in the BLS reports, I view three as especially important.    

The most salient figure politically is the unemployment rate, which hit 9.5% in June, according to Thursday’s report.    This was the highest level since August 1983 and clearly reflects the current extent of distress in American labor markets.

Critics of the official statistics like to point out that the unemployment rate does not capture discouraged workers who have dropped out of the labor force because they couldn’t find a job.  True.  But the government isn’t trying to make the unemployment number look smaller.   Rather, it is just too difficult to decide who is a “discouraged worker,” as opposed to simply being out of the labor force.   So the BLS always defines only those who have looked for a job recently as being in the measured labor force.   This still allows us to compare changes in unemployment over time, which is the purpose of the unemployment rate.   The agency does compute a measure that attempts to include discouraged workers and part-time workers — the U-6 series — but I don’t think it is right to call this the “real unemployment rate.”   

The second important number in the labor market reports is employment, that is, the number of workers who have jobs, which was down another 467,000 in June.    This is the statistic to which the financial markets and macroeconomic forecasters pay the most attention on a monthly basis.  (In that sense, the question of discouraged workers is a red herring.)     Employment peaked in December 2007, the start of the recession.    Since then, we have lost 6 million jobs altogether.   The current recession is now both the longest-lasting and the deepest since the 1930s.    But at least the period of the steepest rate of job loss –  November 2008 to March 2009 – appears to be behind us.  

Two details about the jobs number.    First, the statisticians get the “employment” number through one method, by surveying establishments (employers), while the unemployment rate uses a measure of employment derived through a different method, by surveying households.   The employment number is generally considered more reliable because it is based on a wider survey — another reason to prefer it.  

The second point is that, for purposes of comparison across different business cycles, we still need to divide employment by something.     If not the labor force, then what?   We must, at a minimum, allow for population growth.    So it is useful to divide employment by total population.  This way we don’t have to attempt distinctions about which Americans might be prepared to take a job under the right circumstances.  The fraction of the population (civilian non-institutional) with jobs peaked at the end of the Clinton Administration, exceeding 64% in January 2001.   It has now declined below 55%.

Although the financial markets pay most attention to the number of workers with jobs, employment is not much good for forecasting the overall economy, because it tends to be a lagging indicator.   Even when firms see economic activity starting to pick up, they delay hiring, because it is costly to find, hire, and train new workers – not to mention to fire them again if the recovery turns out abortive.   

For this reason, the third indicator is my personal favorite for gauging the business cycle in real time:  the rate of change of total hours worked in the economy.  Total hours worked is equal to the total number of workers employed, multiplied by the length of the workweek for the average worker.   The length of the workweek can be expected to respond at turning points faster than does the number of jobs.  When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off.    The phenomenon is called “labor hoarding.”  Conversely, when demand begins to rise, firms tend to increase the workweek, before they hire new workers.   (To take two historical examples, the “change in total hours worked” improved in both April 1991 and November 2001, which on other grounds were eventually declared to mark the ends of their respective recessions.)   

The workweek reached a historically short level in June: 33.0 hours.  Not a good sign.    As one consequence, total hours worked fell 0.8% that month, continuing the same rapid deterioration we have seen since last September, the month when Lehman Brothers failed and the recession worsened sharply.  

The bottom line for the economy:   despite signs in other areas that the recession is leveling out – most importantly, production and sales — the labor market indicators in themselves are not yet signaling a turning point.   Thus the June numbers confirm the evaluation I made a month ago, based on hours worked in May, that the apparent good news in the widely reported May employment number was probably an insignificant blip.   The bottom line for newspaper readers:   master your statistics, so that they can’t master you.

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The effects of a changing global climate show up gradually, decade by decade.   The effects of a changing US political climate have also been showing up gradually, year by year.   A watershed was reached June 25, when the US Congress for the first time approved a bill to limit emissions of Greenhouse Gases (GHGs), by a vote of 219 to 212.    But the Senate hurdle will be tougher.  The attempt to address Climate Change still has a very long way to go. 

The problem

Climate Change is of course a global externality.   Due to the free-rider problem, no single country, especially the United States, is likely to act on its own.   The best solution is a multilateral treaty in which all countries commit to serious action together.   In December of this year, a Conference of Parties to the UN Framework Convention on Climate Change will meet in Copenhagen, in the hope of negotiating a successor treaty to the Kyoto Protocol.

Three critical attributes were missing from the Kyoto Protocol.  These attributes need to be included in any realistic attempt to tackle the reduction of year-2100 GHG concentrations to levels considered less dangerous by scientists:     

i)   Comprehensive participation – that is, acceptance of quantitative limits on emissions – by all major countries, including the US and developing countries.

ii)   A credible framework that can establish a path for emissions reductions extending throughout the century, not just five years ahead.

iii)   Some reason to think that all countries will be willing to join and then comply.  This precludes targets that impose enormous economic costs on any major countries in any decades relative to the alternative of dropping out of the treaty.

For ten years — since I worked on Kyoto in the Clinton Administration — I have been thinking about how to design such a framework for assigning quantitative limits across countries.  I now have a complete proposal to offer.   It builds on the foundations of Kyoto, in that it accepts the framework of national targets for emissions and internationally tradable permits.  But it attempts to solve the most serious deficiencies of that agreement: incomplete country participation, the need for long-term targets, and the economic incentive for countries to fail to abide by their commitments.

Although there are many ideas to succeed the Kyoto Protocol, the existing proposals are typically based on just one or two out of the following three philosophical approaches:

·        science (e.g., capping global concentrations at 450 ppm) or 

·        equity (e.g., equal emissions per capita across countries) or

·        economics (weighing the economic costs of aggressive short-term cuts against the long-term environmental benefits).   

My emissions reductions plan is a bid to offer a more practical alternative:  in addition to those three considerations, it is based heavily on politics.

More specifically, any future climate agreement must in practice comply with six important political constraints.

1)     The US will not commit to quantitative targets if China and other major developing countries do not commit to quantitative targets at the same time, due to concerns about economic competitiveness and carbon leakage.

2)     China and other developing countries will not make sacrifices different in character from those made by richer countries that have gone before them.

3)     In the long run, no country can be rewarded for having “ramped up” its emissions high above the levels of 1990.

4)     No country will agree to participate if the present discounted value of its future expected costs is more than, say, 1% of GDP.

5)     No country will continue to abide by targets that cost it more than, say, 5% of GDP in any one budget period.

6)     If one major country drops out, others will become discouraged and the system may unravel.

                   The proposal

The proposed plan sets the emissions caps using formulas that assign quantitative emissions limits to countries in every five-year period from now until 2100.   Operationally, four political constraints are particularly important in specifying the formulas.

·        First, “carbon leakage” is precluded, by including all countries from the beginning

·        Yet developing countries are not asked to bear any cost in the early years.

·        Even later, developing countries are not asked to make any sacrifice that is different from the earlier sacrifices of industrialized countries, accounting for differences in incomes.

·        Finally, no country is asked to accept targets that cost it more than 1% of GDP cumulatively, nor more than 5% of GDP in any given budget period.

Under the formulas, rich nations begin immediately to make emissions cuts in line with what their leaders have already committed to.  Developing countries agree to maintain their business-as-usual emissions in the first decades, but over the longer term agree to binding targets that ultimately reduce emissions well below business as usual. This structure precludes energy-intensive industries from moving operations to developing countries (i.e., leakage) and gives industries a more level playing field. However, it still preserves developing countries’ ability to grow their economies; they can even raise revenue by selling emission permits. In later decades, the emissions targets asked of developing countries become stricter, following a numerical formula. However, these emissions cuts are no greater than the cuts made by rich nations earlier in the century, accounting for differences in per-capita income, per-capita emissions, and baseline economic growth.

More specifically, the formula incorporates three elements: a Progressive Reductions Factor, a Latecomer Catch-up Factor, and a Gradual Equalization Factor.

·        The Progressive Reductions Factor requires richer countries to make more severe cuts (relative to their business-as-usual emissions) than poor countries.

·        The Latecomer Catch-up Factor requires nations that did not agree to binding targets under Kyoto to make gradual emissions cuts to account for their additional emissions since 1990. This factor prevents latecomers from being rewarded with higher targets, or from being given incentives to ramp up their emissions before signing the agreement.

·        Finally, the Gradual Equalization Factor addresses the fact that rich countries are responsible for most of the carbon dioxide currently in the atmosphere. During each decade of the second half of the century, this factor moves per capita emissions in each country a small step in the direction of the global average of per capita emissions.

The formulas, for some convenient parameter values, turn out to imply that global emissions peak around 2035.  This targets result in a world price of carbon dioxide that reaches an estimated $20-$30 per ton in 2020, $100-$160 per ton in 2050, and $700-$800 per ton in 2100, according to economic simulations using the WITCH climate model courtesy of Valentina Bosetti. Most countries sustain economic losses that are under 1% of GDP in the first half of the century, but then rise toward the end of the century. The simulations also show that atmospheric concentrations of CO2 stabilize below 500 ppm in the last quarter of the century, and world temperatures increase by about 3 degrees.  Each of the six political constraints listed above is satisfied.

               Conclusion

The framework here allocates emission targets across countries in such a way that every country is given reason to feel that it is only doing its fair share, comparable to what  otherws have done before it. Furthermore, the framework – a decade-by-decade sequence of emission targets determined by a few principles and formulas – is flexible enough that it can accommodate major changes in circumstances during the course of the century.  The hope is that only such a combination of continuity and flexibility can make the process dynamically consistent, i.e., credible.

Most climate scientists say that 500 ppm is not a sufficiently aggressive goal.  We (my collaborator, Bosetti, and I) have not yet been able to achieve year-2100 concentrations of 450 ppm while obeying the same political-economic constraints.  But we are still working on it.  Stay tuned.

The detailed proposal is “An Elaborated Proposal for Global Climate Policy Architecture:  Specific Formulas and Emission Targets for All Countries in All Decades,”  NBER WP, April 2009.  Forthcoming, 2009, in a volume edited by Joe Aldy & Rob Stavins for  the Harvard Project on International Climate Agreements, Cambridge University Press.  Editors’ summary of the volume is at Post-Kyoto International Climate Policy, Cambridge University Press.   (See also Stavins’ blog, especially, for analysis of the Waxman-Markey bill.)

[Readers wishing to post comments are referred to the version of this post on the RGE site.]

The rate of decline in employment moderated substantially in May, according to the BLS figures released June 5, to about half the monthly rate of job loss recorded over the preceding six months (345,000 vs. 642,000).    The news was received in a variety of ways. 

First, the cynics.  They tend to wax sarcastic at the idea of “things are not getting worse quite as fast as they were” as a good-news proposition.    But a wide variety of recent data indicate that the economy is no longer in the state of free-fall that it entered last September, and this is indeed good news.  To begin to level off is the first step toward the start of the recovery.

Second, the academics note (correctly) that there is little information in each individual monthly statistical fluctuation that is measured, because the data are inevitably noisy.   Still, the public wants to know, in real time, what is the best we can glean from the information we have. 

Third, the financial press, in particular, had been asking whether this quarter could turn out to be the bottom of the recession.  The May employment report encouraged enthusiastic speculation that the answer was “yes.”  The stock market reacted positively.

The members of the NBER Business Cycle Dating Committee (of which I am one) will be responsible for calling the trough when the time is right.  We have a range of views regarding the proper place of employment numbers in such deliberations.    But one can say, on the one hand, that a decline in economic activity is a decline in economic activity, and therefore still a state of recession, even if the rate of decline has moderated a lot.    One can also say, on the other hand, that employment is usually a lagging indicator of economic activity.  (For example, the economy continued to lose jobs long after the ends of the 1991 and 2001 recessions.  Hence the “jobless recoveries.”)

Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy.  Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker.   The length of the workweek tends to respond at turning points faster than does the number of jobs.  When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off.  Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers.   (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.)     The phenomenon is called “labor hoarding”  and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.

Unfortunately, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all.  Forbes picked up on the point. The length of the average work week fell to its lowest since 1964 !  The graph below shows that, not only did total hours worked decline in May, but the rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September.  Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a monthly aberration.  If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work?   If one factors in falling wages, to compute total weekly earnings, the picture looks still worse.  My bottom line:  the labor market does not quite yet suggest that the economy has hit bottom.