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Tuesday, August 7, 2012

Economix: Romney\'s Job Growth Promises


Last week, Mitt Romney declared that if his new, one-page economic policy plan were implemented, the country would add “12 million new jobs by the end of [his] first term.”

Now, usually politicians (Barack Obama included) get hammered for overstating how much the economy will improve under their watch. But by at least some forecasts, Mr. Romney's promises may actually be a little underambitious, in that his promised job growth is pretty close to what's already expected.

In its semi-annual long-term economic forecast released in April, Macroeconomic Advisers projected that the economy would add 11.8 million jobs from 2012 to 2016. That means Mr. Romney believes his newly announced policies would add an extra 200,000 jobs on top of what people already expected, or a jobs bonus of about 2 percent. The more jobs the better, of course, but that's not really much to write home about.

Moody's Analytics, anothe r forecasting firm, projects similar job growth:

Payroll Employment Change
Millions of Jobs
Sources: Bureau of Labor Statistics, Moody's Analytics


In an e-mail Monday, Mark Zandi, the chief economist at Moody's Analytics, emphasized that he actually expects the economy to remain on about the same path regardless of who is elected:

The forecast is agnostic with regard to who is elected in November.  The key assumption is that whoever wins they will reasonably gracefully address the fiscal cliff, increase the Treasury debt ceiling without major incident, and achieve something close to fiscal sustainability.

My view, is that the economy's fundamentals are much improved, as households deleverage, the financial system re-capitalizes, and American businesses become global competitive.  Moreover, the construction cycle is on the verge of turning up significantly, which by itself will create a boat load of jobs, particularly in 2014-15.  If policymakers can get it roughly right soon after election, all of this will shine through quickly.

Not everyone is so upbeat.

Jan Hatzius, the chief economist at Goldman Sachs, told me that he has not developed explicit forecasts that go through the end of 2016, but he says he expected an average job growth of just under 150,000 a month from now through the end of 2013.

Given those expectations for the start of the next presidential term, he said that Mr. Romney's promise of job growth averaging 250,000 a month over the next four years “would be quite a good outcome.”

Additionally, the Congressional Budget Office's latest long-term economic forecast, released in January, showed that employment would grow by just 10 million from the first quarter of 2013 to the first quarter of 2017, the dates of the next presidential term. (Two asides: The numbers are the same if you use the last quarter of 2012 through the last quarter of 2016. Additionally, note that the C.B.O.'s forecast refers to the number of workers employed, as opposed to the n umber of payroll jobs in existence, which was the metric in the other forecasts cited.)

That C.B.O. forecast implies that Mr. Romney would be promising an extra 2 million jobs, or a 20 percent bonus from what's already expected. Pretty impressive.

By law, though, the Congressional Budget Office must base its projections on the laws that are on the books rather than on what Congress is expected to do. That means that the office's forecast assumes the “fiscal cliff” - with its sharp tax increases and deep spending cuts - materializes at the end of this year. Most economists do not believe Congress will allow this to happen.

Needless to say, the C.B.O.'s jobs numbers would probably look stronger if they likewise assumed Congress does not allow the country to go over the cliff. In that case, Mr. Romney's job growth premium would be at least somewhat less impressive.

So what to make of all these figures?

First, as you can probably tell from both these forecasts and the events of the last decade, there is a huge margin of error when it comes to predicting economic trends for the next week, let alone the next four years. So it's very hard to judge whether a promised gain of 12 million jobs under Mr. Romney's policy overhaul significantly deviates from what would happen without the overhaul.

Perhaps the more important corollary, though, is that there's a huge margin of error in what Mr. Romney is promising, too. And that's true for just about any economic forecast you hear from any politician (or pundit or journalist for that matter).

Politicians throw out lots of different numbers for what the economy will do under the assumption that their exact agenda is passed, which is a pretty unrealistic assumption in the first place. Even if their policies do sail through the sausage factory that is Washington unscathed, there's no telling what effect they'll have when they move out of the world of bullet points and into the actual economy. So take any forecasts you hear from either presidential campaign with a boulder-size grain of salt.