Ideology Trumps Data - Yet Again

In a blog posting at CNBC, Tony Fratto asks the question "Do Long Term Unemployment Benefits Elevate the Unemployment Rate?"  He provides the graph below, purportedly showing that the current recession is unique, in that "weekly initial claims for unemployment insurance are very tightly correlated with the unemployment rate – until mid-2009, that is..."

Looking at that data, you might find yourself thinking that it is, in fact, strange that well into the recession there is a sudden dislocation between the two measures.  And, look!  There was no similar dislocation in the 2001 recession.  It must be that there is something different about the current recession that is affecting unemployment.  And it must be something that occured later in the recession.  Therefore, it must be that we extended unemployment benefits longer than in past recessions.  Quod erat demonstrandum!

Only did we really demonstrate that?

Absolutely not.

First, there's no cause/effect argument that would tell us that the unemployment rate should drop as soon as initial claims start to drop.  Just because fewer people are losing their jobs doesn't mean a lot of unemployed are being rehired.

Second, the 2001 recession was relatively short and shallow compared to the current recession.  What if we looked for more data?

The following is what Fratto would have shown, if he had extended his graph as far back as initial claims data is available (1967).

(Note: I don't have the recession quarters shaded because I don't know how to do that in Excel, but you can pretty much tell where the recessions are.)

Now what do we see?  

The unemployment rate and the initial claims rate correlate pretty well, until they diverge at the point in a recession/recovery where the initial claims starts to drop.  Then the unemployment rate takes a while (sometimes years) to come back into correlation.  Then the process occurs again in the next business cycle.

Tony Fratto probably had access to this longer data set.  But the full data doesn't support his argument, so he shows us the shorter time series.  This is a great example of ideology trumping the actual data.  If the data doesn't show what you want, pick a subset that does.

Shame on Tony Fratto.

Frankly, this misleading tripe deserves to be retracted.

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