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Fri September 14, 2012
Even If You're All-Powerful, It's Hard To Fix The Economy
Originally published on Tue September 18, 2012 2:43 pm
The world inside Mark Zandi's computer model feels pretty familiar. It's full of people who are worried about the economy. Their homes are being foreclosed on. They're paying more for gas. Something like 13 million of them can't find jobs.
Zandi is the chief economist at Moody's Analytics, and he built his model to predict what's going to happen in the real world. When he plugs what he thinks is going to happen in the real world, his model spits out a pretty grim result: Four years from now, the unemployment rate will be 6.6 percent. That's lower than today, but still much higher than the 5 percent rate that was typical before the recession.
I recently sat down with Zandi, and gave him a challenge: Fix the economy in the world inside your computer. Try to ensure that, four years from now, the unemployment rate inside the computer will get back down to 5 percent.
Zandi starts big: He fixes the U.S. government. Republicans and Democrats work together to agree on a long term plan to deal with the country's debt through a mix of tax increases and spending cuts.
The computer chews on this unlikely event for a few seconds, solving equations, calculating some 1700 variables. It tells us that, four years from now, the unemployment rate will be 6.1 percent.
"Still uncomfortably high," Zandi says.
Next up: Gas prices. Zandi brings down the price of a barrel of oil by about $20. The price of gas in the U.S. falls to $3 a gallon.
This, sadly, only reduces unemployment by a tenth of one percent. Zandi's not surprised.
"Gasoline prices are outsized in our thinking," he says. "But when it comes down to brass tacks. still a small proportion."
On to Europe.
Let's make sure the euro survives. Inside Zandi's computer, the European economy is going to grow. Not grow like crazy, but grow more than it's growing now. That means more U.S. exports to Europe. And it means that U.S. unemployment four years from now will be 5.9 percent.
Still too high. In fact, It is surprisingly hard to get back to a 5 percent unemployment rate in the world inside Zandi's computer.
But we keep trying. We boost home prices by 10 percent. We make banks lend out more money. We raise consumer confidence. We still can't get to 5 percent unemployment. It's time to get crazy.
We make people not just confident, but super confident. We cut the price of a barrel of oil in half. We give Europe a spectacular recovery. China keeps growing. Africa takes off.
We let the computer rip. In 2016, it tells us, the unemployment rate will be 5.2 percent. No matter what we do, we can't seem to get the unemployment rate down to 5 percent.
"What's happening is the economy is reaching its new limits," Zandi says.
This is something I hadn't really appreciated before. When you go through a really big, catastrophic recession, it's not always possible to fix things.
Millions of people lost their jobs in the recession. At the same time new high school and college grads started looking for jobs.
The economy just can't grow fast enough to absorb the backlog. Zandi says we'll have an extra million people looking for jobs, and unable to find them.
"We dug ourselves a huge hole," Zandi says, "Its gonna take a generation to get completely out of it."
AUDIE CORNISH, HOST:
If you are tired of hearing bad news about our economy, this next story is for you. We're going to try to make everything better - at least for an economy very much like ours, that lives inside a computer. Here's David Kestenbaum with our Planet Money team.
DAVID KESTENBAUM, BYLINE: The people in Mark Zandi's computer model, like us, they are not happy. Homes are being foreclosed on; gas prices are up; there's a debt crisis in Europe; something like 13 million people can't find jobs. Consumer confidence? Low.
MARK ZANDI: We are pretty dark right now. People are very upset.
KESTENBAUM: But fear not, since this is a computer model of the economy. We, sitting here at this computer in Zandi's offices at Moody's Analytics - we control this little world, and we are going to try to fix it. Economists often use computer models to try to understand the real economy. And our goal is that four years from now - the end of the next presidency - we will have gotten the unemployment rate back to what was normal before the Great Recession; back to 5 percent.
Right now, Zandi's model is assuming not much good happens in the next four years, and the unemployment rate will only go down to 6.6 percent. So Zandi starts big. He fixes the U.S. government. Republicans and Democrats work together - agree on a long-term plan to deal with the country's debt, a mix of tax increases and spending cuts. The computer chews on this unlikely event for a few seconds; solving equations, calculating some 1,700 variables...
ZANDI: And now, the unemployment rate is 6.1 percent. So we, by the end of 2016, have shaved about a half-point off the unemployment rate.
KESTENBAUM: It's still not great.
ZANDI: No. Still too high. Still uncomfortably high.
KESTENBAUM: So what else can we do? How about peace in the Middle East? Zandi says. That could bring down the price of oil.
ZANDI: Let's lower the price of a barrel of oil by about $20. In terms of gasoline price, it means that instead of paying 3-buck-75 for a gallon of regular unleaded, we're going to be paying closer to 3.
KESTENBAUM: This - sadly - only reduces unemployment by a tenth of 1 percent. Zandi's not surprised.
ZANDI: Gasoline prices are outsized in our thinking but, you know, when it comes down to brass tacks, it's still - you know, relatively small proportion here.
KESTENBAUM: All right. So let's keep trying. What else can we fix?
ZANDI: Why don't we - why don't we fix Europe; as best we can, fix Europe.
KESTENBAUM: All right. Zandi tells the computer that the euro is going to survive. European economy starts to grow. Nothing crazy - but better than now. In the model, this means more U.S. exports to Europe and...
ZANDI: And now, the unemployment rate is 5.9 percent. So we've now pushed the employment rate down another tenth of a percent.
KESTENBAUM: That's all we get for Europe? That's all we get, for fixing an entire continent?
ZANDI: Yeah, yeah. Well, we didn't fix it completely, right? We didn't, you know, sort of - we didn't say they're off and running. We're just saying they're not going to fall apart.
KESTENBAUM: It is surprisingly hard to get back to a 5 percent unemployment rate. We keep trying. Boost housing values by 10 percent, we make banks lend out more money.
Can we try one more thing?
KESTENBAUM: Can we just make everyone happier?
ZANDI: Yeah. Let's try that, let's try that.
KESTENBAUM: We boost consumer confidence, and still...
ZANDI: Ah, not very much.
KESTENBAUM: We can't get to 5 percent unemployment. I refuse to give up. We make people not just confident, but super confident. We cut the price of a barrel of oil in half. We make the European economy recover spectacularly. Put in a huge number for economic growth in Asia and around the world.
And this assumes, maybe China somehow...
ZANDI: And Africa takes off, right.
KESTENBAUM: And Africa takes off?
ZANDI: Let's say Africa takes off.
KESTENBAUM: Wow. (LAUGHTER) All right.
Let 'er rip, he says. This is so ridiculously optimistic, he doesn't know if the computer can handle it. But it does. And it gives us its answer: 5.2 percent. Still, we cannot get the unemployment rate down to 5 percent.
ZANDI: What's happening is that the economy is reaching its new limits.
KESTENBAUM: Its new limits. This is something I hadn't really appreciated before. When you go through a really big, catastrophic recession, it's not always possible to fix things. So many people lost their jobs and meanwhile, every year more people graduate from high school, graduate from college. They're looking for jobs also. And the economy can't grow fast enough to absorb the backlog. Zandi says we'll have an extra million or 2 million people looking for jobs, and unable to find them. [POST-BROADCAST CORRECTION: In the long term, Zandi says there will be an extra million people looking for jobs and unable to find them.]
ZANDI: Think about each and every year, how much they would be producing. That's a lot of lost talent, wealth - we're much worse off as a result.
KESTENBAUM: You know, that's sad because I came here today thinking we would be able to fix everything - at least, in a model. And what you're telling me is, you can't.
ZANDI: Yeah, I think we're in a different world. We dug ourselves a huge hole. And you know, even after doing all these things we discussed, we're not going to get completely out of that hole; certainly not by the mid-part of this decade. It's going to take a generation to get completely out of it.
KESTENBAUM: Zandi's isn't the only computer model out there. But he says the consensus in all these little, virtual worlds, is that the effects of the Great Recession could be with us for quite awhile. David Kestenbaum, NPR News.
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