In Get a Model, Plug in Guesses, Cure Unemployment Caroline Baum takes a look at Janet Yellen’s statements regarding the alleged creation of 3.5 million jobs. Here are a few snips.

Just when you thought you’d heard the last of “jobs created or saved,” the Obama administration’s quarterly report card on its $814 billion fiscal stimulus, along comes the Federal Reserve with its own model-derived guesstimates.

The Fed’s full menu of securities purchases, starting with $1.7 trillion of Treasuries, agency and mortgage-backed bonds in late 2008 and 2009 and including the current $600 billion of intermediate- and long-term Treasuries, “will have raised private payroll employment by about 3 million jobs,” said Fed Vice Chairman Janet Yellen.

Yellen’s projections, presented at the Allied Social Science Association’s annual meeting in Denver last weekend, are based on simulations performed by the Fed’s macroeconomic model, known as FRB/US, not real jobs.

That would be the same model that failed to grasp that mortgage loans made during a period of exceptionally low interest rates by lenders with no skin in the game might not be repaid, putting major financial institutions on the brink of insolvency; the same model that failed to understand how new and exotic derivatives based on these mortgages would perform; the same model that failed to see the millions of jobs that would be lost if housing and credit bubbles were allowed to inflate until they burst; and the same model that predicted an unemployment rate of 8.8 percent in the fourth quarter of 2010 without the enactment of a fiscal stimulus. (It was 9.6 percent with it.)

Fantasy Models

Baum asks “Why do policy makers persist in perpetrating this fantasy, in asserting something that can’t be proven?”

That’s a good question. I had questions of my own regarding Yellen’s preposterous statements in Janet Yellen Says Fed Asset Purchases Will Create 3 Million Private Jobs By 2012

Should we add those three million jobs to the 3.5 million jobs Obama wanted to create or save? By the way what happened to those 3.5 million jobs anyway?

Janet Yellen thinks the Fed is going to create 3 million jobs by the end of this year. Let’s do that math, too. 3 million divided by 12 is 250,000 jobs a month. Does anyone believe that?

I posted a graph in that article that shows we lost 3.87 million jobs in the very timeframe Obama pledged to create or save 3.5 million jobs. That’s a whopping deficit of 7.37 million jobs.

Mathematical Models

As long as we are discussing models, let’s look at the math behind them. The Fed bloated its balance sheet by $2.3 trillion to allegedly create 3.5 million jobs. My math suggests it takes $657,142.86 in balance sheet additions to create a single job.

Note the mistake by Yellen. She should have claimed the Fed created 10 million jobs, dropping the needed balance sheet expansion to a mere $230,000 per job.

Labor Force Models

Last year, the reported unemployment rate fell from 9.9% to 9.4%. In that time, those “not in the labor force” rose by 1,447,000 while those in the labor force rose by a mere 518,000.

If we factored that into the unemployment rate calculation, it would have risen. However, Yellen’s model ignores such discrepancies so we must march on as if the drop in unemployment rate is real.

Forward Projections

Let’s model what it would take to reach “full employment” (assuming that such a preposterous concept exists, even though I assure you it doesn’t).

Economists love to project forever into the future the conditions we see today. It is one of their favorite pastimes, so I want to show you what the math suggests.

Currently it takes $2.3 trillion to cause a .5 point drop in the rate. To obtain a “full employment” unemployment rate of 5.9%, the Fed’s balance sheet will need to expand by an additional $16.1 trillion to a total of $18.4 trillion.

To be fair, I most certainly ignored the fact that Yellen believes all we need to do is “prime the pump” and the economy skyrockets onward. Then again, it appears that $2.3 trillion did not do much pump priming judging from the pathetic performance so far. How much pump priming does it take?

The correct answer is pump priming does not work at all, but let’s ignore that little factoid as well.

Marching on, it’s fair to point out there is a significant risk of an economic relapse for numerous reasons including a tax hikes by states, layoffs and cutbacks at the city and state level, an implosion in Europe, a slowdown in China, a slowdown in consumer spending.

But hey, let’s ignore those risks too, while we continue to “model away”. Here is a summary of what will happen based on projections of Yellen’s model.

Modeling The Model

  • The Fed created 3.5 million jobs.
  • The Fed bloated it’s balance sheet by $2.3 trillion to do so.
  • It takes $657,142.86 in balance sheet additions to create a single job.
  • It takes the same $2.3 trillion to lower the unemployment rate .5%
  • The Fed’s balance sheet will reach $18.4 trillion by the time the unemployment rate drops to 5.9%
  • It will take another 3.5 years to get to a “full employment” situation with an unemployment rate of 5.9%.

Don’t blame me, I’m just modeling Yellen’s model.

Mike “Mish” Shedlock
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