Using R in Political Controversies: Unemployment Reduction Prowess Under Bush versus Obama Years

September 27, 2012
By

Editor’s note: R-bloggers does not take a political side. Since this is an important topic, this post has the comments turned on. Also, If you wish to write a reply post (which includes an R context), you are welcome to contact me to have it published.

This post was written by Prof. H. D. Vinod. Fordham University, New York.

A Chicago professor Luigi Zingales recently reported on Bloomberg that had Romney been the president for the last four years, US would have had a different labor market. In particular it is alleged that Obama increased the uncertainty and instilled disincentives for hiring.

http://www.bloomberg.com/news/2012-09-23/we-would-be-better-off-had-romney-been-president.html

 
I had already worked on a similar problem for the benefit of my Ph.D. students in econometrics.  I use R to test similar hypotheses about distinct labor markets under George W. Bush and Obama.

Although it is impossible to directly study disincentives, we can look at their practical consequences.  Indeed the conservative Chicago claims appear to be supported by the data.  Liberals are invited to re-do my reproducible analysis since I provide all data and my R code.

 

In particular, the “elasticity of substitution” between unemployment rate and job vacancy rate is quite different for Obama and Bush.  I urge the readers to read my paper which uses R and Sweave allowing my results to be completely transparent and reproducible for skeptical readers. My paper is entitled “Unemployment Reduction Prowess Under Bush versus Obama Years”. The pdf file of the paper provides my R code (in red font) with output in blue font along with full explanation of concepts with figures using Latex based pdf file is freely available at The social science research network http://ssrn.com/abstract=2149316

 

The source code is available here: Bush_r_code



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8 Responses to Using R in Political Controversies: Unemployment Reduction Prowess Under Bush versus Obama Years

  1. Joris Meys on September 27, 2012 at 7:37 am

    Striking plots and paper, but I do like to make a side remark. Although the R code is flawless, it presents here a very striking feature of R: It does what you ask, not what you intend. The analysis would have been correct if only it would take into account the economical context in the rest of the world. If that would have been done, it would be clear that regardless of government type, the plots show nothing else but the story before and after the crisis. And as far as I remember, Obama can’t be blamed for it…

  2. Robert Young on September 27, 2012 at 10:10 am

    The problem with the Freshwater economists is that they dream of a world which never was: the Free Market of Adam Smith (it wasn’t and he spent a good deal of text bemoaning that fact). As any experienced stat/quant knows: given enough data, any hypothesis can be “proved”.

    There is only one incentive to hire additional staff: greater demand for output than can be accommodated with existing staff. No amount of “incentives” to corporations will entice a business to hire un-needed folks; they’ll simple take the money and run. To do so is to deny the right wing corporate ethos of Increasing Shareholder Value. We see the effect all the time: incentives by governments are sopped up while they last, then business moves to another jurisdiction offering “incentives”. Professional sports teams are the exemplar.

    Don’t for a second assert that the rest of business acts any differently. In the case of general wage reductions, imposed by unemployment, businesses simply pocket the delta, thus increasing income concentration, reducing demand (due to reduced median income), and further reducing output. Anyone who is silly enough to think otherwise hasn’t observed the Eurozone over the last couple of years. There is no Prosperity through Austerity, only increased poverty. No amount of data mining will change that.

    The reason the Obama “package” (which has been mostly monetary easing) hasn’t been as effective as it might, is simply because it hasn’t been an exercise in fiscal policy; the Right Wing gutted the fiscal efforts and increased the monetary ones. The money has been targeted to financial sectors (the kind that Romney and Bush cleave to; remember, it was Greenspan under Bush who crashed interest rates, not Bernanke), and so we see a bull market with persistent unemployment. How can that be?

    Yes, there has been inflation. But only in the sector that got the handouts. Without a restoration of demand, output will flag. There will be no Devil Inflation until such time as the masses have more income (median income grows). That is modulo cost push inflation (resource shortages) as we had during the Oil Embargo.

    It is thoroughly understood, among Saltwater economists, that the Bush “incentives” were the substitution of income (median income during Bush stagnated) with housing price appreciation. That happened because Greenspan crashed interest rates, and mortgage companies became the source of CDOs to soak up investment monies with “risk free” mortgages. There was no fiscal policy under Bush.

    So, the Right Wing/Chicago/Freshwater thesis is that if the poor unemployed would only accept wages which are less than they previously earned, and less than unemployment/welfare/whatever, all will be well, and full employment results. One need only read 19th American economic history to understand the falsehood of that. 19th America was a miserable place for most Americans. Read “The Gilded Age” by Mark Twain; he invented the term with the book.

    The post WWII expansion, up to the 1973 oil embargo, was propelled by the residual “we’re all in this together” meme of shared war time sacrifice. Taxation was progressive (in a meaningful way), unions garnered wages which created a blue collar middle class, and expansion resulted. Anyone who denies that is simply lying. Reagan ended that, by blaming workers for all the country’s economic ills, and set the 1% on their current rampage, aided and abetted by Freshwater economics. Bush I rightly described as “voodoo economics”.

  3. Chris McMaster on September 27, 2012 at 3:01 pm

    Ah yes, the a priori assignment of “sectors” and their inflationary isolation. I think you’ll find the evidence is missing for that assertion.

    • H. D. Vinod on September 27, 2012 at 4:01 pm

      Dear McMaster
      If you look at my paper and search for words
      sector and inflation there is no hit.
      I am not sure what you are talking about here.
      Please see
      http://ssrn.com/abstract=2149316
      before commenting.

      cheers

  4. Joel Cadwell on September 27, 2012 at 5:57 pm

    Obviously, I have missed something in the analysis.

    The article begins with the following claim:

    “This paper uses empirical data to see whether alleged increase in uncertainty and changed incentives have made an observable difference to measurable parameters of the labor market.”

    So I looked carefully for an equation in which some indicator of uncertainty and changed incentives occurred as an independent variable. However, all I could find was a comparison of the value of a ratio for the Bush and the Obama years. Clearly, I am confused. Isn’t the author making a causal claim about the impact of increased uncertainty? Yet, when you search the pdf, you find only one reference to uncertainty, and I have provided the quote above. Where is the evidence that Obama’s policies have increased uncertainty? Where is the coefficient showing the impact of those policies? Where is Judea Pearl when we need him?

    If the article begins with a bang, it ends with a whimper. Here is the conclusion:

    “Despite limitations of aggregate production functions, the sign reversals between Bush and Obama elasticities seem to suggest new labor market frictions, perhaps related to the unknown employer expectations regarding their future profitability.”

    What happened to the impact of “alleged” uncertainty and changed incentives? All we are left with is unknown employer expectations regarding future probability. Well, perhaps the author can explain what I have missed.

    • H. D. Vinod on September 28, 2012 at 5:54 pm

      Allow me to make two points
      1) Relation between Unemployment and Economic Policy Uncertainty.
      My critics are right. I should have been more explicit about the uncertainty in the economy attributed to Obama policies. It is generally agreed that businesses will not invest in new labor and capital in the presence of various kinds of uncertainty. Bernanke observed back in 1983 that since hiring and firing is expensive businesses tend to postpone hiring decisions during uncertain time. For example, Obama Care, Dodd-Frank, tax cliff and continuing changes to tax laws and bailout conditions, future property rights. John B. Taylor explains this in his Op Ed in the Wall Street Journal, May 31, 2012. An index of economic policy uncertainty created by Professors Baker and Bloom (Stanford) and Davis (Univ. of Chicago) also shows an increase during Obama years. The index distinguishes between general economic uncertainty and economic policy uncertainty.
      2) Could Obama be blamed for the Great Recession?
      No president has been free of challenges beyond his control. Bush’s term began with Sept 11, 2001 terrorist attacks and Obama had to face the great recession. However some economists argue that the recession was worsened by economic policy uncertainly. We are looking at the bottom line in the job market and the evidence presented in my paper does not favor Obama. Since I do not play the blame game, my paper’s ending may sound like a whimper.

  5. Stephen H on September 28, 2012 at 7:50 am

    This is bizarre. I read your paper twice as I couldn’t believe you were saying what you seemed to be saying.

    In effect you say that before the huge crash there was a healthy relation between GDP, job vacancies and employment.

    Then measured from the moment Obama takes office in the midst of said huge crash the relationship becomes less healthy.

    This apparently maybe due to intangibles such as ‘uncertainty’ or ‘disincentives’ rather than the tangible aftermath of the global clusterfrack, household debt overhang, negative equity, lack of demand etc etc etc..

    Are you serious? I’m not going to re-do your analysis. I’m sure it’s semantically correct but it doesn’t address the question you suggest.

    To borrow a Physicists phrase “it’s not even wrong.”

  6. Kevin on October 1, 2012 at 12:12 pm

    There’s an error in the code on page 14 of the paper.

    MEunemO=cO[3]+cB[4]*Ovac

    should read

    MEunemO=cO[3]+cO[4]*Ovac

    The first equation uses a Bush regression coefficients where an Obama regression coefficient should be.