Karl Smith: Apostle to the Ignoramuses

by: Brad DeLong

Karl Smith appears to be hanging out with some economists who have trained themselves into being incapable of seeing what is going on around them. Their idea of why the employment-to-population ratio is so low right now is something like this:

At the end of 2008, for some reason or another, an extraordinary mismatch suddenly developed between the skills of American workers and the requirements of industry. Thus the employment-to-population ratio fell by five percentage points. And nothing government can do can make the situation better.

When you ask them why this structural mismatch emerged at the end of 2008 rather than, say, in 2006 and 2007--when the recognition that America was overbuilt because MBS could not possibly be as riskless as their originators were claiming took hold? Why did the employment-to-population ratio stay high for a full extra year and a half before starting the sudden fall to its current level? Ask that question, and you are met with inky, squid-like clouds of obfuscatory word salad.

Yes, he is the Apostle to the Ignoramuses. Better him than me. He is a very patient man. He does a good job (Unanticipated Changes in Inflation: Small Business Edition):

The chart... shows the percentage of small businesses raising or lowering prices. It comes from the NFIB Small Business Economic Trends Report.


One of these periods is not like the others. Can you spot it? To be fair, the current period isn’t completely different from all the others. We can see mini-versions in 2002 and in 92. What did those periods have in common with today?

Sharp dives in the number of businesses raising prices is coincident with rising unemployment. In particular a large gap between what is really happening and what business say they are planning is also associated with increases in unemployment.... Here is the thing that really stays with me. All of this is survey data. We are asking people. People lie. People are biased. People don’t understand the question. All of these are inherently noisy indicators of what is going on, but they tell a consistent story: tight credit leads to higher unemployment and lower pricing power.


Where’s the mismatch?