Data matter. Yes, I know, we live in a world of “alternative facts” and “it is obvious” and “that is what he thinks,” but good economic policy doesn’t happen by accident. It starts with an understanding of the “real” facts. If we make policy without regard to what is actually happening, we wind up in trouble.
Right now, too many policymakers, including the policymaker-in-chief, are making proposals based on reasons that don’t stand up to examination. Here are two misconceptions that need to be corrected. There are many others, but you have to start somewhere.
Myth #1: There are "96 million really wanting a job and they can't get [one]. That’s the real number."
In his first news conference, President-elect Donald Trump told the world that the number of people unemployed is 96 million. Really? If 40 percent of the adult U.S. population were unemployed, we would be in a depression.
Thankfully, the 96 million that Mr. Trump referred to is the number of working-age people not in the labor force. Of those, only about six million want jobs. As for the rest, they are retired, going to school, sick, disabled, in institutions, staying home to be with their families, or even working but in the underground economy.
What is important is that the six million number is not abnormally high. During the last economic expansion, that group averaged about five million. There may be only about one million additional “potential” workers, which is not much, given the 5.5 million job openings.
Knowing the correct number of unemployed individuals matters when making policy. If there really were 96 million people looking for jobs, the government should do everything possible to create them. But the “reserve army of the unemployed” is small, so there is no great need for aggressive fiscal policy.
Myth #2: Dodd-Frank is a disaster that needs to be changed because it is keeping banks from lending.
The Trump administration wants to “do a big number” on the Dodd-Frank law that was implemented after the financial crisis.
To defend the overhaul, the president stated: “We expect to be cutting a lot out of Dodd-Frank, because frankly I have so many people, friends of mine, that have nice businesses and they can’t borrow money. ... They just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank."
Really? Banks aren’t lending money? That, of course, can be determined by looking at the data, so let’s do that.
The Federal Reserve publishes the level of commercial and industrial (C&I) loans monthly. Those are what we generally call business loans for which Mr. Trump’s friends would be applying.
Well, it turns out that C&I loan growth has been really strong, averaging about 11 percent annual growth over the last five years. Banks are giving loans to creditworthy borrowers who have creditworthy projects.
Well, maybe the friends who couldn’t get loans were looking to do real estate projects. Given the massive meltdown in the real estate market, it is not surprising that lending was limited after the recession. But in the last two years, real estate loan growth has averaged nearly 6 percent, which shows banks are funding realistic projects.
One intent of Dodd-Frank was to restrict the aggressive instincts of some bankers that led to the near meltdown of the world’s financial system. And, yes, lending has become more difficult under Dodd-Frank. But that doesn’t mean the rules are bad. With real estate delinquency rates rising, banks should be more cautious. That is exactly what has happened.
The latest Fed quarterly survey of lending officers indicated that the “lending standards for commercial real estate loans of all types tightened during the fourth quarter.” If the stricter Dodd-Frank standards required bankers to act responsibly, that's great.
In contrast, C&I delinquency rates remain at 20-year lows. Businesses are doing well, and the financial system is supporting them by easing standards and making lots of loans.
The lending data don’t indicate that banks are refusing to lend because of Dodd-Frank. They say the exact opposite, that banks are lending despite Dodd-Frank.
Dodd-Frank should be modified, but not because of lending restrictions. Instead, reducing the excessive regulatory burdens placed on smaller to mid-sized banks makes sense.
Targeting Dodd-Frank for the wrong reasons runs the risk of making the wrong changes. The last thing we need is to greenlight the excessive lending practices that brought the economy to its knees a decade ago.
Defending a political position can be hard when the data aren’t there. But the current willingness to propose unsupportable policies is creating the potential for major email@example.com