Warning of an 11% Unemployment Rate

Groups that represent manufacturers and the manufacturers themselves constantly complain that the unfair trade practices employed by China have largely wrecked their industries and continue to do so. Some of the attention given to China has swung to the effects of the fiscal cliff, which is only natural as the end of the year approaches. And the forecasts about the harm of the watershed event have become alarming, though probably not for any good reason.

The National Association of Manufacturers (NAM) has released a new study that predicts that the fiscal cliff could drive unemployment to 11% and cause a cumulative drop in gross domestic product over three years. Commenting about the terror of the event, NAM said:

It is unsurprising that, according to recent surveys, 55 percent of manufacturers and other small business owners wouldn’t start their business in today’s climate.

Yet, there is no evidence that business formation has dropped sharply in the past several months, nor that the rate of start-ups in the United States has fallen precipitously. The forecast is another example of how several groups have used the possibility of tax increases and government spending activities at the end of the year to suit their ends.

NAM does not offer much of an analysis beyond the harm to its own member base. President and CEO Jay Timmons said:

If we fall off the fiscal cliff, another recession is almost guaranteed, and we will see 6 million more people out of work. Manufacturers will lose the workers needed to drive American innovation, and the industry may suffer an irreparable setback.

The analysis is based on a view of the economy through a single lens:

This paper provides model-based scenarios concerning the fiscal cliff using Inforum’s LIFT model of the U.S. economy.

The Long-term Interindustry Forecasting Tool (LIFT) is a single way to forecast future economic growth, and hardly one that is alone in being mainstream. There is nothing particularly wrong with LIFT, but it is only one model used by well-regarded economists, and, like any other model, its critics are not shy about its flaws. And, why should they be? They have forecasting tools of their own.

If the National Association of Manufacturers wants to support research that makes its case, it needs to go beyond one model to do so.

Douglas A. McIntyre