Category Archives: Economics

Miscellaneous economy stuff

(Un)employment

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The initial employment numbers from December were quite favorable: roughly 200,000 new jobs were added, almost all in the private sector (government employment shrank a small amount), and the unemployment rate ticked down to 8.5%.  These are numbers worth watching, as a recovery may be in progress, despite President Obama’s economic policies.  But  these numbers don’t tell the whole story.

First, Seeking Alpha describes some of “the rest of the story.”  When the current malaise, loss of our edge, and descent into laziness began in December 2007, the civilian non-institutional population* of the United States was 190 million, and the labor force was a tad over 125 million.  As of December 2011, the Bureau of Labor Statistics says that the “civilian non-institutional population” had increased to roughly 194 million, or 3.7 million higher (the difference includes rounding error from my own rounding) than it was those four years ago, and the labor force was 124 million.  BLS also says  that the employment population ratio was 58.5% as of last month.   Multiplying the increase in the U.S. population over the four years by the employment population ratio, says Seeking Alpha, implies that our labor force should have increased by 2 million to more than 127 million, not decreased to the 124 million actually reported: more than three million people are missing in the BLS figures.  (Note that, given the way the unemployment rate is calculated, a smaller labor force produces a better (headline) unemployment rate: dividing the number of employed in December 2011 by the size of the labor force that should exist based on the BLS’ population numbers gives us an unemployment rate of 9.6%, not 8.5%.)

What about those 3 million people, then?  The BLS says these folks left the labor force and that this justifies purging them from the statistics.  It’s certainly true that if 3 million Americans left the labor force—gave up and stopped looking for work—it’s valid for them to be scrubbed from the employment numbers.  (As an aside, note that this departure from the labor pool is a continuing trend: 2011’s labor pool is smaller than 2010’s, despite an increasing total national population.) Thus, it’s not inaccurate—as far as it goes—to say that of the population looking for work, their unemployment rate is the reported 8.6%.  But now think about what it means for 3 million folks to have just given up on finding jobs.  It’s clear that the current recession is continuing (yes, yes, I’m aware that by the consecutive quarters official measure, this recession ended ‘way back in 2009—see how your unemployed neighbor, or your spouse, or yourself feels about that), and no economic recovery has taken place or is in progress.

The Wall Street Journal describes another aspect of the story concerning long-term problems that exist and that will persist as a result of this prolonged recession.

Long-term unemployment remains above 15%, down only trivially from 15.3% to 15.2% last month.  Additionally, our labor market has, over the last 20 years, lost much of the edge it enjoyed over other developed countries.  Some of this is due to the deterioration of our education system, so that our relative gains from the last century due to our education are disappearing.  There are demographic causes, too: we relocate less frequently and change jobs less often, which makes the job market less flexible, as employers are less able to find the workers they want.  If the desired worker isn’t local, the employer has to do without, pay more for more training, or pay more for relocation costs.  And as seen above, a smaller share of us are working.

Additionally, there are 5.6 million Americans that have been unemployed for more than 6 months, and of these, 3.9 million have gone unemployed for a year or more.  Indeed, these 5.6 million out of work for half a year or more represent fully 42.5% of our unemployed.  This, of course, is in addition to those millions that have given up on finding a job.  This long-term unemployment rate forms a vicious circle, also.  The longer people go unemployed, the less (re)hirable they become.  Reasons for this vary, but they include deterioration of skills and the stigma of having already been long-term unemployed.  This can lead, domestically, to the same situation that has occurred in Europe: an underclass of semi-permanently unemployed labor develops, with all of the negative implications for any hope of overall productivity, and regardless of what we might think of social welfare programs, for those programs as well.

There’s another dimension to this negative feedback loop: a National Bureau of Economic Research Working Paper, “Recessions and the Cost of Job Loss,” by Steven Davis and Till von Wachter found that workers who lose their job when unemployment is low—below 6%—lose on average 1.4 years’ worth of earnings.  This is bad enough, but it turns out that those who lose their jobs when unemployment is above 8%—the current jobless population—lose 2.8 years’ worth of their pre-job-loss wages, or twice as much.  Von Wachter, et al., also found that unemployed workers’ earnings fall 1% for each additional month they’re out of work (recall the long-term unemployed numbers above), and that those losses can last for years even after they find another job.  There’s further fallout from this: those lower earnings result in less revenue for government regardless of tax rates and regardless of what we might think of how much money government actually needs.

The longer the government stays in the way of the economy and our recovery, the worse our economy will be and the more difficult and slow any recovery will be because the more entrenched these feedback loops will get.

*BLS-speak for “persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.”

Basic Economics

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A thought on Keynesian economics.  Brad DeLong offers this thought concerning our current debate over government spending:

The government purchases $100 billion of goods, issues $100 billion of bonds, and raises taxes by $3 billion a year in order to amortize the bonds.  Government purchases go up by $100 billion this year.  Private consumption goes down by $3 billion this year.  Net fiscal impetus is not $0 but rather $97 billion.  Cochrane [and other Keynesians] doesn’t understand the Ricardian Equivalence argument he is trying to make.

Keynesians think $97 billion were created through this spending and taxing program and that government spending is a good.  But having sold $100 billion in bonds generate this “demand increment,” from where would those $100 billion have come, and to where would they have gone otherwise?  The Keynesian view can be summarized in either (or both) of two ways: supply creates its own demand, or demand creates its own supply. Talk about trickle down, or building fields of fancy and hoping fanaticizers come.

No, what goes on actually is this.  Falkenblog commenter Aaron Brown explains:

The main point is…that people react to the $100 billion future tax increase (or spending cut, or reduction in value of nominal assets from inflation, or some other loss).  You might argue that people will under-react in some cases, but it’s highly implausible that they don’t react at all, or that they systematically under-react (and there’s no data supporting either implausible contention).  I think systematic over-reaction is plausible (although also has no empirical evidence) since once currency debasement begins i[t] almost always seems to accelerate.

The question of where the $100 billion would have gone otherwise is a different one.  It could come from private consumption or private investment, in either case likely making the net effect of the stimulus spending negative, even before factoring in the future costs.  Government takes money today from privately-selected uses to government-directed ones (loss of utility there) and also must take money tomorrow from privately-selected uses to repay the debt.

And since the economy continues to be depressed from the government having withdrawn so much money from it for its own spending, government must, apart from tomorrow’s taking for current borrowing, repeat the whole borrowing and taxing cycle tomorrow, also.  This continues to hold down the economy, as we saw with the government’s “stimulus” spending in the Great Depression, and as we’re seeing today.  Brown continues:

The Keynesian hope is that today’s $100 billion comes from hoarding or asset bubbles, in which case the net effect could be neutral or even positive.  The further hope would be that the future debt repayment will go to sound private investment or elimination of future wasteful spending (sort of “stuff then starve the beast”).

However “hoarding” and “bubble” are in the eye of the beholder. So even if you make the assumption people under-react to the future implications of stimulus spending, you also have to assume that the government’s judgment using other people’s money, with officials being paid whether they are right or wrong, is better than people making choices with their own money, bearing the losses if they are wrong.

If people are correctly preparing for future bad times instead of “hoarding” or correctly anticipating a rise in nominal asset prices instead of feeding a “bubble”, then the stimulus will be doubly harmful.

But the fact is, we don’t hoard.  We (both individual and business) save/invest.  We may have a good idea of why we’re saving—a new house, future retirement, or future expansion—or we may not, saving only against an inchoate reservation about the future—but this isn’t “hoarding.”  And government judgment?  We’re seeing how that’s playing out with the government’s substituting its judgment for ours in its use of our money for its entitlement programs.  Keynesians are all about the superiority of government’s judgment.  Otherwise, they wouldn’t keep taking our money and spending it for us, even (especially) when we don’t want to spend, in order to stimulate our economy (which, just incidentally, Keynesians also view as government’s economy).

h/t to Eric Falkenstein at Falkenblog.

Gridlock Works

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Lost in the hoo-raw over the payroll tax reduction extension at the end of the year was Congressional inaction on a couple of other weighty matters—and this inaction redounds to our benefit.

Congress failed to continue a 45 cent per gallon tax credit for corn-based ethanol and a 54 cent per gallon tariff on imported ethanol (mostly from Brazil—Obama wants us to be one of their best customers).  Since these two items were among the few things Congress even constructed reasonably—they actually had sunset clauses—they expired Dec. 31.  Of course we can expect the Progressives to attempt to redress this egregious failure or to score the evil Republicans for stopping a resumption—that is, if the Republicans find their courage, lost in the debt ceiling fiasco and which loss was underscored by their screw-up on the payroll tax reduction, and block a resumption.

Another useless “green” subsidy expired through Congress’ inaction, also: the thousand dollar tax credit for installing an electric car charging station in a residential garage expired, as did the related tax credit (up to $30 thousand) for installing a commercial charging station.

Unfortunately, the gridlock didn’t achieve a sweep: fuel refiners still are required to add 36 billion gallons of ethanol to their fuel mixes by 2022, and the (maximum) $7,500 tax credit for buying an electric car remains in place.

Of course, as with all subsidies, these had just made the subsidized items more expensive.  The 45 cent credit for the ethanol-in-gasoline just followed the fuel right into your cost at the pump, for instance.  The $6 billion per year we taxpayers were being hit for this credit bought everyone else’s ethanol gasoline.  And we paid those $6 billion even when we bought an electric car, instead.  Those of us that have bought one; sales are steady, but far from outstanding.

That credit for buying the electric car is interesting in its own right.  Just to take an anecdote for an illustration, a Ford Fusion (ignoring the usual haggling, and only looking at MSRP) runs around $20 thousand.  The correspondingly ungussied-up Fusion Hybrid is a bit under $29 thousand.  With the subsidytax credit, that drops the Hybrid to a shade over $21 thousand.

In some cases, the credit doesn’t do the buyer as much good, though.  The Tesla’s Model S is a $50 thousand electric car, and their Roadster seems, from Tesla‘s Web site, to be of a price that if you have to ask, you can’t afford it.  The tax credit doesn’t have so much practical effect here.  As to the Fisker Karma, well, that electric car isn’t available at any price, at least for a while: its batteries are…defective.  The credit is useless for it.

Maybe instead of renewing the ethanol subsidies, we can get Congress to eliminate the electric car subsidy and the requirement to dump ethanol into our gasoline, too.  Keep in mind that ethanol is hard on your car‘s engine.

Or am I hoping for too much change this year?

What’s in it for the New Year?

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Irwin Stelzer, of The Weekly Standard, offers some excessively realistic predictions for 2012.

Some examples follow; their accuracy, as Stelzer points out, depends on the likelihood of some things occurring—whether you believe in certain “ifs,” in his terms.  Stelzer mentions certain possibilities in Europe, but I’ve dwelled on the doings of that continent several times already; I’ll just mention some of his “ifs” for the US.

If you believe that the recent jagged but downward trend in claims for unemployment insurance foretells a drop in the unemployment rate that will be reported on Friday, and if you give weight to recent cheery numbers such as the uptick in regional indices of economic activity, you will stop worrying about the possibility of a renewed collapse in the jobs market.

If you read the recent upsurge in consumer confidence and spending to be suggesting that the demand side of the economy is ready to contribute to a more rapid recovery, you will murmur a word of thanks to the sainted John Maynard Keynes, and face 2012 with equanimity

You’ll also be, I think, ignoring the spike nature of the hiring, as it was primarily for temporary labor to man the retail stores and related endeavors as retailers and suppliers ramped up for that part of the year—Thanksgiving through New Year’s—when consumer shopping itself spikes for holiday buying.  You’ll also be ignoring this same season’s normal spike in optimism as the Christian optimism that underlies the two holidays dominates, as does the festive nature of the season, at least for a little bit.  And you’ll be ignoring three years of belt-tightening under these difficult economic conditions that produced what economists call pent-up demand: buying has been put off, and put off, and put off, until necessary things absolutely must be bought—or the feeling of too-tight living must be relieved at least a little.

The holidays are over.  The next few jobs and spending reports and consumer confidence readings will be interesting.

On the other hand,

If you believe that the continued fall in house prices—down in October for the 13th consecutive year-over-year decline—is more significant a harbinger than the recent modest pickup in sales, you also believe experts who guess that the bottom of the housing market will not be reached until 2015. That bodes ill for the jobs market….

If you believe that the recent spurt in consumer spending will prove unsustainable because it has come at the expense of savings…you believe the demand…will remain too weak to sustain [growth.]

See above re jobs and spending.

If you believe that the new round of regulations being readied by the Obama administration for the new year will frighten businesses, especially job-creating small businesses, you also believe that business investment is unlikely to provide much of a boost to the economy.

See above re jobs, and think about an ability to continue spending, even were a desire to do so present.

Stelzer then concludes, in keeping with the rump of the holidays, on an optimistic note:

…longer term the outlook brightens. America is still the world’s largest source of major innovations. It remains the home of risk-taking venture capitalists, deep and liquid securities markets, and a labor market so flexible that thousands can flee, and indeed are fleeing high-tax, regulation-heavy, union-ridden California for booming Texas. It is a safe haven for investors and the country of choice by immigrants.

But given the state of our educational system, for how much longer can we innovate?  Given the state of our economy, for how much longer can our jobs engine—small and medium businesses—afford to pay for innovation, or take risks involving innovation—or any other risks, come to that?  Given the present administration’s drumbeat of attacks on business—regulations Stelzer also mentions—for how much longer will small and medium businesses be willing even to try?  Given the present administration’s steady drumbeat of attacks on right to work states (vis., NLRB’s attack on South Carolina via its suit against Boeing for the miscreancy of wanting to build airplanes in that state), for how much longer will there be states that are sanctuaries for business, for innovation?  And he misses the fact that, in this economy, immigration is way down.

I’m not as sanguine about the coming year, or the years after, if we continue on our present course.

Free Market Capitalism And Democracy

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I want to spend a little time talking about the relationship between free markets and democracy and about how closely connected the two are to each other.

A free market in this context is a market in which the participants—buyers and sellers, producers and buyers, businesses and customers, i.e., any pairing you’d care to think of involving people exchanging items of value—are free to determine for themselves both what it is that’s of value and the terms, if any, by which they’re willing to exchange those things.  Moreover, since the participants are free to bargain among each other, their collective choices, summarized into a general supply of and demand for goods and services and money determine general—and since voluntary, constantly fluctuating—terms of exchange: what can generally be expected to be available for buying and selling, and at what prices.

Capitalism in this context means private ownership of property, including money, and of the means of production: one’s body, including labor output; one’s thoughts, including intellectual property and output; and physical plant, including the entire gamut from individual hammers and screwdrivers up through whole plants and companies that use plants and employ physical and intellectual labor.  Further, capitalism occurs within the framework of a free market, and it facilitates accumulation of capital in a broad variety of forms for profit, for future expansion, and for development of new products and/or means of production.  Thus, capitalism underpins free markets.

Democracy is a means, often political, by which the members of a community decide for themselves a variety of matters, usually by voting in some manner.  A democracy may use a government as a mechanism for arriving at decisions, but in a democracy that government is subordinate to the people.  This is as opposed to a government originating decisions and handing them down to a subject people, with the people being subordinate to the government.

The aggregate of individual economic decisions is what makes up an economy.  In a free market, capitalist economy, individuals, at bottom, vote on what we want produced, vote on what we want to possess or to consume, with our economic property: dollars (which we earn in another component of the free market capitalist economy, the labor market, in which we sell our labor for a price voluntarily agreed on with an employer) and any other items we might offer in an exchange.

Every purchase we make, every sale we make, is the outcome of our voice speaking and the result of our choice made.  I’ve cited Adams before, but he’s applicable here, too: an individual’s happiness—the pursuit of which is one of those inalienable rights acknowledged in our Declaration of Independence—is this:

All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.

Where we are free to choose for ourselves what we will do with our property, we there are free to develop our own lives toward our own goals.  And our economic property is founded on our natural right of property in our lives, our bodies, our minds, and the things we produce with those.  (As an aside, this natural right, among others, is acknowledged in our Declaration of Independence, as well as in Adams’ Massachusetts Constitution.)

It is this democracy of a capitalistic free market that enables us to manage our own ends, to reach for goals of our own choosing.  This is where we exercise our property rights in our own outputs.

And we must do so: if government exercises rights in our property, it also has control over our political property: it can give or withhold from us according to its approval of our voting.  Any time a government determines these things for us, even indirectly, by determining the terms of our exchanges, by determining the things we will be permitted—or required—to exchange, regardless of lofty motive, we individual participants lose our vote, we lose our voice: government is speaking, not for us and saying what we have instructed it to say; it is speaking, rather, to us and saying what its instructions to us are.

This is a two-way street.  Without political democracy, we cannot have the economic democracy of capitalistic free markets.  Within political democracy, we individually and freely vote with our political property for the things we need and want; it is through political democracy that we are able to act to preserve the freedom and capitalist nature of our markets.  The free market, our individual ownership of our property and of our productive facilities, are both demonstration and constructor of democracy.

In the end, free markets, capitalism, and democracy each needs the others; none can exist without the other two.  In fact, they are the same; they are merely economic and political sides of the same coin.