Tag: economics

I’ve been pointing out this wage stagnation for years; many people even used to argue with me about whether it was real or not. Perhaps in another decade, the US Census Bureau will also admit that these declining wages are the result of a) 2x more women in the post-1950 workforce, and, b) post-1965 immigration:

The real median income of American men who work full-time, year-round peaked forty years ago in 1973, according to data published by the U.S. Census Bureau. In 1973, median earnings for men who worked full-time, year-round were $51,670 in inflation-adjusted 2012 dollars. The median earnings of men who work full-time year-round have never been that high again.

In 2012, the latest year for which the Census Bureau has published an estimate, the real median earnings of men who worked full-time, year-round was $49,398. That was $2,272—or about 4.4 percent—below the peak median earnings of $51,670 in 1973.

Why 1973? Two reasons. The consequences of the 1965 change to immigration law was beginning to take effect and it marked the year that the number of old men leaving the work force stopped balancing the number of young women entering the work force. Essentially, the system was structurally rebalanced to substitute inexpensive young women of child-bearing age in the work force for expensive old men of retirement age.

Which means that young women have been forgoing families so that they can be taxed to pay for old men sitting around collecting social security checks. It was a system structurally and mathematically doomed to eventual failure. When the financial and social security systems collapse, it will be important to remember that it was the encouragement and embrace of careers over marriage that was the necessary factor. Middle-class educated young women were not liberated, they were enticed to enchain themselves to feed the corporate mills in lieu of marriage.

Keep in mind, too, that this only accounts for men who work full-time. If the nonexistent wages of the additional men no longer in the labor force were included in the calculation, the comparison would look even worse. Perhaps one of these days I will bother to work out the numbers, but off-hand, I’d estimate that the 4.4 percent decline from peak median earnings would increase to about 15 percent on the basis of the 10-point decline in the 40-year male employment-to-population ratio.

Women can get as upset as they like about how they should have the right to choose what they want to do and so forth. That doesn’t change the facts. It doesn’t change the math. And it won’t undo the incredible societal damage that has been done by four decades of lowering working men’s wages and producing too few children.

The economic death knells are beginning to ring louder for the USA:

I read a troubling story in the Financial Times about Pfizer’s bid to take over British drug company AstraZeneca. One of the prime reasons that Pfizer is so interested is because the takeover would afford them the opportunity to redomicile the business in England.

Why do this? Because right now they’re paying US corporate tax… which is substantially higher than in the UK. So by moving the business abroad, the company would save shareholders billions. Uncle Sam has a big problem with this. And Congress is jumping all over Pfizer to block the deal… even going so far as to propose RETROACTIVE legislation.

In other words, they’re willing to go back in time to kill the deal before it even gets started.

The FT quotes Oregon Senator Ron Wyden as saying “I don’t approach retroactivity in legislation lightly, but corporations must understand that they won’t profit from abandoning the US…”

Ummm, actually that’s the whole point, Senator. The tax situation is so onerous that people do profit when they leave the US. That’s WHY people leave the US. Duh.

But like the drug companies themselves, Congress isn’t looking at the root cause. They’re treating the symptom. In this case, the symptom is American businesses heading overseas to escape the highest tax regime in the developed world.

The federal corporate tax rate alone can be as high as 38%, and that’s before including state corporate taxes, or personal taxes on the dividend distributions to shareholders.

It’s getting very, very obvious that the US government is desperate for tax revenue, to the point that they’ve entered a vicious circle of negative returns on their efforts. More inquiring minds might wonder what is driving this observable sense of desperation.

Lest you be under the impression that the Federal Reserve is in control of anything, consider this informal Q&A with Ben Bernanke:

RUHLE: … you recently had dinner with Ben Bernanke. What went down? We didn’t get to be there.

EINHORN: Well, it was — I watched him for years in front of Congress and speaking and watched him on TV and “60 Minutes” and —

RUHLE: And what was your opinion of him before you had dinner?

EINHORN: I was — I’ve been critical. I’ve been critical of him for a very long time. And the dinner for me, in one way it was cathartic because I got to ask him all these questions that had been on my mind for a very long period of time, right? And then on the other side, it was like sort of frightening because the answers weren’t any better than I thought that they might be.

SCHATZKER: What did you ask him?

EINHORN: I asked several things. He started out by explaining that he was 100 percent sure that there’s not going to be hyperinflation. And not that I think that there’s going to be hyperinflation, but it’s like how do you get to 100 percent certainty of anything? Like why can’t you be 99 percent certain and like how do you manage that risk in the last 1 percent? And he says, well, hyperinflations generally occur after wars and that’s not here. And there’s no sign of inflation now and Japan’s done a lot more quantitative easing than we’ve done, and they don’t have it. So if there is a big inflation, the Fed will know what to do. That was kind of the answer.

RUHLE: What did you say?

EINHORN: That was it. Then it went to the next question. So then a few minutes later it came back and I got to ask him about the jelly donuts. And my thesis is that it’s like too much of a good thing. Like lowering rates and quantitative easing and these stimulative things, they help but with a diminishing return. And eventually you go too far and it’s like eating the 35th jelly donut. It just doesn’t help you. It actually slows you down and makes you feel bad. And my feeling has been that by having rates at zero for a very, very long time the harm that we’re doing to savers outweighs the benefits that might be seen elsewhere in the economy. So I got to ask him about this.

SCHATZKER: Okay, and what did he say?

EINHORN: Well first of all he says, you’re wrong. That it was good. And then he said the reason is if you raise interest rates for savers, somebody has to pay that interest. So you don’t create any value in the economy because for every saver there has to be a borrower.

And what I came back to him was I said, but wait a minute. You said for a long time we haven’t had enough fiscal stimulus, and who’s on the other side of the low interest trade? It’s the government. And so if the government — if we raise the rates, the government would have to pay more money to savers. You’d have the bigger deficits. You’d create the stimulus, the fiscal stimulus that you’ve been complaining that Congress wouldn’t give to you, right? And savers would benefit from the higher rates and because savings is spent at a very high rate in terms of interest — interest income on savings is spent at a high percentage, you’d get a real flow through into the economy.

It gets incredibly tiresome hearing these idiot Keynesians – and yes, monetarists are Keynesians – constantly reminding everyone that for every buyer, there has to be a seller. Although Bernanke’s formulation is technically incorrect, as there does NOT have to be a borrower for every saver because not all savers are lenders.

We can cut him some slack on that; it was an informal conversation and since the discussion concerned interest rates, only savers who are lenders, (which is to say depositors), were in context here. But what we cannot cut him any slack on is the idea that this statement of the obvious actually addressed the issue.

The real reason there isn’t a risk of hyperinflation is the same reason rates have been keep artificially low for years: we are in an ongoing state of credit disinflation. All that cheap credit has gone into the banks and the equity markets to prop them up, but as Einhorn has noted, the law of diminishing returns is beginning to take effect.

Karl Denninger explains the problem with quantitative easing:

The basic economic equality is MV = PQ; that is, “Money”(ness) X Velocity (times each unit of “moneyness” is spent in a given amount of time) = Price (of each item or service produced) X Quantity (number of goods and/or services sold.)

This is a fact and nothing can change it.

Now here’s the problem — we state “PQ” (otherwise known as GDP) in units of “M”.

If you don’t understand the problem that QE presents (indeed, that any borrowing presents) with this you’re not very bright.

Short-term borrowing — that is, a loan that is quickly extinguished — doesn’t change “M”.  It time shifts a transaction but economically is otherwise a non-event from a monetary perspective.  If I borrow $100 from you to buy a night at the bar, get paid on Friday and give you back your $100 (with or without interest) I have simply changed the night at the bar’s economic event from Friday to Tuesday; further, the event Tuesday now cannot happen on Friday (as well) because the $100 has already been spent.

I have not changed whether it happens at all.

QE, however, is a permanent change in “M”.  It is intended to “make up” for private borrowing for which there is either no demand or no supply.  That is, in the market today there is insufficient incentive for private capital to be loaned either because the interest rate that can be earned doing so is unattractive for the risk inherent in the loan or there is nobody willing and able to borrow at the offered rate.

But since “QE” is not “paid back” and withdrawn it permanently changes the amount of “M” in the system.  Since GDP is stated in “M” to get an accurate account of GDP you must subtract back off any permanent change in “M” from GDP.

QE, on a rolling 12 month basis, is about $1 trillion.  The US Economy is about $17 trillion.  Therefore you must subtract the amount of QE added back out, which is about 5.9% of the total economy!

In other words with the current GDP “growth” of effectively zero (0.1%) the economy is in fact in deep recession as the actual “growth rate” is currently -5.8%.

This is caused by QE.

Zerohedge and other economic globalists don’t understand the real benefit of minimum-wage laws:

Most of our readers probably know what we think of minimum wages, but let us briefly recapitulate: there is neither a sensible economic, nor a sensible ethical argument supporting the idea.

Let us look at the economic side of things first: for one thing, the law of supply and demand is not magically suspended when it comes to the price of labor. Price it too high, and not the entire supply will be taken up. Rising unemployment inevitably results.

However, there is also a different way of formulating the argument: the price of labor must not exceed what the market can bear. In order to understand what this actually means, imagine just for the sake of argument a world without money. Such a world is not realistic of course, as without money prices the modern economy could not exist. However, what we want to get at is this: workers can ultimately only be paid with what is actually produced.

As Mises has pointed out, most so-called pro-labor legislation was only introduced after enough capital per worker was invested to make the payment of higher wages possible – usually, the market had already adjusted wages accordingly.

However, unskilled labor increasingly gets priced out of the market anyway, which is where the ethical argument comes in. If a worker cannot produce more than X amount of  goods or services, it is not possible to pay him X+Y for his work. Under minimum wage legislation he is condemned to remain unemployed, even if he is willing to work for less.

In Switzerland, the unions have recently managed to get the demand for minimum wage legislation on one of the quarterly referendums in the country.

The purpose of the minimum-wage laws have nothing to do with socialism and everything to do with nationalism. This should be obvious by the at-first-glance outlandish proposal to raise the Swiss minimum wage to $25 per hour. But once you understand that Switzerland has learned from the example of the USA and the EU states and is battling to avoid being overrun by cheap-labor immigrants from Africa and Eastern Europe, and the brilliance of the political tactic becomes apparent.

The entire justification for importing tens of millions of Mexicans is the reduction of labor costs, thereby resulting in tremendous damage to the social fabric, the destruction of the middle class, and a permanent change in the political system. All of this can be avoided by raising the minimum wage to a level that ruins the value proposition of the immigrant worker to the large corporations.

As a general rule, the Swiss are among the sanest of nations. If you are asking if they have gone insane, that is a good reason to assume you are missing something. Americans who are interested in salvaging any vestige of traditional America should push hard for raising the minimum wage to at least $20 per hour.

Will wonders never cease? I actually concur with Paul Krugman for once:

Four years ago Chris Christie, the governor of New Jersey, abruptly canceled America’s biggest and arguably most important infrastructure project, a desperately needed new rail tunnel under the Hudson River. Count me among those who blame his presidential ambitions, and believe that he was trying to curry favor with the government- and public-transit-hating Republican base.

Even as one tunnel was being canceled, however, another was nearing completion, as Spread Networks finished boring its way through the Allegheny Mountains of Pennsylvania. Spread’s tunnel was not, however, intended to carry passengers, or even freight; it was for a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. And the fact that this tunnel was built while the rail tunnel wasn’t tells you a lot about what’s wrong with America today.

Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. Not surprisingly, Michael Lewis starts his best-selling new book “Flash Boys,” a polemic against high-frequency trading, with the story of the Spread Networks tunnel. But the real moral of the tunnel tale is independent of Mr. Lewis’s polemic.

Think about it. You may or may not buy Mr. Lewis’s depiction of the high-frequency types as villains and those trying to thwart them as heroes. (If you ask me, there are no good guys in this story.) But either way, spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.

The financial sector is nothing but a gigantic, money-sucking tick on the US economy. None – I repeat – NONE of the claimed benefits it supposedly provides as “the lubricating oil of capitalism” are worth even one-tenth the present cost of the financial sector. There will be no recovery, there CAN be no recovery under the twin burdens of the federal and the financial sectors, which presently account for 48 percent of the outstanding debt in the American economy.

As I have repeatedly shown, the Rising Tide school of economic thought always leaves out the fact that the rising tide must inevitably come at the expense of workers in the wealthier societies:

Branko Milanovic, a visiting professor at CUNY who once served as a senior economist at the World Bank, has tracked worldwide changes in income growth from 1998 to 2008. Milanovic calculates that the middle class in China and India experienced 60 to 70 percent income growth from 1998 to 2008, while growth stalled for the middle and working classes in the United States.

The question then becomes, in Milanovic’s words, “Does the growth of China and India take place on the back of the middle class in rich countries,” especially the United States? Milanovic does not claim a direct causal relationship, but contends that the two “may not be unrelated.”…

Entering the fray, three economists – David Autor of M.I.T., David Dorn of the Center for Monetary and Financial Studies in Spain, and Gordon Hanson of the University of California, San Diego – have analyzed the employment consequences of globalized trade and technological advance.

In a series of papers they wrote together – “Trade Adjustment: Worker Level Evidence,” “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” and “Untangling Trade and Technology: Evidence from Local Labor Markets” — Autor, Dorn and Hanson find that in the case of trade with China, there are very painful consequences for specific categories of American workers.

Their findings show why voters are wary of free trade agreements.

Relative to the average employee in manufacturing, workers in industries that face stronger competition from imports “garner lower cumulative earnings and are at elevated risk of exiting the labor force and obtaining public disability benefits,” Autor, Dorn and Hanson write.
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And if manufacturers are ranked on a scale of 1 to 100 for exposure to import competition from China, between 1992 and 2007, workers in firms high on the exposure scale lost nearly half a year’s pay, compared to workers in firms at the low end of the scale.

And this doesn’t even begin to get into the fact that the expansion of domestic free trade into the international arena would INEVITABLY RESULT in the same sort of labor movement that one sees in the USA. Don’t like the fact that your kids live in a different state? Well, in a true free trade regime, they might have to go to Bangladesh or Peru to find employment.

Free trade is logically incompatible with national sovereignty, the Constitution, and the maximization of human liberty. This should be obvious, as it is an aspect of globalism and a major objective of those who advocate global government.

It’s going to be fascinating to learn how long the great game of Let’s Pretend can continue:

Federal Reserve Chair Janet Yellen, easing investor concern that interest rates may rise earlier than previously forecast, said the world’s biggest economy will need Fed stimulus for “some time.”

Yellen said today the Fed hasn’t done enough to combat unemployment even after holding interest rates near zero for more than five years and pumping up its balance sheet to $4.23 trillion with bond purchases.

“This extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policy makers,” Yellen said at a community development conference in Chicago. “The scars from the Great Recession remain, and reaching our goals will take time.”

The amusing thing is that if you take the GDP numbers seriously, the Great Recession was actually a very minor one. Of course, it’s all fiction at this point, and poorly written fiction at that.

Remember, the Fed always talks about the general economy, but all it actually cares about is keeping the giant banks from collapsing.