Tag: economics

Obama’s attempt to address unemployment and the economic contraction can best be described as “quixotic”. Another apt adjective would be “doomed”:

The White House scrambled Monday to finalize a new jobs initiative as President Obama nominated the last member of the economic team that will be charged with carrying it out. In tapping Alan Krueger, a Princeton University professor and noted labor expert, to be chairman of the Council of Economic Advisers, Obama turned to an economist who officials said was well suited to guide the White House through a jobs crisis…. Obama’s nomination of Krueger would largely reconstitute the economic policy team inside the Treasury Department during the first two years of the administration. At the time, Krueger served as Treasury Secretary Timothy F. Geithner’s top economic adviser. His work overlapped with that of Gene Sperling, who was a top adviser on budget and tax issues.

The Krueger appointment only makes sense, given that Obama’s economic policy team did such an effective job in 2009 and 2010, avoiding the Second Great Depression and subsequently producing seven straight quarters of economic recovery, right? Let’s look at the elements of the proposed plan:

1. a tax cut that would directly reward companies for hiring new workers

The big companies already have billions parked in offshore accounts. The tax cut won’t be big enough to balance the risk and additional expenses that new hires impose on small companies. Conclusion: irrelevant, but at least it won’t cost anything.

2. new spending for environmentally friendly construction and for rehabilitating schools

This is just more of the same Samuelsonian stimulus, but not so much that the demand for labor it will create can’t be met by the existing construction labor force that is already half-idle due to the collapse in the real estate markets. Conclusion: this will increase federal debt and create no new employment.

3. clean-energy tax cuts.

Actual tax cuts will do nothing. I’m guessing these are actually subsidies disguised as tax credits. Conclusion: More federal debt, more malinvestment, no new employment.

4. programs to target long-term unemployment, potentially including a version of a Georgia unemployment insurance program that pays employers to hire workers who have been unemployed and provides funding for training.

Theoretically more useful, depending upon the industry. Serious employer-provided training could be a genuinely positive long-term boost to employment if it was combined with import tariffs in manufacturing industries, especially if tighter immigration restrictions were imposed as well. But since neither trade restrictions nor immigration restrictions will be incorporated and the training will probably be oriented towards low-skill service industry jobs, all of the subsidized positions will disappear as soon as the subsidies do. Conclusion: expensive and irrelevant. A 2012 Census would have the same effect and likely prove more useful.

5. new programs to lift the housing market, such as a refinancing initiative that could pump tens of billions of dollars into the economy.

Conclusion: This is the Bank of America bailout signaled by Warren Buffet’s investment. I suspect the plan will somehow involve shifting household debt to the federal sector and thereby attempting to encourage homeowners to take on more debt. This might involve something like a federal guarantee for X amount of debt with administration-approved banks in return for every XY amount of new debt borrowed from BACthose banks. The Fed and the administration are desperate to get the household sector borrowing again since the trillions in financial sector debt they ate in 2008 didn’t even slow down the decline in financial borrowing. Conclusion: if large enough, it would trigger a short term spending and employment boost combined with another debt-deflation disaster within three years.

6. renewing — and potentially expanding — ongoing efforts, such as a two-percentage-point cut in the payroll tax.

Trivial. They’ll have to eliminate it for at least a five year period for this to have any effect on unemployment.

This doesn’t even include the plan to extend “emergency” unemployment benefits, which will tend to increase the unemployment rate. The only way the Obama administration is going to reduce the unemployment rate is to continue the Bureau of Labor Statistics’s practice of artificially lowering the labor force participation rate to keep U3 below 10 percent. Of course, the continued decline in the Employment-Population Ratio to pre-1953 levels will expose this predictable shenanigan.

This promises an amount of amusement, as Sam Harris has unaccountably decided to dabble in economics:

I’ve written before about the crisis of inequality in the United States and about the quasi-religious abhorrence of “wealth redistribution” that causes many Americans to oppose tax increases, even on the ultra rich. The conviction that taxation is intrinsically evil has achieved a sadomasochistic fervor in conservative circles—producing the Tea Party, their Republican zombies, and increasingly terrifying failures of governance.

Sam is off to a bad and overly politicized start. First, Sam simply has it wrong as there is very little conviction that all taxes are intrinsically evil, since most of those opposing the income tax have no problem with a flat tax, sales taxes, or excise taxes. No one expects the government to do without any funding at all, it is the amount of funding required that is at issue. Thus, it is not an issue of taxation, but rather one of government spending. Harris also gets the Tea Party wrong, as it is a rebel force within the Republican Party that is primarily opposed to the pro-spending Republican establishment and is focused on unseating certain types of Republicans during the nomination phase rather than electing Republicans in the general elections. This should be obvious, as the Tea Party began in opposition to a Republican administration, not a Democratic one.

Happily, not all billionaires are content to hoard their money in silence. Earlier this week, Warren Buffett published an op-ed in the New York Times in which he criticized our current approach to raising revenue. As he has lamented many times before, he is taxed at a lower rate than his secretary is. Many conservatives pretend not to find this embarrassing.

Warren Buffett is a corrupt old bag of shit. He steals from the American people with the connivance of the Wall Street bankers, the Bush administration, and now the Obama administration. Witness his little deals with Goldman Sachs and now Bank of America. To point to Buffett as any sort of moral examplary indicates that Harris has absolutely no idea what he is talking about. Buffett is the poster boy for how government creates the very income inequality that bothers Harris so.

Conservatives view taxation as a species of theft—and to raise taxes, on anyone for any reason, is simply to steal more. Conservatives also believe that people become rich by creating value for others. Once rich, they cannot help but create more value by investing their wealth and spawning new jobs in the process. We should not punish our best and brightest for their success, and stealing their money is a form of punishment.

How is taking money from others utilizing the threat of violence not a form of theft? It is true that not all rich people become rich by creating value, of course. Some inherit it, but more often these days, they do so through government-enabled gambling and government corruption.

Of course, this is just an economic cartoon. We don’t have perfectly efficient markets, and many wealthy people don’t create much in the way of value for others. In fact, as our recent financial crisis has shown, it is possible for a few people to become extraordinarily rich by wrecking the global economy.

Like, for example, Warren Buffett. Buffett creates nothing, neither do the financial institutions, which presently skim off around 30 percent of all the corporate profit in the USA.

Nevertheless, the basic argument often holds: Many people have amassed fortunes because they (or their parent’s, parent’s, parents) created value. Steve Jobs resurrected Apple Computer and has since produced one gorgeous product after another. It isn’t an accident that millions of us are happy to give him our money.

But even in the ideal case, where obvious value has been created, how much wealth can one person be allowed to keep? A trillion dollars? Ten trillion? (Fifty trillion is the current GDP of Earth.) Granted, there will be some limit to how fully wealth can concentrate in any society, for the richest possible person must still spend money on something, thereby spreading wealth to others. But there is nothing to prevent the ultra rich from cooking all their meals at home, using vegetables grown in their own gardens, and investing the majority of their assets in China.

And the inevitable atheist tendency towards totalitarianism finally shows through. Rich people aren’t “allowed to keep money”. They have it. It’s theirs. As in, not yours, Sam. This is called the principle of private property, and upon it all the wealth of the Western world is founded. Or rather, was founded before it was turned into collateral in a ponzi scheme.

Bill Gates and Warren Buffet, the two richest men in the United States, each have around $50 billion. Let’s put this number in perspective: They each have a thousand times the amount of money you would have if you were a movie star who had managed to save $50 million over the course of a very successful career. Think of every actor you can name or even dimly recognize, including the rare few who have banked hundreds of millions of dollars in recent years, and run this highlight reel back half a century. Gates and Buffet each have more personal wealth than all of these glamorous men and women—from Bogart and Bacall to Pitt and Jolie—combined.

In fact, there are people who rank far below Gates and Buffet in net worth, who still make several million dollars a day, every day of the year, and have throughout the current recession.

Some people have more money than others. Big deal. I don’t see Sam handing over his royalties to the poor. If he’s a typical atheist, he gives a lower percentage of his income to charity than Bill Gates or Warren Buffett does.

And there is no reason to think that we have reached the upper bound of wealth inequality, as not every breakthrough in technology creates new jobs. The ultimate labor saving device might be just that—the ultimate labor saving device. Imagine the future Google of robotics or nanotechnology: Its CEO could make Steve Jobs look like a sharecropper, and its products could put tens of millions of people out of work. What would it mean for one person to hold the most valuable patents compatible with the laws of physics and to amass more wealth than everyone else on the Forbes 400 list combined?

This is actually a very good point and something which has concerned me for nearly 20 years. I remember going over a list of 100 employees with my father and realizing that about 10 of them actually did anything particularly relevant to producing the products we sold. Everyone else was basically talking to other people or filling out forms.

How many Republicans who have vowed not to raise taxes on billionaires would want to live in a country with a trillionaire and 30 percent unemployment? If the answer is “none”—and it really must be—then everyone is in favor of “wealth redistribution.” They just haven’t been forced to admit it.

Dude, they already kind of do. There may not be a trillionaire yet, but since the Employment-Population Ratio is presently 58.1, that means 41.9% of the population is already not employed. And if he means U3, as I showed yesterday, that’s already over 15%. I haven’t recalculated U6, but if that’s not over 30% now, it’s very close.

Yes, we must cut spending and reduce inefficiencies in government—and yes, many things are best accomplished in the private sector. But this does not mean that we can ignore the astonishing gaps in wealth that have opened between the poor and the rich, and between the rich and the ultra rich. Some of your neighbors have no more than $2,000 in total assets (in fact, 40 percent of Americans fall into this category); some have around $2 million; and some have $2 billion (and a few have much more). Each of these gaps represents a thousandfold increase in wealth.

Some Americans have amassed more wealth than they or their descendants can possibly spend. Who do conservatives think is in a better position to help pull this country back from the brink?

The problem has nothing to do with income inequality. In fact, the income inequality stems from the real problem, which is the massive quantities of debt in the system. The relatively recent increase in income inequality is primarily an artifact of the massive quantities of financial sector debt combined with the way in which the federal government – the very institution Harris imagines using to reduce income equality – is providing a backstop insuring the very wealthiest against the negative consequences of the huge gambles they are taking. For example, Warren Buffett was probably the primary beneficiary of the federal government’s $85 billion credit line to AIG, $13 billion of which went directly to paying off Goldman Sachs.

I will address his addendum in a future post.

It’s interesting how so few of the objective measures tally well with the GDP statistics:

U.S. incomes plummeted again in 2009, with total income down 15.2% in real terms since 2007, new tax data showed on Wednesday. The data showed an alarming drop in the number of taxpayers reporting any earnings from a job — down by nearly 4.2 million from 2007 — meaning every 33rd household that had work in 2007 had no work in 2009.

Average income in 2009 fell to $54,283, down $3,516, or 6.1% in real terms compared with 2008. … Compared with 2007, average income was down $8,588 or 13.7%.

So, income is down 15.2% and I previously calculated that current U3 unemployment comparable to the Depression-era estimates are around 15.5%. I’m just not seeing a lot of economic growth there, seven straight quarters of reported GDP growth notwithstanding.

He also doesn’t anticipate QE3 from Jackson Hole:

in 2000 an economist named Ben Bernanke offered a number of proposals for policy at the “zero lower bound.” True, the paper was focused on policy in Japan, not the United States. But America is now very much in a Japan-type economic trap, only more acute. So we learn a lot by asking why Ben Bernanke 2011 isn’t taking the advice of Ben Bernanke 2000.

Back then, Mr. Bernanke suggested that the Bank of Japan could get Japan’s economy moving with a variety of unconventional policies. These could include: purchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4% range for inflation, to be maintained for a number of years,” which would encourage borrowing and discourage people from hoarding cash; and “an attempt to achieve substantial depreciation of the yen,” that is, to reduce the yen’s value in terms of other currencies.

Was Mr. Bernanke on the right track? I think so — as well I should, since his paper was partly based on my own earlier work. So why isn’t the Fed pursuing the agenda its own chairman once recommended for Japan?

We’ll see what Ben Shalom has to say soon enough. But I note that gold buyers would have to be salivating at the idea that the Fed would target a 4% inflation rate. I just wonder why Krugman doesn’t go all the way and call for electronic currency that actually degrades in face value over time.

And give Rick Perry some credit, if firing that public shot across Bernanke’s bow was sufficient to intimidate him. And we would be remiss to fail to note another downward revision to GDP.

Gross domestic product growth rose at annual rate of 1.0 percent the Commerce Department said, a downward revision of its prior estimate of 1.3 percent.

Don’t worry, they’ll revise it into negative territory long after the fact, just like they did for 2008.

UPDATE – “Federal Reserve Chairman Ben S. Bernanke said the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them.”

Translation: No QE3 until after the autumn round of market crashes.

Readers here are aware that I have staunchly maintained the U.S. economy has been in an economic depression since 2008. I have done so despite NBER declaring the “recession” over in 2009 and in the face of seven straight quarters of positive GDP growth statistics because I don’t believe that either the agencies or the statistics they report have much, if anything, to do with the observable economic reality.

To give one example, the U3 unemployment rate is presently reported at 9.1%. But this is a heavily massaged number which not only depends upon survey-based employment estimates, but upon the subsequent manipulation of the raw data. Since it’s not possible to radically alter the number of reported “employed” without looking as if they are blatantly manipulating the numbers, the BLS manages to keep the official unemployment rate artificially low by reducing the size of “the labor force”, chiefly through reducing “the participation rate”.

However, is it reasonable to believe that people are any less inherently willing to work in these difficult economic times than they were in the year 2000? I don’t see any justification for it. The suggestion that something is amiss can be seen when comparing the labor force participation rates with the employment population ratios (EPR) for 1973 and 2000 versus today. Given that the percentage of women participating in the labor force has methodically risen from 44.7% in 1973 to 59.2 in 2009, and that this increase has outpaced the exit of elderly men from the labor force since 1973, the current overall participation rate should be significantly higher than it was in 1973. But this is not the case, according to the BLS.

Dec 1973 Participation rate 61.2 EPR 58.2 U3 4.9
Jan 2000 Participation rate 67.3 EPR 64.7 U3 4.0
Jul 2011 Participation rate 63.9 EPR 58.1 U3 9.1

Now, if we simply compare the present number of reported employed to the present size of the civilian, non-imprisoned population, but calculate the labor force based on the 2000 participation rate, we get an unemployment rate that is 50 percent higher than the currently reported rate of 9.1%. Note that numbers given are in thousands as per the BLS.

239,671 Civilian non-imprisoned population x.673 participation rate equals

161,299 Labor Force minus
139,236 Employed equals
22,063 Unemployed

22,063 divided by 161,299 equals 0.13678

This means the current U3 unemployment rate according to the BLS metric should be 13.7%, not 9.1%. Note that this is higher than the “unemployment rates” reported in the first two years of the Great Depresion, 1930 (8.9%) and 1931 (13.0%). Please also note that the two historical “unemployment rates” are estimates made well after the fact as the BLS didn’t track unemployment statistics until 1948. Finally, one also must take into account that the current rate would be considerably higher were it not for the 2,868,000 more people that are now employed by the federal government than were employed in 1940, much less before the New Deal of 1933. Including these extra 2.8 million government workers in the unemployed list, as one must do in order to make a reasonable comparison between 2011 and 1930-31, indicates a comparable “unemployment rate” of at least 15.5%.

A second sign is the woeful state of the housing market. “A telling sign of how bad things have gotten for the housing industry: Prices have dropped more since the recession started, on a percentage basis, than during the Great Depression of the 1930s. And it took 19 years for prices to fully recover after the Depression.”

Of course, we can always apply Paul Krugman’s reasoning and launch an alien war to solve the economic problem. If we can simply arrange for 30 million people to be slaughtered by the aliens, that will reduce the labor force and lead to full employment overnight.

I swear, Neo-Keynesians must never look at debt statistics. I mean, they literally NEVER seem to look at them! Our favorite Nobel Prize-winner comments on what is supposed to be the mysterious failure of interest rates to rise in line with the massive expansion of government debt since 2008 and erroneously concludes that this proves his belief in unicornsthe ability of government to borrow indefinitely without affecting interest rates:

I mean, common sense — or at least common sense as the WSJ sees it — would tell you that massive government borrowing would send interest rates soaring. And that’s certainly what the WSJ editorial page told its readers would happen. Only us fancy-schmancy Keynesians said otherwise; and here’s what actually happened:

Yes, interest rates have declined from 4.7% in 2007 to 2.3% in 2011 even as government borrowing has almost doubled, but what Krugman fails to point out is that the neo-classicals at the WSJ were assuming, incorrectly, that the private demand for debt, (a 12x larger factor), would continue to increase, and therefore increased government borrowing added on top of that would cause overall debt to expand in excess of its average annual post-WWII rate of 8.7%. This OVERALL increase in demand for debt would increase the price of debt, thereby causing interest rates to rise. All very sensible and perfectly in line with both post-war economic history and basic economic theory alike.

However, what the WSJ failed to anticipate was that despite the 82.9% increase in government borrowing since 2008, total debt outstanding only grew 4.8% in 2008 and actually SHRANK 0.32% in 2009 and 0.87% in 2010. That’s not a liquidity trap, that’s a 22.5% demand gap between the overall amount of debt anticipated and the actual amount borrowed!

Even an Econ 101 student knows what happens to price when supply goes up and demand goes down. The price goes down. Interest rates are at historic lows for the obvious reason that OVERALL demand for debt, relative to GDP, is at historic lows as well, even though the federal government sector has increased rapidly. The WSJ made what at the time appeared to be a safe and perfectly reasonable assumption, given that between 1946 and 2007, there had never been a single year in which overall debt grew less than 4%. Their assumption also happened to be absolutely wrong, but the incorrect nature of that assumption does not mean that Krugman and his fancy-schmancy Keynesian-imagined exception to the law of supply and demand is therefore correct.