The Faces of Unemployment

Our economy is no longer producing jobs at a level that can sustain what we’ve considered a ‘normal’ rate of unemployment of around 5%. Our leaders seem incapable of understanding the dynamics of job creation and think that subsidizing businesses and lowering taxes any way they can on any form of business is going to create the trickle down effect. This was a disproved hypothesis decades ago. They mistake monopoly creation for being pro-free market. This has created some very persistent long term unemployment. It will also create a bigger federal deficit because these folks may not return to the job market and peak wages. This means lower tax revenues in the future. Some may also opt for social security at 62 putting them on the expense side of the deficit quicker than previous generations.

There is increasing attention in the press to the faces of unemployment and two such profiles are out there today. The WSJ journal looks at the face of 50 somethings who have been unemployed or underemployed for nearly two years now. These folks are usually at the peak of the income earning years but instead have been dumped out to pasture unceremoniously early with no real safety nets. They are years away from being eligible for the retirement benefits and medicare their elder boomer brothers and sisters can collect. The 50-something generation–well educated and trained–is now the lost wages generation.

Extending unemployment benefits isn’t free, of course, and has the potential to keep unemployed workers out of jobs for longer. But it could also be preventing a “lost generation,” economists say. That generation is the crop of 50-somethings who might have worked for another decade. Their outlook isn’t bright.

Once older workers are laid off they take the longest to find new jobs. For workers 65 and up, it takes a median of 45.1 weeks to find a new gig. For those 55 to 64, 38.7 weeks. It takes a slightly shorter 30.4 weeks for those who are 45 to 54-years old.

Unemployment checks have the added benefit of helping these people feel like they’re still a part of the labor force. When the checks run out, and with few glimmers of hope in their job searches, they’re more likely to drop out of the labor force and turn to a program like disability.

And unlike a relatively short-term fling with jobless benefits, their attachment to disability is more likely to be permanent.

Facing equally dismal job prospects are the so-called Millennials. These are twenty-somethings that cannot find jobs that meet their credentials. The NYT profiled this group of jobless that can’t even get their feet on the bottom rung of corporate ladders these days. A more detailed look at the future prospects of this generation shows that they may not be better off than their grandparents or parents. EVER. This is from Catherine Rampell; also of the NYT.

There are a few forces behind these trends. One is that generally speaking, it’s harder to make it in today’s job market than it was a few decades ago if you don’t have at least a high school degree, since the expectations for what educational credentials workers should possess have risen. This is in part because the economy is less dependent on lower-skilled, manual-labor-intensive industries like manufacturing, and more reliant on industries that require formally credentialed education and training, like health care. Thus, in general, the earnings potential for the most educated has risen, and that for the least educated has fallen.

Economist Mark Thoma points to two interesting articles on the state of the jobs market. One is buy FED watcher Tim Duy called ” Why is the American Jobs Machine broken?”

Only one word describes the American labor market outcome of the last decade – abysmal. Not only is job growth well below trend, but the quality of jobs is in question. The jobs deficit is even more striking considering the supposed gains in productivity over the past 15 years. Job growth should not stagnate. Resources – including labor – released via higher productivity are supposed to be channeled into expanding sectors. Moreover, productivity growth is supposed to yield improved economic outcomes via higher real wages. Yet as spencer famously shows, labor’s share of output has been steadily decreasing since the early 1980s. This downward trend was interrupted by gains evident during the tech bubble of the mid-1990s. Apparently, only during that brief, shining moment of generational technological change did the productivity story work as we believe it should, at least since the early 1980’s.

The other relevant site is Yves  at Naked Capitalism who discusses a piece by Andy Grove–the former CEO of Intel– at Bloomberg. There’s a follow up link and discussion piece of that article by Rajiv Sethi. Sethi is another economist who blogs. There are quite a few of us out there these days, I guess because we’re all just panicked about what’s been going on the last 10 years and discussing it in a research article with other economists does not get anything real done in the way of public policy. Yves is definitely a modern day Cassandra with well rounded academic credentials as well as practitioner’s viewpoint to all things financial and economic. If any one deserves to be syndicated, it’s Yves. Every one is discussing the impact of all those old manufacturing jobs that have now gone elsewhere and left those folks without high school diplomas with no future. There’s really nothing out there comparable to what used to be good union jobs and blue collar jobs. Sethi, a microeconomist and Grove, an entrepreneur in an industry that thrives on innovation effectively argue that this loss of manufacturing industry will eventually impact our ability to innovate which is really been the prime driver of the U.S. economy since its inception as a mishmash of colonies.

The Grove article is amazing and the discussion of it by the three economists and their readers is fascinating. It’s going to take some time to wallow through it all, but I highly recommend it. Grove believes that the myth of America to continually birth start ups is just that; a myth. It’s a myth birthed by and of course, followed like a religion (an equally implausible myth) by pro-Business politicians. I’m going to use the generic nomer ‘politicians now’, because it’s obviously it’s just not a Republican mental defect any more.

Here’s Groves hypothesis and it’s an earth-shattering and hopefully myth-shattering one. I have no idea why we tell ourselves these stories and believe in them to the point of blinding ourselves to reality and hope. But, there it is. The Groves article is a response to an article by Thomas Friedman. You can read that too if you’re into the new Horatio Alger story of the Reagan fairy tales.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.

Sethi, a practicing microeconomist, takes it back to a need for change in incentives; one of the major points in the Grove article. It’s also something I discussed in my last economics thread, Simple Truths. Sethi doesn’t want to embrace protectionist policy–nor does Yves– but he and Grove and Yves and then back to Thoma say that we need our policy makers to change the incentives. I agree with these greater minds.

Grove recognizes, of course, that companies will not unilaterally change course unless they face a different set of incentives, and that this will require a vigorous industrial policy:

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability — and stability — we may have taken for granted… Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it… If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Update (7/4). In an email (posted with permission) Yves adds:

On the one hand, you are right, any move towards protectionism (or even permitted-within-WTO pushback against mercantilist trade partners) could very quickly get ugly. But the flip side is I wonder if we have a level of global integration that is inherently unstable (both for Rodrik trilemma reasons, international economic integration with insufficient government oversight creates political problems, plus the Reinhart/Rogoff finding that high levels of international capital flows are associated with financial crises). If so, we may have a short run (messiness of reconfiguration) v. long term (costs of really big financial crises) tradeoff.

So why do we give businesses incredible subsidies for doing these activities? Yes, it helps them. But, it does not help the U.S. economy or the American worker or for that matter, the American Taxpayer. Why not give businesses some subsidies if they keep the jobs here and some taxes if they take the jobs elsewhere? This is basically an industrial policy. It’s not a trade policy so it’s not a cry to revive something like Smoot Hawley. No sane economist would suggest setting off a trade war. However, changing the incentives to businesses that bail out on the US to achieve higher profits is something that people with policy responsibility need to take examine. At the very least, we need to stop giving them Federal business. After all, we should be pro-economic growth and development which has no bias towards any particular economic agent. It’s time to quit looking at everything that’s ‘pro-business’ as being good for the U.S. Economy because it is not. That includes putting the criminals in charge of crime scenes something that the Obama administration seems to specialize in.


Simple Truths

One of the useful things about theories and laws–in the sense of scientific method–is that they provide some very simple insight into the way things are. They are not based on wishful thinking or faith. Hypotheses grow up to be theories only with rigorous testing by many many great minds who consistently recreate similar truths in similar circumstances.

Once the theory becomes established, it can be used for many purposes and insights. In economics, we use these things for predictions and policy insights. We know that a given outcome will–with extremely high probability–recur given the same circumstances. There are laws of demand and supply. There are theories on elasticities of supply and demand given prices or income. We have a fairly good catalog of theories that we teach and we make doctoral students reprove over and over again so they too, can establish that insight and make predictions.

Established theories are basically things that are ‘no brainers’ in any field. One such set of theories in economics deals with taxes and subsidies. You tax something, you see less of that thing because it adds cost and dampens both supply and demand for the taxed thing. You subsidize it, you get more demand and more supply because it lowers the cost. As a matter of theory, when you really subsidize something, you generally end up warping the incentives for production and consumption of that good so badly that not only does that market become pretty dysfunctional, but it tends to spread to other markets because it transfers scarce resources–better put to other uses– from some markets to the subsidized market.

In some cases, we purposely warp a market with taxes for policy purposes. This is the case with so-called sin taxes. There is a reason that cigarettes are taxed to the point that the pricing point of a pack of cigarettes approaches the cost of a CD of music or a ticket to a movie. That’s because the government wants to discourage entry to the market to teen smokers. Prices (after tax) of cigarettes typically rival things teens do. These include going to movies or buying music. It forces the teen who might become a smoker into a choice and hopefully, a good one that includes not smoking. In this case, the disincentive is the policy choice. We often subsidize things too like public transportation or public education. This is because we’d see less of them and less public benefit if they were priced to the market or priced to the cost of producing the good. When you study microeconomics which is the study of individual choices within individual markets, you study externalities.

Generally speaking, a good policy will subsidize a good or service with positive externalities and tax a good or service with bad externalities. We usually call these “spill over” costs or benefits because the cost or the benefit of the activity spills over to the public. If a business can’t realize the benefit in terms of profit, the business won’t provide the service or good. If the business can pass the cost of an activity or service on to the public, it will.

Subsidies should only go to places where there are positive spillovers. Taxes should be applied to places where there are negative spillovers. It is not considered a good idea for taxpayers to subsidize harmful activities in economic theory. We have finally lowered our subsidies to the tobacco industry because it’s good policy. The taxpayer shouldn’t be incentivizing a public health issue that they will have to pay for on both ends. First, in the subsidy to the business, and second to the costs of tremendous health problems created by the users. People who benefit neither from growing tobacco, making cigarettes or smoking, shouldn’t be asked to pay all the spill over costs that come from that activity.

This is why subsidies to Oil Companies baffle many of us.

There’s a really good article today in the NYT on the billions of dollars provided by the U.S. Taxpayer to Oil Companies. My students will be reading this shortly, believe me, because it’s a great example of really bad public policy. Among the things that the article mentions is that the drilling rig, The Deepwater Horizon, “was flying the flag of the Marshall Islands. Registering there allowed the rig’s owner to significantly reduce its American taxes”. Transocean basically shopped corporate ownership to several countries to avoid tax liability. But wait, it gets worse.

At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon — a deduction of more than $225,000 a day since the lease began.

With federal officials now considering a new tax on petroleum production to pay for the cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, as well as an increased dependence on foreign oil.

But an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by var-ious credits. These companies’ returns on those investments are often higher after taxes than before.

“The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant,” said Senator Robert Menendez, Democrat of New Jersey, who has worked alongside the Obama administration on a bill that would cut $20 billion in oil industry tax breaks over the next decade. “There is no reason for these corporations to shortchange the American taxpayer.”

Yes, that’s right. President Obama with his green agenda is working on a bill that CUTS $20 billlion in more tax breaks to this industry. But don’t get me started on their ethanol subsidies, it’s the same damned deal. Take food away from being used as food and use it as an additive to fossil fuels. This, too, is bad policy. (To read more on that you may want to check out this link at The Oregonian.)

THIS is what passes as “free market” capitalism these days. Tax payers pay in their tax bills for these horrendous subsidies, then they take it at the pumps too. (In the case of ethanol subsidies, we’ll also take it at the grocery store.) Republicans are much worse. They have no idea that what they are doing is not capitalism. It’s basically encouraging monopolies and monopoly profits as well as distorting resource markets.

Ethanol subsidies, oil drilling incentives, government insurance and loan guarantees for nuclear energy, natural gas subsidies: These proposals tend to have as many or more Republican advocates as Democratic advocates. Even worse, self-described free-market conservatives often rally for energy subsidies and claim it’s not a deviation from their principles.

Today, at the liberal environmentalist website Grist, blogger Dave Roberts takes to task Newt Gingrich. Roberts, with whom I often spar on the Interwebs, has a great (and depressing) argument and analysis of Gingrich’s defense of current energy subsidies and proposal for even more energy subsidies. This is the heart of the argument:

Gingrich and his acolyte defend these subsidies. Why? Says Gingrich, “a low-cost energy regime is essential to our country.”… Fossil-fuel subsidies don’t reduce costs, they shift costs. The burden is moved from energy companies to the public. The result is what we have today: energy that looks cheap because most of its costs are hidden from view.

Even during times of obscene profits (which are pretty much guaranteed by subsidies in a good where the market demand isn’t very sensitive to price changes), we still subsidize these business. Here’s the link to The Grist which basically outs Ginrich as being anything but a capitalist. This is more like the old mercantilism of the past where the king and queen choose a particular company to be blessed with a monopoly and give them some start up funds to go and rape a colony of its natural resources. Think East India Tea Company and the colonies here pre-Revolution. For years, our tax funds have gone to big oil, big finance, and big defense contractors. Lincoln warned of it. Eisenhower warned about it. Teddy Roosevelt and Sherman did something about.

So, here we are again with companies that feed at the public trough while behaving in a way that has nothing to do with public interest. This is no surprise to any economist. We know that the only things corporations are about are maximizing profits and minimizing costs any way they can. They’ll do it by abusing any resource they can, IF we let them get away with it. That’s why there is still slavery, pollution, strip mining, blood diamonds, and for all intents and purposes, wars in places that sit on oceans of oil.

Politicians are all about maximizing their chances of getting re-elected. If they can’t do that, then they maximize their wealth and their after politics career possibilities. This is where we come in. They will continue to do whatever they want to as long as our vote is no longer a check and balance on those behaviors. We have a responsibility to throw the bums out that do this to us.

So, carrots and sticks are important to economic theory and political theory. We know this. The problem is what are going to do about it?


Economic Fairy Tales and other Bed time stories

One of the things that grew out of the Reagan years was a set of myths. Primary among them were economic myths. The first one was that the country was overtaxed. The second was that there was no particular useful role for government. The third was a revival of our country’s Puritan ethos. None of these were particularly helpful and all of them were put to death–in short order–during the Clinton years by theory and empirics. Well, they were put to death by every one but those that rely on faith and ideology rather than theory and data. I see a revival of these myths in the signs of tea partiers. The tea party folks realize we’re losing our way of life. The problem is they are so angry they are looking to Reagan Fairy tales for answers. Republicans and Blue dawgs are playing those fears like magical harps. Fairy tales calm children’s fears, but they do not solve real problems.

A really good example of a stupid hypothesis in Reagan’s VooDoo economics that was soundly put to death by empirics was the Laffer curve.(That was the basis of the argument that we’re overtaxed.) However, I do know some one that has to rely on old articles to bring this ‘view point’ into his classroom. No matter how many ways I insist that it’s not our job to bring failed hypotheses to students he still keeps clapping for this very dead Tinkerbell. He wants to believe he’s over taxed no matter what the data says and I haven’t seen him for awhile but I have no doubt he’s participating in whatever passes for a tea party up in his rural part of Washington.

Paul Krugman’s hair is on fire about the Austerity Myth today. He’s not the only one. Here’s something from The Economist with the same urgency on the international scale called the Austerity Alarm. These articles seem even more prescient given the news about unemployment today. The U.S. economy is not creating jobs. It’s still losing them in large numbers. The economy lost 125,000  jobs last month. The previous dips in the unemployment rate seem to have come from part time Census worker jobs. This one comes from people giving up so they’re not counted. I warned 1 1/2 years ago that the Porkulus bill was not concentrating spending on the right things and too full of useless tax cuts. Surprise! Surprise! Job creation remains elusive. Mortgage rates are at record lows and without bribes to first time buyers, the housing market–perhaps the most central element of the American Dream Fairy tale–looks like a lost market. So, the best our leaders can do in response to all of this is reheat policies that failed during the Hoover Administration.

As Krugman points out, the U.S. and nearly all the world’s economies remain in a deep recession, so why are all the leaders talking about austerity programs and acting like the big issue is that some imaginary set of investors will treat them like Greece if they act responsibly? Why are they repeating the policies that made the Great Depression worse to begin with and then the policies that turned the recovery of the mid thirties into a double dip depression?

Krugman suggests that it’s the power of the village that keeps churning out the myth. It’s not the village economists that embrace this fairy tale. It is our village idiots and unfortunately, they seem to be in charge of economic policy these days. This is not to deny that the U.S. has long term budget problems. Demographics are presenting serious problems to both Social Security and Medicare. Both need to be revamped to meet future commitments. Revamping, however, does not mean tearing down all the buildings in the village to stop one fire from spreading.

So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

So Krugman is a liberal and of course, the argument against him is that all we liberals believe is that the our big daddy government will get us out of trouble. So, why is the same argument coming from The Economist whose subtitle to their op-ed piece reads “Both sides in the row over stimulus v austerity exaggerate, but the austerity lobby is the more dangerous”. They are hardly a bastion of liberal thinkers and they call the austerity hawkers dangerous.

The austerity fad is also distorting politicians’ priorities. Many European governments, for instance, are fixated on cutting their deficits, when they should also be trying harder to shake up their labour and product markets. A new analysis by the IMF suggests that fiscal austerity coupled with structural reforms would yield far higher growth than austerity alone. In America the new deficit-focused climate is preventing politicians from passing a temporary (and sensible) fiscal stimulus package without inducing them to tackle the sources of the country’s huge medium-term deficit by, for instance, reforming social security. The result probably won’t be another Hooveresque Depression. But it could be a recovery that is weaker and slower than it should have been.

Read the rest of this entry »