Saturday Reads: Dismal Science Edition

Good Morning!

I’m going to concentrate on the economy this morning.  You better grab some coffee.

The unemployment rate dropped yesterday for a variety of reasons.  I thought I’d talk a little about that first.   The job growth was fairly strong this month in every sector but government.  This improved the labor outlook for some of the workers hardest hit by the last recession.  However, it was a mixed report–although you wouldn’t know that from the stock market–in that it still showed a number of people who are working part time that don’t want to be and again, a large number of people simply disappeared from the labor force.  Temp jobs surged.   Wage growth is “meager” as shown by graphs in this blog post by Tim Duy.  He also notes that the employment to population ratio remains at a levels not seen since the early 1980s.  This is an interesting situation.  We’re still in a huge hole.  At this growth rate, it will take us until 2019 just to gain back the jobs we had in 2008.

One interesting trend pointed out at Zero Hedge by Tyler Durden is that older workers are increasing the number of hours worked.  There appears to be a basic shift in many of the ‘normal’ labor habits.  Durden calculates an alternative measure to the unemployment rate by including workers that the BLS ignores.  He uses the long-term average labor force participation rate instead of the number of people that are participating now which is shrinking in a very odd way.

… do the following calculation with us: using BLS data, the US civilian non-institutional population was 242,269 in January, an increase of 1.7 million month over month: apply the long-term average labor force participation rate of 65.8% to this number (because as chart 2 below shows, people are not retiring as the popular propaganda goes: in fact labor participation in those aged 55 and over has been soaring as more and more old people have to work overtime, forget retiring), and you get 159.4 million: that is what the real labor force should be. The BLS reported one? 154.4 million: a tiny 5 million difference. Then add these people who the BLS is purposefully ignoring yet who most certainly are in dire need of labor and/or a job to the 12.758 million reported unemployed by the BLS and you get 17.776 million in real unemployed workers. What does this mean? That using just the BLS denominator in calculating the unemployed rate of 154.4 million, the real unemployment rate actually rose in January to 11.5%. Compare that with the BLS reported decline from 8.5% to 8.3%. It also means that the spread between the reported and implied unemployment rate just soared to a fresh 30 year high of 3.2%.

So, the deal is that the labor force participation rate is at a 30 year low.  That’s still the number that puzzles and bothers me despite the good looking job growth.  Why are people leaving the job market?  As shown in Durden’s numbers, it’s not baby boomers.  Here’s some speculation by Edward Harrison of Credit Write Downs who is concerned like me.  Look at the graph on the right from Durden that shows why reason number three isn’t the explanation right now.  The blue line is the participation rate by the older workers (55+) and as you can see it’s headed straight up.

My take on this: A declining labor force participation rate is a bad thing. It says people are dropping out of the labor force. So despite the bullish headline figure, the question still remains as to how robust the jobs market is.

Here are three things to consider:

• Cyclical: that’s the point I made above. Low participation is a negative signal.
• Structural: A lot of people have been pointing to long-term unemployment as a sign that the jobs market is weak. This makes sense and it should put downward pressure on the participation rate as people drop out of the labor force. The difference here is that if the problem is structural and not cyclical, the so-called output gap will continue to be large as throngs of people remain out of the labor force.
• Secular: The first cohorts of boomers started to retire last year. I know many  people that were close to retirement when the recession began in 2007 that have had to change plans. Some have delayed retirement because of financial turmoil. But many others have accelerated retirement unwillingly because they were forced out of the labor force. Expect the loss of boomers to put downward pressure on the labor force for years to come.

My guess is that all three factors are affecting the labor force participation rate here. But I am beginning to think that the structural and secular forces are starting to predominate.

I’m still thinking that younger people may be holding up in school for awhile until things get better but I’d have to do some research to see if the university population is up.  I also think that there’s the discouraged worker factor too.   I actually know a lot of folks that are just hanging in there and cashing in their IRAs or have gone back to school and are living on student loans and or going back and forth between short term jobs and contract work. I guess we’ll see if the trend holds, but to me it’s a worrisome one.  If things were really getting better, those folks should be entering the job market now driving the participation rate up.  Since I’m a financial economist and not a labor economist,  I really don’t know the flows well enough to speculate on anything beyond a theoretical level.  It’s not my research area.

Thomas Fran has written an interesting post at Alternet on “Why We Got Ayn Rand Instead of FDR”.

An appropriate metaphor for the conservative revival is the classic switcheroo, with one fear replacing another, theoretical emergencies substituting for authentic  ones, and a new villain shuffling onstage to absorb the brickbats meant for another. The conservative renaissance rewrites history according to the political demands of the moment, generates thick smokescreens of deliberate bewilderment, grabs for itself the nobility of the common toiler, and projects onto its rivals the arrogance of the aristocrat. Nor is this constant redirection of public ire a characteristic the movement developed as it went along; it was present at the creation. Indeed, redirection was the creation.

…

Here, in one sentence, was a key to the amazing success the Right would shortly enjoy. They had an answer to the bailout outrage, and it was not modulated by lawyerly subtleties or votes-taken-with-nose-held, like the House Democrats who had voted for the TARP. “Let the failures fail”: it was a line that would allow the revived Right to depict itself as an enemy of big business, rooting for the collapse of the megabanks. The Tea Partiers may have looked ridiculous in their costumes, but their central demand was anything but.

Not all “failure” is the same, however. What the newest Right has in mind is something philosophical, something both personal and sweeping. It demands liquidation across the board,  a sort of deserved doomsday for the borrowing-based way of life. But in the great die-off it delights in imagining, the real culprits of 2008 have a way of disappearing from view.

If we watch closely, we can see the cards being switched. Whenever our tea-partying friends warm to the subject of  letting-the-failures-fail—and they do so often—sooner or later they inevitably turn from the bailed-out banks to those spendthrift “neighbors” identified by Santelli, those dissolute people down the street who borrowed in order to live above their station.

This could be why the Republican Presidential Wannabes sound so down right Dickensian.  We’ve had school children offered up as janitorial help.  We’ve had Willard talking about enjoying a good firing and ranting on about how he’s not worried about the poor because they are safe in their safety nets.  Instead of pointing to the business welfare queens, we’ve got poor children being held up as not having the fortitude and values. As Krugman says, Willard doesn’t feel any one’s pain.

Now, the truth is that the safety net does need repair. It provides a lot of help to the poor, but not enough. Medicaid, for example, provides essential health care to millions of unlucky citizens, children especially, but many people still fall through the cracks: among Americans with annual incomes under $25,000, more than a quarter — 28.7 percent — don’t have any kind of health insurance. And, no, they can’t make up for that lack of coverage by going to emergency rooms.

Similarly, food aid programs help a lot, but one in six Americans living below the poverty line suffers from “low food security.” This is officially defined as involving situations in which “food intake was reduced at times during the year because [households] had insufficient money or other resources for food” — in other words, hunger.

So we do need to strengthen our safety net. Mr. Romney, however, wants to make the safety net weaker instead.

Specifically, the candidate has endorsed Representative Paul Ryan’s plan for drastic cuts in federal spending — with almost two-thirds of the proposed spending cuts coming at the expense of low-income Americans. To the extent that Mr. Romney has differentiated his position from the Ryan plan, it is in the direction of even harsher cuts for the poor; his Medicaid proposal appears to involve a 40 percent reduction in financing compared with current law.

So Mr. Romney’s position seems to be that we need not worry about the poor thanks to programs that he insists, falsely, don’t actually help the needy, and which he intends, in any case, to destroy.

Still, I believe Mr. Romney when he says he isn’t concerned about the poor. What I don’t believe is his assertion that he’s equally unconcerned about the rich, who are “doing fine.” After all, if that’s what he really feels, why does he propose showering them with money?

The New York Review of Books has an entire list of economics books up that have to do with austerity and income inequality.   The heading basically sums it up.  We’re more unequal than you think.  Here’s a review of two that I found particularly interesting.

Robert Frank’s The Darwin Economy and Thomas Edsall’s The Age of Austerity provide much-needed information and analysis to explain why so much of the nation’s money is flowing upward. Frank, an economist at Cornell, draws on social psychology to shatter many myths about competition and compensation. While he doesn’t explicitly cite the classical French economist Jean-Baptiste Say, much in his exposition echoes Say’s axiom that “supply creates demand.” This doesn’t mean that if items are put on display, people will automatically buy them. Consumers decide what or if they’ll purchase, and clearly can only do so if they have the credit or money. Even so, the items they decide they want have been created by the suppliers, who put things on the shelves.

Frank carries this a step further. In recent years, he argues, the products and enjoyments set before us have become increasingly enticing—including houses, vacations, television programs, video games, electronic devices, and the attractions of the Internet. In many cases, the rich acquire them first; since what they have and do becomes widely known, emulation descends down the line.

Nor are these just Tiffany trinkets. Frank’s most vivid examples are newly built houses. As the very rich installed grander entrance halls and rarely used bathrooms, the professional classes felt they should have a semblance of such amenities. “By 2007,” Frank writes, “the median new single-family house built in the United States had an area of more than 2,300 square feet, some 50 percent more than its counterpart from 1970.” Indeed, it’s revealing that this expansion was happening as people were having fewer children. However, these homes—along with more elaborate wardrobes, holidays, and technical gear—are costly. If they were to be bought, salaries needed to keep pace.

Hence, I would argue, an unstated but still real compact was made between the employers and the new upper-middle class. Their pay would be raised to support their ascending status. As the samplings in Table B show, while real earnings for the overall workforce have risen only 7 percent since 1985, professions like physicians and professors have done several times better. Incomes of lawyers and executives, for their part, have soared much further than anyone would have forecast a few decades ago.²

One of the reasons the poor do so poorly is that the states have tax structures that are very regressive.  If you didn’t see me link to this down thread yesterday, take a look at how regressive state taxes really are.   Kevin Drum includes a table where you can check on how bad your state treats you.

And then there are state taxes. Those include state income taxes, property taxes, sales taxes, and fees of various kinds. How progressive are state taxes?

Answer: They aren’t. The Corporation for Enterprise Development recently released a scorecard for all 50 states, and it has boatloads of useful information. That includes overall tax rates, where data from the Institute on Taxation and Economic Policy shows that in the median state (Mississippi, as it turns out) the poorest 20 percent pay twice the tax rate of the top 1 percent. In the worst states, the poorest 20 percent pay five to six times the rate of the richest 1 percent. Lucky duckies indeed. There’s not one single state with a tax system that’s progressive.

So, hopefully, you’re still awake!  What’s on your reading and blogging list today.