Archive for the ‘financial’ Category

« Older Entries

The Education Bubble.

Monday, September 6th, 2010

There has been quite a bit of discussion on various blogs about the rising cost and declining utility of a college education, especially outside the “hard sciences.” Even the left is beginning to notice some of the problems.

And if colleges are ever going to bend the cost curve, to borrow jargon from the health care debate, it might well be time to think about vetoing Olympic-quality athletic facilities and trimming the ranks of administrators. At Williams, a small liberal arts college renowned for teaching, 70 percent of employees do something other than teach.

Complaints about athletics are old news in leftist publications but that number for non-teaching employees is an eye opener.

Tuition is part of the problem.

No one can look at that curve and miss the magnitude of the problem. Roger Kimball has a nice summary of the problem and the comments are almost as interesting as his post.

I went through college and medical school mostly on scholarship. I did lose my scholarship one year through the effects of too much extracurricular activity. I was taking a calculus course from this little Indian professor. He was difficult to understand but I thought we had an agreement. If I got an A on the final, I would get a B in the course. I had been delinquent in turning in homework assignments but had finally seen the light. The final exam came and, since I had finally begun to study systematically, I got the A. All my life, I had gotten by with minimal study. I was finally motivated enough to do the work necessary instead of just enough to “get by.”

Well, I went over to the Math office (In those days a small bungalow painted a dreary sunshine yellow as all the temporary university buildings were.) and the posted grades were up. I had gotten a C. I needed that B to keep a B average and my scholarship. I was doomed. I made an appointment to talk to the professor. He didn’t show up. I made another with the same result. A couple of days later, I was walking down University Avenue when I saw him across the street. I called to him and started to cross. He saw me, his eyes bulged and he started to run the other direction. I didn’t think I would improve my grade by chasing him so that was it.

In those days, there were no student loans except some private funds that I knew nothing about. My father had left high school at the age of 15 to join the Navy in World War I. I have a picture of him in his uniform. When the war ended, he wanted out of the Navy so he told them he was only 15. He never went back to school, which is a shame because he was a very bright man and could have been a very good engineer. As it was, he did pretty well in the middle years of his life and disdained education. I never saw him open a book.

My mother had graduated from high school (In 1915) and from “Business College,” which taught her to type fast enough to be a legal secretary. She could type my high school papers as I dictated them at normal speaking speed. She encouraged me to study and to think about college but nobody knew how you went about it. I knew I wanted to be an engineer and I knew I wanted to go to Cal Tech, to me the pinnacle of engineering (I still think so).

I can’t believe how naive I was about getting funding but I just didn’t know anything. My father declared himself early. He took me down to his basement bar and recreation area and had a serious talk with me. “Son, I want you to get this idea of going to college out of your head.” He wanted me to be a golf pro. One of his standard greetings to me was “Get your nose out of that book !” so this was no surprise. I had never counted on him, anyway. I didn’t know at the time that he would have one more blow to administer to my hopes.

That year, 1956, was the first year a new national scholarship program was in effect. It was called The National Merit Scholarship Program and that became my chief goal. Of course, I didn’t realize there were only 100 scholarships that year. It began with the SAT. There were no SAT prep courses then. We were lined up one day and marched into the study hall, a classroom that was unique in that it had theater style seating. We took the exam and about a month later, I was notified that I was a finalist for the National Merit Scholarship.

What I didn’t know was that a packet was sent to the parents of finalists. One item in the packet was a statement of income, although the scholarship was not based on need, apparently that was one criterion. My father refused to fill it out. It was no one’s business how much money he made, which wasn’t very much by that time. His prosperous career was pretty much behind him. A few months later, I got a letter congratulating me, and informing me that, since I did not need financial aid, I was getting a certificate of achievement. In the meantime, I had been interviewed by a Cal Tech professor who traveled to Chicago, my dorm room had been assigned and I was ready to go except for the lack of ability to pay the tuition. I look back in wonder at my own naivete in not contacting the school after my mother told me about the uncompleted financial statement. Maybe they would have helped. I just didn’t know enough.

A month or so later, I was contacted by the Chicago group of USC alumni. I was vaguely familiar with the University of Southern California and, since my prospects were otherwise dim, I accepted. I was interviewed by Robert Brooker, then a vice-president of Sears, and was awarded a full scholarship plus a $500 stipend for living expenses. My high school’s unfamiliarity with my new university was exhibited by the fact that they sent my records to UC, Berkley. I got a letter from Berkley accepting me for admission and asking me to submit an application. We finally got that straightened out and I arrived in Los Angeles about two weeks before classes began to find a place to live.

I eventually, settled in a fraternity house, Phi Gamma Delta, because, in those days at least, fraternity houses were the cheapest place to live and, of course, the fact that they asked me. I had been staying there at the request of my local sponsor, a UCLA Phi Gam alum, while I looked for an apartment. USC in those days had almost no dorms for men, unless they were football players. When I was asked to pledge, I accepted. It was a good decision in many ways (I needed socialization) but it didn’t help studying. I often wonder how I would have turned out if I had made it to Cal Tech.

Engineering at USC was a weak department but I did not take sufficient advantage of what was there. When I lost the scholarship, I was somewhat at sea. What was I to do ? The tuition was $17 a unit, about $272 a semester. I didn’t have it but, at that time, it wasn’t out of reach like it is now. I got a job. I went to work for Douglas Aircraft at what was called a Mathematician I. This was a junior engineer. I had a couple of fraternity brothers who were working there, working their way through the last year of engineering school. In those days, and the point of this stream of consciousness, is that you could work your way through school in those days, even a private university.

My job was in the wind tunnel facility. I spent most of the day with a Marchant desk calculator and the rest programming an IBM 650 computer. This was about the era when the term “bug” was first used for computer malfunctions. We were told that it derived from the fact that one of the COBOL programmers had spent weeks trying to solve a programming error only to find that a moth had gotten into the machine and was contacting random connections.

After six months at this job, I decided to go back to school at night. I was lying on the beach at Playa Del Rey (now under the take-off zone of LAX) in January talking with my roommates about my future. They were both pre-med majors. I had begun thinking about it several years before, even before dropping out of school. John Paxton, whose father was a surgeon, suggested I take a basic biology course (My high school had zero biology) and another advanced course called “Comparative Anatomy.” The latter was a junior level course and maybe too tough for me but, he said, it would be the closest thing to medical school I would find in undergraduate.

I signed up for both courses, paying the $119 tuition myself. It was a good decision. That was January 1960. A year later, I had been accepted to medical school.

Now, there is no way I could do that and the alternative would be thousands of dollars in debt.

Tags: ,
Posted in education, financial | 5 Comments »

This may really happen.

Monday, August 30th, 2010

I am a confirmed pessimist. I was sure that the Republicans would screw this up before November. You know something ? They may pull this off, after all. Not because they are Republicans, of course. They have just enough sense to get out of the way of a movement with little precedent in this country’s history. John Fund gets it.

In the past, more secular Tea Party types might not have showed up at a religiously-themed event like “Restoring Honor.” Similarly, many of the devoutly religious people I met at Saturday’s rally probably would in the past have shunned an explicitly political event such as Friday night’s Freedom Works meeting. But I kept bumping into the same people at both gatherings.

“I happen to be opposed to gay marriage, but our peril is so great that goes on the back burner,” Debbie Johnson of Georgia told me on Saturday. Bruce Majors, a gay real-estate agent from Washington D.C., had a different take. He told me earlier this year that he felt perfectly comfortable working with the Tea Party on bringing the size of government under control. “We’re both about freedom and we have a common short-term goal,” he said. Indeed, in Washington this past weekend the more libertarian and the more socially conservative elements of the Tea Party seemed to get along just fine.

I still think there is time to screw it up but the force of history seems to be too powerful. I posted before on John Boehner’s talk on economics that could not have been better. Many of us have thought for years that a real experiment with socialist policies might have a salutary effect on those who are vague liberals but not hard left ideologues. The problem was that it would be too dangerous to the country. Well, it happened !

Tags: , ,
Posted in economics, financial, politics | 3 Comments »

The Left and its delusions.

Monday, August 23rd, 2010

I skim the Washington Monthly blog as a window on the thinking of the far left. They are more civil (except in comments) than the DailyKos but the mentality is the same. Today is a reasonable example. The topic is taxes.

Roll Call noted this morning that the Senate is moving towards “an epic election-year battle over Bush-era tax cuts.” That sounds about right.

The dispute helps capture exactly what the two parties prioritize right now — Dems want to keep lower rates for the middle class, while reducing the deficit by letting the rich go back to the rates they paid when the economy was healthy. Republicans want to hold the Dem proposal hostage, fighting tooth and nail for breaks for millionaires and billionaires, and adding $680 billion to the deficit the GOP pretended to care about for a while.

The “middle class” is a very elastic concept for them with the top income range going all the way down to $150,000 per year. Secondly, the group with incomes of $250,000 or more, the target class, consists of mainly small business people who are not incorporated and who file all income with a personal return.

There is also no concept here of who pays the taxes. Shouldn’t “tax cuts” be distributed to those who pay taxes ? Otherwise, it is just one more government handout to those who are nonproductive. Here is a look. The top 1% of income pays 40% of the income taxes. Hmmm That’s also about $410,000 per year, not $2 million.

The top 5% pays 60.63% of the income taxes. The threshold for the top 5% is $160,000. Well, what do you know ?

Billionaires need little help from Republicans but they do invest and are the source of most new jobs. The concern for “the deficit” on the part of Democrats may be translated as the left side of the entire argument about spending versus taxing. Republicans want to talk about cutting spending, especially tea party Republicans. I even have a compromise: Let the tax rates go back to the Clinton administration rates but let’s also go back to the number of government employees of the Clinton period.

[W]here would this $680 billion go? Nearly all of it would go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year. But that’s the least of it: the policy center’s estimates say that the majority of the tax cuts would go to the richest one-tenth of 1 percent. Take a group of 1,000 randomly selected Americans, and pick the one with the highest income; he’s going to get the majority of that group’s tax break. And the average tax break for those lucky few — the poorest members of the group have annual incomes of more than $2 million, and the average member makes more than $7 million a year — would be $3 million over the course of the next decade. [...]

Notice how the “richest” become those with incomes over $2 million when we are talking about one aspect of the issue but, when it is time to actually impose the taxes, the incomes shrink back down to $250,000 or, in some cases, it shriveles all the way down to $150,000 per year.

Midwestern centrists such as Sens. Kent Conrad (D-N.D.) and Evan Bayh (D-Ind.) have called for an extension of all of Bush’s tax cuts, including those benefiting individuals earning more than $200,000 and families earning over $250,000 annually.

Other Democrats say they would consider raising taxes on individuals and families earning below those thresholds, despite President Obama’s promise that middle-class families would not see their taxes increase.

Some liberals balk at the notion that families earning $250,000 or more belong in the middle class.

“Two hundred and fifty thousand dollars? Is that the top 1 percent of Americans, or half a percent? Come on!” said Sen. Tom Harkin (D-Iowa).

Harkin said he would be willing to extend the tax cuts for families earning $150,000 or less annually.

See how elastic that number is ? Families with a combined income of $150,000 are “rich.” We went from $2 million per year to $150,000 per year just like that!

Or we’re told that it’s about helping the economy recover. But it’s hard to think of a less cost-effective way to help the economy than giving money to people who already have plenty, and aren’t likely to spend a windfall.

Did you notice that one ? Tax cuts “give” money to people who have “plenty.” Just keep repeating to yourself; it’s not your money. It’s the government’s money and they are “giving you some of it.” They used to call that “To each according to his needs.”

No, this has nothing to do with sound economic policy. Instead, as I said, it’s about a dysfunctional and corrupt political culture, in which Congress won’t take action to revive the economy, pleads poverty when it comes to protecting the jobs of schoolteachers and firefighters, but declares cost no object when it comes to sparing the already wealthy even the slightest financial inconvenience.

Once again, a translation. Schoolteachers “need” the money. Firefighters is just a cover. The “wealthy” (Those with over $150,000 per year income) don’t “need” the money.

Note, there is no concept of a private economy here. Nobody invests; nobody starts a business. The story of the 2001 tax cuts that Democrats want to repeal is here in more detail.

This is what socialism looks like in practice.

Tags: , , , ,
Posted in economics, financial, politics | Comments Off

Deficits and taxes.

Sunday, July 25th, 2010

I switched back and forth today between This Week and Fox News. That is my usual practice although, without George Will, I have little interest in the This Week discussion period. The Fox regulars would seem, from the complaints of the left, to be garden variety Republicans on economics. Therefore, it is disappointing to see them mouthing the same old Washington nostrums. They seem to agree that deficits are a problem but spending is never mentioned. Not once on Fox News Sunday was cutting spending mentioned. To hear a mention of reducing spending, it was necessary to watch Jake Tapper’s interview of governor Chris Christy on This Week.

Juan Williams, nearly always to the left of the rest of the panel, brought up the old canard (of course) of Clinton era tax rates. Letting the Bush tax cuts expire was simply going back to the Clinton rates and the economy was booming. Fair enough. If that is the case, why not go back to Clinton era spending ? Why not go back to Clinton era government employee numbers ?

Let’s see. The 1999 data is here, and shows that the 1999 budget included:

A more realistic headcount begins with the 1.9 million full-time permanent civilian federal workers who get their paychecks and identification cards from Uncle Sam. Add in the 1.5 million uniformed military personnel and 850,000 U.S. Postal Service workers who were counted in the federal workforce until their department became a quasi-government corporation in 1970, and the total full-time permanent federal workforce was just under 4.3 million in 1996, the last year for which good numbers are available on both the visible and shadow federal workforce.

That should give us a fairly good comparison. How many civilian federal employees are there ? The bureau of labor statistics says 2.0 million. There is a number that would give us some real information.

Table 1. Federal Government civilian employment, except U.S. Postal Service, November 2008
(Employment in thousands)

United States Total Executive departments Defense, total Army

1,909 1,664 652 244

Notice that this is November 2008 data, just before Obama was elected. Notice also that the military is much smaller than in 1998. Notice also that the number of federal employees had only increased by 9,000 in ten years.

What happened after Obama was elected ? Well, the number of federal employees has gone to 2.15 million !. That’s an increase of 250,000 in two years.

Juan, let’s make a deal. We can go back to Clinton tax rates if we lay off 250,000 federal employees.

The Washington line is always to raise taxes to deal with deficits. I wish a well documented, well written book about Harding and Coolidge would be written. Maybe Amity Schlaes could do it. The 1920 recession was more severe than the 1929 contraction. Why don’t we hear about it ?

Because Harding and Coolidge cut government spending in half and advocated a “return to normalcy.” The economy boomed and the recession was over.

Tags: , ,
Posted in corruption, economics, financial, politics | 4 Comments »

The Tyranny of the Credentialed

Wednesday, June 30th, 2010

There is an interesting post today on the blog of Ambrose Evans-Pritchard at the Telegraph. Why is it that we get better coverage of the US economy and government from British newspapers than our own ? Don’t bother to answer as that question has an obvious answer (aside from economic illiteracy of US writers). A junior member of the Federal Reserve Board economics staff, Kartik Athreya, senior economist for the Richmond Fed, has written a ridiculous letter complaining that economics blogs should be suppressed because the bloggers do not have economics PhDs.

“Writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy.”

I especially like how he invites ridicule by emphasizing the quality of his own education at U of Iowa.

“The response of the untrained to the crisis has been startling. The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading.”

Yes, we can’t have incoherent of misleading statements flying about the internet. I would include the statements of Nobel Prize winning economist Pail Krugman who wants to spend much, much more but who am I to question such an expert ?

“Economics is hard. Really hard. You just won’t believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.”

I won’t argue with that. Nuclear physics is hard, too. Even Medicine can be difficult at times. Mr Evans-Pritchard (not doctor), however, has some strong opinions that, I suspect, do not agree with Dr Athreya’s.

The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did.

Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.

They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of “inflation targeting”. Have they all forgotten Keynes’s cautionary words on the “tyranny of the general price level” in the early 1930s? Yes they have.
They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher’s “Debt Deflation causes of Great Depressions”? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.

The present policies of this administration are based on the recommendations of credentialed idiots like this letter writer and they scare the hell out of me.

The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don’t we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell.

Nicole Gelinas, in her book, After the Fall blames credit rating agencies and lack of regulation but she also writes that there was a brief period when an auction of non-performing assets was begun and could have set prices for the Mortgage backed bonds but this was short circuited by the Fed paying the banks full price in TARP. That ended the auction since who would sell for less than par when Uncle Sam was there paying retail ? Then, it turned out no one could decided what the retail price was since it was obvious the bonds were worth a quarter or less of the face value. The auction approach might have worked but it was aborted by government intervention, once again !

The 20th Century was a horrible litany of absurd experiments and atrocities committed by intellectuals, or by elite groupings that claimed a higher knowledge. Simple folk usually have enough common sense to avoid the worst errors. Sometimes they need to take very stern action to stop intellectuals leading us to ruin.
The root error of the modern academy is to pretend (and perhaps believe, which is even less forgiveable), that economics is a science and answers to Newtonian laws.

Here is the take-home lesson, as they say in medical school; Economics is NOT a science.

Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves: a rarer spectacle in science, where disputes are usually resolved one way or another by hard data.
It is a branch of anthropology and psychology, a moral discipline if you like. Anybody who loses sight of this is a public nuisance, starting with Dr Athreya.

It sounds like economics shares some problems with climate science.

Tags: ,
Posted in economics, financial | Comments Off

The coming economic crash

Monday, June 7th, 2010

Arthur Laffer has a powerful column today in the Wall Street Journal. He, of course, was the author of the “Laffer Curve” that led to supply side economics as the economic policy of Ronald Reagan.

People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

It shouldn’t surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

This is one effect that supply side economics, in its most basic form, should predict. Maryland passed a “Millionaire’s Tax” a couple of years ago and discovered that millionaires and their tax revenue disappeared.

But as the state comptroller’s office sifts through this year’s returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million.

That is supply side economics. The basic definition is narrow, that demand does not drive the economy but that economic activity is based on incentives for the producers. If you can make more money by producing widgets, you will do so. The principle difference from Keynesian economics is that the producers themselves, not government bureaucrats, make the decisions. This is Adam Smith’s Hidden Hand. Making more widgets will not necessarily cause consumers to buy them. It is up to the producer to recognize demand and fulfill it. Sometimes they will fail because they misread the market. That is their problem, not the government’s.

People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, “high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994.”

Even Hillary CLinton recognized the incentive and had her law firm bonus moved up to December 1992.

We saw this in 1992 when there was a bulge in income realizations late in the year as people anticipated higher taxes after the election of Bill Clinton. Hillary Clinton’s law firm, for example, distributed bonuses in 1992 that otherwise would not have been paid until 1993. While the number of people who have this much flexibility in timing their income this way is small, the same principle applies to all income earners. In the aggregate, the impact can be large.

We have seen the same phenomenon with the “Cash for Clunkers” program and with the cash incentive for first time home buyers, which ended on April 30. In both cases, purchases were moved up to take advantage of the incentive but the sales after the incentive expired plunged. No net increase in economic activity resulted.

Laffer discusses the Reagan tax cut of 1981.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

He doesn’t mention that the delay in implementation of the tax cuts was due to Bob Dole who, as Senate majority leader, rejected supply side economics and delayed the recovery. The result was a big loss for Republicans in the 1982 election. The election this fall is being compared to the 1982 election but there is a huge difference. The Reagan loss was due to the delay in tax cuts and economic recovery. This year, the loss will be due to anticipation of Obama’s policies that have not yet taken effect. Once they are in force, things will get worse, a lot worse.

Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what’s going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.

This might be dismissed as partisan rhetoric except that Laffer predicted the 1981 to 83 effect of delaying tax cuts.

Next year will be a bad year for the US economy. I have read an investment letter since 1977. It is called The Dow Theory Letter and it has been written by Richard Russell since the 1950s. I wish I had taken all his advice but, fortunately, I have taken some. Twice, he has sent an unscheduled warning to subscribers. Each time, it was a warning of a major drop in the stock market. Once was in 1987, a month before the 25% market drop in one day. The second time was two weeks ago. He told his subscribers to sell all their stocks. He also said that, by the end of the year, the America we know would be changed beyond description. I think there may be a bit of hyperbole in that statement but I would sell all my stocks if I still had any.

We have not yet seen the Obama policies in effect. The economy has made some tentative moves in the direction of recovery. That will end once the Obama policies take effect. I have made adjustments in my life, including selling my house. I wonder how many others are doing the same thing ?

Tags: , , , ,
Posted in economics, financial, politics | 5 Comments »

Jobs

Sunday, May 9th, 2010

There is a lot of discussion about jobs and the economy lately. This week the Labor Department announced that jobs growth had increased.

The American economy added 290,000 jobs in April — the most in four years or so. At the same time, the jobless rate grew to 9.9 percent, after hanging at 9.7 percent for three consecutive months.

The latter figure was explained as discouraged workers returning to the job market. Maybe so. A lot of those jobs were temporary census jobs.

There is also a theory that the lost jobs may never come back.

More on that here.

Three industries, in particular, where many jobs may not be coming back are retailing, manufacturing and advertising.

Retailers have lost 1.2 million, or 7.5 percent, of jobs that existed before the recession, according to Labor Department data. Circuit City and Linens & Things have collapsed. Starbucks closed nearly 800 U.S. stores. Robert Yerex, an economist at Kronos, a work force management company, estimates 20 percent of those jobs are never coming back.

Manufacturing has shed 2.1 million jobs, or 16 percent of its total, since the recession began. Goodyear Tire & Rubber and Boeing Co. laid off a combined 15,700 people during the recession. General Motors eliminated 65,000 through buyouts and layoffs. And as Americans buy fewer cars and homes, more than 1 million jobs in the auto, steel, furniture and other manufacturing industries won’t return, according to estimates by Moody’s Analytics.

Advertising and PR agencies have lost 65,000 jobs, or about 14 percent of the pre-recession total. Moody’s Analytics estimates those industries will lose even more within five years.

Those are white collar jobs, except manufacturing, which has been losing jobs for years. Ironically, Boeing workers are threatening a strike and the Obama administration has changed the Railway Labor Act to encourage unions to organize Delta Airlines.

Under an interpretation of the Railway Labor Act dating to 1934, aviation and rail workers who don’t vote on whether to form a union have been counted as “no” votes. That means a union could not be approved without a full majority of employees voting yes.

Under the National Labor Relations Act governing the vast majority of private-sector workers, a union can be created if a majority of the votes cast are in favor of collective bargaining. In such elections, nonvotes don’t count.

The rule change by the NMB mandates that unionization votes for air and rail workers be tallied in the same manner as in other industries.

Now, if 5% of employees vote in a union election, the rest may be forced to join or pay dues to the union. That should help jobs !

It’s hard to exaggerate how bad the job market is. Here’s one arresting fact: One of every five men 25 to 54 isn’t working.

Even more alarming, the jobs that many of these men, or those like them, once had in construction, factories and offices aren’t coming back. “A good guess…is that when the economy recovers five years from now, one in six men who are 25 to 54 will not be working,” Lawrence Summers, the president’s economic adviser, said the other day.

Is this true ? Are poorly educated men facing permanent unemployment ? The jobs picture had some dark spots as the overall unemployment rate climbed.

Reflecting the modest nature of this recovery, the report included some negative notes. The overall jobless rate, including people who have stopped looking, jumped to 17.1%, which is the highest rate this year. More disturbing, the share of those out of work for 27 weeks or more reached another record of 45.9%. This means that some 6.7 million Americans have spent more than half a year without maintaining the skills and contacts they’ll need to compete across a lifetime.

This is a worry. Government employees have not seen layoffs yet although they will be coming in California soon. The private sector is reeling.

Demand for workers who haven’t much education—which includes many men, particularly minority-group men—is waning. A shrinking fraction of them are working. Some are looking for work; some have given up. Some are collecting disability benefits or an early-retirement pension. Some are just idle. On average, surveys find, the unemployed in the U.S. spend 40 minutes a day looking for work and 3 hours and 20 minutes a day watching TV.

One of every five men between ages 25 and 54 isn’t working, and jobs once available for men in construction and factories continue to dry up in the U.S.

For 50 years, the fraction of men with jobs in what once were prime earning years has been trending down. Over the same decades, the share of women who work has been rising, a significant social change that lately has cushioned the blow of Dad’s unemployment for many couples.

Women have suffered less in this recession. They were more likely to be in health care and other jobs that weren’t hit as hard as construction and manufacturing. They are increasingly likely to have the education so often required to get or keep a good job these days.

I think this is too pessimistic and I also think the value of a college education has drastically declined in the past 30 years. I have talked to small businessmen and small business is the source of most jobs for men since heavy industry, like the auto companies, has contracted. Many of these small businesses are busy and their employees are working full time. What is the difference ? A lot of the men I know who are working have skills with tools. A lot of the long term unemployed have limited skills other than the work they were doing, like residential loan processing, that isn’t coming back.

My neighbor runs a flooring business out of his home. That is technically against some city code or other but he is a good guy and I don’t care. I run a small (very small) consulting business out of my home. He has a big truck loaded with carpet in front of his house most days. He does a lot of theater work so they work at night a lot. He has a bunch of young men working for him, all US natives, and they work hard. The hardest thing a small business employee says about new hires is seeing them arrive on time Monday morning. A lot of American kids have not learned a work ethic. The illegal aliens often work harder.

I had my house painted two months ago. The guys who own the painting business are Asian but their employees are Hispanic. They did a good job and worked quickly. Some of the painters spoke good English and some didn’t. I also had some guys from a pest control company check my home for termites and they found a number of areas of dry rot. There are also termites in my attic and I will have the house tented when it is sold, as it is for sale. The fixed the dry rot, including replacing a window, and did a great job at a reasonable price. The guys told me they were all construction workers who had gone to work for the pest control company and they did good work; very good work.

The one thing that Obama and his administration can do to help jobs is to aid small business. Since they appear to be doing the opposite, I don’t expect much but I do see people working. Maybe they aren’t making the money that the Ford assembly line workers make but there are a lot fewer jobs like that. I deal with plumbers, like Joe the Plumber, and with electricians. They are working. Restaurants are in trouble but I was in one last night for a Mother’s Day dinner with the family and it was very busy. Maybe weeknights are slow. I see retail stores going out of business and I fear a lot of them won’t come back in my lifetime. Those, however, are not men’s jobs. My college student daughter got a restaurant job a couple of months ago but the business is slow and she is only getting three days a week work. She is looking for another job and can work her class schedule around if given enough lead time.

There’s an amusing piece on the Daily Beast on “Prostitute Moms”. Now there’s a job men can’t do. Of course there is a male equivalent.

After getting a women’s studies degree, Isabel entered the sex industry as a 24-year-old high-end escort, three years after her mother had died. Before she passed away, she told Isabel, “You own the means of production, you can be anything.” It’s unclear how she would have reacted had she lived to see Isabel working as an escort.
“When I got burned out from doing sex work, I drove a city bus for three years,” Isabel says. “They took my picture—I was the young female driver with a red streak in her hair—and made me the poster child for the union.” Isabel is also a trained clown (“I studied the Pachenko method”), a health practitioner, and an organic farmer.

Now, is there any doubt about the value of a college degree ?

Tags:
Posted in economics, financial, politics | Comments Off

Why Tom Freidman will be disappointed

Wednesday, March 17th, 2010

New York Times columnist Tom Freidman has expressed a wistful admiration for the Chinese government and its ability to get things done.

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.

I think Tom is going to be very disappointed if this article is correct, and I think it is.

The world looks at China with envy. China’s economy grew 8.7 percent last year, while the world economy contracted by 2.2 percent. It seems that Chinese “Confucian capitalism” – a market economy powered by 1.3 billion people and guided by an authoritarian regime that can pull levers at will – is superior to our touchy-feely democracy and capitalism. But the grass on China’s side of the fence is not as green as it appears.

In fact, China’s defiance of the global recession is not a miracle – it’s a superbubble. When it deflates, it will spell big trouble for all of us.

Oh oh.

To understand the Chinese economy, consider three distinct periods: “Late-stage growth obesity” (the decade prior to 2008); “You lie!” (the time of the financial crisis); and finally, “Steroids ’R’ Us” (from the end of the financial crisis to today).

The first period is like Starbucks.

About a decade ago, the Chinese government chose a policy of growth at any cost. China’s leaders see strong gross domestic product (GDP) growth not just as bragging rights, but as essential for political survival and national stability.

Because China lacks the social safety net of the developed world, unemployed people aren’t just inconvenienced by the loss of their jobs, they starve; and hungry people don’t complain, they riot and cause political unrest.

So did Starbucks, sort of.

To achieve high growth, China kept its currency, the renminbi, at artificially low levels against the dollar. This helped already cheap Chinese-made goods become even cheaper. China turned into a significant exporter to the developed economies.

Normally, if free-market economic forces were at work, the renminbi would have appreciated and the US dollar would have declined. However, had China let this occur, demand for its products would have declined, and its economy wouldn’t have grown at roughly 10 percent a year, which it did during the past decade.

The more China sold to the United States, the more dollars it accumulated, and thus the more US Treasuries it bought, driving our interest rates down. US consumers responded to these cheap goods and cheap home loans by going on a buying binge.

However, companies and countries that grow at very high rates for a long time will inevitably suffer from late-stage growth obesity. Consider Starbucks: In 1999, it had 2,000 stores and was adding 1.8 stores a day. In 2007, when it had 10,000 stores, it had to open 5.5 stores a day in a desperate bid to keep growth rates up. This resulted in poor decisions and poor quality – a recipe for disaster.

In China, political pressure for full employment has led to similar late-stage growth obesity. In 2005, China built the largest shopping mall in the world, the New South China Mall: Today it’s 99 percent vacant. China also built up a lavish district in a city called Ordos: Today, it’s a ghost town.

Starbucks can close poorly performing stores. What will China do ? Stage II “You lie !”

All good things come to an end, and great things come to an end with a bang. When the financial meltdown erupted in 2008, US and global banks started dropping like flies. Countries everywhere suffered contraction.

Even China.

During the crisis, Chinese exports were down more than 25 percent, tonnage of goods shipped through railroads was down by double digits, and electricity use plummeted.

Yet Beijing insisted that China had magically sustained 6 to 8 percent growth.

China lies. It goes to great lengths to maintain appearances, including censoring media and jailing those who write antigovernment articles. That’s why we have to rely on hard data instead.

Sorry, Tom.

In the midst of the financial crisis, in late 2008, Beijing fire-hosed a $568 billion stimulus into the Chinese economy. That’s enormous! As a percentage of GDP, it would be like a $2 trillion stimulus in America, nearly triple the size of the one Congress passed last year.

It gets even more interesting. Unlike Western democracies, whose central banks can pump a lot of money into the financial system but can’t force banks to lend or consumers and corporations to spend, China can achieve both at lightning speed.

The government controls the banks, so it can make them lend, and it can force state-owned enterprises (one-third of the economy) to borrow and to spend. Also, because the rule of law and human and property rights are still underdeveloped, China can spend infrastructure project money very fast – if a school is in the way of a road the government wants to build, it becomes a casualty for the greater good.

Does that sound like anyone here that you know of ? Government controls the banks and makes them lend ?

Well, not yet anyway.

To maintain high employment, China has poured money into infrastructure and real estate projects. This explains why, in 2009, new floor space doubled and residential real estate prices surged 25 percent. This also explains why the Chinese keep building new skyscrapers even though existing ones are still vacant.

The enormous stimulus has exacerbated problems that already existed, threatening to turn China into a less shiny but more drastic version of debt-riddled Dubai, United Arab Emirates.

What happens in China doesn’t stay in China. A meltdown there – or even a slowdown – would have severe consequences for the rest of the world.

It will tank the commodity markets. Demand for industrial goods will fall off the cliff. Finally, Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boosting our interest rates higher. No more 5 percent mortgages and 6 percent car loans.

That is why I am downsizing and getting fixed rate mortgages. The storm is coming and it will be really bad. I don’t know if we can stop it, even with a Republican Congress. After all, they helped bring it on.

Tags: , ,
Posted in economics, financial, politics | 9 Comments »

The perfect storm.

Friday, February 19th, 2010

There is an excellent paper available today from CATO institute on how the financial crisis got to be so bad. It fits well with the theory in Nicole Gelinas’ book, After the Fall, which I reviewed here.

This paragraph is critical.

Given the large number of contributory factors — the Fed’s low interest rates, the Community Reinvestment Act, Fannie and Freddie’s actions, Basel I, the Recourse Rule, and Basel II — it has been said that the financial crisis was a perfect storm of regulatory error. But the factors I have just named do not even begin to complete the list. First, Peter Wallison has noted the prevalence of “no-recourse” laws in many states, which relieved mortgagors of financial liability if they simply walked away from a house on which they defaulted. This reassured people in financial straits that they could take on a possibly unaffordable mortgage with virtually no risk. Second, Richard Rahn has pointed out that the tax code discourages partnerships in banking (and other industries). Partnerships encourage prudence because each partner has a lot at stake if the firm goes under. Rahn’s point has wider implications, for scholars such as Amar Bhidé and Jonathan Macey have underscored aspects of tax and securities law that encourage publicly held corporations such as commercial banks — as opposed to partnerships or other privately held companies — to encourage their employees to generate the short-term profits adored by equities investors. One way to generate short-term profits is to buy into an asset bubble. Third, the Basel Accords treat monies set aside against unexpected loan losses as part of banks’ “Tier 2″ capital, which is capped in relation to “Tier 1″ capital — equity capital raised by selling shares of stock. But Bert Ely has shown in the Cato Journal that the tax code makes equity capital unnecessarily expensive. Thus banks are doubly discouraged from maintaining the capital cushion that the Basel Accords are trying to make them maintain. This litany is not exhaustive.

Banks were allowed to use Mortgage Backed Securities as capital assets and were encouraged to do so by regulations.

In 1988, financial regulators from the G-10 agreed on the Basel (I) Accords. Basel I was an attempt to standardize the world’s bank-capital regulations, and it succeeded, spreading far beyond the G-10 countries. It differentiated among the risks presented by different types of assets. For instance, a commercial bank did not have to devote any capital to its holdings of government bonds, cash, or gold — the safest assets, in the regulators’ judgment. But it had to allot 4 percent capital to each mortgage that it issued, and 8 percent to commercial loans and corporate bonds.

When MBS vehicles were devised, they were rated as AAA.

The United States implemented it in 1991, with several different capital cushions; a 10 percent cushion was required for “well-capitalized” commercial banks, a designation that carries privileges that most banks want. Ten years later, however, came what proved in retrospect to be the pivotal event. The FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision issued an amendment to Basel I, the Recourse Rule, that extended the accord’s risk differentiations to asset-backed securities (ABS): bonds backed by credit card debt, or car loans — or mortgages — required a mere 2 percent capital cushion, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Thus, where a well-capitalized commercial bank needed to devote $10 of capital to $100 worth of commercial loans or corporate bonds, or $5 to $100 worth of mortgages, it needed to spend only $2 of capital on a mortgage-backed security (MBS) worth $100. A bank interested in reducing its capital cushion — also known as “leveraging up” — would gain a 60 percent benefit from trading its mortgages for MBSs and an 80 percent benefit for trading its commercial loans and corporate securities for MBSs.

This is why the crash is a failure of regulation and not just a result of “greed.”

Tags: ,
Posted in economics, financial | 9 Comments »

The debt limit

Thursday, January 21st, 2010

Congress wants to raise the debt limit.

By a lot.

This cannot go on much longer.

UPDATE: The world According to Krugman.

Quite aside from everything else going on, the economic recovery isn’t looking very good. Unemployment claims are stalled at a level that bodes ill for for the overall employment picture (don’t count on falling unemployment until that number falls well below 400,000). And the 10-year bond rate, which is my personal index of the market’s expectations about recovery, has been falling off again after rising for several weeks.

No reason to panic — but it does look as if this recovery is going to be jobless for quite a while.

He previously said this:

In the table above, spending peaks in the second quarter of 2010, but the peak impact on growth is in the third quarter of 2009, i.e., it’s behind us. That’s true even though by the end of 2009 less than a third of the money has been spent.

And when the spending begins to tail off, the effect on growth turns negative.

So growth will soon turn negative. I like the first comment on his blog post.

As Alesina and Ardagna showed in a recent study of 91 episodes in OECD countries since 1970 when governments attempted to stimulate the economy, cuts in business and income taxes are successful, while increases in government spending fail. There is no reason at all to ever propose a Keynesian “stimulus”.

Unfortunately, ideology often trumps fact and analysis. Accordingly, Prof. Krugman continues to propose Keynesian stimulus, even as he struggles to square his ideology with the failure of (now three) stimuli since 2008 to do anything other than destroy jobs.
Those who actually create jobs in small businesses struggle to manage the obstacles that governments create upon the advice of people like Prof. Krugman. We see nothing but future obstacles, as the promise of new taxes on investment, inheritances, and growth destroy seed capital, added regulations based on junk science (for example “climate change”) and health care “reform” raise the cost of business, and Obama’s corporate socialism transfers wealth to cronies in unions and Wall Street.
Pork-laden stimulus bills and the frantic vote-buying that preceded this week’s Senate health vote confirms our worst fears about liberal governance, with or without a “conscience”: it’s a racket rigged to benefit privileged insiders floated by our tax dollars.

Now, that fellow should be considered for a Nobel Prize.

Now comes this.

The fact is that the Senate [health care] bill is a centrist document, which moderate Republicans should find entirely acceptable. In fact, it’s very similar to the plan Mitt Romney introduced in Massachusetts just a few years ago. Yet it has faced lock-step opposition from the G.O.P., which is determined to prevent Democrats from achieving any successes. Why would this change now that Republicans think they’re on a roll?

This man is delusional. He doesn’t seem to understand economics or health reform. God help us.

Tags:
Posted in financial | 8 Comments »

« Older Entries