Saturday, October 31, 2009

Exit Zero

The Real Unemployment Rate in the US Economy currently sits at 16% according the Federal Reserve of Atlanta. (1) Further, no relief is in site for idle Human Capital. (2) Persistent high unemployment appears to be the norm with no current favorable factors contributing to the reduction in the number of unemployed.

Are Government Policies contributing to high persistent unemployment?

Government Policies

Stimulus Plan

An $800 Billion Stimulus plan was rammed through Congress in early 2009. The unread and un-debated Bill had a marquee of urgency. The urgency of passing the Stimulus Bill was to head off Unemployment. That the Unemployment Rate would not exceed 8% if the Stimulus Bill was immediately passed by legislatures and signed by President Obama.

Although the Stimulus Bill was unread and un-debated within Government, many outside the Government in the Private Sector did debate the Bill. Warning signs went up that the Stimulus Bill was Social Engineering, Financed Wealth and Income Transfers, and in the Macro Economic sense, not an engine to create Employment. That the Stimulus Plan was full of pork, ear marks, and based on a Political-Political design rather than a Political-Economy design.

One merely needs to look at the results to see the warning signs were correct.

Reasons for the Failure of the Stimulus Plan

Why is the American Recovery Act such a Spruce Goose? Why is the American Recovery and Reinvestment Act the Spruce Goose of all stimulus plans ever concocted? Surely $800 Billion of borrowed money will create jobs?

First of all, Keynesian Government Deficit Spending (Fiscal Stimulus) is suspect at best with very mixed results/track record. However, if one is to deploy Keynesian Government Deficit Spending the best results of past stimulus plans of this label are based on Infrastructure Spending. Building and repairing Social Overhead Capital does in fact create temporary employment and a public asset is either created or repaired.

However, only a small portion of the Stimulus Plan was based on Social Overhead Capital ($80 Billion of the $800 Billion). Why? It has to do with the designers of the Stimulus Plan. Who designed the Stimulus Plan? Very good question. Many parts of the design were concocted by the Tides Foundation in association with The Center for American Progress.(3) You mean to say Congress in association with Public and Private Sector Economists didn't design the entire plan? Correct.

The Warning Flags were real.

The Tides Foundation and The Center for American Progress influenced the Stimulus Plan? Who are they? These two organizations label themselves as liberals or "progressives". Others label them as Socialists as many of the members of these two groups are Socialists. (4) Many past members of the Tides Foundation and The Center for American Progress now hold positions in the White House.

Socialists have a grand track record in Social Engineering aka wealth and income transfers. Socialists on the other hand have no track record regarding income, wealth, and job creation. Beginning to ring a bell?

Hence we have transfers of borrowed Stimulus Funds arriving at the Public Sector that produces virtually nothing. Those transfers go to pet projects (pork barrel spending) that are dubious job creators. More transfers go to Social Welfare Programs. Meanwhile, on the Federal Level employment is expanding based on borrowed Stimulus Funds. Expanding a sector that produces little.

Liberal Economists believe that transfers of funds to Private Welfare Programs create a situation where the transferred funds will immediately be spent (a component of Social Engineering). The theory is based on the notion that low income or no income recipients will spend 100% of their funds and save zero. That 100% of the transferred funds will be spent hence creating a multiplier effect thus stimulating the economy. However the theory has a major flaw: low income recipients generally spend their funds on "staples". Low income earners do not buy new vehicles, contract for a home to be built, invest in new business ventures, and other dynamic economic activities that truly have multiplier effects.

The tax cuts associated with the Stimulus Plan are doomed to fail. Why? Any positive economic effect associated with Tax Reductions is closely associated with "expectations". That is, temporary tax cuts have basically no effect as consumers and businesses realize the short term duration on any additional disposable income and hence make short term type purchases that match the short duration of additional disposable income. Whereas long term tax cuts (e.g. reducing Marginal Income Tax rates for the next 10 years) causes consumers and businesses to make long term purchases such as home, vehicles, and capital investment in business as the consumer or business matches long term purchases to the long term increase in disposable income.

Meanwhile, tax revenues at all levels of government are plummeting at historical rates. The answer to plummeting tax revenue? Taxes are increasing on the State and Local levels to support the bloated size and scope of these governments. The increased taxes then reduce disposable income of consumers and businesses which consequently reduces Private Sector Demand for goods and services.

On the Federal Level tax revenues are plummeting as well. However, the Federal Government continues to spend at unprecedented levels (spending increasing at an increasing rate). Spending and tax revenues are on a course of complete divergence. The result is a swollen deficit.

Enter the non-renewal of the Bush Administration across the board tax cuts. Soon all tax payers will face an across the board tax increase. This creates the expectation of long term higher taxes and consequently changes consumer and business consumption behavior (the opposite behavior of long term tax cuts mentioned above).

However, the specter of even more tax increases are affecting consumer and business behavior. The spending increases by the Federal Government, the constant need to borrow funds by the federal government for financed spending such as the Stimulus Plan and general revenue needs, the specter of higher energy taxes through Cap and Trade legislation, talk of a Value Added Tax as an additional tax, and finally the increased tax burden of Socialized Medicine are causing consumer and business long term spending behavior to be paired back.

Oddly the Consequences are Known

The consequences of the above mentioned Government Behavior is well known. Huh? The lessons of the Great Depression have been enumerated by economists through empirical study. Thousands of empirical studies have concluded the errors of the Great Depression:

(1) Keynesian Government Deficit Spending (fiscal stimulus) creates temporary jobs creating temporary stimulus. When the deficit spending ends, the temporary jobs end as well as the temporary stimulus,

(2) rising taxes, rising regulation, and increased government debt reduces Private Capital Formation which is directly related to Private Sector Job Creation,

(3) rising taxes reduce Private Sector consumption,

(4) repeating 1-3 above, over and over again, as was done in the Great Depression, yields the same result: continued recession.

Milton Friedman's Fourth Category of Spending

Milton Friedman basically said when you spend someone else's money, you have no rational interest in either value or quality. (5) (6) In other words, when the government taxes you, brings in the revenue, when the time comes to spend that tax revenue, value and quality are Job 57. Hence Keynesian Government Deficit Spending (Stimulus) has inherent value and quality problems.

Enter "Jobs Saved"

In the field of Manpower Economics and Labor Economics you are either employed or unemployed. Yes, you either have a job or you don't have a job. Sure, you can be underemployed, structurally unemployed, part-time employed and a multitude of sub-categories of employment and unemployment. However, at the end of the day, you either are employed or unemployed.

Heard the phrase "Jobs Saved"? (7) Guess what? No such term or statistic or measurement exists within the field of Economics. Huh?

When the Spruce Goose of all stimulus plan fell on its fat little porker , income transfer, wealth transfer face, the Obama Administration, through the Council of Economic Advisers, created the ultimate Political Speak Phrase "Jobs Saved".

Jobs Saved is a non-statistic statistic. Its unmeasurable, un-comparable, and basically fantasy. Why did they create "Jobs Saved"? One must remember that the $800 Billion stimulus plan, if passed immediately, would then cause unemployment to top-off at 8%. When the 8% target was unmanageable, enter "Jobs Saved". (8)

Jobs Claim

The employment picture created by the stimulus plan is so bleak that the Obama Administration has begun to grab at straws. "30,000 jobs created" was the reported headline and the Obama Administration lauded the report (9). Unfortunately 30,000 is an anemic number of jobs and better yet the report was refuted, called "way off the mark" a week later. (10)

Subsequently the White House announces the Stimulus Plan saved 650,000 jobs (jobs saved non-statistic statistic yet again). (11) Somehow borrowed money, sent to the States on a temporary basis, has saved jobs? Or has borrowed money been used by State Governments to subsidize budgets that were already out of control?

Please remember, no jobs were saved. You are either employed or unemployed. However, take a closer look at the report and what jobs are referred to within the report? Public Sector jobs. (11) Hence Government Workers remained employed based on unsustainable State Budgets temporarily funded by borrowed money. One might also point to Government Workers, unionized in many states, are predominantly supports of the Obama Administration.

Meanwhile Back in the Unemployment Line

Creating the phase "Jobs Saved" and lauding a phony job report or pointing to borrowed money propping up unsustainable State budgets funding Government Jobs doesn't really help the unemployed.

What is the Jobs outlook for the Unemployed? Not too bright. (2) (8) (12)

With the average work week at 33.2 hours the average employer has plenty of room to expand the utilization of current employees before any expansion of total employment. (8)

If demand does expand, and employers do increase the average work weeks to 40 hours, an employer will opt for over time for the current work force rather than expand the number of workers. Why? The employer wants to be certain that any increase in demand is sustainable and not a false signal. (13)

An employer also realizes that the laid off workers were the most marginal workers. In other words, employment was reduced at the margin, leaving the most productive workers retained. It can be argued some workers laid off were in marginally profitable lines of business while other workers were laid off from core profit business. The marginally profitable line of business would have to show even more robust sustainable growth before human capital is added back in comparison to employment in a core profit business.

Gross Domestic Product (GDP) can Rise and High Unemployment can Persist?

GDP can grow, however, if human capital is under utilized (current 33.2 hour average work week) a slack or lag occurs in labor markets and persistent high unemployment can exist. The slack or lag is elongated by the determination of employers, as mentioned above, regarding GDP growth and the ability of GDP growth to be robust and sustained. Hence GDP can show positive results while unemployment can remain persistently high.

What if Demand grows in an anemic fashion? That is referred to as a Jobless Recovery.

Exit Zero

If you are currently unemployed, you have reached Exit Zero on the unemployment highway. Exit Zero is the last exit before unemployment Armageddon.

Discouraged workers are increasing at an increasing rate (those giving up on finding a job). The average length of time unemployed workers have been drawing unemployment benefits is at an all time high (week after week after week these workers can not locate a job).

The Stimulus Plan is a bust accompanied by made up statistics and made up economic criteria. Private Capital Formation leading to private sector job creation is anemic. Rising taxes are depressing consumption dynamics.

The average work week at 33.2 hours means employer will utilize current workers before hiring new workers.

Welcome to mile marker Zero. The zero job creation mile marker on the employment highway. Welcome to Exit Zero.














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