Saturday, July 18, 2009

Unemployment: The Sequel to Peanut Butter and Jelly (the Stale Bread)

In the post Unemployment: Peanut Butter and Jelly the premise is that Unemployment will remain high and persistent which will lead to a high and persistent "Political Anger Factor".

Looking into the prediction of persistent and high unemployment, the following 07/14/2009 Op'ed by Mortimer Zuckerman from the Wall Street Journal is likely worth your attention:

After reading Zuckerman's Op'ed, the 33 hour average work week and 65% capacity utilization likely means that any increased demand for goods and services would result (on the average) in the average work week increasing for the employed labor force rather than new hires.

If one assumes a 40 hour work week is full employment of one unit of Human Capital, then a 33 hour average work week means Human Capital is only at 82.5% of capacity. If Demand for goods and services substantially increased, the result would be that one unit of Human Capital would be further utilized until the 40 hour threshold is reached.

Hence a sustained and robust increase in demand would, on the average, merely increase the average work week of the cuurently employed rather than solve the plight of the currently unemployed.

Note: an article was recently published that indicated you would need 20 straight quarters of 4% GDP growth in order to reduce the published unemployment rate from 9.5% to 6%. There has never been a recorded period of 20 straight quarters of 4% GDP growth!

What about the published 9.5% Unemployment rate and what really is the true Unemployment rate?

Main Street Media recites 9.5% over and over as that is the Government published statistic. However, most economists say the rate is well north of 9.5%. Why? Because at least 40% of the US Workforce is made up of the Self Employed and Contract Labor. Guess what? The Department of Labor does not use the Self Employed and Contract Labor in calculating the 9.5% statistic. Hence a vast section of the US Workforce is Unemployed yet not counted in the 9.5% statistic.

When you add in the Self Employed and Contract Labor the Unemployment rate is likely 15%. Yikes!

However, is there an outside indicator that would confirm 15% Unemployment rater than 9.5% Unemployment? Oh yes! Tax revenues of the Federal Government and State Governments is an indicator. Please see the following article that confirms tax revenues are falling like a rock:

Which is related to, and confirms an earlier post of :

One can clearly point to the unprecedented drop in Tax Revenue as being related to an unprecedented drop in Taxable Income generated, which then points to a much higher Unemployment rate than 9.5%. In other words, the current tax revenue collected is more correlated with a 15% Unemployment rate than a 9.5% Unemployment rate.

Another indicator of the severity of Unemployment is the ridiculous notion of "Jobs Saved". Heard that phrase? "Jobs Saved", as a statistical measurement, does not exist. It’s a concocted “political phrase”/"political speak".

The phrase came out of the White House and likely originated in the Council of Economic Advisers. When Romer and Bernstein’s projections of the impact of the Quasi-Stimulus Plan immediately went South (no higher than a 8% Unemployment rate with the Stimulus Plan), they concocted the “Jobs Saved” phrase as CYA.

Any Economist would tell you that “Jobs Saved” does not exist. That Employment is a statistical measurement and Unemployment is a statistical measurement. “Jobs Saved” does not exist as a statistical measurement.

If you further think about the ridiculous notion of “Jobs Saved”, one would conclude if the idea existed, it would be the exact same number as "Employment" and not a separate stand alone statistic. That is, All Employed Jobs are All Saved Jobs. The extension is: all Unemployed Jobs are all Lost Jobs.

Here we are, the stage is set for high persistent unemployment in the 15% range. Going back to Unemployment: Peanut Butter and Jelly, the "Political Anger Factor" and the "Me Next Factor" are sitting atop a Saturn Booster Rocket, well on their way off the charts.

Wait a minute, the Calvary is coming in the form of the Quasi-Stimulus Plan. Wrong. The Stimulus Plan was based on Political-Political rather than Political-Economy. What ever short term employment it generates will fade to black once the spending runs out.

What is even more onerous is that the authors of the Stimulus Plan are using Keynesian Deficit Government Spending, based on Political-Political, and forgot to read what Keynes said about Deficit Spending: That Deficit Spending is temporary until the Private Sector Recovers.

The Private Sector needs incentives to recover. That is, Private Capital Formation leads to Private Sector jobs. The same authors of the Stimulus Plan forgot part of Keynes theory of Deficit Government Spending, namely ....until the Private Sector Recovers.

There are no incentives for Private Capital formation ! The authors of the Stimulus Plan have simultaneously erected Disincentives to Private Capital Formation leading to Private Sector jobs: Cap and Trade (energy tax), Socialized Medicine (tax), Over Regulation (cost), and of course the specter of higher business and personal taxes (tax, tax, and more tax).

Maybe this sums up the situation: in the words of Slim Pickens from Blazing Saddles: What in the Wide, Wide, World of Sports does Carbon, the Health Care Industry, and Higher Taxes have to do with how we got into the current recession and how we get the Economy back on track?

Thursday, July 16, 2009

Unemployment: Peanut Butter and Jelly

Of all the economic trends, Unemployment seems the most important Political-Economy aspect at this point in time. Persistent high unemployment historically leads to a Political Anger Factor that unseats the powers-that-be.

Not discounting any other economic indicator, trend, or consequence, Unemployment rises to the top regarding importance. When John/Jane Q. Public can’t even put peanut butter and jelly on his/her table, everything else is of no Political-Economy importance.

If you were unlucky enough to live through the 1970’s, with price controls, increasing taxes, expanding government, over regulation, hyper inflation, 21% mortgage rates, 16% CD rates, and the drying up of consumer credit…..Unemployment was still the number one concern of households during the 1970’s.

Go back to the 1930’s. Unemployment was the number one concern.

Back to the future, the 06/2009 published unemployment rate is 9.5%. The true rate is likely 15% if you count the Self Employed and contract labor.

Lets call the collective attitude of the unemployed the “Political Anger Factor”. Historically the Political Anger Factor exponentially rises after unemployment reaches 10%. The Political Anger Factor is contagious as well. Those remaining employed begin to wonder how secure their job is given the large number of unemployed . That is, the Me-Next-Factor, which is the cousin of the Political Anger Factor, creates economic uncertainty.

What about the direction of Unemployment and the Political Anger Factor and Me Next Factor? On the rise?

Human Capital Unemployment is directly related to Capital. One must remember that Capital is unemployed at this point as well.

In the 1930’s, several of the lessons of the Great Depression never mentioned by Romer, Bernstein, Goolsbee and the gang are:

(1) Federal, State and Local taxes increased on consumers and businesses,

(1a) the increased taxes depressed Private Capital Formation,

(1b) Private Capital Formation leads to Private Sector jobs.

(2) Government Regulation increased significantly,

(2a) Government Regulation then affected business profit at the margin.

Hence Cap and Trade (a tax), Socialized Medicine (a tax), Additional Regulation (a cost), add to unemployment. Then the specter of increased Federal, State and Local taxes add to an employment freeze or employment reduction by employers. Increased taxes lower consumption by both consumers and businesses further accelerating unemployment. Increased taxes inhibit Private Capital Formation. That is, Private Capital Formation leading to Private Sector jobs is under assault.

Of course we do have the Stimulus Plan. The 800 billion, 100% financed by-the-way, Stimulus Plan based on Political-Political rather than Political-Economy. The most dismally designed Stimulus Plan of all time. You know, the Stimulus Plan that needs immediately recalled.

If one buys into the idea of Financial Sector Systemic Risk and the ensuing cascading effect, then one must understand that rising taxes and regulation causes the same cascading effect within the realm of Unemployment.

Hence the Social Policy (it can’t be characterized as Economic policy as its not based on Economics) coming from Political Leaders is creating an accelerated unemployment rate that will likely level off into a high and persistent unemployment rate. Hence the Political Anger Factor will rise significantly and persist.

A high persistent Political Anger Factor caused by high persistent Unemployment has historically unseated the-powers-that-be.

Tuesday, July 7, 2009

Cap and Trade: The Conservation Price Increase Wave

How you do you see energy prices increasing due to Cap and Trade? What kind of costs will households face with the new energy tax?

The $179 per year Obama Administration estimate per household or the $1300 per year Heritage Foundation estimate?

Let us take an average of the two estimates and go with a $740 energy tax increase per household due to Cap and Trade.

If the assumption above of $740 is our base line, consider another wave influencing price: the results of Consumer Energy Conservation in the environment of Public Utilities.

Please consider the following:

(a) The Raleigh, NC (Triangle Area) had a prolonged drought. Citizens were asked to conserve water. Commercials ran on TV to conserve water. The Governor went on TV many times and asked for water conservation,

(b) People did in fact conserve water,

(c) After the drought ended consumers continued to conserve water as the State of NC fostered a water conservation program on a continuous basis pointing to the probability of future droughts,

(d) The infrastructure and labor of the Raleigh, NC water system was based on "X" revenue per year. The treatment plans, sewers, water lines, etc. required "X" revenue to cover financed infrastructure (Bonds) and variable costs such as maintenance of the infrastructure, supplies, and labor,

(e) The conservation of water created "X-2" revenue.

(f) The cost of a unit of water was then increased to cover the lower demand for water as the water system could not meet its expenses given the new level of revenue due to conservation.

Going back to our above assumption of $740 tax increase on energy prices. Wouldn't a rational consumer of energy reduce consumption to save money (conserve)? Its not that the consumer voluntarily wants to conserve, but the consumer is forced to conserve due to their budget which is constant in the short run and being faced with the new higher energy tax.

Looking merely at Electric Prices, a consumer in the short run can quickly unplug unused items, turn off lights, wash laundry on cold, etc., etc.. The consumer clearly has the ability to conserve.

As mentioned above, Public Utilities such as Water and Electricity have a rigid cost structures in the short and medium run. The cost structure is based on constant or increasing revenue. If Cap and Trade is passed, and consumers begin to conserve due to the new tax on energy, then revenue will fall for the Electric Utility.

The Electric Utility, faced with declining revenue and rigid costs in the short and medium run, will petition for a price increase to bring revenues back to pre-conservation levels.

Hence the Cap and Trade energy tax increases price which leads to conservation which leads to another price increase. Therefore, the $740 estimate above is really $740 + the public utility conservation effect.

Saturday, July 4, 2009

Recall the Stimulus Plan Now!

Basing an Economic Stimulus Plan on a Social Engineering Agenda is an Economic Train Wreck. Basing an Economic Stimulus plan on 6000 earmarks is an Economic Train Wreck. Legislatures not either reading the plan.. or... in other cases not having enough time to read the plan, is absolutely unforgivable. Not having an extended debate over a 1200 page Stimulus Plan is ridiculous.

The failure of the Stimulus Plan is inevitable on so many levels that it begs to be recalled. The most basic failure of the plan is two fold:

(a) Deploying Keynesian Deficit Government Spending by definition creates short term employment,

(b) while simultaneously making no plans for Private Capital Formation which leads to Private Sector job creation.

If you are going to deploy Keynesian Spending (no matter how badly designed), at the very least understand Keynes went on to say that the jobs created would be temporary until the Private Sector recovered.

This is not hind sight. 90% of Private Sector Economists said: Just Say No to the Stimulus Plan.

The Private Sector jobs will not recover without Private Capital Formation incentives. Matter-of-fact, beyond no incentive for Private Capital Formation leading to Private Sector jobs, add in the following:

(a) the specter of rising Federal, State, and Local taxes further depressing Private Capital Formation,

(b) over regulation causing profits at the margin to fall due to the added cost to comply which in turn depresses the expansion of existing Capital,

(c) Cap and Trade causing producer input costs to rise which in turn causes the producer to seek out sourcing or moving over seas,

(d) your chance to add another 500 reasons, right here: _________________.

That's the Economics.

How about the Political-Economy?

The Political-Economy of the situation is much worse. If you spend an enormous amount of money, on loan, and promise jobs for the American People, they believe you. You must make the economics the priority. People expect a job. In this case, the lesson (again) is never, ever make the Politics first.

When the Politics and the Power trump Economics of a Stimulus plan, during a severe, major, recession you have made a major error. When people need/believe they will get a job, you have merely taken Political-Economy and moved to Political-Political.

Recall the Stimulus Plan.

The Other Unemployment: Capital

Many articles are being published regarding the 9.5% unemployment rate. That unemployment will worsen. That June unemployment came is at 473,000 more losing their job (+100,000 more than predicted). That many States have unemployment rates of +11% and that pockets of unemployment exist that are approaching 20%.

What about the other unemployment? Unemployment of Capital. This economic phenomena never gets much attention in the mainstream media.

Production is made up of human capital and Physical and Monetary Capital. With absolutely, positively no incentive being offered for Private Capital Formation or activation of existing Capital, the other component of production , human capital, sits idle.

Human Capital will continue to sit idle for the very fact that no stimulus has been sent the way of Private Capital Formation leading to Private Sector jobs. The fact that no incentive exists for Private Capital Formation is compounded by the specter of an Energy Tax via Cap and Trade as well as the expectation of general tax increases by Federal, State, and Local Government Bodies. Furthermore, the specter of over-regulation threatens profits at the margin even if Private Capital Formation is employed.

Romer, Goolsbee, and Jared "The King of Spin" Bernstein (the non-economist Economist) have painted themselves right into a corner.

Recall the un-read-but-we-voted-on-it-anyway, 6000 earmark, Social Engineering Stimulus Goofiness. Try painting from the corners toward the doorway this time around.