Finally, a really good, solid datapoint!
Tuesday's Wall Street Journal featured an article on the front place, top, of its Marketplace section with the headline,
"U.S. Firms Eager to Add Foreign Jobs"
The first paragraph said it all,
"U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported."
Further, regarding the other important business input, capital, the article stated,
"The multinational companies, for instance, reduced capital-investment spending in the U.S. at an annual rate of 0.2% in the 2000s and increased it at a 4.0% annual rate abroad. Still, they allocated $2.40 in capital spending in the U.S. for every $1 spent abroad."
In summary, US-based multinational companies cut 864,000 workers in the US and added 2.9 million workers overseas from 1999 to 2009.
If this doesn't explain why the US economy and GDP growth are slowing, with stubborn unemployment, while S&P500 company profits continue to rise, what else do you need?
It also explains why business investment spending, while remaining robust, isn't helping US employment. It's reasonable to expect that much of that new investment spending is being serviced by overseas units and, thus, workers, of US-based companies.
No surprise to me. This is pretty much what I would have expected to see. This is simply the first solid piece of data on the phenomenon which I've seen.
If you heard interviews with the author of Steve Jobs' authorized biography, you may have heard him recount Jobs' frustration with US immigration policy. The story involved Jobs and Google chairman Eric Schmidt, at a White House dinner with its current occupant, explaining that a lack of US engineering talent forced Apple to build a facility in Southeast Asia, where the engineers were available. In addition to the hundreds of engineers, Jobs told the president, Apple also hired thousands of local workers for the production facility.
That, writ large, is what these recent Commerce numbers capture.
Shareholders of these companies should rejoice that the firms are doing what is economically best for them. That includes...ahem.....union members whose pension funds own shares of the S&P500 Index or companies therein.
I wouldn't go pillorying the executives or boards of these companies. They are simply reacting to global demand, costs, tax rates and regulatory environments.
The US Congress and administration should take note. This report illustrates Ricardian comparative advantage economics in action. And that clearly portrays a US labor market that has become overly-regulated, too expensive and difficult to accommodate in exchange for the presumed benefits. Thus, these multinationals find it more cost-effective to service overseas demand with overseas labor, capital equipment and facilities.
Showing posts with label Employment. Show all posts
Showing posts with label Employment. Show all posts
Friday, November 25, 2011
Friday, November 04, 2011
Today's Employment Numbers- More Gloomy News
By now you've probably heard or seen the October employment numbers from the BLS. Net jobs were 80,000 and the narrowest unemployment level was notionally down from 9.1% to 9%. CNBC's various reporters and anchors all tried to talk up these continuing weak economic numbers, claiming that, once you got past the anemic new jobs created, all is bright with the US economy.
The phrase that came to my mind was 'angels dancing on the head of a pin.'
I mean, really, look at the trends. How long has unemployment, narrowly measured, been at or above 9%? A year? It's at least twice what Americans are used to seeing.
The widely-defined unemployment measure, U6, is still up in the teens and largely unchanged.
And the monthly jobs number- only +80,000.
You can search various prior posts I've written discussing what the monthly new jobs number must be just to absorb the new entrants into the US labor pool. I feel like I'm writing about France now. That's how sluggish the economy has become on the employment front.
Meanwhile, I read a piece in this morning's Wall Street Journal discussing China's slow but steady rise in innovation ranking, while the US fell from 4th to 5th in the most recent table. Several pundits cited US firms continuing to base more plants and research facilities in China, hiring Chinese PhDs who file patents. And noting that, over time, innovation occurs at and with manufacturing sites, thus slowly hollowing out more of the US manufacturing base from an innovation perspective.
Fresh in my mind as I write this is the anecdote involving recently-deceased Steve Jobs assailing Obama for not opening the US labor market to more foreign-born PhDs. That Apple had to locate plants overseas, in Asia, because it couldn't recruit sufficient numbers of US engineers, so both the engineering and production jobs, numbering in the tens of thousands, went to Southeast Asia. The president's reply was a muddled, political obfuscation involving the complexity of immigration policy.
Much like it ignores the true depth and breadth, and causes, of the current European debt crisis, US equity investors are seemingly sticking their heads in the sand regarding US economic growth and unemployment. As I write this, the Bloomberg anchor is citing 7 years as the time required, at 80,000 net jobs created per month, to re-employ US workers back to, I believe, the 2007 level.
As I wrote here yesterday, there's simply no way these monthly numbers should give anyone confidence that the US economy is healthy and undergoing a normal expansion.
The phrase that came to my mind was 'angels dancing on the head of a pin.'
I mean, really, look at the trends. How long has unemployment, narrowly measured, been at or above 9%? A year? It's at least twice what Americans are used to seeing.
The widely-defined unemployment measure, U6, is still up in the teens and largely unchanged.
And the monthly jobs number- only +80,000.
You can search various prior posts I've written discussing what the monthly new jobs number must be just to absorb the new entrants into the US labor pool. I feel like I'm writing about France now. That's how sluggish the economy has become on the employment front.
Meanwhile, I read a piece in this morning's Wall Street Journal discussing China's slow but steady rise in innovation ranking, while the US fell from 4th to 5th in the most recent table. Several pundits cited US firms continuing to base more plants and research facilities in China, hiring Chinese PhDs who file patents. And noting that, over time, innovation occurs at and with manufacturing sites, thus slowly hollowing out more of the US manufacturing base from an innovation perspective.
Fresh in my mind as I write this is the anecdote involving recently-deceased Steve Jobs assailing Obama for not opening the US labor market to more foreign-born PhDs. That Apple had to locate plants overseas, in Asia, because it couldn't recruit sufficient numbers of US engineers, so both the engineering and production jobs, numbering in the tens of thousands, went to Southeast Asia. The president's reply was a muddled, political obfuscation involving the complexity of immigration policy.
Much like it ignores the true depth and breadth, and causes, of the current European debt crisis, US equity investors are seemingly sticking their heads in the sand regarding US economic growth and unemployment. As I write this, the Bloomberg anchor is citing 7 years as the time required, at 80,000 net jobs created per month, to re-employ US workers back to, I believe, the 2007 level.
As I wrote here yesterday, there's simply no way these monthly numbers should give anyone confidence that the US economy is healthy and undergoing a normal expansion.
Friday, October 07, 2011
This Morning's Fake Job Numbers
It's 8:35AM and I've just watched the release of the September Labor Department employment numbers.
Allegedly, consensus was for +60K jobs and 9.1% unemployment.
In reality, jobs rose by 110K with a flat 9.1% unemployment rate. However, we then quickly learned that August jobs were restated upwards, and September jobs were high, by roughly the number of striking Verizon craft workers.
Meaning that August wasn't really flat, and September didn't really add 110K jobs.
What kind of bizarro employment measurement system distorts results over a strike that everyone knows happened?
You wonder why any one month's numbers are useless? This is why.
Allegedly, consensus was for +60K jobs and 9.1% unemployment.
In reality, jobs rose by 110K with a flat 9.1% unemployment rate. However, we then quickly learned that August jobs were restated upwards, and September jobs were high, by roughly the number of striking Verizon craft workers.
Meaning that August wasn't really flat, and September didn't really add 110K jobs.
What kind of bizarro employment measurement system distorts results over a strike that everyone knows happened?
You wonder why any one month's numbers are useless? This is why.
Saturday, September 24, 2011
It's Not About Jobs- It's About Dreams, Businesses & Careers
As someone who left corporate life in 1996 to adapt what I'd learned concerning corporate strategy and performance into quantitative consulting products and an equity management process, I'm familiar with the concept of building a business.
Thus it strikes me as foolish and naive to hear federal politicians of both parties ceaselessly natter on about "jobs," as if that's all people want. Some sort of economic unit of income delivery.
That's not what people want.
The people who inadvertently create jobs want to monetize their dreams. They have what they believe to be either unique, or uniquely competitive business concepts, the successful implementation of which they believe will bring them fulfillment, satisfaction and wealth.
Some of those people who start businesses, as they in fact succeed, may create employment for others. It's likely been this way for homo sapiens since we hunted mastodons while living in caves hundreds of thousands of years, and longer, ago. There were, in each group, probably one or two superior hunters with whom others hoped to join, in order to get a share of the food he would lead them to and kill. Perhaps a loose confederation of a superior tracker and the best spear-thrower of the group.
Call them chiefs, kings, what have you, human social groups have probably always had, in the hunter-gatherer era before settled communities, rainmakers. Those who organized and led the efforts to secure food.
Today, we buy food, water, shelter and clothing. Those basics about which I learned in a simple 7th grade economics unit taught in Social Studies by, I believe, the current secretary of Transportation, Ray LaHood. So rather than join other humans in hunting game or gathering edible plants, we hope to earn sufficient income to buy those goods and services which we once procured directly by our own efforts.
Most people want more than a job. A job suggests a temporal source of money which necessarily results in reduced spending and a large sense of uncertainty about which of your life's aspirations will be attainable. Even those who labor at manual tasks ideally seek situations which make their own sense of economic and financial vulnerability to forces outside their control somewhat less.
I think what those who don't create businesses want is to be useful and valuable to, employed by someone with a passion for building their successful business. So that they can look forward to some security in their ability to rely on the income they earn in that business.
They want careers, not jobs. But both business creators and their employees ultimately desire, though it's hard to attain, long term involvement in a business which brings them income security based on the continued success of their efforts in creating value in the enterprise.
If you've ever worked for a large company, as I have- AT&T, Chase Manhattan Bank and Andersen Consulting (now Accenture), you know that, in the post-1970s era of downsizing and LBOs, you were only as secure as your connection to your upper management, if then. More likely, as happened to me at all three companies, large-scale reorganizations could affect your job, and, thus, your career,
In the era of my late father's corporate career, working for a large firm typically meant security, as things moved slowly. Not so in the era that followed. The era for those of us in the middle and late boomer cohort.
My experience after corporate life, in a smaller consultancy (Oliver Wyman & Co.), working as a consultant to a wealthy would-be hedge fund operator, and in association with various hedge fund and private investment partnerships, provided the expected trade-offs of anonymity with direct risks of interpersonal quirks and individual unreliability. A most personal form of counterparty risk, if you will.
Working in small organizations, with or for entrepreneurs, affords no less risk than working in a large firm- simply a different sort. You know the person who will dismiss you for purely personal reasons, or in a direct contravention of agreements. Your partner loses his financial backer, whimsically decides to pursue other businesses and exit the effort on which he's asked you to work, or simply comes up missing with promised capital, as my last partner did. Or, as in the case of the last consulting firm for which I worked, decides your success on agreed-upon objectives are now too expensive, and reneges on original employment terms.
My point is, earning income is never as simple as just having a "job" for anyone with a college degree and hopes of more than mindless manual labor. Every employment or business creation effort involves risks. You hope you wisely manage those risks, but they never just vanish.
To fix a nation's hopes on public spending to employ road and building construction workers misses the point of returning our nation to a situation in which educated people can imagine, construct and manage their careers.
The sort of personal income streams creation that will return America to the type of society it had in recent decades will only be achieved by the ability of those who want to create businesses to do so, and perhaps employ others in their impassioned drive to build those enterprises.
Those will be careers, not just jobs seen by politicians as temporary or unenumerated income production units.
The involvement of humans in US society to earn income transcends simply putting in a day's work for a current paycheck. And, thus, transcends seeing such effort as just a job.
That is why temporary measures, including more federal borrowing to build roads and schools (a/k/a Stimulus II) and/or suspension of payroll taxes, won't deliver what people want. Those measure might create temporary jobs, but they won't provide opportunities for the business creation and expansion which provides careers.
To do that, government needs to lower taxes, reduce cumbersome regulation, and provide a more certain, reliable climate in which more businesses may be formed, and existing ones expanded. That comes from real demand from the private sector for what those businesses provide, not the faux-demand of temporary government fiscal policies.
Thus it strikes me as foolish and naive to hear federal politicians of both parties ceaselessly natter on about "jobs," as if that's all people want. Some sort of economic unit of income delivery.
That's not what people want.
The people who inadvertently create jobs want to monetize their dreams. They have what they believe to be either unique, or uniquely competitive business concepts, the successful implementation of which they believe will bring them fulfillment, satisfaction and wealth.
Some of those people who start businesses, as they in fact succeed, may create employment for others. It's likely been this way for homo sapiens since we hunted mastodons while living in caves hundreds of thousands of years, and longer, ago. There were, in each group, probably one or two superior hunters with whom others hoped to join, in order to get a share of the food he would lead them to and kill. Perhaps a loose confederation of a superior tracker and the best spear-thrower of the group.
Call them chiefs, kings, what have you, human social groups have probably always had, in the hunter-gatherer era before settled communities, rainmakers. Those who organized and led the efforts to secure food.
Today, we buy food, water, shelter and clothing. Those basics about which I learned in a simple 7th grade economics unit taught in Social Studies by, I believe, the current secretary of Transportation, Ray LaHood. So rather than join other humans in hunting game or gathering edible plants, we hope to earn sufficient income to buy those goods and services which we once procured directly by our own efforts.
Most people want more than a job. A job suggests a temporal source of money which necessarily results in reduced spending and a large sense of uncertainty about which of your life's aspirations will be attainable. Even those who labor at manual tasks ideally seek situations which make their own sense of economic and financial vulnerability to forces outside their control somewhat less.
I think what those who don't create businesses want is to be useful and valuable to, employed by someone with a passion for building their successful business. So that they can look forward to some security in their ability to rely on the income they earn in that business.
They want careers, not jobs. But both business creators and their employees ultimately desire, though it's hard to attain, long term involvement in a business which brings them income security based on the continued success of their efforts in creating value in the enterprise.
If you've ever worked for a large company, as I have- AT&T, Chase Manhattan Bank and Andersen Consulting (now Accenture), you know that, in the post-1970s era of downsizing and LBOs, you were only as secure as your connection to your upper management, if then. More likely, as happened to me at all three companies, large-scale reorganizations could affect your job, and, thus, your career,
In the era of my late father's corporate career, working for a large firm typically meant security, as things moved slowly. Not so in the era that followed. The era for those of us in the middle and late boomer cohort.
My experience after corporate life, in a smaller consultancy (Oliver Wyman & Co.), working as a consultant to a wealthy would-be hedge fund operator, and in association with various hedge fund and private investment partnerships, provided the expected trade-offs of anonymity with direct risks of interpersonal quirks and individual unreliability. A most personal form of counterparty risk, if you will.
Working in small organizations, with or for entrepreneurs, affords no less risk than working in a large firm- simply a different sort. You know the person who will dismiss you for purely personal reasons, or in a direct contravention of agreements. Your partner loses his financial backer, whimsically decides to pursue other businesses and exit the effort on which he's asked you to work, or simply comes up missing with promised capital, as my last partner did. Or, as in the case of the last consulting firm for which I worked, decides your success on agreed-upon objectives are now too expensive, and reneges on original employment terms.
My point is, earning income is never as simple as just having a "job" for anyone with a college degree and hopes of more than mindless manual labor. Every employment or business creation effort involves risks. You hope you wisely manage those risks, but they never just vanish.
To fix a nation's hopes on public spending to employ road and building construction workers misses the point of returning our nation to a situation in which educated people can imagine, construct and manage their careers.
The sort of personal income streams creation that will return America to the type of society it had in recent decades will only be achieved by the ability of those who want to create businesses to do so, and perhaps employ others in their impassioned drive to build those enterprises.
Those will be careers, not just jobs seen by politicians as temporary or unenumerated income production units.
The involvement of humans in US society to earn income transcends simply putting in a day's work for a current paycheck. And, thus, transcends seeing such effort as just a job.
That is why temporary measures, including more federal borrowing to build roads and schools (a/k/a Stimulus II) and/or suspension of payroll taxes, won't deliver what people want. Those measure might create temporary jobs, but they won't provide opportunities for the business creation and expansion which provides careers.
To do that, government needs to lower taxes, reduce cumbersome regulation, and provide a more certain, reliable climate in which more businesses may be formed, and existing ones expanded. That comes from real demand from the private sector for what those businesses provide, not the faux-demand of temporary government fiscal policies.
Tuesday, September 06, 2011
How Not To Create Jobs
I returned from some time away just before Labor Day to read and hear that the administration is now really focused on jobs!
Nice, but it demonstrates a predictable, lamentable failure to comprehend the nature of job creation.
Many politicians of both parties speak of jobs as if they are simply units of income-production which magically appear if and when government does things with taxes. Currently, the thinking is to spur job creation by lowering the after-tax cost of employees with various employment tax reductions.
As it happens, I met a genuine small businessman on last week while hiking in New Hampshire's White Mountains. While discussing the recent behavior of US equity markets, social welfare programs and the economy, I asked him if lowering the costs of hiring and paying workers would lead him to bring on more people.
It would not. He owns and operates a picture-framing business. Over the past few years, he's had to lay off most of his small staff. As is often the case, family members will assist him to meet peak demand. But he only has one remaining full time employee.
He confirmed that he could only hire another worker if demand for his services rose and remained steady. That might take 6 months to a year. But there's simply no way, in this economy, that a reduction in payroll taxes will have any effect on his hiring plans.
The current political thinking about reversing causality, and the confirmation of my view which I received from my fellow hiker, led me to recall the words of an old grad school professor.
Morris Gomberg, one-time labor leader and, many years ago, management professor at Penn's business school, was lampooning federal inflation-fighting efforts. I remember Gomberg laughing at the notion of government capping prices, thus expecting that by manipulating an output, inputs would react accordingly and fall, too.
He quickly offered a comparison that went something like this,
'It's like you want someone to eat less, so you shove what comes out of them back in. What you would get, instead, is a very foul and disgusting mess.'
So it is with this equally backward notion of attempting to game payroll taxes, which is a result of hiring, hoping that by temporarily lowering them, hiring will magically appear. It is a sad statement on the state of government that the best economists federal money can buy don't have a clue regarding what drives job creation. At best, their tax reductions could affect the prices at which additional labor would be hired, meaning a total after-tax cost could be maintained and more paid to workers, or the savings kept and workers paid no more. But the payroll tax gimmick won't spur raw demand for hiring.
It's the prospect, for a business owner, of steadily rising demand for his products or services which cause him to add employees. Not a totally unrelated cost element being temporarily lowered.
Of course, the federal government tried several times in the past three years to stoke demand via its stimulus programs. Nothing worked.
So now it's on to completely unrealistic fantasy schemes which display a gross lack of appreciation for how businesses actually function.
Nice, but it demonstrates a predictable, lamentable failure to comprehend the nature of job creation.
Many politicians of both parties speak of jobs as if they are simply units of income-production which magically appear if and when government does things with taxes. Currently, the thinking is to spur job creation by lowering the after-tax cost of employees with various employment tax reductions.
As it happens, I met a genuine small businessman on last week while hiking in New Hampshire's White Mountains. While discussing the recent behavior of US equity markets, social welfare programs and the economy, I asked him if lowering the costs of hiring and paying workers would lead him to bring on more people.
It would not. He owns and operates a picture-framing business. Over the past few years, he's had to lay off most of his small staff. As is often the case, family members will assist him to meet peak demand. But he only has one remaining full time employee.
He confirmed that he could only hire another worker if demand for his services rose and remained steady. That might take 6 months to a year. But there's simply no way, in this economy, that a reduction in payroll taxes will have any effect on his hiring plans.
The current political thinking about reversing causality, and the confirmation of my view which I received from my fellow hiker, led me to recall the words of an old grad school professor.
Morris Gomberg, one-time labor leader and, many years ago, management professor at Penn's business school, was lampooning federal inflation-fighting efforts. I remember Gomberg laughing at the notion of government capping prices, thus expecting that by manipulating an output, inputs would react accordingly and fall, too.
He quickly offered a comparison that went something like this,
'It's like you want someone to eat less, so you shove what comes out of them back in. What you would get, instead, is a very foul and disgusting mess.'
So it is with this equally backward notion of attempting to game payroll taxes, which is a result of hiring, hoping that by temporarily lowering them, hiring will magically appear. It is a sad statement on the state of government that the best economists federal money can buy don't have a clue regarding what drives job creation. At best, their tax reductions could affect the prices at which additional labor would be hired, meaning a total after-tax cost could be maintained and more paid to workers, or the savings kept and workers paid no more. But the payroll tax gimmick won't spur raw demand for hiring.
It's the prospect, for a business owner, of steadily rising demand for his products or services which cause him to add employees. Not a totally unrelated cost element being temporarily lowered.
Of course, the federal government tried several times in the past three years to stoke demand via its stimulus programs. Nothing worked.
So now it's on to completely unrealistic fantasy schemes which display a gross lack of appreciation for how businesses actually function.
Equities & Friday's Jobs Numbers
I was away for most of last week, having set two posts to auto-publish. The post for 31 August failed, per Blogger's frequent problems with scheduled posts, so I manually published it this morning.
When I began to clear my inbox over the weekend, I noted the precipitous fall in the S&P500 on Friday after fairly uneventful days from Tuesday through Thursday. Guessing I'd read of some significant event or news for that day, I was not surprised in the least to learn of the jobs report showing no net employment increase for August. The net result for the S&P for last week was to end essentially flat.
Happily, when I checked the values of the equity portfolios selected by my proprietary quantitative process, I saw that they continue to average more than 10 percentage points of total return above the S&P returns for the respective matching timeframes. For 2011, at Friday's close, the index had lost 6.65%. As of late morning today, it's lost more than an additional 2%.
The pundits and co-anchors on CNBC and Bloomberg all have 'this might be a rerun of 2008' looks on their faces and distress in the tones of their voices. Finally, after many months of administration attempts to make mountains out of pathetically weak economic data, said data is looking decidedly worse, and these financial news network on-air staff can't hide it anymore.
Between continued investor nervousness about European debt problems, and their hyper-sensitivity to bad US economic data, it probably won't take much non-good news during September to drive equity markets down even further.
When I began to clear my inbox over the weekend, I noted the precipitous fall in the S&P500 on Friday after fairly uneventful days from Tuesday through Thursday. Guessing I'd read of some significant event or news for that day, I was not surprised in the least to learn of the jobs report showing no net employment increase for August. The net result for the S&P for last week was to end essentially flat.
Happily, when I checked the values of the equity portfolios selected by my proprietary quantitative process, I saw that they continue to average more than 10 percentage points of total return above the S&P returns for the respective matching timeframes. For 2011, at Friday's close, the index had lost 6.65%. As of late morning today, it's lost more than an additional 2%.
The pundits and co-anchors on CNBC and Bloomberg all have 'this might be a rerun of 2008' looks on their faces and distress in the tones of their voices. Finally, after many months of administration attempts to make mountains out of pathetically weak economic data, said data is looking decidedly worse, and these financial news network on-air staff can't hide it anymore.
Between continued investor nervousness about European debt problems, and their hyper-sensitivity to bad US economic data, it probably won't take much non-good news during September to drive equity markets down even further.
Tuesday, July 26, 2011
Will The UAW Never Learn?
Yesterday's Wall Street Journal carried this headline for its Marketplace section's lead article,
For UAW, Jobs Trump Pay
Will this union never learn?
The article begins with comments from a Flat Rock, Michigan Ford employee who asserts,
"We know that we need more product in the contract because that will mean more jobs and job protection for the rest of us."
Job protection. What a quaint notion, eh? Especially in a company in a sector, which had to be rescued by the federal government, so badly was it mismanaged due to management's ineptitude in dealing with the UAW's egregious demands.
The article goes on to list some comparative hourly wage rates:
$58 for Ford
$58 for GM
$49 for Chrysler
$27 @ Volkswagen in Chattanooga, TN & Hyundai in Montgomery, AL
Those Ford and GM numbers equate to a rough gross annual cash compensation of $111,360. Chrysler is paying about $94K/year. Obviously, the right-to-work Tennessee and Alabama compensations are about half that, or just under $52K.
Meanwhile, the UAW is pushing hard, with German labor officials, to unionize Volkswagen's Tennessee operation. Interviews reported in the Journal with employees at the plant aren't particularly enthused and, at best, are open to hearing why they should join the UAW.
Not so promising for the union guys, is it?
Let's consider what's really going on here. Foreign auto makers locate their plants in Southern, right-to-work US states so they can be competitive with cars and trucks which they hope to sell to Americans.
Unfortunately for GM, Ford and Chrysler, their legacy plants leave them stuck in closed shop states in which they are forced to pay about twice as much per employee. Those cars and trucks, too, are destined for US consumers. With Boeing's recent attempt to open a second Dreamliner assembly plant in South Carolina under union attack, the Big 3 can't ever hope to simply move production south of the Mason-Dixon Line.
I'm guessing Ford, GM and Chrysler build as few vehicles as possible in Michigan and other northern plants. In an ideal world, they'd shut them and locate near their competitors' plants in the South. But that's obviously impossible.
From that perspective, what could the UAW possibly offer to get any of those assemblers to commit to more jobs, in a contract, at those sky-high wage rates? No wonder Ford, GM and Chrysler all want to move to more profit-sharing for union workers, and, I'm sure, in time, health care premiums more in line with their white-collar workers.
Is it really possible that rank and file UAW workers at Ford, GM or Chrysler, having witnessed the carnage in their sector in the past three years, really believe any of those managements can offer 'more jobs,' let alone 'job protection?' Hell, they're lucky that the Democratic administration repaid the UAW's election efforts by stiffing legitimate bondholders, short-circuiting a conventional Chapter 11 bankruptcy for GM and Chrysler, and handing over significant chunks of the companies to the UAW.
If a reorganization had put the profitable parts of those two companies up for bid, it's not even clear any of the buyers would have retained the Michigan plants. They may have just bought machinery, licenses to IP and various trademarks and patents, and re-opened production somewhere in the South.
It's truly comical that UAW members think that, global trade and competition notwithstanding, they should earn north of $100K/year for fastening subassemblies together for commodity cars and trucks selling in a hotly-competitive US market.
When will they learn?
For UAW, Jobs Trump Pay
Will this union never learn?
The article begins with comments from a Flat Rock, Michigan Ford employee who asserts,
"We know that we need more product in the contract because that will mean more jobs and job protection for the rest of us."
Job protection. What a quaint notion, eh? Especially in a company in a sector, which had to be rescued by the federal government, so badly was it mismanaged due to management's ineptitude in dealing with the UAW's egregious demands.
The article goes on to list some comparative hourly wage rates:
$58 for Ford
$58 for GM
$49 for Chrysler
$27 @ Volkswagen in Chattanooga, TN & Hyundai in Montgomery, AL
Those Ford and GM numbers equate to a rough gross annual cash compensation of $111,360. Chrysler is paying about $94K/year. Obviously, the right-to-work Tennessee and Alabama compensations are about half that, or just under $52K.
Meanwhile, the UAW is pushing hard, with German labor officials, to unionize Volkswagen's Tennessee operation. Interviews reported in the Journal with employees at the plant aren't particularly enthused and, at best, are open to hearing why they should join the UAW.
Not so promising for the union guys, is it?
Let's consider what's really going on here. Foreign auto makers locate their plants in Southern, right-to-work US states so they can be competitive with cars and trucks which they hope to sell to Americans.
Unfortunately for GM, Ford and Chrysler, their legacy plants leave them stuck in closed shop states in which they are forced to pay about twice as much per employee. Those cars and trucks, too, are destined for US consumers. With Boeing's recent attempt to open a second Dreamliner assembly plant in South Carolina under union attack, the Big 3 can't ever hope to simply move production south of the Mason-Dixon Line.
I'm guessing Ford, GM and Chrysler build as few vehicles as possible in Michigan and other northern plants. In an ideal world, they'd shut them and locate near their competitors' plants in the South. But that's obviously impossible.
From that perspective, what could the UAW possibly offer to get any of those assemblers to commit to more jobs, in a contract, at those sky-high wage rates? No wonder Ford, GM and Chrysler all want to move to more profit-sharing for union workers, and, I'm sure, in time, health care premiums more in line with their white-collar workers.
Is it really possible that rank and file UAW workers at Ford, GM or Chrysler, having witnessed the carnage in their sector in the past three years, really believe any of those managements can offer 'more jobs,' let alone 'job protection?' Hell, they're lucky that the Democratic administration repaid the UAW's election efforts by stiffing legitimate bondholders, short-circuiting a conventional Chapter 11 bankruptcy for GM and Chrysler, and handing over significant chunks of the companies to the UAW.
If a reorganization had put the profitable parts of those two companies up for bid, it's not even clear any of the buyers would have retained the Michigan plants. They may have just bought machinery, licenses to IP and various trademarks and patents, and re-opened production somewhere in the South.
It's truly comical that UAW members think that, global trade and competition notwithstanding, they should earn north of $100K/year for fastening subassemblies together for commodity cars and trucks selling in a hotly-competitive US market.
When will they learn?
Monday, July 18, 2011
More Economic Nonsense from Alan Blinder
Only last month Princeton's Alan Blinder was in the Wall Street Journal espousing discredited economic theory. On the subject of his views, and Alan Meltzer's comments thereon, I wrote,
"Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research."
Blinder was at it again last week in the same paper. This time Blinder was castigating businesspeople for not hiring, and advancing his own personal remedy involving some sort of payroll tax credit.
Sadly, he demonstrated the same, well, to use a pun, blindness to how business managers react to uncertainty. Specifically, in the face of slack or uncertain demand, they don't rush out to hire more people. Blinder couldn't seem to fathom that his model of cost-push hiring isn't how the real world operates.
Yes, for non-perishable end-use products in a grocery store, lowering the final cost will spur demand, according to conventional microeconomics.
But hiring workers to produce goods or services isn't the same thing at all. When revenue growth is in doubt, making incremental workers cheaper isn't relevant and won't affect hiring decisions.
It's more evidence of how far removed from the realities of business many economists are. And Blinder is clearly one of them.
"Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research."
Blinder was at it again last week in the same paper. This time Blinder was castigating businesspeople for not hiring, and advancing his own personal remedy involving some sort of payroll tax credit.
Sadly, he demonstrated the same, well, to use a pun, blindness to how business managers react to uncertainty. Specifically, in the face of slack or uncertain demand, they don't rush out to hire more people. Blinder couldn't seem to fathom that his model of cost-push hiring isn't how the real world operates.
Yes, for non-perishable end-use products in a grocery store, lowering the final cost will spur demand, according to conventional microeconomics.
But hiring workers to produce goods or services isn't the same thing at all. When revenue growth is in doubt, making incremental workers cheaper isn't relevant and won't affect hiring decisions.
It's more evidence of how far removed from the realities of business many economists are. And Blinder is clearly one of them.
Tuesday, July 12, 2011
Housing's Misplaced Role in Personal Finance
Robert Bridges, described as "professor of clinical finance and business economics at the University of Southern California's Marshall School of Business," wrote a very useful editorial in yesterday's edition of the Wall Street Journal entitled A Home Is a Lousy Investment.
I found, as I read his piece, that much of what he contends meshes well with some of the points I made in this July 4th post.
Bridges begins by providing some factual evidence that homeownership in a state once considered home to many Americans who grew prosperous with the nation's and state's economy has actually been a comparatively bad deal,
"Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.
So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
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Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850."
Note that Bridges provides data on end values before the recent financial crisis destroyed so much California residential real estate wealth.
If you argue that California became a less-desirable state in which to own a home over the period, that, too, is evidence. Who, nowadays, can predict a state's spending and taxation climate over 30+ years? Or even 20 years?
My current state of residence, New Jersey, went from a fiscally more responsible neighbor to New York to one of the nation's worst economic disasters from 1970 to today.
Bridges continues, based upon his knocking the supports out from under the 'housing as investment' argument, to ask why we, as a nation, are so preoccupied with housing as an driver of our economy,
"In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets? The answer is that for policy makers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.
Home values may gain value over time, but home equity is locked-in until the house is sold. The profits may then be reinvested or spent, creating significant stimulative effects, but usually this happens when market conditions are strong, exacerbating unsustainable market booms. When troubled assets are dumped, or when defaults occur during weak market conditions, the trough is deepened.
Housing markets may be forever doomed to cyclicality for many reasons, but public policies that stimulate new construction or home purchases by tax and financing subsidies, reduction of qualifying incomes, buyer credits, mortgage backstopping, and preferential zoning and permitting, only intensify these cycles. Efforts to reduce loan balances and to create special rescue programs have reduced the security of loans, challenged the enforceability of contracts, and driven up real borrowing costs. Nearly a third of our states do not allow lenders the recourse provisions necessary to go after a borrower's personal assets in case of default on a residential mortgage. The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit."
Next, Bridges debunks the myth of home as emergency piggy bank,
"There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets."
Having cast serious doubt over the wisdom of homeownership, Bridges then directly asks,
"Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both. With the specter of looming cuts in Social Security and other entitlement programs, or even possible systemic insolvency, the challenge for tomorrow's retirees is income self-sufficiency.
A nation of house buyers becomes captive to the economic cyclicality caused by bursts of construction activity, and it is not lifted or sustained by the limited levels of service employment related to existing housing. By contrast, a nation of business startups and investors supports our capital markets and creates long-term employment, income, exports and the myriad technological advancements desperately needed by an expanding American society.
New home construction and the markets for existing homes should be recognized as activities secondary to, and dependent on, employment. Healthy job markets create healthy property markets, not the reverse. Housing demand driven by job growth creates conditions capable of sustaining a stable level of construction employment, attracting private equity investment, sustaining competitive private debt markets, encouraging capital growth, and ensuring the lowest possible housing prices."
The observation that "healthy job markets create healthy property markets, not the reverse," is, I believe, more important historically than Bridges realizes.
Much as I contended in my recent, linked post, that much bad US social welfare policy was posited on a brief, passing period of economic hegemony from 1945-75, so, too, I realized, after reading Bridges' excellent piece, has been US housing policy and beliefs thereabout.
For, contemporaneous with returning GIs, the rise of suburbs, etc., after WWII, was the new phenomenon of widespread middle-class ownership of non-farm homes.
I read an editorial in the Journal sometime within the past two years which contrasted US cities having advanced technology jobs with those having more blue-collarish, heavy industry employment. This isn't an exact list, but the former included San Francisco, whereas the latter included St. Louis and Cleveland.
What the author found was that homeownership was associated with cities having older, more industrial job bases. In effect, employees of high technology firms expected to be more mobile and, thus, didn't bother to own homes in as high proportions as blue-collar workers.
Could it be that much of our American view of the importance, the near-necessity of homeownership, result from a short period of just 30 years after WWII, when so many middle-class, blue-collar Americans enjoyed the fruits of the nation's unchallenged economic supremacy?
I did a little informal survey of friends last winter. All are college-educated and work in white-collar jobs. I asked what their grandparents did for work, and in what sort of homes they lived?
Without exception, most grandparents were not college-educated and lived in rental housing. One of my friends had a grandmother whose lumberjack husband was crushed to death on the job, requiring her to become a maid and laundress to support her children.
The mythic imagery of poorer, less-educated ancestors sacrificing so that future generations could own homes as a major part of "the American Dream," is, I believe, a curiously materialistic side-effect of a temporary period of American economic power.
It takes little thought to see that education is the most valuable asset a person can ever possess. It's portable, can be applied as creatively as the person to whom it belongs and, once acquired, is never truly lost.
Physical homes are different. They are, in truth, expensive luxuries in an unpredictable world. As investments, they are lumpy, costly to buy and sell, and require constant, expensive maintenance.
How we got to the point of subsidizing those who could barely afford to own homes is less a mystery than the continued misguided conclusions of Americans and their government, from 1945 onward, that the nation had come into some sort of economic and financial Promised Land of eternally rising living standards. In short, the exception became the norm, became the expected birthright of employed, educated Americans.
Bridges ends his piece with this passage,
"Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence."
I would go further. Owned homes may be "part of a good life," but, more correctly, they would be part of "a good, predictable, dependable economic life."
Otherwise, they are a cursed millstone. I suspect that while land or judiciously-chosen investments in rental properties would be good investments, homes, generally, across all economic eras, are not. And won't be in the future.
I found, as I read his piece, that much of what he contends meshes well with some of the points I made in this July 4th post.
Bridges begins by providing some factual evidence that homeownership in a state once considered home to many Americans who grew prosperous with the nation's and state's economy has actually been a comparatively bad deal,
"Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.
So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
Note that Bridges provides data on end values before the recent financial crisis destroyed so much California residential real estate wealth.
If you argue that California became a less-desirable state in which to own a home over the period, that, too, is evidence. Who, nowadays, can predict a state's spending and taxation climate over 30+ years? Or even 20 years?
My current state of residence, New Jersey, went from a fiscally more responsible neighbor to New York to one of the nation's worst economic disasters from 1970 to today.
Bridges continues, based upon his knocking the supports out from under the 'housing as investment' argument, to ask why we, as a nation, are so preoccupied with housing as an driver of our economy,
"In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets? The answer is that for policy makers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.
Home values may gain value over time, but home equity is locked-in until the house is sold. The profits may then be reinvested or spent, creating significant stimulative effects, but usually this happens when market conditions are strong, exacerbating unsustainable market booms. When troubled assets are dumped, or when defaults occur during weak market conditions, the trough is deepened.
Housing markets may be forever doomed to cyclicality for many reasons, but public policies that stimulate new construction or home purchases by tax and financing subsidies, reduction of qualifying incomes, buyer credits, mortgage backstopping, and preferential zoning and permitting, only intensify these cycles. Efforts to reduce loan balances and to create special rescue programs have reduced the security of loans, challenged the enforceability of contracts, and driven up real borrowing costs. Nearly a third of our states do not allow lenders the recourse provisions necessary to go after a borrower's personal assets in case of default on a residential mortgage. The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit."
Next, Bridges debunks the myth of home as emergency piggy bank,
"There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets."
Having cast serious doubt over the wisdom of homeownership, Bridges then directly asks,
"Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both. With the specter of looming cuts in Social Security and other entitlement programs, or even possible systemic insolvency, the challenge for tomorrow's retirees is income self-sufficiency.
A nation of house buyers becomes captive to the economic cyclicality caused by bursts of construction activity, and it is not lifted or sustained by the limited levels of service employment related to existing housing. By contrast, a nation of business startups and investors supports our capital markets and creates long-term employment, income, exports and the myriad technological advancements desperately needed by an expanding American society.
New home construction and the markets for existing homes should be recognized as activities secondary to, and dependent on, employment. Healthy job markets create healthy property markets, not the reverse. Housing demand driven by job growth creates conditions capable of sustaining a stable level of construction employment, attracting private equity investment, sustaining competitive private debt markets, encouraging capital growth, and ensuring the lowest possible housing prices."
The observation that "healthy job markets create healthy property markets, not the reverse," is, I believe, more important historically than Bridges realizes.
Much as I contended in my recent, linked post, that much bad US social welfare policy was posited on a brief, passing period of economic hegemony from 1945-75, so, too, I realized, after reading Bridges' excellent piece, has been US housing policy and beliefs thereabout.
For, contemporaneous with returning GIs, the rise of suburbs, etc., after WWII, was the new phenomenon of widespread middle-class ownership of non-farm homes.
I read an editorial in the Journal sometime within the past two years which contrasted US cities having advanced technology jobs with those having more blue-collarish, heavy industry employment. This isn't an exact list, but the former included San Francisco, whereas the latter included St. Louis and Cleveland.
What the author found was that homeownership was associated with cities having older, more industrial job bases. In effect, employees of high technology firms expected to be more mobile and, thus, didn't bother to own homes in as high proportions as blue-collar workers.
Could it be that much of our American view of the importance, the near-necessity of homeownership, result from a short period of just 30 years after WWII, when so many middle-class, blue-collar Americans enjoyed the fruits of the nation's unchallenged economic supremacy?
I did a little informal survey of friends last winter. All are college-educated and work in white-collar jobs. I asked what their grandparents did for work, and in what sort of homes they lived?
Without exception, most grandparents were not college-educated and lived in rental housing. One of my friends had a grandmother whose lumberjack husband was crushed to death on the job, requiring her to become a maid and laundress to support her children.
The mythic imagery of poorer, less-educated ancestors sacrificing so that future generations could own homes as a major part of "the American Dream," is, I believe, a curiously materialistic side-effect of a temporary period of American economic power.
It takes little thought to see that education is the most valuable asset a person can ever possess. It's portable, can be applied as creatively as the person to whom it belongs and, once acquired, is never truly lost.
Physical homes are different. They are, in truth, expensive luxuries in an unpredictable world. As investments, they are lumpy, costly to buy and sell, and require constant, expensive maintenance.
How we got to the point of subsidizing those who could barely afford to own homes is less a mystery than the continued misguided conclusions of Americans and their government, from 1945 onward, that the nation had come into some sort of economic and financial Promised Land of eternally rising living standards. In short, the exception became the norm, became the expected birthright of employed, educated Americans.
Bridges ends his piece with this passage,
"Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence."
I would go further. Owned homes may be "part of a good life," but, more correctly, they would be part of "a good, predictable, dependable economic life."
Otherwise, they are a cursed millstone. I suspect that while land or judiciously-chosen investments in rental properties would be good investments, homes, generally, across all economic eras, are not. And won't be in the future.
Wednesday, June 29, 2011
Jobs, Growth & The US Economy 1939-2011
Michael Spence's recent Wall Street Journal editorial discussing types of jobs, and "Why the Old Jobs Aren't Coming Back," got me to thinking about a much longer cycle of employment and growth in the US economy.
Some pieces become watersheds for me, and, like the occasional piece by Brian Wesbury, Alan Reynolds or Robert Barro, Spence's recent piece is for me right now. It is the catalyst that has allowed me to reshape a number of ideas and observations into a more coherent fabric than I was previously able to do.
Nobel Laureate Spence distinguished "nontradable" jobs which produce goods and services which "must be consumed where they are produced," from "tradable" jobs which can produce exports. He wrote,
"Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer."
Well, what if there is no long term answer? At least, an answer that everyone's going to find acceptable over the long term.
Spence mentions Germany, which has heavily-unionized labor, limiting
"wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries."
That's a fairly serious admission of a very undesirable solution, i.e., deliberately slashing standards of living in an advanced economy in order to try to compete with lower-wage nations in tradable goods and services. Frankly, it doesn't strike me as a sustainable approach in any advanced economy where citizens' aspirations and expectations have been raised by decades of cossetted, unrealistic long term economic conditions.
Why would that be necessary if an economy like Germany or the US could train its least-productive workers to be more productive, thus offsetting their higher wages and maintaining their higher standards of living?
I think the answer lies in trade, evolution of various geographic parts of the globe, and the natural refusal of humans to see bountiful periods as fleeting and a lucky combination of factors which won't be occurring again, at least not foreseeably.
Consider this view of the US economy from the mid-1930s to the present.
Having futilely borrowed and spent like crazy, FDR's federal government found itself, by late in the decade, as Roosevelt's Treasury Secretary put it, to paraphrase,
'billions in debt and the unemployment rate no lower.'
But, luckily for the US, economically, at least, a world war came its way. By the late 1930s, FDR and Congress were re-arming America. This was yet another example of an aphorism popular in my youth, i.e.,
"Elect a Democrat president and go to war."
Digging holes, then filling them in, or doing other non-economic work with federal borrowing, didn't do the trick in the 1930s or, for that matter, in 2008-11, either. But spending on defense to prepare for war with a German madman, well, that's different.
Never mind that munitions were expended, tanks, planes and ships destroyed. Men and women killed in the millions. In the short term, people went back to work and, after the Allied victory in 1945, peacetime economies could pick up where they left off.
Oops....not all of them. Europe and Japan were in ruins. South America and Asia remained relatively undeveloped economically, certainly no challenge to the one remaining economic superpower with a now-trained workforce and plenty of invested capital plant and equipment- the US.
From 1945 until roughly the mid-1970s, America was luckier than smart. Many of the jobs available in the burgeoning US economy which supplied the world were blue collar, middle-class building jobs which were within the reach of high school-educated workers, e.g., auto assembly, steel making, heat-beat-and-bend manufacture, transportation, and construction, to name a few.
Without serious global competition to provide downward pressure on goods and services prices, labor costs and benefits soared, with no difficulty in sight to funding lavish defined benefits for private and public sector workers alike.
The good times had arrived and would roll forever! After all, it was America, the mightiest economic and military power on Earth.
However, thirty years on, by the mid-1970s, the ruined Allies and losers of WWII, Germany, Italy and Japan, had rebuilt their economies and infrastructures to the point that they began to be serious global competitors. US auto and steel industries were the first to feel the impact, being among the lowest value-added sectors with the lowest-skilled labor. As such, they were most easily priced out of the market, as the unionized US work forces in those industries refused to absorb pay and benefit cuts, choosing instead to penalize new workers entering those industries as US capacity shrank amidst crippling, bankrupting losses.
Look at the recent union contract settlements in the airline, auto and public sectors. It's still the solution of choice for unionized workers in vulnerable sectors,
'I'm in the union, I have my time in, and I've got mine. Pull up the ladder and screw the younger workers coming in behind us.'
That's almost an exact quote from my New Jersey teachers' union friend concerning the current situation affecting his union, job, pension and health care benefits.
Meanwhile, by the end of the Reagan era of lessened regulation, lower taxes and renewed US economic growth, the nature of job growth was already changing. White-collar jobs requiring more education and an ability to use technology such as computers began to move the US to a more service-based economy. Truth is, after Reagan, we've never had robust economic expansions following recessions in which overall employment growth across education and skill levels participated equally.
Recently, say, since 2000, the internet and rapid global transportation of components, combined with a maturing Europe and a growing, better-educated India, China and Southeast Asia, have rendered even many of the formerly-unassailable high-paying US service sector jobs tradable and vulnerable to price competition.
While your local grocer and dry cleaner remain relatively unaffected in terms of competition, but not necessarily in terms of demand, jobs in legal services, banking, equity research, chemical research and the like have begun to move abroad as transnational firms locate those functions where productivity is highest. Indian financial analysts are sufficiently good to offer reasonable quality, yet be much less expensive and, thus, more productive analytical product than their US counterparts.
While growth in revenues and profits for America's S&P500 firms continues apace, thanks to the global coverage of many of the firms in terms of both facilities and demand, the domestic employment picture in the home economy of the index, the US, is much bleaker.
Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.
But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.
My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.
It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.
Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.
I've been fond of saying for several decades, upon hearing or reading pleas from unemployed Americans in sectors such as footwear production, logging, steel, mining, or auto assembly,
"Do you really want a job in those industries anymore? Do you really want to take a competitive wage to make shoes when Asians are doing the same job for a fraction of what you hope to be paid? But can't be paid anymore because the shoes you make will be too expensive for other Americans to buy?"
Thus, it was disappointing to hear the president claim just yesterday, in Iowa, that America needs more manufacturing jobs, and to 'make more things.'
First, economic resource allocation is best done by market forces, not government mandate. Second, last I read, within the past two years, the value of American manufacturing output has remained fairly steady at about 20% of GDP for decades. However, due to the forces I've mentioned in this post, lower value-added products requiring less-skilled manufacturing have not survived competition with overseas sources. Further, again, due to the technologies and capital involved in on-shore manufacturing,increased productivity in such advanced products which are more difficult to manufacture have resulted in fewer workers producing the same, or more, value-added. This is a very conventional economic model- applying more capital to the production of higher-value products which require more advanced technology and fewer workers per dollar of output.
For better and for worse, we've evolved a global trading system in which all economies are now easily linked. David Ricardo would be quite at home with the economic rules of our world. But there are challenges.
Today, I can visit a local grocer and buy soft fruit from South America, fresh fish from the coast of another country, and the like. But the same global trading economics which allow that have closed US fisheries and led American fruit growers to hire migrant laborers at low wages and no benefits to compete with overseas goods.
While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.
Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?
Spence wrote, in closing,
"Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice."
His identification of the challenge seems correct to me, but not his vision of a solution. I really don't think it's about better education or some grand government-business entity "investing in future growth" anymore.
Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.
A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonabl facsimile of "the American Dream." Others will not.
I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.
Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.
But it's not just because of the US government's 80-year binge of deficit spending. Rather, it's this global economic linkage, combined with profoundly bone-headed, behavioral- and expectations- altering, fraudulent promises of defined-benefit schemes. A topic about which I'll write in an imminent post.
Spence correctly fingered the necessary economic accommodation in his German example, but I doubt it went far enough. Economic evolution is making more and more formerly-nontradable goods, services and jobs tradable. So economic growth and employment are likely to exist not among the most productive nations, but the most productive people in most nations which fully-participate in the global economic system.
America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning.
This isn't a pleasant scenario. However, my background as a strategist, especially under my mentor, Gerry Weiss of GE and Chase Manhattan Bank, taught me that strategic options and realities are periodically unpleasant. But that doesn't make them untrue or unlikely.
Those who delude themselves into believing there is some undefinable, indescribable better, rosier scenario than the plausible, describable, even existing and self-evident ones facing them, are destined to learn the hard way they were wrong. At great pain and expense.
Some pieces become watersheds for me, and, like the occasional piece by Brian Wesbury, Alan Reynolds or Robert Barro, Spence's recent piece is for me right now. It is the catalyst that has allowed me to reshape a number of ideas and observations into a more coherent fabric than I was previously able to do.
Nobel Laureate Spence distinguished "nontradable" jobs which produce goods and services which "must be consumed where they are produced," from "tradable" jobs which can produce exports. He wrote,
"Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer."
Well, what if there is no long term answer? At least, an answer that everyone's going to find acceptable over the long term.
Spence mentions Germany, which has heavily-unionized labor, limiting
"wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries."
That's a fairly serious admission of a very undesirable solution, i.e., deliberately slashing standards of living in an advanced economy in order to try to compete with lower-wage nations in tradable goods and services. Frankly, it doesn't strike me as a sustainable approach in any advanced economy where citizens' aspirations and expectations have been raised by decades of cossetted, unrealistic long term economic conditions.
Why would that be necessary if an economy like Germany or the US could train its least-productive workers to be more productive, thus offsetting their higher wages and maintaining their higher standards of living?
I think the answer lies in trade, evolution of various geographic parts of the globe, and the natural refusal of humans to see bountiful periods as fleeting and a lucky combination of factors which won't be occurring again, at least not foreseeably.
Consider this view of the US economy from the mid-1930s to the present.
Having futilely borrowed and spent like crazy, FDR's federal government found itself, by late in the decade, as Roosevelt's Treasury Secretary put it, to paraphrase,
'billions in debt and the unemployment rate no lower.'
But, luckily for the US, economically, at least, a world war came its way. By the late 1930s, FDR and Congress were re-arming America. This was yet another example of an aphorism popular in my youth, i.e.,
"Elect a Democrat president and go to war."
Digging holes, then filling them in, or doing other non-economic work with federal borrowing, didn't do the trick in the 1930s or, for that matter, in 2008-11, either. But spending on defense to prepare for war with a German madman, well, that's different.
Never mind that munitions were expended, tanks, planes and ships destroyed. Men and women killed in the millions. In the short term, people went back to work and, after the Allied victory in 1945, peacetime economies could pick up where they left off.
Oops....not all of them. Europe and Japan were in ruins. South America and Asia remained relatively undeveloped economically, certainly no challenge to the one remaining economic superpower with a now-trained workforce and plenty of invested capital plant and equipment- the US.
From 1945 until roughly the mid-1970s, America was luckier than smart. Many of the jobs available in the burgeoning US economy which supplied the world were blue collar, middle-class building jobs which were within the reach of high school-educated workers, e.g., auto assembly, steel making, heat-beat-and-bend manufacture, transportation, and construction, to name a few.
Without serious global competition to provide downward pressure on goods and services prices, labor costs and benefits soared, with no difficulty in sight to funding lavish defined benefits for private and public sector workers alike.
The good times had arrived and would roll forever! After all, it was America, the mightiest economic and military power on Earth.
However, thirty years on, by the mid-1970s, the ruined Allies and losers of WWII, Germany, Italy and Japan, had rebuilt their economies and infrastructures to the point that they began to be serious global competitors. US auto and steel industries were the first to feel the impact, being among the lowest value-added sectors with the lowest-skilled labor. As such, they were most easily priced out of the market, as the unionized US work forces in those industries refused to absorb pay and benefit cuts, choosing instead to penalize new workers entering those industries as US capacity shrank amidst crippling, bankrupting losses.
Look at the recent union contract settlements in the airline, auto and public sectors. It's still the solution of choice for unionized workers in vulnerable sectors,
'I'm in the union, I have my time in, and I've got mine. Pull up the ladder and screw the younger workers coming in behind us.'
That's almost an exact quote from my New Jersey teachers' union friend concerning the current situation affecting his union, job, pension and health care benefits.
Meanwhile, by the end of the Reagan era of lessened regulation, lower taxes and renewed US economic growth, the nature of job growth was already changing. White-collar jobs requiring more education and an ability to use technology such as computers began to move the US to a more service-based economy. Truth is, after Reagan, we've never had robust economic expansions following recessions in which overall employment growth across education and skill levels participated equally.
Recently, say, since 2000, the internet and rapid global transportation of components, combined with a maturing Europe and a growing, better-educated India, China and Southeast Asia, have rendered even many of the formerly-unassailable high-paying US service sector jobs tradable and vulnerable to price competition.
While your local grocer and dry cleaner remain relatively unaffected in terms of competition, but not necessarily in terms of demand, jobs in legal services, banking, equity research, chemical research and the like have begun to move abroad as transnational firms locate those functions where productivity is highest. Indian financial analysts are sufficiently good to offer reasonable quality, yet be much less expensive and, thus, more productive analytical product than their US counterparts.
While growth in revenues and profits for America's S&P500 firms continues apace, thanks to the global coverage of many of the firms in terms of both facilities and demand, the domestic employment picture in the home economy of the index, the US, is much bleaker.
Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.
But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.
My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.
It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.
Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.
I've been fond of saying for several decades, upon hearing or reading pleas from unemployed Americans in sectors such as footwear production, logging, steel, mining, or auto assembly,
"Do you really want a job in those industries anymore? Do you really want to take a competitive wage to make shoes when Asians are doing the same job for a fraction of what you hope to be paid? But can't be paid anymore because the shoes you make will be too expensive for other Americans to buy?"
Thus, it was disappointing to hear the president claim just yesterday, in Iowa, that America needs more manufacturing jobs, and to 'make more things.'
First, economic resource allocation is best done by market forces, not government mandate. Second, last I read, within the past two years, the value of American manufacturing output has remained fairly steady at about 20% of GDP for decades. However, due to the forces I've mentioned in this post, lower value-added products requiring less-skilled manufacturing have not survived competition with overseas sources. Further, again, due to the technologies and capital involved in on-shore manufacturing,increased productivity in such advanced products which are more difficult to manufacture have resulted in fewer workers producing the same, or more, value-added. This is a very conventional economic model- applying more capital to the production of higher-value products which require more advanced technology and fewer workers per dollar of output.
For better and for worse, we've evolved a global trading system in which all economies are now easily linked. David Ricardo would be quite at home with the economic rules of our world. But there are challenges.
Today, I can visit a local grocer and buy soft fruit from South America, fresh fish from the coast of another country, and the like. But the same global trading economics which allow that have closed US fisheries and led American fruit growers to hire migrant laborers at low wages and no benefits to compete with overseas goods.
While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.
Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?
Spence wrote, in closing,
"Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice."
His identification of the challenge seems correct to me, but not his vision of a solution. I really don't think it's about better education or some grand government-business entity "investing in future growth" anymore.
Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.
A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonabl facsimile of "the American Dream." Others will not.
I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.
Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.
But it's not just because of the US government's 80-year binge of deficit spending. Rather, it's this global economic linkage, combined with profoundly bone-headed, behavioral- and expectations- altering, fraudulent promises of defined-benefit schemes. A topic about which I'll write in an imminent post.
Spence correctly fingered the necessary economic accommodation in his German example, but I doubt it went far enough. Economic evolution is making more and more formerly-nontradable goods, services and jobs tradable. So economic growth and employment are likely to exist not among the most productive nations, but the most productive people in most nations which fully-participate in the global economic system.
America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning.
This isn't a pleasant scenario. However, my background as a strategist, especially under my mentor, Gerry Weiss of GE and Chase Manhattan Bank, taught me that strategic options and realities are periodically unpleasant. But that doesn't make them untrue or unlikely.
Those who delude themselves into believing there is some undefinable, indescribable better, rosier scenario than the plausible, describable, even existing and self-evident ones facing them, are destined to learn the hard way they were wrong. At great pain and expense.
Thursday, June 23, 2011
Alan Meltzer On Alan Blinder's Keynesian Position
In yesterday's post I discussed Princeton economics professor Alan Blinder's poorly-reasoned editorial warning of a shortfall of government spending.
It turns out that Blinder's piece was just a part of a larger current exchange in several venues between liberal Democratic Keynesians and their adversaries who espouse more modern economic theories.
On Tom Keene's noontime Bloomberg program he described the Krugman/Blinder Keynesian position versus that of Alan Meltzer and other more modern economic thinkers, then had an on-air talk with Meltzer.
Meltzer noted that Krugman and, by inference, Blinder, espoused a rather old, primitive Keynesian brand of economic theory which ignores the last few decades of rational expectations work.
Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research.
Between Reynolds' empirical work undercutting traditional Keynesian stimulus programs, and the Nobel-prize winning work of Lucas and Prescott on rational expectations, it's difficult to understand why any thinking person would take Blinder's and Krugman's ideas seriously.
While I didn't read about Lucas' work while in college or graduate school or, for that matter, years after that, I noticed something which the linked site attributes to him, i.e., that modern Keynesians tend to build econometric models which are bereft of explicit theoretical bases or explanations, as well as being susceptible to only fitting periods on which they were calibrated, rather than being generically effective at prediction of consumer or investor behaviors.
It turns out that Blinder's piece was just a part of a larger current exchange in several venues between liberal Democratic Keynesians and their adversaries who espouse more modern economic theories.
On Tom Keene's noontime Bloomberg program he described the Krugman/Blinder Keynesian position versus that of Alan Meltzer and other more modern economic thinkers, then had an on-air talk with Meltzer.
Meltzer noted that Krugman and, by inference, Blinder, espoused a rather old, primitive Keynesian brand of economic theory which ignores the last few decades of rational expectations work.
Specifically, Meltzer discussed more recent economic work showing that investors and consumers take note of government actions and develop expectations as a result which then affect their behavior.
These reactions involve several of the points I made in yesterday's post, i.e., expectations by consumers and investors regarding future tax and interest rates affect their behavior in a very dynamic and sensible manner. Some of that effect can result in a sort of palsy, in which both spending and investment await less government intervention and more predictable behaviors.
Meltzer's comments added an interesting dimension to the exchange because, without appearing mean-spirited, he basically characterized Blinder, Krugman and their kindred economists as rather backward and primitive, clinging to a discredited, eighty-year-old theory which has been eclipsed by new theory based upon empirical research.
Between Reynolds' empirical work undercutting traditional Keynesian stimulus programs, and the Nobel-prize winning work of Lucas and Prescott on rational expectations, it's difficult to understand why any thinking person would take Blinder's and Krugman's ideas seriously.
While I didn't read about Lucas' work while in college or graduate school or, for that matter, years after that, I noticed something which the linked site attributes to him, i.e., that modern Keynesians tend to build econometric models which are bereft of explicit theoretical bases or explanations, as well as being susceptible to only fitting periods on which they were calibrated, rather than being generically effective at prediction of consumer or investor behaviors.
Wednesday, June 22, 2011
Alan Blinder's Latest Attempt To Revive Keynesian Economics
I know Princeton economics professor and former Fed member Alan Blinder is a liberal Keynesian economist. But in yesterday's Wall Street Journal editorial, he displayed an ability to play fast and loose with contexts, as well as so narrowly define terms and situations as to make his points irrelevant.
He began by writing,
"Right now, I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes's teaching, government spending destroys jobs.
No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.
Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? "
Blinder is engaging in incredibly literal interpretation of a statement that isn't meant to convey what he chooses to draw from it.
To begin with, empirically, Alan Reynolds has done research, about which he wrote in a Journal editorial, which has effectively dismissed the contention that government intervention in recessions helps economies. I mention this because later in his editorial, Blinder appeals to empirical evidence, or the lack of it.
Regarding 'job killing government spending,' it's not meant to be a direct and simple logical proposition as implied by Blinder's semantics. Rather, in the current context, with pre-existing uncertainty regarding government extra-legal intervention in business sectors (health care, autos, finance, insurance), aggressive regulatory actions (energy, autos, finance, health care), combined with record government debt and deficits, further deficits or higher taxes to finance more spending is seen as driving businesses to refrain from domestic expansion and/or new hiring. Additionally, the increasing deficits are expected to lead to higher rates on government borrowing demanded by investors, which will raise the deficit, which will eventually require, combined with the other economy-retarding government policies, higher taxes.
These are nuances points, but Blinder's not interested in the reality of nuances as he continues,
"The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?
One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what's at issue today. The current debate is about deficit spending: raising spending without raising taxes."
Blinder is wrong on both points. It's precisely government's ill-advised spending that is at issue. Such as bailing out GM, rather than letting it be reorganized through conventional bankruptcy. Plus, such government spending inevitably invites cronyism, e.g., Jeff Immelt's GE and its curious ties with the current administration and benefits from all manner of environmentally-related government-procured favors.
Further, "tax-financed spending" is indeed part of what's at issue today. In order to avoid further borrowing, the current administration is using the debt limit crisis to try to force higher tax rates and new taxes.
Blinder continues to write,
"For example, the large fiscal stimulus enacted in 2009 was not "paid for." Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus's effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million."
Well, as Blinder would know if he read the business press of the past few years, most of that so-called stimulus was used to fund transfer payments to state and local governments. It didn't create jobs, but it may have maintained some. Blinder evades the question of whether simply leaving the governments to resolve their own longer term fiscal situations wouldn't be better for the nation in the first place.
Oh, those pesky details that fall outside of economics.
Then Blinder turns to the fabled "crowding out" effect,
"A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.
There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out."
I don't believe it's quite that simple just now. Rather than crowd out private investment via higher rates, perversely, private lending is stalled because everyone knows current rates don't cover risk. Especially when we just suffered through a residential housing-initiated financial crisis triggered by the Fed's low-rate policies.
Did you really forget that already, Alan?
Plus, the crowding out now occurring is businesses expecting higher taxes at some point to pay for all the deficit spending. That's implicitly crowding out domestic investment as businesses wait for the uncertain other government fiscal shoes to drop in the form of new taxes or higher tax rates.
Blinder then offers this,
"In sum, you may view any particular public-spending program as wasteful, inefficient, leading to "big government" or objectionable on some other grounds. But if it's not financed with higher taxes, and if it doesn't drive up interest rates, it's hard to see how it can destroy jobs."
He simply ignores the transmission effect I noted in my earlier comments, i.e., deficit spending means higher future taxes, in part due to the US government's debt becoming objectionably large to global investors. How Blinder can ignore this is a mystery to me, unless it's because he is an economist, not a financier.
Blinder then appeals to his liberal colleague Paul Krugman's argument,
"Let's try one final argument that is making the rounds today. Large deficits, it is claimed, are creating huge uncertainties (e.g., over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply, confidence will soar, spurring employment and investment.
As a matter of pure logic, that could be true. But is there evidence? Yes, clear evidence—that points in the opposite direction. Business investment in equipment and software has been booming, not sagging. Specifically, while real gross domestic product grew a paltry 2.3% over the last four quarters, business spending on equipment and software skyrocketed 14.7%. No doubt, there is lots of uncertainty. But investment is soaring anyway."
I suppose this is where economists show their ignorance of actual business operations. Business spending by US corporations doesn't mean that spending occurs in the US, or employs more workers in the US. Much of the growth of the S&P500 corporations recently has been overseas, not in the US. Blinder and Krugman fail to distinguish between domestic and foreign investment, spending and hiring by US multi-nationals.
Finally, Blinder closes with,
"Despite all this evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic.
Yet it is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better. So it appears we're caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?
Actually, yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls, but there are other options. And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too."
I disagree with Blinder's contention that "we need ..... more spending." Blinder seems unwilling, Keynesian that he is, to simply accept the conclusions of Reynolds' empirical work on the ineffectiveness of government fiscal expansionary policies, and let the US economy endure the natural cycles that private savings, spending and investment will cause.
Many observers, myself included, feel that government spending is the wrong response to the current economic situation. Better to trim government borrowing, by cutting spending, thus improving prospects for Treasury debt offerings and avoiding higher tax rates and new taxes, to leave more money in the private sector. That money will either be spent, or invested, according to private sector appetites, leading, either way, to economic growth.
Why can't we just do that? Allow the private sector to spend and invest its own money as it chooses, rather than force it to either disgorge its money to the government via taxes, or force it to take on liabilities as our government continues to borrow- and spend- on the private sector's account?
He began by writing,
"Right now, I'm worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes's teaching, government spending destroys jobs.
No, that's not a typo. House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises. Using the same illogic, employment should soar if we made massive cuts in public spending—as some are advocating right now.
Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"? "
Blinder is engaging in incredibly literal interpretation of a statement that isn't meant to convey what he chooses to draw from it.
To begin with, empirically, Alan Reynolds has done research, about which he wrote in a Journal editorial, which has effectively dismissed the contention that government intervention in recessions helps economies. I mention this because later in his editorial, Blinder appeals to empirical evidence, or the lack of it.
Regarding 'job killing government spending,' it's not meant to be a direct and simple logical proposition as implied by Blinder's semantics. Rather, in the current context, with pre-existing uncertainty regarding government extra-legal intervention in business sectors (health care, autos, finance, insurance), aggressive regulatory actions (energy, autos, finance, health care), combined with record government debt and deficits, further deficits or higher taxes to finance more spending is seen as driving businesses to refrain from domestic expansion and/or new hiring. Additionally, the increasing deficits are expected to lead to higher rates on government borrowing demanded by investors, which will raise the deficit, which will eventually require, combined with the other economy-retarding government policies, higher taxes.
These are nuances points, but Blinder's not interested in the reality of nuances as he continues,
"The generic conservative view that government is "too big" in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?
One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what's at issue today. The current debate is about deficit spending: raising spending without raising taxes."
Blinder is wrong on both points. It's precisely government's ill-advised spending that is at issue. Such as bailing out GM, rather than letting it be reorganized through conventional bankruptcy. Plus, such government spending inevitably invites cronyism, e.g., Jeff Immelt's GE and its curious ties with the current administration and benefits from all manner of environmentally-related government-procured favors.
Further, "tax-financed spending" is indeed part of what's at issue today. In order to avoid further borrowing, the current administration is using the debt limit crisis to try to force higher tax rates and new taxes.
Blinder continues to write,
"For example, the large fiscal stimulus enacted in 2009 was not "paid for." Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus's effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million."
Well, as Blinder would know if he read the business press of the past few years, most of that so-called stimulus was used to fund transfer payments to state and local governments. It didn't create jobs, but it may have maintained some. Blinder evades the question of whether simply leaving the governments to resolve their own longer term fiscal situations wouldn't be better for the nation in the first place.
Oh, those pesky details that fall outside of economics.
Then Blinder turns to the fabled "crowding out" effect,
"A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.
There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out."
I don't believe it's quite that simple just now. Rather than crowd out private investment via higher rates, perversely, private lending is stalled because everyone knows current rates don't cover risk. Especially when we just suffered through a residential housing-initiated financial crisis triggered by the Fed's low-rate policies.
Did you really forget that already, Alan?
Plus, the crowding out now occurring is businesses expecting higher taxes at some point to pay for all the deficit spending. That's implicitly crowding out domestic investment as businesses wait for the uncertain other government fiscal shoes to drop in the form of new taxes or higher tax rates.
Blinder then offers this,
"In sum, you may view any particular public-spending program as wasteful, inefficient, leading to "big government" or objectionable on some other grounds. But if it's not financed with higher taxes, and if it doesn't drive up interest rates, it's hard to see how it can destroy jobs."
He simply ignores the transmission effect I noted in my earlier comments, i.e., deficit spending means higher future taxes, in part due to the US government's debt becoming objectionably large to global investors. How Blinder can ignore this is a mystery to me, unless it's because he is an economist, not a financier.
Blinder then appeals to his liberal colleague Paul Krugman's argument,
"Let's try one final argument that is making the rounds today. Large deficits, it is claimed, are creating huge uncertainties (e.g., over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply, confidence will soar, spurring employment and investment.
As a matter of pure logic, that could be true. But is there evidence? Yes, clear evidence—that points in the opposite direction. Business investment in equipment and software has been booming, not sagging. Specifically, while real gross domestic product grew a paltry 2.3% over the last four quarters, business spending on equipment and software skyrocketed 14.7%. No doubt, there is lots of uncertainty. But investment is soaring anyway."
I suppose this is where economists show their ignorance of actual business operations. Business spending by US corporations doesn't mean that spending occurs in the US, or employs more workers in the US. Much of the growth of the S&P500 corporations recently has been overseas, not in the US. Blinder and Krugman fail to distinguish between domestic and foreign investment, spending and hiring by US multi-nationals.
Finally, Blinder closes with,
"Despite all this evidence and logic, some people still claim that fiscal stimulus won't create jobs. Spending cuts, they insist, are the route to higher employment. And ideas have consequences. One possibly frightening consequence is that our limping economy might have one of its two crutches—fiscal policy—kicked out from under it in an orgy of premature expenditure cutting. Given the current jobs emergency, that would be tragic.
Yet it is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better. So it appears we're caught in a dilemma: We need both more spending (or lower taxes) to create jobs and less spending (or higher taxes) to tame the deficit monster. Can we square the circle?
Actually, yes. Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation. My personal favorite is a tax credit for firms that add to their payrolls, but there are other options. And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too."
I disagree with Blinder's contention that "we need ..... more spending." Blinder seems unwilling, Keynesian that he is, to simply accept the conclusions of Reynolds' empirical work on the ineffectiveness of government fiscal expansionary policies, and let the US economy endure the natural cycles that private savings, spending and investment will cause.
Many observers, myself included, feel that government spending is the wrong response to the current economic situation. Better to trim government borrowing, by cutting spending, thus improving prospects for Treasury debt offerings and avoiding higher tax rates and new taxes, to leave more money in the private sector. That money will either be spent, or invested, according to private sector appetites, leading, either way, to economic growth.
Why can't we just do that? Allow the private sector to spend and invest its own money as it chooses, rather than force it to either disgorge its money to the government via taxes, or force it to take on liabilities as our government continues to borrow- and spend- on the private sector's account?
Friday, June 10, 2011
Economic Denial
Despite recent anemic GDP and net job growth, the administration uses terms like "bump in the road" and "a blip" to describe the continuing lack of robust performance of the US economy.
I found the president's remarks concerning the economy while at a press conference with German PM Andrea Merkel to be particularly galling and condescending.
For a guy with little background in any productive line of work, to use the term very loosely, and absolutely no knowledge of economics, he's hardly one to set expectations or characterize the failure of his 2 1/2 years of expensive, failed Keynesian policies.
Then, yesterday, Robert Schiller warned that average housing prices could fall by another 25% in the next 4-5 years.
I don't think "bump in the road" or "blip" describes what the effects of that prediction coming true will be.
I found the president's remarks concerning the economy while at a press conference with German PM Andrea Merkel to be particularly galling and condescending.
For a guy with little background in any productive line of work, to use the term very loosely, and absolutely no knowledge of economics, he's hardly one to set expectations or characterize the failure of his 2 1/2 years of expensive, failed Keynesian policies.
Then, yesterday, Robert Schiller warned that average housing prices could fall by another 25% in the next 4-5 years.
I don't think "bump in the road" or "blip" describes what the effects of that prediction coming true will be.
Monday, June 06, 2011
The May BLS Employment Numbers & Economic Forecasts
By now the business press and pundits have thoroughly treated the dismal 54,000 net employment increase in May and the rise in unemployment to 9.1%.
The usual suspects claim it's transitory- simply the result of the Japanese earthquake aftermath and Midwest tornadoes. Or that at least it was a positive number.
Get real. An already-anemic average of some 200,000/month for a few months has turned down as the bottom dropped out of housing prices- again.
Housing price declines spark increased probabilities of defaults, as more current homeowners experience negative equity. Such disruption of households bodes ill for consumer spending. Lower consumer spending leads to fewer net jobs created.
What was unexpected, at least to me, was the number of Keynesian pundits who came out of the woodwork, amidst the debt limit standoff and the end of the Fed's QE2, to call for more federal stimulus.
You can't make this stuff up. We've seen 2 1/2 years of wrongheaded economic policy by two administrations fail to simply let the economy naturally bottom out and return to expansion.
Instead, we had about a trillion dollars of wasted stimulus, illegal takings under the guise of auto and insurance company bailouts which did nothing that constitutionally-provided normal bankruptcy wouldn't have accomplished, sans the extra tens of billions of spending, and failed attempts to prop up home prices via foreclosure moratoria and threatened equity write-offs.
As I paraphrased Michael Steinhardt in this post from early 2009,
"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive."
He was correct. By most measures of economic activity- housing construction and pricing, job creation, GDP growth- the US economy continues to be troubled.
The Wall Street Journal took the opportunity to make Bob Doll, BlackRock's equity investments chief, its weekend interview. The piece noted that BlackRock is now the world's largest investor.
Hhhmmmm.....I wonder what Bob was going to say amidst all the gloomy data.
'It's time to sell?'
Hardly. Bob Doll's number one job right now is to talk BlackRock's book, in order to let the firm reposition without calling attention to any sales it may be conducting. The very last thing you would expect to see- and he didn't disappoint this weekend- is Doll yelling to head for the exits, causing a stampede of retail and other institutional investors that would destroy the valuations in BlackRock's own funds.
At times like these, the last people you want to listen to are those with the most to lose by publicly admitting how bad current economic statistics are.
That said, my own signals don't indicate an immediate need to go short. And Doll's taking a longer term perspective is not necessarily bad, either. But being a Pollyanna isn't believable, either.
Perhaps the most interesting thing Doll said was an almost throwaway comment about technology having raised the unemployment level associated with full employment from 3% thirty years ago to something north of 6% now. He blithely said,
"And that has political and social consequences that I don't think we even know what to do with yet."
Indeed. And what a time to realize this, eh? When the housing sector, traditionally an important driver of the US economy, is dormant, housing prices continue to weaken, and net job creation is nowhere near the necessary rate to attain full employment for years.
The usual suspects claim it's transitory- simply the result of the Japanese earthquake aftermath and Midwest tornadoes. Or that at least it was a positive number.
Get real. An already-anemic average of some 200,000/month for a few months has turned down as the bottom dropped out of housing prices- again.
Housing price declines spark increased probabilities of defaults, as more current homeowners experience negative equity. Such disruption of households bodes ill for consumer spending. Lower consumer spending leads to fewer net jobs created.
What was unexpected, at least to me, was the number of Keynesian pundits who came out of the woodwork, amidst the debt limit standoff and the end of the Fed's QE2, to call for more federal stimulus.
You can't make this stuff up. We've seen 2 1/2 years of wrongheaded economic policy by two administrations fail to simply let the economy naturally bottom out and return to expansion.
Instead, we had about a trillion dollars of wasted stimulus, illegal takings under the guise of auto and insurance company bailouts which did nothing that constitutionally-provided normal bankruptcy wouldn't have accomplished, sans the extra tens of billions of spending, and failed attempts to prop up home prices via foreclosure moratoria and threatened equity write-offs.
As I paraphrased Michael Steinhardt in this post from early 2009,
"The current administration seems to be attempting to skip the 'restructuring of debt' step necessary to any economic recovery, and moving directly to flooding markets with liquidity, while leaving inept managements, such as auto makers and commercial banks, intact, rather than force them through bankruptcy. Steindhardt clearly indicated a disbelief that this will work or be productive."
He was correct. By most measures of economic activity- housing construction and pricing, job creation, GDP growth- the US economy continues to be troubled.
The Wall Street Journal took the opportunity to make Bob Doll, BlackRock's equity investments chief, its weekend interview. The piece noted that BlackRock is now the world's largest investor.
Hhhmmmm.....I wonder what Bob was going to say amidst all the gloomy data.
'It's time to sell?'
Hardly. Bob Doll's number one job right now is to talk BlackRock's book, in order to let the firm reposition without calling attention to any sales it may be conducting. The very last thing you would expect to see- and he didn't disappoint this weekend- is Doll yelling to head for the exits, causing a stampede of retail and other institutional investors that would destroy the valuations in BlackRock's own funds.
At times like these, the last people you want to listen to are those with the most to lose by publicly admitting how bad current economic statistics are.
That said, my own signals don't indicate an immediate need to go short. And Doll's taking a longer term perspective is not necessarily bad, either. But being a Pollyanna isn't believable, either.
Perhaps the most interesting thing Doll said was an almost throwaway comment about technology having raised the unemployment level associated with full employment from 3% thirty years ago to something north of 6% now. He blithely said,
"And that has political and social consequences that I don't think we even know what to do with yet."
Indeed. And what a time to realize this, eh? When the housing sector, traditionally an important driver of the US economy, is dormant, housing prices continue to weaken, and net job creation is nowhere near the necessary rate to attain full employment for years.
Monday, May 23, 2011
Job Market Context Statistics
Edward Lazear, former Council of Economic Advisers chairman for President George W Bush, wrote an informative editorial a week ago in the Wall Street Journal.
With all the hoopla surrounding changes of a few tens of thousands of newly-employed in recent monthly BLS numbers, Lazear provided some useful background to these series.
First, Lazear reminded readers that changes in employment are a function of lack of layoffs and new hires- not just the latter- among some 150MM "workers or job seekers."
Recently, net positive monthly employment numbers have been the result of "a decline in the number of layoffs, not from increased hiring."
He notes that,
"In a healthy labor market like the one that prevailed in 2006 and early 2007, American firms hire about 5.5 million workers per month." Meaning that there is tremendous monthly churn in the overall employment base.
Lazear wrote his editorial to argue for lower taxes, less regulatory burden and such to foster more investment that would lead to more hiring.
That all may be true. But my reason for discussing his piece is how it calls into question so much micro-concentration on the series that is the net of hiring and layoffs, rather than paying attention to the current monthly employment base, hires and separations.
Against a 150 million-person workforce, monthly net gains of some 200,000, or .00133%, seems insignificant. By dwelling on the mean and variance of the net series, we miss how woefully inadequate the mean is when set against the overall labor market.
No more 'new jobs created' scenario as the government would like us to believe, but, rather, simply a recognition of less need to shed existing workers.
To now learn that the past two years of net gains have been almost totally accounted for by layoffs ebbing, rather than all new hires, paints a much different picture, doesn't it?
With all the hoopla surrounding changes of a few tens of thousands of newly-employed in recent monthly BLS numbers, Lazear provided some useful background to these series.
First, Lazear reminded readers that changes in employment are a function of lack of layoffs and new hires- not just the latter- among some 150MM "workers or job seekers."
Recently, net positive monthly employment numbers have been the result of "a decline in the number of layoffs, not from increased hiring."
He notes that,
"In a healthy labor market like the one that prevailed in 2006 and early 2007, American firms hire about 5.5 million workers per month." Meaning that there is tremendous monthly churn in the overall employment base.
Lazear wrote his editorial to argue for lower taxes, less regulatory burden and such to foster more investment that would lead to more hiring.
That all may be true. But my reason for discussing his piece is how it calls into question so much micro-concentration on the series that is the net of hiring and layoffs, rather than paying attention to the current monthly employment base, hires and separations.
Against a 150 million-person workforce, monthly net gains of some 200,000, or .00133%, seems insignificant. By dwelling on the mean and variance of the net series, we miss how woefully inadequate the mean is when set against the overall labor market.
No more 'new jobs created' scenario as the government would like us to believe, but, rather, simply a recognition of less need to shed existing workers.
To now learn that the past two years of net gains have been almost totally accounted for by layoffs ebbing, rather than all new hires, paints a much different picture, doesn't it?
Friday, May 06, 2011
The April Jobs Report
Here's my post after last month's release of the government's March jobs report. Basically, April's report, released this morning, stated that net non-farm jobs added was 245,000, up about 30,000 from March.
Rereading my post of last month, it's clear that, despite the so-called record number since February of 2006, the US economy is nowhere near so-called 'escape velocity.'
With a need for 8-9 million jobs, and a need for 100,000 new net jobs per month to absorb entrants into the labor force, we're nowhere near a job-creation rate that can begin to clear the unemployed this decade.
And then there's the rise in unemployment, back up to 9%, because, predictably, more job seekers lifted the rate.
Once again, despite any political spin applied by the administration, we see another month of tepid US economic job growth. Which explains continued soft demand and, thus, tepid GDP growth.
Rereading my post of last month, it's clear that, despite the so-called record number since February of 2006, the US economy is nowhere near so-called 'escape velocity.'
With a need for 8-9 million jobs, and a need for 100,000 new net jobs per month to absorb entrants into the labor force, we're nowhere near a job-creation rate that can begin to clear the unemployed this decade.
And then there's the rise in unemployment, back up to 9%, because, predictably, more job seekers lifted the rate.
Once again, despite any political spin applied by the administration, we see another month of tepid US economic job growth. Which explains continued soft demand and, thus, tepid GDP growth.
Tuesday, April 05, 2011
Government Employment vs. Private Sectors
Stephen Moore wrote an interesting piece in Friday's Wall Street Journal regarding the balance between government/public sector and private sector employment.
Here are some of his statistics,
"Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million)....More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined.....Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees.....Surveys of college graduates are finding that more and more of our top minds want to work for the government."
Moore goes on to note that employment in teaching has doubled, per student, from 1970-2005, while test scores remained flat. Similarly, mass transit spending is up, while usage is a smaller share of transportation than in the past.
Now, I find some fault with Moore's simplistic presentation of data. For example, manufacturing value in America has remained high and stable for decades, but, thanks to productivity, employment has declined. Low-complexity, low-wage manufacturing goes overseas, now to Southeast Asia and China, while more difficult manufacturing remains onshore and pays well, albeit to fewer workers. More automation and mechanization ensures higher quality and more consistency of output.
So griping about a reversal of government and manufacturing employment from 1960 to the present isn't completely fair or representative of what's going on.
That said, it's stunning to simply read that there are 22.5 million government workers in America. How do we measure the value they create for our society? We can't and we don't. That is troubling.
Here's the way I prefer to consider Moore's numbers.
Jobs should entail adding value. When numbers of jobs, and total wages, increase, that should mean that the sector involved is creating more value. Thus, while private sector jobs typically follow that route, government does not. Or, more importantly, we can't tell.
The teaching and transportation statistics are troubling, because, as Moore puts it, they are backward. When we don't like results in those sectors, we do not, as in business, cut resources. Instead, we spend more. It becomes a case of buying service levels at any price.
That's why the average voter should ask why government ever does anything through its own employees, short of military and policing, rather than contract it out every 3-5 years? We don't want to employ people in government, because that's tax money. We want productivity, which is best bought via competitive contracting over the relevant time period to get the most out of facilities and the productivity gains of a contractor's operations.
I wish Moore had noted the total private sector US employment versus government employment, and those numbers over time. And, then, total wages and benefits for both over time.
Now that would be revealing.
Here are some of his statistics,
"Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million)....More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined.....Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees.....Surveys of college graduates are finding that more and more of our top minds want to work for the government."
Moore goes on to note that employment in teaching has doubled, per student, from 1970-2005, while test scores remained flat. Similarly, mass transit spending is up, while usage is a smaller share of transportation than in the past.
Now, I find some fault with Moore's simplistic presentation of data. For example, manufacturing value in America has remained high and stable for decades, but, thanks to productivity, employment has declined. Low-complexity, low-wage manufacturing goes overseas, now to Southeast Asia and China, while more difficult manufacturing remains onshore and pays well, albeit to fewer workers. More automation and mechanization ensures higher quality and more consistency of output.
So griping about a reversal of government and manufacturing employment from 1960 to the present isn't completely fair or representative of what's going on.
That said, it's stunning to simply read that there are 22.5 million government workers in America. How do we measure the value they create for our society? We can't and we don't. That is troubling.
Here's the way I prefer to consider Moore's numbers.
Jobs should entail adding value. When numbers of jobs, and total wages, increase, that should mean that the sector involved is creating more value. Thus, while private sector jobs typically follow that route, government does not. Or, more importantly, we can't tell.
The teaching and transportation statistics are troubling, because, as Moore puts it, they are backward. When we don't like results in those sectors, we do not, as in business, cut resources. Instead, we spend more. It becomes a case of buying service levels at any price.
That's why the average voter should ask why government ever does anything through its own employees, short of military and policing, rather than contract it out every 3-5 years? We don't want to employ people in government, because that's tax money. We want productivity, which is best bought via competitive contracting over the relevant time period to get the most out of facilities and the productivity gains of a contractor's operations.
I wish Moore had noted the total private sector US employment versus government employment, and those numbers over time. And, then, total wages and benefits for both over time.
Now that would be revealing.
Tuesday, March 15, 2011
US Outsourcing: A Race To The Bottom?
About a week ago, a friend and I were at our fitness club when he ran into another guy as we were talking.
The third man began to converse, and, in time, mentioned he had been laid off from a New York-based insurance company. He then briefly recounted that, though an IT professional with an electrical engineering degree, he'd been laid off from Bell Labs, then a second firm, and, most recently, from the IT department of the insurance firm.
Understandably disappointed, he railed that there was no manufacturing left in the US, while companies are engaged in what he termed a "race to the bottom," hollowing out high-paying jobs from America and outsourcing them to India, China and Southeast Asia.
However, the laid-off engineer isn't entirely correct. As I wrote in this recent post concerning a recent Wall Street Journal editorial,
"A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.
In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.
Perry observes,
"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.
The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.
The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972."
It's not that the US doesn't produce things. It's that high value-added goods don't require as many workers per capital dollar to do so. The sorts of manufacturing jobs the engineer had in mind aren't competitive with those in other countries where such lower-value work is done for lower wages.
But this guy wasn't even in manufacturing. So let's consider his general concern- about outsourcing and a 'race to the bottom.'
I don't know where the guy earned his BS in EE, but it seems as if he was a fairly recent employee of Bell Labs. Probably within the last decade. Let's just say, as kindly as possible, that it's not the same Bell Labs of the pre-Lucent era. And it hasn't exactly been associated with lots of Nobel Prizes since ATT was broken up, as it was in the organization's salad days from the 1950s to 1970s.
Further, while the conversation was fairly brief, he typified himself as just a 'financial IT' guy. Working in such a capacity for a garden-variety general insurer is hardly a unique sort of job.
While he complained that it was no longer useful for Americans to earn EE degrees, as engineering jobs went overseas, I thought of Google, Facebook, Cisco, Apple and lots of other technology firms which still appear to be growing and using engineering talent.
Part of being an American is the freedom to educate yourself and then pursue a chosen field and skill set. If you make poor choices, you may find yourself challenged to maintain the career path you envisioned. For example, there are a lot fewer telecommunications engineers now than there were a decade or more ago, when so much more of the existing systems were analog. That's partly why communications are so much less expensive and more powerful.
It's the same with jobs in steel, autos, and even airlines.
In one respect, the laid-off engineer was correct. American companies, in order to remain competitive, for the good of their shareholders, do locate functions where they are most productive. For lower value-added functions, that can mean lower-wage countries outside the US.
Sometimes, companies have gone too far in this direction, as Boeing's CEO recently admitted, and reverse course,
"Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.
If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.
I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future."
It's the higher value-added functions and services that will remain onshore. American productivity is often superior in those areas, especially when requiring large and sophisticated amounts of capital to work so productively.
Sadly, the engineer's comments seemed to signal, more than anything else, that he'd perhaps made some sub-optimal educational and career choices in the past, which led to his having too few highly-valued skills, despite his degree.
The US does have a challenge to continue to create business growth which will employ highly-educated and -skilled Americans in highly-productive jobs which create high value-added. We can continue to expect lower value-added jobs to migrate to lower-wage locales, often offshore.
But that's not the same challenge as every worker to constantly evaluate whether her or his skills will remain competitive and highly-prized in our economy.
The third man began to converse, and, in time, mentioned he had been laid off from a New York-based insurance company. He then briefly recounted that, though an IT professional with an electrical engineering degree, he'd been laid off from Bell Labs, then a second firm, and, most recently, from the IT department of the insurance firm.
Understandably disappointed, he railed that there was no manufacturing left in the US, while companies are engaged in what he termed a "race to the bottom," hollowing out high-paying jobs from America and outsourcing them to India, China and Southeast Asia.
However, the laid-off engineer isn't entirely correct. As I wrote in this recent post concerning a recent Wall Street Journal editorial,
"A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.
In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.
Perry observes,
"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.
The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.
The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972."
It's not that the US doesn't produce things. It's that high value-added goods don't require as many workers per capital dollar to do so. The sorts of manufacturing jobs the engineer had in mind aren't competitive with those in other countries where such lower-value work is done for lower wages.
But this guy wasn't even in manufacturing. So let's consider his general concern- about outsourcing and a 'race to the bottom.'
I don't know where the guy earned his BS in EE, but it seems as if he was a fairly recent employee of Bell Labs. Probably within the last decade. Let's just say, as kindly as possible, that it's not the same Bell Labs of the pre-Lucent era. And it hasn't exactly been associated with lots of Nobel Prizes since ATT was broken up, as it was in the organization's salad days from the 1950s to 1970s.
Further, while the conversation was fairly brief, he typified himself as just a 'financial IT' guy. Working in such a capacity for a garden-variety general insurer is hardly a unique sort of job.
While he complained that it was no longer useful for Americans to earn EE degrees, as engineering jobs went overseas, I thought of Google, Facebook, Cisco, Apple and lots of other technology firms which still appear to be growing and using engineering talent.
Part of being an American is the freedom to educate yourself and then pursue a chosen field and skill set. If you make poor choices, you may find yourself challenged to maintain the career path you envisioned. For example, there are a lot fewer telecommunications engineers now than there were a decade or more ago, when so much more of the existing systems were analog. That's partly why communications are so much less expensive and more powerful.
It's the same with jobs in steel, autos, and even airlines.
In one respect, the laid-off engineer was correct. American companies, in order to remain competitive, for the good of their shareholders, do locate functions where they are most productive. For lower value-added functions, that can mean lower-wage countries outside the US.
Sometimes, companies have gone too far in this direction, as Boeing's CEO recently admitted, and reverse course,
"Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.
If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.
I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future."
It's the higher value-added functions and services that will remain onshore. American productivity is often superior in those areas, especially when requiring large and sophisticated amounts of capital to work so productively.
Sadly, the engineer's comments seemed to signal, more than anything else, that he'd perhaps made some sub-optimal educational and career choices in the past, which led to his having too few highly-valued skills, despite his degree.
The US does have a challenge to continue to create business growth which will employ highly-educated and -skilled Americans in highly-productive jobs which create high value-added. We can continue to expect lower value-added jobs to migrate to lower-wage locales, often offshore.
But that's not the same challenge as every worker to constantly evaluate whether her or his skills will remain competitive and highly-prized in our economy.
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