EconProph

January 25, 2012

Does Anybody Understand Debt?

Filed under: Current Situation,Macro,Teaching Example — Jim Luke @ 9:27 pm
Tags: , , , ,

Does anybody understand debt?  Some – but not many.  Today’s post is less of my normal extended prose and more of an outline.  I’ve been invited to speak at some writing classes here at the college and this is intended to serve as my speaking notes.

Background: What have you heard?

Krugman in New York Times

Harvey in Forbes

Background Info on U.S. National Debt

Brazelton:  The US CANNOT Go Broke

Numbers, Metaphors, and Stories

Get the terms right

Debt, Deficit, and tr/b/m-illions

$1,000,000,000,000

$1,000,000,000

$1,000,000

$1 trillion =  1 million times $1 million

Debt

Deficit

1984-present U.S. Federal Budget

Measuring the Debt

Counting Absolute Dollars of Debt Deceives. It's All Relative.

Three Bad Metaphors

Government is NOT a Household

Government is NOT like a Household!

Econproph: Once Again, Government is Not Like  a Household

 Govt Debt is NOT a Burden on future generations

Private Debt is NOT like Government Debt

Federal Reserve Breakdown of Household Debt

Foreigners Don’t Control

So…

A Sovereign Government Cannot “Go Broke”

Eurozone Countries Can “Go Broke”

Government Debt is Like Money that Pays Interest

But What About Inflation?  Printing money?

Inflation involves real demand vs. real supply, not just $

Test on Debt:  Interest Rates

Rates are historically low and staying low.

Are Gov. Deficits Necessary?

Yes, if you want to save money.

Forever?   Yes.

Econproph: But What About National Debt-to-GDP Ratio? Not a Problem, Really

Are There Limits to Deficits?

Yes, but related to full employment and capacity.

In Practice, Nobody Understands Money.

Well they understand yesterday’s money, not modern money.

That’s why they don’t understand debt.

January 18, 2012

Why I Went Dark and Why It Matters

Filed under: Current Situation,Political Economy — Jim Luke @ 9:37 pm
Tags: , , , , ,

As those readers who visited this blog earlier today on Jan 18 know, I took this site “dark” in solidarity with the anti-SOPA/anti-PIPA protests. Yes, I’m back now. But I’m angry. And you should be angry too.

I’m angry because the SOPA/PIPA bills in Congress are nothing more attempts by a privileged few large corporations who want to reap even greater profits at everybody else’s expense.  Rather than engage in the difficult and creative work of creating products and services that people want at prices that people want to pay, these corporations want to sit back and earn monopoly profits using monopolies granted by Congress. They make a big deal of the supposed “losses” to “piracy”.  But their numbers are totally bogus. Their numbers for losses are based on an assumption that demand curves for music, entertainment, movies, etc don’t slope downward.   I’ll comment on that and explain it more in a future post.  These publishers don’t even want to be bothered to engage in protecting their interests themselves.  A major portion of the SOPA/PIPA bills involve clauses that would require other people, y0u and me, to do the enforcement that has historically always been the responsibility of the copyright owner.  If these corporations/publishers don’t think you or I or Google or whoever is adequately protecting their profits, then they want the power to shut us down summarily without having to even prove anything in court.

I’m angry because if SOPA/PIPA succeed, even if in an altered form, I will at a minimum have to stop accepting comments on this blog.  I’ll have to live the likelihood that should I write anything to which one of these corporations takes offense, then they can and very likely will be able to shut down this site permanently.  No recourse in court. They won’t even have to prove they own any copyright they allege is infringed. Most likely I will have change my teaching also. My online teaching may become untenable.  It’s not because I infringe on anybody’s copyrights.  It’s because these powers in SOPA/PIPA will be abused.

I’m angry because the major publishers of textbooks (McGraw-Hill, Cengage, Pearson, Macmillan, some others) have all publicly supported these bills. They’ve funded the lobbying that created these anti-free speech bills.  Why? Because they want a monopoly on the distribution of knowledge in higher education.  These two bills would grant the power to these publishers to shut down open education resources, shut down professors that want to share material the professors have written, and shut down any collaborative learning site if they take offense to it.  The result will be higher costs for students, less knowledge shared, and less learning. But it will mean these same publishers will be able to continue to make profits without having to adapt to new technology or having to actually improve their products or re-invent their business models.

I’m angry because in the subject I teach, I regularly get sales reps from these big publishers pushing “solutions” (read textbooks w/ software that mean the book can’t be resold) that cost easily $200 or more.  That’s almost as much as the tuition for the course itself.  A couple of these big publishers have even adopted a page from the pharmaceutical industry.  I’ve been offered (and refused) all-expense paid trips to 5-star resort hotels in Texas, South Carolina, and California for “conferences” on teaching – just like doctors who get bribed into prescribing expensive medicines the patient doesn’t need (happened to me 10 years ago).  these SOPA/PIPA bills are just an attempt to perpetuate the same corrupt ways of doing business.  In economics, we have a term for it. It’s called rent-seeking.  It’s the opposite of doing productive activity.  I have now instituted a policy of refusing to talk with these reps.  From henceforth, reps from any firm who publicly supports SOPA/PIPA is not welcome in my office.  I will not spec any book for any class from them. I call on all other professors in higher education to do so also.  We either stand on the side of learning, sharing knowledge, and or students, or we stand with monopolists interested only in profits and closing minds.

I’m angry because the politicians, mostly Republicans, who claim to be all about stopping “job-killing regulations” are supporting and co-sponsoring these bills in large numbers.  Yet these two bills, SOPA/PIPA are draconian measures to regulate the Internet, the World Wide Web, and public communications and these two bills will kill jobs.  By the tens of thousands in the technology industry.  Jobs that the entertainment industry won’t replace.

I’m angry because freedom of speech, the freedom to converse, share ideas, to learn, to innovate, will end under these two bills.  If these bills become law, then make mistake, you and I will only be free to speak so long as some unnamed, unseen corporation decides to tolerate what we say.  The firms than enable us to talk without being face-to-face, the Googles, the Wikipedias, the Facebooks, the WordPresses, etc, will have inspect and limit what we say lest they find themselves banned and their funds cut off.  That’s not what the U.S. was supposed to be about.

I affirm they stand with the author of the Declaration of Independence, Thomas Jefferson, whose words are inscribed on the dome of his memorial in Washington, D.C.:

“…I have sworn upon the altar of god eternal hostility against every form of tyranny over the mind of man.” – Jefferson to Dr. Benjamin Rush, September 23, 1800

 

January 11, 2012

Mr. Daisey Goes to the Apple Factory – A Lesson in Comparative Economic Systems

Filed under: Comp. Econ Systems — Jim Luke @ 8:11 pm
Tags: , , , ,

One of the core lessons that I try to get across in my introductory Comparative Economic Systems classes is that economic systems are complex. Reality is much more complex than either simple theory or ideology.  Countries simply cannot be easily categorized with simple labels such as capitalist, socialist, or communist.  Those labels usually obscure more than they illuminate.

The labels are the work of ideologues and theorists.  Pure capitalism or socialism or communism exists only in the mathematical axioms of textbooks, the novels of Ayn Rand, or the writings of some political power grabber. Real economic systems are the creatures of politics, history, the available resources, culture, religion, and some economic theory.

Another lesson I try to impart is that while we might all want to improve economic conditions, how to do that effectively is also complex.  There are no silver bullets or universal magic solutions.  There are costs and benefits to any proposed policy or practice.  The key to progress is evaluating those costs and benefits wisely and making conscious decisions.

Last weekend I heard  a story on the This American Life radio.  It was called Mr. Daisey Goes to the Apple Factory.  It’s about a man who goes to visit the workers at Foxconn, the company that manufacturers Apple products in China.  It’s a long story, but it’s gripping and powerful.  It struck me that it also powerfully illustrates the two lessons I’m trying to teach in class:  economic systems aren’t that simple and making things better isn’t always obvious.

To listen for yourself, go to: This American Life #454 – Mr. Daisey and the Apple Factory. Here’s their summary:

Host Ira Glass speaks with an Apple device about its origin. (2 minutes)
  • …

Mike Daisey performs an excerpt that was adapted for radio from his one-man show “The Agony and the Ecstasy of Steve Jobs.” A lifelong Apple superfan, Daisey sees some photos online from the inside of a factory that makes iPhones, starts to wonder about the people working there, and flies to China to meet them. His show restarts a run at New York’s Public Theater later this month. (39 minutes)

  • …

What should we make of what Mike Daisey saw in China? Our staff did weeks of fact checking to corroborate Daisey’s findings. Ira talks with Ian Spaulding, founder and managing director of INFACT Global Partners, which goes into Chinese factories and helps them meet social responsibility standards set by Western companies (Apple’s Supplier Responsibility page is here), and with Nicholas Kristof, columnist for The New York Times who has reported in Asian factories. In the podcast and streaming versions of the program he also speaks with Debby Chan Sze Wan, a project manager at the advocacy group SACOM, Students and Scholars Against Corporate Misbehavior, based in Hong Kong. They’ve put out three reports investigating conditions at Foxconn (October 2010, May 2011, Sept 2011). Each report surveyed over 100 Foxconn workers, and they even had a researcher go undercover and take a job at the Shenzhen plant. (15 minutes)

 

 

January 8, 2012

The Problem in One Graph

Filed under: Current Situation,Macro,Measures & Statistics — Jim Luke @ 3:15 pm
Tags: , , ,

Yesterday I said I was reluctant to get over-optimistic about the recent slight upturn in employment data. This year may truly be different from the last few, but there’s a nagging feeling that we’ve seen this movie before. I’m not alone in the feeling. As 2012 dawns, Tim Duy summarizes the problem in one graph (emphasis is mine):

I have been hesitant to embrace the recent positive data flow - once bitten, twice shy perhaps.  Something about the current dynamics that seems a little too familiar.  Indeed, I felt something of relief when FT Alphaville came to a similar conclusion in the waning days of 2011.  Cardiff Garcia reports on a Nomura research note that details a new bias in the seasonal adjustment process, noting:

Up next, writes Nomura, you can expect exaggeratedly strong readings from the Chicago PMI later this month and the next ISM manufacturing survey at the start of January.

I imagine it is premature to call the readings “exaggerated,” but both did surprise on the upside, as much data has of late.  Read the whole piece – it is worth the time.

Indeed, flirtations with either excessive optimism or excessive pessimism were not richly rewarded last year, as on average the economy simply edged upward in pretty unremarkable fashion:

Potential
It seems reasonable to expect the same in 2012, at least as a baseline – a slow “recovery” that is really more of an adjustment to what appears to be the economy’s new equilibrium path, one that is decisively subpar to the pre-recession trend.  I don’t believe that such an adjustment is necessary, as in my view it simply reflects a shortfall of aggregate demand.  That said, the longer the cyclical downturn grinds on, the more likely it is that we will indeed see a new equilibrium path.  A greater percentage of the cyclical unemployment will become structural unemployment or permanent shifts in the labor force participation rate.  In addition, investments will go unmade as firms hoard cash.  And, increasingly, policymakers will manage policy along the new equilibrium path, forgetting entirely the pre-recession path.

The gap in the above graph, the gap between the green trend line of what we’re capable of doing and the blue-red trend from Jan 2009 onward of we’re actually doing is the challenge.  We are slowly becoming an economy that simply cut-off 7% or so of our economy in 2008 and we aren’t recovering it.  Instead it increasingly appears that the 90-93% of the economy that survived, those of us still with good jobs, are simply going on our way leaving behind those who lost out a few years ago.

There are over 13 million unemployed workers. Over 5.6 million of them have been searching fruitlessly for a new job for more than 6 months.  These are the people who got kicked off the American economy bus some time ago.  Unfortunately, even at the recently improved rate of 150-200,000 new jobs per month, there won’t be any room on the bus for them again.  Instead, the bus is moving on and they are left behind.

This is new. This is not the normal pattern. In past recessions, public policy, both fiscal and monetary, was managed to restore full employment rapidly after a recession.  It didn’t always succeed but the effort was made.  Now it is not. Now we focus more on long-term debt issues and spending concerns.  Politicians run on platforms of fear of some future default or financial crisis. This despite the fact that the government is able to borrow at record low rates of interest.

We are on path to a “new normal”, a “normal” that says it’s OK to have millions of long-term unemployed who have no hope.  I don’t think I like the “new normal”.

 

January 7, 2012

Setting the Bar Very Low: The Unemployment Report for December 2011

Filed under: Current Situation,Macro — Jim Luke @ 11:24 am
Tags: , ,

Well I’m back.  Yes, it’s been a longer than expected break from blogging driven by work considerations, but contrary to the rumors, I have not been “doomed”.  So it’s on to a new semester and a new resolution to post frequently. I hope 3-5 times per week.

To start things off, yesterday was the first Friday of the month which means, of course, the monthly report on employment, jobs, and the unemployment rate.  I’ll let Calculated Risk report the news and graph first:

December Employment Report: 200,000 Jobs, 8.5% Unemployment Rate

There were 200,000 payroll jobs added in December. This included 212,000 private sector jobs added, and 12,000 government jobs lost.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The unemployment rate declined to 8.5% (red line).

The Labor Force Participation Rate was unchanged 64.0% in December (blue line). This is the percentage of the working age population in the labor force.

The Employment-Population ratio was unchanged at 58.5% in December (black line).

The good news then is that trend indicates we are creating net more jobs in the last few months than we have been doing for several years.  An unemployment rate of 8.5% is definitely a lot better than the 10% we had in 2009. And, the rate is coming down.  But we shouldn’t get too excited nor should politicians think  their work is done.  First off, although this is the strongest 3 month improvement in the rate we’ve seen since the start of the recession back in 2007, we have seen similar short trends of improvement that fizzle out. It’s always possible as some analysts have observed that the November-December numbers were driven by a surge in temporary hiring in the online retailing sector.  It’s possible that we’re only seeing  a temporary strengthening and that January and February will see a return to same stagnation we saw last summer.

Second, it’s always possible that Congress will do something incredibly stupid that dramatically cuts employment and aggregate demand immediately. A third, very serious risk is that Europe will continue to slide into government austerity-induced recession and possibly trigger a global financial crisis with the Euro.  A European slide will adversely affect our exports and depending on how severe it is, possibly reduce employment in U.S. exporting industries.  A Euro financial crisis would likely ripple back to big U.S. banks who could in turn cause problems here.

But the biggest reason that we shouldn’t be satisfied with these numbers is simple. This isn’t enough! An improvement of 200,000 net new jobs might be acceptable if we were already at full employment, but we’re not. We need to grow faster so we can put the millions of unemployed back to work.  Again back to Calculated Risk:

Percent Job Losses During RecessionsThis graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses.

This is the worst post WWII employment recession. However, as bad as this is, the Great Depression would be way off the chart. At the worst, employment fell a little over 6% during the recent employment recession – although the data is a little uncertain – employment probably fell by around 22% during the Great Depression.

Calculated Risk makes the point that the past few years haven’t been as severe as the Great Depression.  That’s true in the sense of how deep or severe the crisis has been.  But in terms of length, how long we go without full employment, we are clearly on a path to making this on par with the Great Depression.  The Great Depression in employment was essentially 11 years long.  Unemployment started rising in late 1929. It never fully recovered until the war spending took off in a big way in 1940-41. That’s eleven years. The current recession/depression/inadequate recovery started in late 2007. It’s at least 4 years old already.  The current pace of jobs addition puts us another 3 or so years until we recover all the jobs we lost.   So that’s a total of 7 plus years.

But as Paul Krugman points out, the population and labor force has been growing during the last 4 years.  To really reach full employment we need even more.

Let me give two back-of-the-envelope ways to think about how inadequate 200,000 jobs a month is.

First, note that there are still about 6 million fewer jobs than there were at the end of 2007 — and that we would normally have expected to have added around 5 million jobs over a four-year period. So we’re 11 million jobs down — and we need at least 100,000 jobs a month just to keep up with working-age population growth. Do the math, and you’ll see that it would take 9 or 10 years of growth at this rate to restore full employment.

Alternatively, note that during the Clinton years — all 8 of them — the economy added around 230,000 jobs a month. As it did that, the unemployment rate fell about 3 1/2 percentage points — which is about what we’d need from here to get back to something that felt like full employment. Again, this suggests that we’re looking at something like a decade-long haul to have full recovery.

So yes, this is better news than we’ve been having. But it’s still vastly inadequate.

So, yes I’m encouraged by the recent employment reports, but not very much.  I still hold to my position that when all is done and we look back on this period we’ll be referring to it as some sort of depression, not a “Great” one, but some sort of depression.

December 9, 2011

Student Debt + Stagnant Real Wages = Colleges Need to Focus On Student Success

Filed under: Demographics/Income Distribution,Econ Hist,Macro,Micro,Political Economy — Jim Luke @ 4:16 pm
Tags: , , ,

Today’s post is an excerpt of something I wrote for another site.  This year, in addition to my teaching duties at the college, I’m leading a project to update our college strategic plan.  As part of that project I’m writing and editing a series of “briefing papers” (long blog posts, actually) about issues of strategic importance to the college’s future.  When those papers cover a topic that I think might be of interest to econproph readers I’ll cross-post them. Last week I wrote the following about the student debt explosion in the U.S., the stagnation in hourly wages for those for with less than college degrees/credentials, and the implications for those of us who work in higher education.  The full original post is here.

America has a student debt problem.

And it’s growing. According to the statistics assembled by the New York Federal Reserve Bank, theU.S. Dept. of Education, and other sources, total student loan debt outstanding is nearing $1 trillion, easily exceeding the $791 billion in total credit card debt.  As disturbing as the total might seem, the growth rate of student debt is even more distressing.  This graph, first published by The Atlantic last summer from NY Federal Reserve Bank statistics shows the relative growth  (not amounts) of outstanding student debt since 1999 compared to total household debt including mortgages. FromThe Atlantic:

The red line shows the cumulative growth in student loans since 1999. The blue line shows the growth of all other household debt except for student loans over the same period.

crazy student loans 2011-q2.png

This chart looks like a mistake, but it’s correct. Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

The chart  is striking for another reason. See that blue line for all other debt but student loans? This wasn’t just any average period in history for household debt. This period included the inflation of a housing bubble so gigantic that it caused the financial sector to collapse and led to the worst recession since the Great Depression. But that other debt growth? It’s dwarfed by student loan growth.

Roots of the Problem

The student loan debt problem has many roots, most of which [colleges] cannot change or directly affect.  Causes of the explosion in student debt include:

  • A long-term shift in U.S. political opinion away from thinking of higher education as a public good with direct funding support from government toward thinking that students should pay for their own educations with loans guaranteed by the government.
  • Tuition and fee increases in higher education (particularly at 4 year schools and especially at private schools) have outpaced inflation for at least 3 decades, driven by cost increases, stagnant productivity, and reduced government direct funding.
  • Middle class real incomes have been largely stagnant or only modestly increasing for those same 3 decades, limiting the ability of families to pay dependent students’ tuitions.
  • The collapse of the housing price and mortgage bubble in 2006-07 which limited the ability of many middle- and working-class families to finance college education through home equity loans.
  • High unemployment rates since 2008 have limited the ability of students to work while in college and have also sent increased numbers of unemployed back to college.

… most community colleges can be a partial solution to the nation’s growing student loan burden.  After all, [community colleges are] one of the most cost-effective providers of the first 2 years of a college education.  Indeed, students can graduate with a bachelors’ degree with less total indebtedness if they take their first two years at community college and then transfer.

But the growing student loan problem when combined with another trend has even more significant implications the community college mission.

The Long Term Trend on Real Incomes – A Closing Middle Class

Long term trends in incomes in the U.S. including increasing income inequality have become a news headline topic in recent months.  …  Cumulative Growth in Hourly Wages, 1979-2009, by Level of EducationAs this graph from  the Congressional Budget Office (via Paul Krugman) shows, over the past 30 years the clear trend in hourly wages for workers with less than high school or only high school education has been negative. A high school graduate now earns 10% less per hour in inflation-adjusted dollars than they did 30 years ago.  Even workers who only have some college but haven’t completed a formal degree or credential are either negative or at best, even with 30 years ago.  The data in the graph is from 2009 and labor market conditions have not improved since then.  Indeed, most labor market economists, myself included, expect little to no improvement in wages or employment rates for many years to come.

So what does this mean?  It’s clear that for young and middle-aged people, the route to a rising income and participation in the middle class requires either a college credential or advanced degree.  Yes, anecdotal exceptions are always possible such as the stellar young person who becomes a big success in sports or entertainment. But the numbers are clear – for virtually all, membership in the middle class in the future requires succeeding at college not just attempting college.

Implications for LCC and It’s Mission

The mission of LCC and community colleges in general since they were created has been to provide access.  The great post-World War II expansion of community colleges in the U.S., of which LCC was a part, was based on the idea that broad, democratic access to higher education was important.  Community colleges provided access to college for millions who otherwise couldn’t attend, either because of costs, lack of family support, family/work obligations, location, lack of preparation, grades, or other circumstances.  Over time community colleges have expanded programs to help  increase access to even more individuals.  Indeed, this open-door, democratic access mission is a large part of the motivation for many who work at LCC.  Providing access is something we could feel good about.

But let’s consider how access has traditionally worked.  LCC, like most community colleges, has focused on providing the same basic instruction and learning that was available at 4 year institutions.  The difference was we had an open-door. We provided access.  We provided a chance at college and greater income and success in life. But it was always considered up to the student to succeed. The historical model is the college provides the student a chance at success. If they didn’t succeed that was their problem.  We measured our success by our enrolments as an indicator of the number of people to whom we had provided access.  Thirty years ago, if a student attempted college and didn’t succeed it didn’t carry the consequences it does today.  Thirty and forty years ago, a student who failed at college or simply didn’t complete could always get a job in a factory or a trade. They could still make a middle-class life despite not succeeding at college.

Now the trends tell a different outcome.  If a student doesn’t attempt college at all, they are likely not going to stay in the middle class at all and will likely experience declining real incomes.  The big change is if the student does attempt college but simply doesn’t succeed or complete, today their prospects for staying in the middle class are slim.  Successful completion of a college degree or credential has become a requirement now for a middle class future. It’s necessary for young people in particular to attempt and succeed at college now.

But now let’s add the student loan issue.  Suppose a person attempts college today but doesn’t succeed. Not only are they faced with the prospect of flat to declining real income, they have a significant burden – their student debt. Under current law there are really only two ways to discharge student debt – either pay it or die. Student loans cannot be discharged in bankruptcy. There’s no asset to sell or foreclose. So today’s student is facing a higher risk environment than their predecessors did in previous generations.  Instead of access to college being a chance at a better life, it’s now a high-risk necessity.  So it’s not just access; it’s success that matters.

…The governments, both state and federal, are paying increasing attention to success rates.  As mentioned in the first briefing paper, state governments, including Michigan, are increasingly looking at funding for higher education in terms of how many successful credentials or degrees does it produce, not just how many seats in classes were offered.

Beyond what the government is requiring, the success issues pose a challenge to our understanding of our core mission and how we measure our institutional success. In today’s environment, providing access to large numbers of students without regard for their success is playing a cruel joke on them.  It’s teasing them with dreams of a future many of them won’t achieve and then punishing them with a burden of debt.  For those of us in the institution, that’s not the motivator that the original access mission was. We need to adjust our sense of the mission.  Yes, access is important, but it needs to be successful access.  Successful access as a mission changes many things.

It changes our most basic metric of institutional success. Instead of simply enrollment growth showing institutional success at providing access, we now need to consider whether that access was successful. …But measuring success and access are one thing. Improving them is another. The shift to successful access calls for many changes in the organization, it’s processes, systems, the curriculum, teaching methods, support services, and attitudes. It is not easy or simple. It is very challenging.


December 8, 2011

Rick Snyder Advocates Government Planning to Fix the Labor Market

Filed under: Current Situation,Macro,Michigan,Political Economy — Jim Luke @ 12:37 pm
Tags: , , , ,

In recent posts here, here, and here, I’ve been discussing structural vs. cyclical unemployment.  In particular I’ve observed how those who are opposed to government stimulus efforts, either broad-based tax cuts or spending, are desperate to assert that our unemployment is a structural problem and not cyclical.  Yesterday’s post about a story in the Wall Street Journal was one example.  But here in my home state of Michigan, our Governor Rick Snyder has been saying much the same thing.  Since Governor Snyder’s previous claims that the magic jobs genie would create jobs from budget cuts have not worked, he really wants to join the “it’s all structural” brigade.  So last week Snyder announced:

Michigan needs to do better training people for in-demand jobs, and matching skilled workers with potential employers, Gov. Rick Snyder said…

“Today, too few workers have the skills needed to meet the demands of employers in the new economy,” Snyder said, according to an advance copy of his message. “Despite an unemployment rate of 10.6 percent, thousands of jobs remain unfilled in Michigan.”

Snyder said state companies say there is a “talent disconnect,” with baby boomer retirements leading to a loss of skilled workers and increasingly technology-driven economy requires advanced skills that many of our workers do not have.

“Today, talent has surpassed other resources as the driver of economic growth,” he said. “Times have been tough in Michigan. We have failed to think strategically about the relationship between economic development and talent. Job creators are finding it challenging to grow and develop without the right talent and job seekers are struggling to connect with the right opportunities that leverage their skills.”

Among the proposals is a new website, Pure Michigan Talent Connect – MiTalent.org – will feature tools for job-seekers and employers to identify labor trends and help people assess their skills, look for the training they need and connect with mentors.

The site is being launched in phases through June 2012. The first phase, features the “Career Matchmaker” and the “Career Investment Calculator.”

Partnering with public colleges and universities to provide a post-secondary education that is marketable and transferable. Snyder noted that the Center for Michigan concluded that colleges graduated 20 percent too few computer and math professionals, 14 percent too few health care professionals, and 3 percent too few engineers in 2009-2010.

“We need to stop overproducing in areas where there is little or no occupational demand and encourage students and educational institutions to invest in programs where the market is demanding a greater investment in talent,” Snyder said. “The current imbalance creates a population of young talent that cannot find work in Michigan, is saddled with debt and is ultimately forced to leave the state. This is an outcome we cannot afford.”…

“The simple truth is that tomorrow’s opportunities cannot be realized with yesterday’s skills,” he said. “The challenge we face is to align the aptitudes and career passions of job seekers with the current and evolving needs of employers. The solution is to reinvent the way in which we prepare our children for successful, fulfilling careers; reshape the manner in which Michiganders look for work; and redesign the way in which employers obtain the skills they need.”

Basically, Snyder is now asserting that Michigan’s high unemployment rate is primarily structural – it has nothing to do with Snyder’s jobs cuts and spending cuts in the state or with the present contractionary federal fiscal policy.  Instead he blames the unemployed – they have the wrong skills and the wrong education.  What’s particularly interesting here is that normally Snyder, like most Republican governors, is very pro “free market” and “private sector”.  But apparently the free market and the private sector haven’t performed well in the labor market according to Snyder.  Snyder seems to be saying we need government planning and direction to tell people what skills and education to get.  Apparently Snyder also doesn’t think private employment agencies or employers do a very good job of identifying trends or make connections.

I think the problem is not that Michiganders don’t know the right way to look for work.  There simply aren’t enough jobs at reasonable wages when they look.  It seems strange to hear calls for such fancy government economic planning coming from a so-called advocate of free markets and the private sector.  But when you’re desperate to justify spending cuts instead of stimulus, I guess that’s what you say.

December 7, 2011

Below Market Wages Belies Claims of Structural Unemployment

Filed under: Current Situation,Macro,Measures & Statistics — Jim Luke @ 12:10 pm
Tags: , , ,

Continuing what has turned into a short series on unemployment and structural unemployment in particular (see Monday and yesterday’s posts), let us look at some of the claims that structural unemployment.

First up, Brad Delong points us to Kevin Drum who tells the following story:

Kevin Drum:

Skilled Jobs Go Begging? Not Quite: The Wall Street Journal has a piece up this weekend about the difficulty that many companies are having hiring skilled workers in certain areas…. Here’s a description of some skilled job openings at Union Pacific railroad:

When the railroad had openings for diesel electricians earlier this year, it took [Ferrie] Bailey 10 hiring sessions to fill 24 jobs….Known as “installation technicians,” the workers are responsible for putting in and maintaining a sprawling network of cable, microwave relays and related equipment that enables the railroad to monitor 850 trains running daily along its 32,000 miles of track.

This doesn’t require a bachelor’s degree but demands technical skills gained either through an associates’ degree or four years of experience in electronics. And it is grueling work. Technicians have to climb 50-foot communications towers, clamber up utility poles and work outdoors through Wyoming winters and Kansas summers. They put in 10-hour days, in clusters of eight or ten days, and are routinely away from home more than half of each month.

….Standing at the front of the room, Ms. Bailey described the deal. As installation technicians, they would earn $21.64 an hour, or close to $48,000 a year for the railroad’s regular work schedule.

Then there’s this:

After a website job posting, Ms. Bailey initially drew 58 applicants. Of them, she deemed about two dozen sufficiently qualified so that she invited them to take a $25 aptitude test, at their own expense.

Let me get this straight. Union Pacific is supposedly desperate for candidates and can barely fill all their open positions. And yet, when they identify 24 qualified applicants, they aren’t even willing to maximize their hiring pool by ponying up $600 to make sure they all take the aptitude test. Then, later in the story, there’s this:

Ms. Bailey faced more stiff competition at a job fair the next day, because then she was up against several other employers looking for the same sort skilled people as she was. “Make $70,000 – $80,000 the first year with FULL BENEFITS,” read a sign at a booth right across from Ms. Bailey’s at the job fair, put on by the U.S. Army in Fort Carson, Colo., largely to help departing soldiers ease back to civilian life.

So here’s the story. Union Pacific is offering $48,000 per year for skilled, highly specialized, journeyman work that’s physically grueling and requires workers to be away from home about half of each month. The competition is offering 50% more, but not only is UP not willing to increase their starting wage, they’re so certain they can fill all their positions that they make qualified candidates pay for their own aptitude test. And despite all this, they filled all 24 of their positions in ten hiring sessions.

It doesn’t sound to me like there’s a huge shortage of qualified workers here. It sounds to me like Union Pacific is whining about the fact that it took them all of ten hiring sessions to fill their quota even though this is a really tough job and they aren’t paying market rates for workers. It’s as if they think that actually having to make a modest effort to attract job candidates is an inversion of the natural order or something. Speaking for myself, I think I’ll hold off on breaking out the violins.

Kevin has done an excellent job of taking the structural claims apart, but I’ll pile on anyway.  The claim that unemployment is structural is a claim that the labor market is segmented into different labor markets for jobs with different skills.  Further it asserts that there is no elasticity of supply between these different labor markets – in other words, if either have the skills or you don’t, there’s no on-the-job training or adaptable skills possible.  Finally, if unemployment is structural then we are saying that there’s a shortage (lack of supply) of workers in that skill category in that geographic area.  The Wall Street Journal is claiming that because Union Pacific cannot find enough willing sellers (workers) at the price (wage) Union Pacific is offering then there must be a shortage of qualified sellers.  Umm, how do I put this?  No.  Rather it’s evidence that the Union Pacific simply wants to pay below-market prices to labor.  That’s all.  Saying this is evidence of structural unemployment is like me claiming there’s a structural supply shortage of new automobiles because no dealer will sell me a new Porsche for $15,000.

 

December 6, 2011

Fixes for Unemployment Depend on Whether It’s Cyclical (It Is) or Structural (It Isn’t)

Filed under: Current Situation,Macro,Measures & Statistics,Political Economy — Jim Luke @ 12:19 pm
Tags: , , ,

Yesterday I recapped the November employment report. The employment picture remains grim.  The workers depression continues.

As my favorite graph from Calculated Risk shows here, regardless of what happens to the unemployment rate, our recovery from the jobs lost in the recession is incredibly slow.  At the pace we have been on for the last 2-3 years, we won’t recover the jobs lost in the recession until around 2018 – a full lost decade.

Thanks partly to the #OccupyWallStreet movement, these 14 million unemployed aren’t so invisible as they seemed last summer when the policy debates were all about debt and deficits.  Since denial of a problem has failed, folks who argue against any attempts by the government to stimulate the economy need a different pitch.

That revised pitch is that the unemployment problem is “structural”, not “cyclical”.  Now before I move on to show the problem is not structural, let me explain the difference. I’ve looked at structural vs. cyclical before here and here, but I’ll summarize.  In economist-talk, “unemployed” means you are part of the labor force but you don’t have a job.  To be part of the labor force, you must be actively looking (“willing and able”) to work.  Those numbers come from government surveys. Economists unofficially classify those unemployed workers according to why they don’t have a  job.  There’s four possibilities:

  1. Frictional – there’s a job for them, they simply haven’t been matched with it yet.
  2. Seasonal – the job will exist again next year when the season is right (think downhill ski instructors in July)
  3. Structural – empty jobs exist but the unemployed workers either don’t have the right skills or aren’t in the right location.  Train the workers or move them and unemployment disappears.
  4. Cyclical – there simply aren’t enough empty jobs for the number of unemployed workers.  If the GDP were larger and spending greater, then jobs would be created and the people put back to work.

For policy reasons we aren’t concerned with frictional or seasonal. Time cures those individual unemployment situations. But if we only had frictional or seasonal unemployment, our unemployment rate would be much, much lower – 4% or even lower.  Clearly we have either have a lot of structural or cyclical or both.

Which we have matters for policy reasons. If unemployment is structural, then we can effectively blame the unemployed for their fate.  They didn’t get the right skills. They chose to live in the wrong place. From a policy standpoint, the government might adopt policies that support re-training but that’s about it.   If, however, unemployment is cyclical, then government has plenty of room to reduce unemployment through stimulus programs, either effective tax cuts and/or increased government direct spending.

Brad Delong points us to David Wessel of The Wall Street Journal who tells us how and why today’s high unemployment is not structural. In other words, we could bring down the unemployment very dramatically and very quickly if we chose to.  Politicians in Washington simply choose not to do so. (bold emphases are mine)

DW:

Untangling Long-Term Unemployment: Herman Cain, the Republican presidential candidate, avoids carefully calibrated talking points. “If you don’t have a job and you’re not rich, blame yourself,” he said in a Wall Street Journal interview.

Beneath Mr. Cain’s blunt words lurks an economic hypothesis: that there’s nothing much government policy can do to bring unemployment down from today’s 9.1% rate…. [I]f the unemployed aren’t willing or able to fill jobs that muscular stimulus might produce then there’s little wisdom in borrowing more money or chancing inflation. We just have to suck it up.

But according to Fed governor Daniel Tarullo, a veteran of the Clinton White House and Obama presidential campaign who has spent the past few months consulting with Fed and other labor economists for a speech on the job market he is to deliver Thursday at Columbia University, there is little evidence that the bulk of today’s unemployed would still be unemployed if the economy were growing faster or that the bulk of today’s unemployment is, in the jargon of economists, “structural.”…

The Labor Department counts 14 million unemployed and 3.1 million job openings, or 4.6 jobless workers per job opening. Before the recession, the ratio was 1.5. If every opening were filled instantly, there would still be many unemployed.

Wages aren’t rising. “We don’t see rapid wage growth almost anywhere, which is what you would expect if firms were bidding up the wages of qualified workers and were unable to find qualified workers among the unemployed,” said Harvard University’s Lawrence Katz.

Unemployment is up across ages, occupations, industries and years of schooling. “We had a fast-advancing economic decline with layoffs and hiring freezes in a broad range of sectors of the economy. That is not consistent with an increase in structural unemployment being the big explanation,” Mr. Tarullo said…

 

December 5, 2011

November Employment and Revised 3rd Qtr 2011 GDP

Filed under: Current Situation,Macro,Measures & Statistics — Jim Luke @ 7:26 pm
Tags: , , , ,

I’m a few days late but I wanted to note the latest employment (jobs) report and the first revision to 3rd quarter GDP.  There’s really not much news here – it’s the same old story. The economy continues to move along somewhat like  a zombie.  Not really dead, but definitely not anything you could call “living”.  That’s particularly true if you’re one of millions of unemployed who need a job to “make a living” but can’t get one.

CalculatedRisk Blog tells us:

From MarketWatch: U.S. economy adds 120,000 jobs in November

The U.S. gained 120,000 jobs in November and the unemployment rate fell to 8.6% from 9.0%, the Labor Department said Friday. The government also revised jobs data for October and September to show that 72,000 additional jobs were created. … Hiring in October was revised up to 100,000 from 80,000 and the job gains in September were revised up to 210,00 from 158,000. In November, companies in the private sector hired 140,000 workers … Government cut 20,000 jobs…

Employment Pop Ratio, participation and unemployment ratesClick on graph for larger image.

The following graph shows the unemployment rate. The unemployment rate declined to 8.6%.

Some of the decline in the unemployment rate was related to a decline in the number of workers in the labor force.

Percent Job Losses During RecessionsThe second graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

This was still a weak report, and slightly below consensus.

The headline unemployment rate declining from 9.0% in October to  8.6% in November is deceptive.  It is NOT because economic growth created enough new jobs to start making a significant dent in the millions of unemployed.  Instead it was almost entirely due to the labor force shrinking.  In other words, approximately 300,000 would-be workers abandoned their search in frustration and discouragement.  If the economy starts to grow briskly (not much chance of that happening) then these discouraged and “marginally attached” workers will likely renew their searches and rejoin the work force.

Calculated Risk also tells us how just before Thanksgiving the estimate for 3rd quarter real GDP growth was revised downward.

From the BEA: Gross Domestic Product, Second Quarter 2011 (second estimate

Real gross domestic product — the output of goods and services produced by labor and propertylocated in the United States — increased at an annual rate of 2.0 percent in the third quarter of 2011 (that is, from the second quarter to the third quarter) according to the “second” estimate released by the Bureau of Economic Analysis.

This was revised down from 2.5% and below the consensus of 2.4%.

The downward revisions was mostly due to a large decline in the “change in real private inventories ” – this subtracted 1.55 percentage points from the third-quarter change in real GDP (second estimate) as opposed to 1.08 percentage points in the advance estimate. Final domestic demand was mostly unchanged (the inventories will probably reverse in Q4). Still sluggish growth …

The relatively large revision came from having better data about the change in business inventories.  In GDP accounting, when a business produces goods it counts as “production” and part of GDP, even if the goods haven’t been sold yet to a final customer.  Additions to inventory then are considered to be a form of “business Investment”.  A decline in inventories tells us that businesses (in aggregate) sold more from their inventories (previous production) than they produced.  A large decline in inventories can be either a good or bad sign.  It’s good if it happens because sales were unexpectedly higher than managements expected.  That would suggest that production would be increased in the next quarter.  On the other hand, a decline in inventories can also be a sign that businesses expect future sales to be weak and so they didn’t produce as much in advance.  We’ll have to see which it is.  Regardless of why the inventory adjustment was so large, a 2.0% real growth rate is unacceptable.  It wouldn’t even be acceptable at full employment, but with 8.6% unemployment it’s totally unacceptable.

Next Page »

Theme: Rubric. Blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.

Join 53 other followers