Scariest Thing You’ll See This Month

I know the BP spill is scary (oil now washing up in the Florida Keys!) and I know a new vampire movie is coming out this month. But put the following two things together.  First, let’s look at Friday’s unemployment report:

The economy has lost 0.6 million jobs over the last year, and 7.4 million jobs since the recession started in December 2007. Ex-Census hiring, the economy only added 20,000 jobs in May.

The unemployment rate decreased to 9.7 percent.

Percent Job Losses During Recessions The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

The dotted line is ex-Census hiring. The two lines will rejoin later this year when the Census hiring is unwound.

For the current recession, employment peaked in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only early ’80s recession with a peak of 10.8 percent was worse).

That graph is by itself scary enough when you really look at it.  It compares all the post World War II recessions showing how deep they were (loss of employment and jobs) and long they were (length of time until we recovered all the jobs, not just started growing GDP).  Obviously, the current recession is the deepest and greatest loss since the Great Depression. But it’s also on track to take the longest period of time to recover, taking longer to recover than the nearly 4 years it took to recover from the “mild” 2001 recession.  To me this graph is like looking at some gross, scary, ugly monster in a horror movie, but it gets worse because…

Now we get this from the G20 Finance Ministers (via Financial Times and Calculated Risk):

First, from the Financial Times: G20 drops support for fiscal stimulus

Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday …

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances.
Excerpts with permission

This means that the leaders of the 20 largest economies have agreed to stop fighting unemployment and instead start tightening their budgets. No more stimulus – “austerity” instead. No more hope for the 10% unemployed in U.S., or the 8.7% unemployed in Canada, or 10% unemployed in Europe, etc, etc.
If the unemployment graph is a gross, ugly monster; the news from the G20 is an innocent, cute teenage girl deciding to enter the dark, abandoned house all alone while the soundtrack starts playing ominous sounding music. We know how that scene goes….

Address Unemployment and the Oil Slick

Mark Thoma agrees with Robert Reich and John Whitehead.  I’ll add my support too.  Let’s put unemployed teenagers to work NOW cleaning up the mess, even if we have BP has to pay to house them in the Gulf coast hotels that are rapidly losing business.

“Put Jobless Young People to Work Cleaning Up BP’s Mess”

Robert Reich has a wish:

Put Jobless Young People to Work Cleaning Up BP’s Mess and Order BP to Pay, Robert Reich Friday’s job report was awful. For most new high school and college grads finding a job is harder than ever. Meanwhile, states are cutting summer jobs for disadvantaged young people. What to do with this army of young unemployed? Send them to the Gulf to clean up beaches and wetlands, and send the bill to BP. …

[W]e’ve got hundreds of thousands of young people sitting on their hands right now because they can’t find jobs. Many are from affected coastal areas, where the tourist and fishing industries have been decimated by the spill.

The President should order BP to establish a $5 billion clean-up fund, and immediately put America’s army of unemployed young people to work saving the Gulf coast. Call it the new Civilian Conservation Corps.

(The old CCC — created by FDR at another time of massive unemployment and environmental stress — gave millions of young Americans jobs and training to reforest lands that had been degraded, provide emergency flood relief in the Ohio and Mississippi valleys, and build the infrastructure for our national parks.)

This isn’t exactly what he has in mind, but it’s along the same lines. John Whitehead:

Green jobs: “Unemployed Hired to Clean Affected Beaches”:

via www.deepwaterhorizonresponse.com: The Unified Command in Mobile announced today the first deployment of the Qualified Community Responder (QCR) program that will put unemployed individuals to work in the counties that may be affected by the oil spill. Working closely with the Alabama, Mississippi, and Florida unemployment offices, unemployed workers have been hired to help with the cleanup effort.  A similar program exists in Louisiana.

Starting today some 400 QCR workers in Florida and Alabama began cleaning affected beaches….

The plan is to train more than 4,500 workers in the three states in the Mobile Sector (1,500 in Alabama, 1,500 in Mississippi, and 1,600 in Florida). To date there are 2,946 people trained and ready to be deployed (978 in Alabama, 1,500 in Mississippi, and 468 in Florida).

I’m assuming that these states will send a bill to BP, they should, and if they do then it is even closer to what Reich has in mind. With respect to Reich’s idea, if we go that route I’d prefer to have the government in charge of the clean-up rather than BP, with BP billed later. And I don’t see any reason to cap the bill at $5 billion. It will take whatever it takes to clean up after this mess (as though we can simply wash away the damage), and BP should pay the entire bill. If it bankrupts BP, too bad, they should still pay as much as possible with the government making up any shortfall in the amount needed to do the clean up job properly.

Government, the Private Sector, and “Make Work”

Maxine Udall, Girl Economist, (love that blog title) has an excellent short rif on the topic of “make work” projects.  Tea Partiers, Conservatives, Republicans, radio talk-show hosts and many right-leaning economists (politically right, not as in “correct”) frequently attack the idea of government stimulus spending as being simply on “make work” projects.  The implication is that money spent on such activities is wasted because nothing “productive” or “constructive” comes of it.

Like most economic arguments, things become much clearer and less susceptible to error if we clarify the assumptions.*  The underlying assumption behind these attacks is that “anything private ownership does is necessarily productive” and “anything government does is necessarily wasteful and useless”. Such an assumption is ludicrous, of course.  Governments can, of course, waste real resources (think war or the TSA, anybody?) But government spending also gives us lots of valuable, productive resources and services that the private sector wouldn’t or couldn’t:  the first demonstration of telegraph, railroads in the West, Interstate highways (heck most highways), airports, fire departments, schools for everybody, sewers, clean running water, healthcare research, the Internet, and on and on.  But just as important is the fact that the private sector can and does waste money and real resources on useless, wasteful projects. And despite the theories of their apologists, the private sector rarely pays the full bill for their errors (that’s left for government!).  BP anyone? the wasteful expanses of never-occupied condos and houses in NV, CA, and FL that government will probably have to tear down?

Maxine says it better than I.  Read her here.

* what I offer here is by no means the only reason why such anti-stimulus arguments are wrong-headed and mis-guided, but alas, scarce resources (time today) and I can’t explain it all.

Not in Your Micro Textbook: The High Price of iPads and iPhones

From Business Week online we get this story:

Why Apple and Others Are Nervous About Foxconn

The Chinese maker of iPhones and iPads has seen a rash of suicides—which may be a price of turning out low-price, high-quality goods

Terry Gou says he has no idea why so many of his employees are killing themselves. Gou is the founder and chairman of Foxconn, the world’s largest electronics contract manufacturer—the maker of iPhones and iPads for Apple (AAPL), computers for Dell (DELL), and countless other devices for well-known high-tech customers around the world. So far this year, 10 Foxconn workers have committed suicide. “From a logical, scientific standpoint, I don’t have a grasp on that,” Gou told reporters on May 27 at a press conference at the company’s vast production facility in Shenzhen, China. “No matter how you force me, I don’t know.”

Ask around among the more than 250,000 workers at the Shenzhen complex, and you’ll find explanations. One 21-year-old assembly-line worker, who asked that his name not be used, says conditions at Foxconn make his life seem meaningless. He says conversation on the production line is forbidden, bathroom breaks are kept to 10 minutes every two hours, and workers get yelled at frequently.

No one disputes that Taipei-based Foxconn, also known as Hon Hai, has cultivated a tough culture. The company generates more revenue in a year than Apple, Dell, or Microsoft (MSFT). It has grown in profitable obscurity to become an industry juggernaut for a simple reason, says Pamela Gordon of Technology Forecasters, a supply-chain research firm: “It’s the prices. Their prices are lower for high-quality work.” Foxconn won Apple’s order to make the iPhone after Gou directed the business units that make components to sell parts at zero profit, according to two people familiar with the chairman’s actions…

Obviously the “high price” I’m referring to is the senseless loss of human life through suicide of workers.  But it’s more than that, it’s also the loss of freedom and sense of meaning that Foxconn’s working conditions create for the surviving workers.  In standard micro textbooks, these costs are ignored.  The standard neoclassical treatment of both international trade theory and labor markets pretty much ignores such issues.

IMO, one of the failings of standard, neoclassical tales of international trade theory as told in most Principles of Econ textbooks is how they ignore the institutional arrangements of trade while assuming that all trade is transactional.  In other words, in the models everything comes down to a price for a particular good in a particular transaction.  If the buyer changes her mind or learns something about the source that makes the product less attractive, well, just stop buying from that vendor and shop somewhere else.  In the real world, that’s not so easy.  In the real world we have “switching costs”.  Like it or not, buyers and suppliers have long-term relationships that are very, very difficult to change or break.  Legally, Apple Computer and Foxconn may be seperate companies that buy/sell with each other and therefore have options.  But realistically and behaviorally, they are one integrated production enterprise. They’re married at the hip (to mix metaphors):

Gordon, the supply-chain expert, says it would be hard for a tech company to switch from a partner the size and sophistication of Foxconn. “Separating from a contract manufacturer can be painful,” she says, because of the complexity of reworking assembly lines and supply chains. A divorce would be especially difficult for Apple, given that it’s already behind in producing its hit iPad tablet computers.

Another failing is that by not describing the institutional arrangements (the real working conditions and employment relationships) in other countries, students are led to assume that life in other countries is much like in the U.S. only with less income.  Not so.  In the U.S., workers, even low-paid workers, are free to live their own lives:  they live where they want to (and can afford) and do what they want on their off-hours.  Yes, when you’re “on the clock” you pretty much have to dance to the boss’s tune, but not off-the-clock.  That’s why we have so many pop songs over the ages about “living for the weekend”.  But in China, that’s not how it works.  If you work for a major industrial firm, you’re pretty much just a serf on the company’s plantation:  you live in a dorm, you eat what they serve, you do what they want, and you  don’t talk to anyone unless they say so. Grim.

Meanwhile, work goes on in Shenzhen. Foxconn’s facility is three square kilometers (1.16 square miles) and is crisscrossed by tree-lined streets with a fountain at the center. There’s a hospital and a collection of restaurants. Workers live in dormitories, eight to ten people to a room. The company provides worker counseling, according to supervisor Geng Yubin. “For many of the young people who are here, this is the first time they’ve been away from home,” Geng says. “Without their families, they’re left without direction. We try to provide them with direction and help.”

Foxconn says it’s taking other steps to get the situation under control. It has installed netting around outdoor stairwells of dormitory buildings to prevent people from jumping. Workers will also be getting a 30 percent raise. The additional money may not be enough to prevent further tragedies, says Xiao Qi, a college graduate who works at Foxconn in product development. He earns 2,000 yuan a month, or $293, more than twice as much as a line worker. “I do the same thing every day,” says Xiao, who says he has considered suicide. “I have no future.”

Trade theories that assume away these differences and then conclude that trade barriers or trade conditions are always liberty- and efficiency-reducing are simply not realistic.