Monday, February 16, 2015

A Tale of Two Central Banks

"It was the best of times, it was the worst of times, it was the age of Fed debt buying, it was the age of EU mandated austerity, it was the epoch of slow growth, it was the epoch of no growth...

The Unrepentant Capitalist has been reading a lot of articles lately in the business press praising the Americans and criticizing the Euros for their respective responses to the Great Recession of 2009.  When the economy turned south, the US Federal Reserve went interventionist enacting various debt buying programs (TARP, QE1, 2, & 3) while the EU went the austerity route forcing member countries to cut spending and reduce debt.

The consensus of these articles concludes the Fed's actions helped the US to avoid a deeper downturn, while the EU's belt tightening prolonged their problems.  Our economy has been stronger than Europe's when looking at things like GDP and unemployment, but are the pundits jumping the gun when they declare the Fed got it right?

One of the Fed's main jobs is to be the lender of last resort if the markets start to panic.  Economic historians tell us the Fed failed miserably in the early 30's on their lender of last resort duties.  Ben Bernanke knows his history and made sure the Fed didn't sit on their hands this time around.  The cumulative debt buying over the last few years has ballooned the Fed's balance sheet to 4 times its normal size.  Shouldn't we hold off on hanging the 'Mission Accomplished' banner until the Fed gets its balance sheet back to normal size?

And are the Euros' current economic problems all due to belt tightening and central bank passivity?  Even the Libertarian leaning Unrepentant Capitalist is willing to concede that EU austerity measures may have been ill-timed, and a little last resort lending (debt buying) might have been a better course, but the Euros have numerous structural impediments that limit their economic potential.  Relative to the US, the Euros impose more rules and regulations that tend to dampen job creation and steer their economies toward the slow lane.  A couple of exampleslabor laws in Spain compel companies to provide an average of 15+ weeks of redundancy pay to dismissed workers.  Spanish employers must also provide a minimum of 7 weeks paid vacation to workers.  Similar regulations in other EU counties create more cost and risk to prospective employers when it comes to hiring with the net effect of restricting employment.  As of late 2014, unemployment in Spain was running at 24%.   

While central bank policy and government spending are obviously important, the economic growth equation has a lot more variables.  Unfortunately, those other variables often involve policy that politicians are reluctant to change.  In Spain, changing laws to reduce redundancy pay would likely be spun as anti-worker, and therefore difficult to enact.  The Unrepentant Capitalist predicts the Euros will be unable and/or unwilling to address their structural disadvantages, so their debt buying will not do much to get their economy out of the ditch. was the season of Light, it was the season of Darkness, it was the spring of a positive sloping yield curve, it was the winter of 11% Greek government debt, the Fed had a $4 Trillion balance sheet before it, the ECB had 60 Billion Euros of monthly debt buying before it, we were all going direct to Heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."


Saturday, December 14, 2013

Middle Income Households Becoming Upper Income Households. What's Behind the Shift?

In my December 6, 2013 posting, I looked at household income data compiled by the US Census.  The data clearly shows a long term increase in the number of upper income households, and a decrease in the number of lower and middle income households. What's behind these trends? Are we just working harder or are we working smarter?  It's a bit of a hollow victory if all we're doing is trading more hours for dollars.  So are we just working more?

Working more comes in a couple of flavors—longer work hours or more of us in the workforce.

Maybe we're just working longer hours?  Data from the US Bureau of Labor Statistics actually shows a long-term decline in average work hours.  From 1967 to 2012 (the time frame for the Census' income data) average worker hours dropped from 1860 to 1700 hours per year.

How about an increase in two income households?  Looking at the Workforce Participation Rate (defined as the active workforce divided by the total number of working age Americans) over the 1967 to 2012 time frame does indeed show a net increase.   Since 1967, the WPR (I'll make up an acronym and save myself some typing) has ranged from 60% to 68%, and currently sits at 64%.  Moving from 60% to 64% is not a huge jump, but it’s something.

So how many households are impacted by a higher WPR?

Going back to the Census data, and looking at the end points (1967 and 2012) on the data shows the following distribution:

Percentage of Households in Each Income Group
             <$25k/yr      $25k to $100k/yr       >$100k/yr
1967          28.1%              64.6%                   7.4%
2012          24.7%              53.5%                  22.0%        at current WPR of 64%

Combining the lower and middle income groups into a <$100k/yr bucket results in a distribution that looks like:

Percentage of Households in Each Income Group
              <$100k/yr            >$100k/yr
1967           92.7%                  7.4%
2012           78.2%                 22.0%        at current WPR of 64%

What if 1967’s WPR of 60% was in place in 2012?  Working though the numbers shows a lower WPR would mean the employed workforce shrinks from its current 144 million to 135 million, or a reduction of 9 million jobs.  To make things simple, let's assume these 9 million jobs were all lost in households currently residing in the >$100k/yr group and those job losses pushed all 9 million households out of the upper income group.  (NOTE: this is the worst case scenario to my rising general prosperity argument).

Taking the 9 million households out of the >$100k/yr group and moving them to the <$100k/yr group would change the distribution to look like:

Percentage of Households in Each Income Group
                 <$100k/yr            >$100k/yr
1967            92.7%                   7.4%
2012            85.6%                  14.6%       at the 1967 WPR of 60%

The above scenario applying a 1967 WPR of 60% shows there would still be twice as many higher income households in 2012 vs. 1967 due to rising general prosperity.  As mentioned, the above is a worst case scenario because not all 9 million jobs would result in moving a family from the upper income group to the lower income group—think households where one spouse is an attorney and the other is a school teacher where the school teacher leaving the workforce wouldn’t push that household out of the >$100k/yr group.  There are other scenarios that don't impact the upper income group where a middle income family drops from two to one wage earner.

The long term uptick in dual income households probably explains some of the shift, but something else is at work here.  My explanation, we're working smarter.  Innovation and greater workforce productivity has created better jobs with higher pay resulting in increased prosperity that has lifted many families into the higher income group.

Friday, December 6, 2013

Middle Class Problem? What the Data Says

There’s been a lot of talk lately from the President about the ‘sorry’ shape of the middle class and the unfair income inequality the country has ‘suffered’ over the last few years.  To me, it all sounds like someone is laying the groundwork for tax hikes targeting the rich to affect a dose of income redistribution to correct the ‘problem’.  One thing…the data doesn’t support the middle class demise argument.

This data for the graph below is taken from the US Census who’s been tracking household income data going back to 1967.  They’ve adjusted everything to current day dollars to allow for meaningful year-to-year comparisons. 

The data show a very clear trend.  The percentage of households in the lower and middle income groups (blue and red area) have decreased from 1967 to 2012 while the percentage of households in the upper income group (green area) has grown by a factor of 3x!  (7.4% of households in 1967 were high income vs. 22% of households in 2012.)  Lower and middle income households becoming higher income households.  The popular narrative says the middle class has been in steady decline for years, and that Washington must do something to help. 

Washington, don’t just do something, stand there....please.

Friday, May 24, 2013

Ideas Challenging the Invisible Hand

I've got a couple of concepts rambling around in my head that are challenging my economics’ world view.  I've been wrestling with one of these challengers for a while; the other is relatively new.  Readers of my blog know the Unrepentant Capitalist is a disciple of the Adam Smith, David Ricardo, and Milton Friedman school of laissez faire, free market economics, but these two challengers are in conflict with the core tenets of conservative economics—limited government and the profit motive.

Limited Government (Less is More)

The Smith, Ricardo, and Friedman school says the government's role in economic affairs should be kept to a minimum.  Ask any of these economists, and they'd tell you the government can serve the economy and society best by setting the rules (the fewer the better) and then enforcing them fairly.  Government ownership of businesses or crafting policies to favor particular industries are counterproductive and cause an economy to undershoot its potential.  They would argue the Department of Commerce is entirely unnecessary, and would question the wisdom of the government operated central bank (the Federal Reserve).

While I buy the limited government argument, I also have difficulty explaining away the long term benefits that our economy has realized from many years of government spending on technology.  Starting in World War II, and continuing to current day, the Pentagon has been a major buyer of technology.  Government fueled demand for jet airplanes, satellites, nuclear power systems, and all the electronic components inside this stuff greatly advanced the state of the art. Does anyone really believe that our commercial aircraft industry, for example, would be where it is today without years of DoD spending on military aircraft?  

The physicists and engineers would have invented the transistor and the integrated circuit, but didn't Pentagon requirements (backed by lots of procurement dollars) to make electronic gear process faster, weigh less, run cooler, and use less power push these innovations to occur sooner than they would have if driven by consumer demand alone?  With the invention of the integrated circuit, and the demand for better performance from various military and NASA programs, the microprocessor was born.  Would we have been able to establish our leading position in our various Information Technology industries as early as we did without the microprocessor coming along when it did?  In short, haven't many things powering our modern economy—software, mobile phones, the Internet, flying coast to coast in 6 hours—enjoyed a healthy tailwind courtesy of DoD spending?  How many companies have been born, and how many high paying job have been created over the years to help commercialize all the Intellectual Property originally created by defense spending?

I can hear Milton Friedman's rebuttal.  Do the economic benefits justify the trillions of public money spent on all this stuff?  I don't know how to do the business case on that one, but didn't the Cold War force us to spend that money?  Wouldn't have consumer demand eventually driven development of these technologies? Hard to say, but in the absence of government demand, would we have had these technologies as early as we did?  Imagine a 2013 where we're playing pong, talking on Gordon Gekko mobile phones, and marveling over the 'state of the art' 747.

The positive effects of government spending on our various technology industries, and the benefits to the larger economy has been a difficult question for the Libertarian leaning Unrepentant Capitalist to come to terms with.  While I wrestle with this question, some things are more clear.  I'm sure the Pentagon is inefficient in how they spend vs. private companies.  I'm deeply skeptical of government crafted trade policies seeking to protect certain industries (the track record here is very bad) or outright state investment in companies (Solyndra).

Profit Motive (Driving Proper Economic Decisions)

In his 2009 book Drive, author Daniel Pink presents some compelling arguments that question the power of the profit motive as an effective driver of economic behavior.

The profit motive says the goal of business is to turn a profit. The profit motive is a beneficial guiding force in that it ensures resources are being allocated to their highest and best use. If something is worth doing, there's a profit to be made.  If there's no profit, the market is telling you the resources used to create that something are being misallocated.  The profit motive works for the individual too. People will be drawn to vocations where they can make good money.  People will create great stuff if you dangle enough money in front of them.

Pink's book says the profit motive alone may not work as a motivator, and in some cases, may be counterproductive in a modern economy.  Pink suggests that up until recent times, profit and money as motivators work reasonably well.  But, as we evolve towards an economy with a heavier reliance on knowledge workers where we need more innovation and creativity from our workforce, money alone isn’t enough.  The author says that once a worker hits a market level of compensation (or as the author says, "with the question of money off the table") more money's effectiveness as a motivator starts to wane.  Bonuses don't work as we'd expect.  Once the foundational compensation has been met, the source of motivation shifts to softer things like worker autonomy, skill mastery, and work with a higher purpose.  

Pink cites numerous examples from our new economy to support his assertion that money is not the ultimate motivator.  To make his case, he presents an interesting hypothetical. Suppose you go back to the mid-90’s and ask people to predict the eventual market share winner among products from two competing organizations.  One product is from a well-known company with many commercial successes. This company has assembled a well-compensated team led by capable managers.  The other team is loose-knit band of unpaid volunteers with no formal management team and plan to charge nothing for use of their product. Traditional economics tells us the former group will be the heavy favorite to win. But once we pull back the curtain to reveal the products in question, we know Wikipedia won this battle, and Microsoft pulled the plug on Encarta years ago.  The tech world has other similar examples of great free stuff developed by unpaid workers including the Firefox browser and the Linux operating system.

Drive makes a lot of good arguments about teams and individuals achieving higher levels of creativity and productivity with autonomy, mastery, and purpose deliberately added to the workforce equation.  But didn’t we already know this?  To consider profit as the sole source of motivation seems very simplistic.  The new information here is the diminishing returns of more dollars as a motivator.  So if we all agree the soft components are also a requirement, how do we evaluate a company on these criteria?  How do we measure a company to know that it’s offering its workforce opportunities for autonomy, mastery, and purpose?  How do we know the company’s motivated workforce is creating value?  Old fashioned as it may be, profit (or loss) is an objective indicator telling us that something is (or is not) worth doing. Profit can be measured.  Given my left brain orientation, I need some real numbers.  Pink is on to something here, but I need some instrumentation to properly pilot the ship. 

While it might appear the Unrepentant Capitalist has taken a small step in the direction of Europe, I continue to fundamentally believe that free market capitalism is the best driving force to organize our economy—less government is better than more government, businesses exist to make a profit, brush and floss twice a day.  Having said all that, I also believe that strict adherence to one school or the other without taking time to consider the other side’s argument is not wise.  At the risk of edging up to the slippery slope, I believe the best answers can sometimes be found somewhere between strict ideological poles. The Unrepentant Capitalist continues to operate close to the Libertarian camp, but I’m not in the elder’s tent.

Invisible Hand – a phrase coined by Adam Smith in The Theory of Moral Sentiments (1759).   Smith tended to be a bit wordy (who wasn’t in the 1700's?) but, in essence, he said the economy is guided by an Invisible Hand that is the collective result of individuals pursuing their own economic self-interests in a free marketplace.  The Invisible Hand determines the goods and services available, the prices consumers will pay, the compensation tor those involved in bringing those goods and services to the marketplace, etc, etc, and does all this to society’s benefit.  

Wednesday, November 21, 2012

The Business of America is Business

The title of this post is the sound byte version of a famous quote made by Calvin Coolidge, the 30th U.S. president.  

The full version of Coolidge’s comment is:

“…the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing, and prospering in the world.”

It’s very important to understand the power of this statement.  Three years into a weak recovery, business bashing is popular as many people see the Great Recession as a failure of business and capitalism.  Some see business as evil.  But the truth is, America's long standing success story is due to the priority we place on business and trade.  We have succeeded because we value business.  When you consider our first settlements (Jamestown was founded as a business venture) to our current status as the world’s top economic power, the business of America is business.  Many don’t want to acknowledge this truth, but these few words summarize why our country has succeeded.  Our country’s long term economic growth, our relatively high rates of employment, our high standard of living, our industry leading companies producing world class goods and services are due to people’s preoccupation with producing, buying, selling, investing, and prospering.  Economically, we are and have been the envy of the world.

Throughout our county’s history, business has been our golden goose. Business is not without its missteps and faults, but net-net business has yielded huge value to our country. Government plays an important role in helping to create and maintain the environment that allows business do its thing, but don’t be confused, the real engine of economic growth is private business.

When you consider a policy debate, new taxation, or a regulatory issue, it’s worthwhile to consider the likely impacts to business. Want to raise the corporate income tax rates, impose some new regulations, or force companies to buy employee health insurance? Fine, just make sure you’re okay with the probable implications of that change to the bottom line. You put a hurdle in place for business, the net effect will be to reduce profits and/or restrict job creation. Some hurdles are necessary, others are not. A chemical plant dumping waste straight into a river so that fish downstream grow a third eye—not cool. Waste processing equipment will cost the chemical company real dollars and reduce profits, but the alternative is unacceptable.  An EPA regulation defines milk as an oil and therefore requires dairies to treat spills as a hazardous contaminate. This regulation compels dairies to purchase expensive and unnecessary equipment and to follow elaborate clean-up procedures.  Do all regulatory hurdles make sense? Something to think about.

Understand, I’m not suggesting business be given a free pass.  Despite the beliefs of my more pious Libertarian brethren, we need a non-zero level of government regulation in place to provide reasonable safeguards to protect workers, the environment, consumers, etc.  Our history shows that too little or too much regulation can be a problem.  As with most things, there is a proper balance.  The right amount is the right amount.

In addition to our pro-business orientation, another reason for our success has been that government (generally speaking) steps out of the way and allows people to pursue their goals and succeed or fail.  Success is great, but failure is okay too.  Whether it's people, businesses, or whole industries, we tend to let things fail.  Oh sure, we’ve done our share of protecting industries and wasting public money propping up troubled companies, but relative to the rest of the world, we tend to allow failure.  Our tendency has been to recognize the basic truth that Joe Schumpeter taught us with Creative Destruction, namely as technology evolves and society changes, some companies and industries will adapt and thrive.  New companies are born to take advantage of changes, while others die because they can’t or won’t change. Shoveling money to dying companies may be politically expedient in the short term, but it just prolongs the pain and delays the inevitable. Government helps the most when it helps the least. The UC’s advice, "don't just do something, stand there!"

Lastly, our freedoms in their many forms has been a powerful ingredient to our success. People have different gifts, and these gifts come in many forms—playing the violin, painting, playing basketball, writing poetry—and some people have a gift for business and making money. The beauty of our country is that people have the freedom to exercise their gifts. The Occupy people need to understand an implication of this freedom means some particularly gifted business people will make lots of money. The Occupy types will argue that some of the 1%'s gifts are not business oriented as much as they are gaining political influence, organizing PACs, and manipulating the system. There might be some truth to that notion, but I contend that you can rejigger the rules however you want, those gifted business people will adjust and thrive. I think there's truth to the old saying: 'take all the money and divide it up, give everyone an equal amount, and in time, the rich will be rich again.'

Invention, innovation, productivity, efficiency are critical ingredients to grow an economy. A society that is business friendly with reasonable regulation, allows its people to succeed or fail, and embraces its people’s unique gifts creates an environment where these critical ingredients can work their magic.

Saturday, November 3, 2012

The UC Endorses a Presidential Candidate

Before the endorsement, a few words about the campaign.

It's frustrating to hear the distorting and outrageous rhetoric from supporters on both sides during the last few months. To suggest that a candidate has a forged birth certificate and is not a US citizen, or a candidate only wants to line the pockets of the rich at the expense of the middle class and poor is just silly. Let's once and for all recognize that both candidates are good men who sincerely want the country and all its people to succeed. The difference is that each candidate has his own ideas about the appropriate route to success.

In thinking about your vote, shouldn't you first identify the biggest problem we face as a country, and then vote based on the candidate who has the best plan and/or past history? We face lots of issues and challenges as a country, but do all these issues and challenges really carry the same weight? Shouldn't we separate those few issues that really matter from those that 'pull people offsides' emotionally? Stuff like same sex marriages or abortion tend to ignite people's passions, but if we're prioritizing our issues, isn't the slow economy public enemy #1?

As a country, we're on an untenable fiscal path which looms over our economy like a bad storm. Looking into the future, government spending will greatly exceed our revenues. Plot the curves out a few years, and no amount of tax hikes will cover the tab.

Both candidates have talked about our fiscal situation and sketched out high level plans, but neither side has produced a lot of details. With details thin, we're left to look at each candidate's past record.

The President inherited a very bad economy for which he obviously cannot be blamed. As President, his first major policy initiative was to champion the Patient Protection and Affordable Care Act (a.k.a. Obamacare). Healthcare is a problem that does need attention. Did we need this overhaul and did we need it now? In the midst of the weakest economy since the Great Depression, to push for such a government heavy plan just doesn't make sense. At a time when Europe is struggling economically and is actively looking for ways to scale back the size of the state, adding another huge obligation to the scope of our Federal government just doesn't make sense.

I mention the new nationalized healthcare plan championed by Obama, not necessary because I disagree with it, but because its timing demonstrates misplaced priorities. To foist such a huge and unpopular change on our country (polls suggest the public is 50% for, 50% against) when that plan involves so much government spending at a time when the economy is already reeling doesn't seem like sound economic management.

In fairness, Mitt Romney championed his own government heavy healthcare reform while he was governor of Massachusetts, but his timing relative to the prevailing economic conditions was very different. Hopefully he's learned from his dalliance with Socialism. As his running mate, he's chosen one of his party's rising stars who has consistently warned us of the need to reform our government finances and has offered real reform plans. You may or may not agree with his plans, but he's forcing a public discussion of this very important topicThe Obama camp thinks so much of their VP candidate that his name rarely appears on campaign posters or bumper stickers.

From my mostly Libertarian vantage point, both candidates appear to have Socialist leanings. One candidate's leanings are a bit stronger than the others so, in the words of my 6 year old daughter, Obama had his turn, now it's Romney turn to be President.

Wednesday, September 19, 2012

Congress Must Sober Up and Get the Job Done

Richard Fisher, President of the Federal Reserve Bank of Dallas, was recently interviewed by the Dallas Morning News.  The article makes for some excellent reading for those wondering why our economy continues to sputter 3 years into a ‘recovery’.

I particularly liked his response to a question about the risks of further intervention by the Federal Reserve, a.k.a. QE3.  Fisher’s reply, “by being so accommodating, we take the pressure off the fiscal authorities, the Congress of the United States, to sober up and get the job done.”  In other words, the Fed’s actions enable Congress to continue to 'kick the can' and put off the work that really needs to be done now—addressing the nation’s current untenable fiscal path.  Fisher believes our economic problems are not ones of liquidity or credit availability (two things within a central bank’s charter to manage), but rather issues of major policy uncertainty that keep job creators/businesses stuck in neutral as they wait to see what happens.

Please read this interview, and then call your Congressman/woman to ask him/her to stop hiding and be an adult.

I’ve read a lot of stuff authored by Fisher and it’s all good.  For my Republican friends, please note that Fisher is a Democrat.