The Good Old Days of Employment

I thank my readers for voting in the unemployment poll--where we ask when do you think the US will return to a 5% rate of unemployment--just as we enjoyed recently in 2007. Here are your responses.

Half (47%) of you concur with the Advance Realty & Rutgers assessment. That gets us back to a 5% unemployment rate in eight years from now, in 2017. You might re-read my article from October 12.

24% of you think it's going to take even longer!!!

14% side with Christina Romer's work. She represents the current administration as chair of the Council of Economic Advisors. Several months ago they estimated recovery in 2014. See my January 21 article.


10% would like to think we're going to have a "jobs" recovery (as opposed to "jobless"), and get back to 5% unemployment just as we did during the downturn from 2001.

And 5% think the US will never get back to 5% employment. Yikes! Never back to nearly "full" employment, as we enjoyed just a couple years ago.

OK, so much for opinion. Now let's think our way through this problem, courtesy of John Mauldin, president of Millennium Wave Advisors. I have followed his writings for a decade. Each week he publishes thoughtful analysis. He has been heard on CNBC, Bloomberg and many radio shows across the country.


Mauldin estimates that we need about 15 million new jobs over the next five years to get to a 5% unemployment rate.

That works out to needing 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we’ve lost. It amounts to 250,000 new jobs a month every month for five years. And we are still losing more than that number a month.

The chart shows the employment figures for the last ten years. Only once, in 1999, did we actually add over 250,000 jobs a month for a whole year.


Mauldin then goes to work with more plausible assumptions for his analysis of a recovery in the jobs market.

• Job losses are likely to continue for a minimum of another year.

• Then job gains start, they will be very slow at first, then pick up.

• An extremely generous monthly job gain stat over the course of the year would be 150,000 jobs.

• A falling participation rate (boomers retiring) will continue to mask reported unemployment.

• Starting in 2013 the labor pool will start decreasing because of Boomer demographics.

• The noninstitutional population will rise by 2.5 million workers a year.

Overall, this assumes there is no double-dip recession and jobs roughly rise along the same lines as the last recovery.

Here is a graph of his first scenario:


As Mauldin says in his article, Pessimistic? Mainstream and usually very optimistic Mark Zandi of www.economy.com predicted this week that unemployment would rise to 11% by the middle of next year, right in line with this scenario. Also note that total jobs rise by 14 million over ten years. Hardly doom and gloom. Again, Boomers all retire on time and there is no double-dip recession.

In Mauldin's second scenario, he asks, What would it take to get back to 5% unemployment by 2020? He assumed no recessions for the next ten years, and 2 million new jobs a year after 2011 (starting off with almost 1.5 million jobs in 2011). Of course, we have never done that, but let’s be optimistic.


Mauldin asks, Want to get to 5% within five years? Add 3 million jobs a year starting now. With no housing recovery, a smaller auto industry, and financial firms getting leaner.

Mauldin's final thoughts are:

12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.

Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5 trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small business can thrive.

Thank you for participating in my poll. Now you have some basis for understanding what the US is up against--and how this may play out in your life and the lives of Americans over the coming years.

Furthermore, from other, related blog articles, I hope you gain a sense of what could work and what is counter-productive to creating jobs...so you have can keep a more informed tally on what our government leaders are proposing, and whether those solutions have a chance of working.

How to Subdue Employment

Much is being written about the current US unemployment problem--and what can be done about it. Soon there will be an unemployment summit, to search for additional ways our government can alleviate this problem.

I would like to point out actions that can be taken to put pressure on employment--indeed make the situation worse. Sometimes it's helpful to look at the problem backwards, in order to think straight about helpful solutions.

I believe in each of the examples I'll cite, there are reasons for the policy. Indeed, that is the nature of economics: at its core is the law of supply and demand.

That is, sometimes when we want something bad enough, oh, let's say, a cleaner environment, it has a countervailing cost, which would be, for example, fewer jobs (on a net basis) and higher inflation (much greater energy costs are predicted--in some instances, a doubling).

So here are some ways, based on various compiled studies, that demonstrate how to subdue employment. So let's have a go at it!

Now you'll have a thoughtful tally sheet: to help you figure out if the proposals are really helpful solutions, or just political ideas coming out of Washington.


Increase the minimum wage. In previous blog articles I've provided data on how an untimely increase in the minimum wage this year has hurt, particularly our teens.

Snub trades deals. The US has been doing this lately, while China and Europe are "lapping" us at the trade negotiation table with other countries.

Take protectionist measures. These force retaliation. Do you recall the recent US measure to curb import of lower-end tires? That raises the cost of tires, especially falling hardest on the US citizens with limited incomes. Of course, China immediately launched an investigation into our supposed dumping of chickens into their country.

Impose mandates and increase taxes via health care reform. Nothing has been passed yet, but according to a recent study conducted by a major US accounting firm, I estimate the proposed health care legislation should present an incremental increase in my health insurance costs of about $20,000 over the next ten years, starting at about +$1K and getting to about +$4K in additional health insurance premiums by the end of this next decade.

Cause energy prices to rise as a result of climate control legislation. Example, one major utility president is in favor of Cap & Trade legislation, because he fears the more dire consequences of government-controlled EPA mandates. He says our costs for electricity will, however, double.

Increase the capital gains tax rate. This discourages capital investment in companies. That is scheduled to happen next year if Congress lets the current tax provisions expire, ie, not renew/extend them.

Keep current corporate tax rates at about 40%. A couple decades ago the US once had a competitive advantage through corporate taxation. But that has eroded as leading foreign nations have significantly reduced their tax rates. As a result:

• It makes the US less competitive,
• Encourages corporations to move operations elsewhere and
• Hurts our ability to raise capital--which leads to a building of plants and adding of jobs.

A study by Young Lee and Roger Gordon, as documented in the June, 2005 issue of the Journal of Public Economics, finds that if the US government were to lower the corporate tax rate to 30%, from its current 40% rate, US GDP could improve by 1.1% per year--which is a huge boost in prosperity for the US.

Four Prosperity Killers

You may recall reading about Arthur Laffer in a couple of my blog articles. He popularized a concept which is now famously known as the Laffer Curve.


Simplified: this as an economic view that tax revenues would be zero if tax rates were either 0% or 100%, and somewhere in between 0% and 100% is a tax rate which maximizes total revenue.

Thus, if tax rates are too high, then a lowering of tax rates will improve US growth (GDP)--which should in turn improve employment for Americans--and create more prosperity.

In a recent Wall Street Journal article, Laffer said that while Fed policy was undoubtedly important, it was ultimately tariffs, rising taxes, and currency devaluation which ruined the 1930s. According to Art, we face the same dangers today.

The four killers of prosperity are:

• Rising tax rates

• Inflationary money

• Trade protectionism

• Government control/re-regulation
  

You are already experiencing trade protectionism and much greater government control this year. Story after story abounds.

If the current tax policy is allowed to expire next year, then most Americans will be affected by higher taxes as we revert to tax levels from earlier in this decade.

Inflationary money has not hurt us yet, and there is debate over the prospects of inflation, or perhaps the opposite, deflation. So the story on this will likely develop one way or the over over the next couple of years. (More on that in a future blog article.)

14 Bubbles

In a recent blog by Barry Ritholtz, he asks readers to name fourteen major market bubbles in history.

A stock market bubble is a type of economic bubble that occurs when market participants drive stock prices above their fair value. Such distortions inevitably lead to a bursting of the bubble, just as we experienced in the past year.

The existence of stock market bubbles is at odds with the assumptions of the efficient-market hypothesis which assumes rational investor behavior. Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to group-think and herd behavior.

Here are the fourteen bubbles. Click, if you wish, to enlarge.


These bubbles in history are:

1. Tulip Mania in Holland (1637)

2. South Sea /Mississippi Company Bubbles (1720)

3. US Railway Mania (1893)

4. Florida Speculative Building of Housing Mania (1920-23)
5. Roaring 20's Stock Market Bubble (1924-29)

6. Poseidon Bubble (1969)

7. Gold (1980)

8. Japanese Asset Bubble (1997)
9. Dot Com/Tech/Telecoms (1998-2001)

10. Global Real Estate/Credit Bubble (2007)
11. China/Shanghai Index Stock Bubble (2008)
12. Commodity Bubble (2008)
13. Oil Bubble (2008)
14. Leverage/Derivative/Financial Bubble (2009)

In 300 years there were only five bubbles--now look what has happened in the last 40 years, and in particular with all the speculation in the past decade!

Economists on Jeopardy!

Have you ever watched this popular TV game show? Today we feature a clip about economists--and as you will find, the contestants failed to provide answers to most of the questions.

How many can you get correct? I was slow on the uptake--and didn't have an answer for the first question, however, I successfully answered all of the rest.




I have featured some of these economists in previous blog articles, so my most astute readers should pick up on them and give the correct answer.

• Phil, did you provide the correct answer for your favorite Scottish economist?
• I intentionally preceded this post with my Ferris Bueller's Day Off blog, so you would get the "curve" question correct. Now, were you paying attention?
  
• And who remembers my recent article, What Would Milton Say? (See September 10 posting)
  

Economics in Ferris Bueller's Day Off

Do you remember a very young Ben Stein in this 1986 comedy starring Matthew Broderick?


Over seven days before and after the Smoot-Hawley act was passed in mid-June 1930, the Dow fell 15% but got most of the decline back by late July before falling more than 30% into year end. This protectionist act did great harm to the US, and it was one leading cause for the Great Depression.

To a lesser extent, the US today (as I have written in a few prior articles) is pursuing protectionist policies that greatly offend other nations, eg, Mexico, Poland and most recently, China.

Here is Stein's appearance in the movie, teaching to a class of students who are about as interested as most Americans today in the importance of this subject.



Here is the text from that clip: In 1930, the Republican controlled House of Representatives, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.

20/20 Blind Vision

• He assumed office after a rapidly ascending, but personally corrupt politician, was caught with his pants down,
• He makes legislators in Albany very uncomfortable at times,
• His is legally blind,
• He is a governor, and
• He has great vision regarding the fiscal well-being of his state.

Who is this person?


He is New York Governor (D) David Paterson.

He asks NY legislators to cut $5 billion from the state's budget over the next two years in an effort to head off a ballooning budget gap.

Paterson calls this a time of uncommon difficulty. He asked the state legislature to balance New York's $80 billion budget.

Senate Finance Committee Chairman Carl Kruger, a Democrat from Brooklyn, calls Paterson's forecast of budget gaps hysteria.

To which Paterson replies, I guess they're against the cuts, but I guess they're also against governing. Without cuts, the state risks having to borrow money precipitously or closing institutions.

I gave them six weeks to give me suggestions as to how to reduce the deficit, referring to an request earlier this year. And they're just saying, "We're not reducing it, we're not cutting."

They are not eager to rapidly increase taxes in New York either. They have already done that on the wealthiest in the state--and some of those citizens just moved to another state. (And it's not just in New York that the millionaires who feel the pain of excessive taxation are re-locating!!)



I suspect this legislative-governorship face-off is going to be a very difficult ride. Nonetheless, I have to applaud Governor Paterson for trying. We need leaders like this who have the courage to lead us through unpopular courses, and help us get a handle on out-of-control state and federal spending--before it's too late.


Yes, even the blind can have acute vision!

When a Bank Goes Under

60 Minutes correspondent Scott Pelley was given extraordinary access to a bank take over because the FDIC wants you to know what happens to your money when your bank has failed.

A team of FDIC agents prepared to seize a bank outside Chicago. They checked into a hotel under a fictitious name, CB and Associates, to prevent a run on the bank. They didn't want anyone to know who they are or why they were in town.

They were there to seize all five branches of Heritage Community Bank, a 40-year-old institution for savings, student loans, mortgages and checking. But like so many others recently, it made ruinous bets on real estate.

The night was February 27. No one at the bank knew the end was minutes away.

Let's watch how this went down.