Archive for the ‘Economics’ Category.

The Middle Class Is Shrinking Because They Are Becoming Rich

I have made this point before, but Tyler Cowen has a great chart from a new study.  The explanation is here, but basically they have defined the bands based on some income break points corrected for family size and inflation over time.

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A reader sent me a nice note with this link, saying that I had been right many years ago when I began making this point.  That's good, but I will also confess to be wrong on a related point -- I said 8 years ago that the one good thing about having a Democratic President was that the media would become much more positive suddenly about the economy.  On that, I was wrong.  The media still has a strong bias towards telling everyone that their life is getting ever worse, even when no such thing is true.

Job Turnover and the Minimum Wage

Don Boudreaux criticizes an academic article that puports to tell business people that they should be able to easily absorb minimum wage hikes without consequence:

The authors are above not doing economics, properly speaking.  Instead, they offer business advice – or, rather, present themselves as possessing knowledge and information that is salable as business advice.  The authors write as if they are management or business-operations consultants rather than economists.  Pollin and Wicks-Lim here implicitly assert that their information on the details the state of the market and their knowledge of the particulars of how to run actual, real-world businesses are so real, full, and trustworthy that we should accept their conclusion that higher minimum wages will not cause businesses to change their operations in ways that result in fewer hours of paid work for low-skilled workers.

Indeed, the trust that we are asked to put in Pollin’s and Wicks-Lim’s alleged business acumen is so high that we are supposed to accept their conclusions as justification to unleash the force of the state to alter the actual, real-world business decisions of actual, real-world people who are actually operating – with their own actual money – in actual, real-world markets.

In his comments, I focused on one issue in the academic analysis -- that pro minimum wage folks in such analyses always give businesses a big profitability boost from reduced turnover due to higher wages, and it is reduced turnover and resulting increased productivity which provides the resources to "pay" for the wage increase.  I think there is something inconsistent in this thinking:

I can't see how the assumption of turnover reduction is consistent with the assumptions made by pro-minimum wage folks. There are two possibilities. First, assume the turnover is due to employees moving on at their own choice, presumably for a better deal. But how is this consistent with the frequent assumption of monopsony and that employees have no bargaining power? If employees are imposing high turnover costs on employers and frequently shifting jobs for better deals, there can't be a monopsony. It would mean that folks are taking these jobs for a short period of time to gain job skills and experience, and then moving to higher-skilled, better paying jobs, exactly how things should work in a free market without an absurdly high price floor on wages (I remember the old stat form the 80's that 10% of all Fortune 500 CEOs had their first job at McDonald's).

OK, assume the other possibility that the turnover is due to the employer choices, that all the employees they hire are unacceptable because their skills or demeanor or productivity is insufficient in some way. Well if they were unacceptable at $7, how are they suddenly going to be acceptable at $15? Proponents seem to assume some magic occurs when one raises wages, that unskilled employees who can't show up on time will suddenly become attentive and skilled. In my experience, it never happens.

For the record, given our 50% wage costs (and costs tied to wages like payroll taxes), we have had to increase prices 10% for every 20% increase in the minimum wage, and even then we have seen our profits fall, as we never see the magic productivity increase that is supposed to come with suddenly paying the same people higher wages and at the same time we do see a drop in customer demand due to the higher prices, which reduces our fixed cost coverage.

A Journalist Actually Addresses "Compared to What" When Discussing Child Labor in the 3rd World

And in Engadget, no less, a site I frequently mock for its economic ignorance.  This is from an article about Adidas totally automating the shoe-making process with robots:

But there's a dark side to all of this, which is what's going to happen to those communities when the sweatshops eventually close. In 1992, US Senator Tom Harkin proposed legislation that would block imports of goods produced by children under the age of 15. A year later, the Bangladesh garment industry dismissed 50,000 children in anticipation of the bill, which was never passed. A 1997 report by UNICEF tracked those children, and found that their situation had gotten worse, not better. As the report explains, the children wound up in "hazardous situations" where they were "paid less, or in prostitution."

 

The Asymmetry of How the Government Values My Time

I was struck recently by a stark asymmetry in how the government values the time of private individuals.

On the one hand, they insist on a high value for my time, with the state of California ruling that no one may sell their time for less than $15 an hour.

On the other hand, in numerous ways, the government values our time at zero.  They, for example, treat recycling as "free" and ignore the value of the millions of man-hours spent sorting trash.  The IRS certainly values our time at zero, as does most tax agencies.  Certain sales tax agencies do provide a collection and paperwork credit (since technically the business is acting as an agent of the state in collecting the tax) but that credit generally amounts to pennies per hour of labor.  Mono County California changed their tax filing process in a way that created thousands of extra man hours of private filing labor all to save a few dozen of their hours every 3 years on audits.

And then there is this.  Germany is considering eliminating their unlimited autobahn speed limits to save energy:

…the head of Germany’s Federal Environmental Office, Andreas Troge, says a speed limit of 120 km/h on motorways “costs nothing and would immediately reduce C02 emissions by 2.5 million tonnes per year”.

That is it "costs nothing" as long as you value private individual's time at zero dollars an hour.

Private Businesses in Europe Understand the Cost of Labor, But Public Agencies Don't Seem To

Most folks know that labor costs in Europe are high, both because of high minimum wages, high required benefits, and various government regulations that raise the cost of labor (e.g. making it impossible to fire anyone).

My observation so far is that private businesses understand this perfectly.  Given higher labor costs than in the US, most service businesses have fewer employees.  In restaurants in the US a waiter might cover 4-6 tables -- in most European restaurants I have been in the waiter covers the whole restaurant.  In fact, two of the places we have eaten are 12 table restaurants run entirely by a couple, with one being the totality of the waitstaff and the other being the totality of the kitchen staff.  In this case, the married owners of a small business might be hiring nobody.

But for reasons I don't know but I can guess, public agencies -- which presumably have higher labor costs than in the US -- are simply profligate with labor.  The example I will cite is trash pickup, both in Amsterdam and Bruges.  In these two lovely cities, every business and residence throws their trash on the curb in bags and boxes and even loose in piles.  Here is a portion of the 9 streets district in Amsterdam, an important upscale shopping area that lives and dies by attracting tourists.  Look how ugly the streets are:

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In Phoenix we all put our trash into standard cans which are a heck of a lot more attractive than basically just throwing garbage on the street.  These cans are then emptied by a truck with just one employee, a driver that has an arm that reaches out and grabs each can and dumps it in the truck.

In Amterdam, trash is picked up far slower and requires three people, a driver and two guys running around like crazy picking up trash and throwing it in the back.  The compactor on this truck was terrible and slow and so the truck compactor could not keep up with the workers, who had to bend down and pick up the same trash two or three times to get it to stay in the truck.

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It looked like a total custerf*ck

Minimum Wage Pits Employees vs. Customers, Not Employees vs. Management

This post earlier on the customer service downsides of the new salaried overtime rules got me thinking more broadly about the impact of minimum wage type laws.  Progressives justify such laws by saying that there is a power imbalance between management and employees, and that the government needs to have minimum wage laws to make up for the fact that employees lack power.

But from my experience in the service world, it is wrong to look at the situation as a power struggle between managers and employees.  It is much more correct to look at this as a power struggle between employees and customers.  Let me explain.

Service and retail firms tend to live on razor-thin margins.  Retailers typically live on single-digit profit margins, and those of companies like Wal-Mart are as low as 2% of revenues.  Our company in the service business has a similar experience, averaging profit margins of 3-5% of revenues over the last 10 years.

This is not an accident.  Most service and retail businesses depend on simple service-delivery models using relatively low-skilled workers.  There are many low-skilled workers in the world.  If a company were to start making huge profits with a service model using such workers, it would be easy for others to copy it and hire the same types of workers and undercut them on price.  Margins tend to get competed down to the bare minimum.

No matter how much progressives would like it to be so, when California raises its minimum wage, it probably is not going to come out of company margins, at least in the near term.  Over the 10 years from about 2013 to 2022, California will have raised its minimum wage over 87% from $8 an hour to $15.  Wages and costs like workers comp premiums that are tied to wages are about half my costs.  This means an 87% labor cost increase will increase my total costs 44%.  How is that going to come out of a 4% margin?  It is not.

There are really only two things we can do, individually or in combination.  First, we can raise prices 44%, just to try to stay even.  Of course, some customers will balk and stop buying, and then we will lose business and perhaps have to close (we have already closed over half our businesses in California for just this reason).  Or second, we could cut staff in half to keep wages under control.  Of course, this means customers get served much more poorly, which also may drive customers away.  Other companies like fast food restaurants have a third option of automation, replacing people with machines -- I wish we could do this but right now we have run out of ideas for automating bathroom cleaning and landscape work.

Hopefully, you can see what is going on here.  The real tension here is between employees and customers.  When the state mandates a minimum wage in low margin service businesses (such laws are largely irrelevant to high-margin technology companies and such), compliance is paid for by the customer, either in the form of higher prices or worse service or both.

Dumbest Thing I Have Seen Written in A Long While, Courtesy of Douglas Ruchkoff

Thanks to Don Boudreax for the quote, this is from Douglas Rushkoff’s new (apparently execrable) book, Throwing Rocks at the Google Bus.

The same goes for agriculture, textiles, and many other sectors where returning to local, human-scaled enterprise will lead to less worker exploitation and environmental damage while producing better, healthier products.  Nonindustrial practices may be more labor-intensive, but they’re also better for us all.  For those of us used to white-collar jobs, the idea of growing vegetables or making clothes may seem like a big step backward toward more menial labor.  But consider for a moment the sorts of activities the wealthiest Americans or most satisfied retirees engage in enthusiastically: brewing craft beers, knitting, and gardening.  If there’s really not enough work to go around and there are so many extra people to employ, we can always farm in shifts.

My response to anyone who told me this:  You first.  Ugh, this would be a one-way ticket to poverty and starvation.  Ghandi had this same idea for India, and if he had had his way the poverty would have been even more mind-blowing than what actually obtained.

Our Permission-Based Economy

The decline in new business formation in this country shouldn't be a surprise -- in industry after industry, numerous bits of government permission are needed to proceed with a new idea into a new market.  If, like Uber, you plow ahead ignoring these roadblocks, you will likely spend the rest of your life in court (as does Uber).

I thought about all this when reading this article on awesome portable automated systems that can maintain a person's insulin level.  What an amazing advance in safety and life quality for people!  The part that struck me was this line from a woman when she first saw one:

Sarah Howard became interested after she met Ms. Lewis last year. “My first question was: Was it legal?” said the 49-year-old, who has Type 1 diabetes, as does one of her two sons. “I didn’t want to do anything illegal.”

It is pathetic that this is the first reaction of Americans when they see an awesome new innovation.  And it turns out that she is right to worry.  Because if one avails oneself of the normal division of labor, in other words if one lets someone more expert to build the device or program it, then it is illegal.  Only if one downloads all the specs from the Internet and builds and programs it oneself is this fabulous device legal.

The only restriction of the project is users have to put the system together on their own. Ms. Lewis and other users offer advice, but it is each one’s responsibility to know how to troubleshoot. A Bay Area cardiologist is teaching himself software programming to build one for his 1-year-old daughter who was diagnosed in March.

This is roughly the equivalent of having to go fell a tree and mine graphite in order to makes one's own pencils.  It is simply stupid.   All because the government will not let us make our own decisions about the risks we want to take with medical products.  So if you don't have the skills or the time to put one together, you can wait 5 or 10 years for the FDA to get around to approving a professionally-made version.

Hat tip to Tyler Cowen, who by the title of his post obviously also saw the I, Pencil analogy.

Update:  I give it 12 months before someone at the FDA demands that these home-made devices be regulated, and at least registered with the government.  I wonder if in 10 years the government will be demanding registration of 3D printers?  After all, they potentially incredibly empowering to individuals and can let folks work around various product bans like this.   Exactly the kind of empowerment that government hates.

2016 Presidential Election: Battle of the Crony Capitalists

I am not sure that many politicians are good on this score, but Hillary Clinton and Donald Trump are likely as bad as it gets on crony capitalism.  Forget their policy positions, which are steeped in government interventionism in the economy, but just look at their personal careers.  Each have a long history of taking advantage of political power to enrich themselves and their business associates.  I am not sure what Cruz meant when he said "New York values", but both Trump and Clinton are steeped in the New York political economy, where one builds a fortune through political connections rather than entrepreneurial vigor.   Want to build a new parking lot next to your casino or start up a new energy firm -- you don't bother with private investors or arms length transactions, you go to the government.

With that in mind, I particularly liked Don Buudreaux's quote of the day:

First, we labor under a ubiquitous threat of being shackled by crony capitalists.  [Adam] Smith wondered how internally stable a free market could be in the face of a tendency for its political infrastructure to decay into crony capitalism.  (The phrase “crony capitalism” is not Smith’s.  I use it to refer to various of Smith’s targets: mercantilists who lobby for tariffs and other trade barriers, monopolists who pay kings for a license to be free from competition altogether, and so on.)  Partnerships between big business and big government lead to big subsidies, monopolistic licensing practices, and tariffs.  These ways of compromising freedom have been and always will be touted as protecting the middle class, but their true purpose is (and almost always will be) to transfer wealth and power from ordinary citizens to well-connected elites

Yes the Middle Class is Shrinking. And the Ranks of the Poor Are Shrinking. Because Americans are Getting Wealthier

Mark Perry has a number of good graphs that show that the shrinking of the middle class is real, but only because they are moving to "rich" -- hardly the implication of those on the Left who are trying to demagogue the issue.  Check them out if you have not seen them but this animated graph was new to me:

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Note the general movement to the right.

Interestingly, the only block on the low side getting larger is the percent of people at "zero".    In my mind, this just reinforces my point that the poverty issue is primarily one of having a job, not the rate paid at the job.  For that growing cohort at zero, raising the minimum wage only makes it more likely they stay at zero.

So @tylercowen, You Want to Understand the Great Stagnation? Here It Is

Certainly the government's current permission-based approach to business regulation combined with an overt hostility of government (or at least those parties that influence it) to radically new business models (see: Uber) is a big part of the great stagnation story.

But insanity like this is also a big part:

Vague but expensive-if-not-correct rules on employee seating just got vaguer and harder to figure out

Weighing in on two California laws that require employers to provide suitable seating to workers when “the nature of the work” permits it, the California Supreme Court said the phrase refers to an employee's tasks performed at a given location for which the right to a suitable seat is asserted.

In response to questions certified by the U.S. Court of Appeals for the Ninth Circuit, the state high court said April 4 that the phrase “nature of the work” doesn't require a holistic evaluation of the full range of an employee's tasks completed during a shift.

An employer's business judgment and the layout of the workplace are relevant in determining whether sitting is permitted, but courts should apply an objective analysis based on the totality of the circumstances, the California Supreme Court said.

It held that “if an employer argues there is no suitable seat available, the burden is on the employer to prove unavailability.”

As a business owner in California, I am going to have to do a ton of research to figure out just how we can comply with all this, and even then I will likely be wrong because whether one is in compliance or not is never actually clear until it is tested in court.  I had to do the same thing with California meal break law (multiple times), California heat stress law, new California harassment rules, California sick leave rules, the California minimum wage, Obamacare rules, Obamacare reporting, the new upcoming DOL rules on salaried employees, etc.

Five or ten years ago, I spent most of my free time thinking about improving and growing the business.  Now, all my mental bandwidth is consumed by regulatory compliance.  I have not added a new business operation for years, but instead have spent most of my time exiting businesses in California.  Perhaps more important is what I am doing with my managers.  My managers are not Harvard MBAs, they are front-line blue collar folks who have been promoted to manager because they have proven themselves adept at our service process.  There are only a finite number of things I can teach them and new initiatives I can give them in a year.  And instead of using this limited bandwidth to teach some of the vital productivity enhancement tools we should be adopting, I spend all my training time on compliance management issues.

Raising the Cost of Hiring Unskilled Workers by 50% is A Bad Way to Fight Poverty

After my prior post, I have summarized the chart I included from Mark Perry to the key data that I think really makes the point.  Household income is obviously a product of hours worked and hourly wages.  Looking at the chart below, poverty seems to be much more a function of not working than it is of low wages.  Which makes California's decision to raise the price of hiring unskilled workers by 50% (by raising their minimum wage from $10 to $15) all the more misguided.

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Note the calculations in the last two lines, which look at two approaches to fighting poverty.  If we took the poorest 20% and kept their current number of hours worked the same, but magically raised their hourly earnings to that of the second quintile (ie from $14.21 to $17.33), it would increase their annual household income by $2,558, a 22% increase (I say magically because clearly if wages are raised via a minimum wage mandate, employment in this groups would drop even further, likely offsetting most of the gains).  However, if instead we did nothing to their wages but encouraged more employment such that their number of workers rose to that of the second quintile, this would increase household income by a whopping $13,357, a 115% percent increase.

From this, would you logically try to fight poverty by forcing wages higher (which will almost surely reduce employment) or by trying to increase employment?

Why The Minimum Wage Does Not Make Moral Sense: Unemployment, Not Low Wage Rate, Causes Most Poverty

In response to his new $15 minimum wage in California, Governor Jerry Brown said:

Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense because it binds the community together to make sure parents can take care of their kids.

Let me explain as briefly as I can why this minimum wage increase is immoral.  We will use data from the chart below which was cribbed from Mark Perry in this post.

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The average wage of people who work  in the poorest 20% in the US is already near $15 ($28,417 divided by 2000 full time hours - $14.20 per hour).    This is not that much lower than the hourly earnings of those in the second poorest or even the middle quintiles.  So why are they poor?  The biggest different is that while only 16% of the middle quintile households had no one who worked, and 31.5% of the second poorest quintile had no one who worked, of the poorest 20% of households a whopping 63% had no one who worked.  Only 16.1% of poor adults had a full time job.

The reason for poverty, then, is not primarily one of rate, it is one of achieving full time employment.  Many of these folks have limited education, few job skills, little or no work experience, and can have poor language skills. And California has just increased the cost of giving these folks a job by 50%.  The poor will be worse off, as not only will more of them miss out on the monetary benefits of employment, but also the non-monetary ones (building a work history, learning basic skills, etc.)

Past studies have shown that most of the benefit of the minimum wage goes to non-poor households (ie second and third earners in middle class homes).  The targets Jerry Brown speaks of, parents earning the minimum wage to take care of families, are perhaps only 1/8 of minimum wage earners.

MaCurdy found that less than 40% of wage increases [from a minimum wage hike] went to people earning less than twice the poverty line, and among that group, about third of them are trying to raise a family on the minimum wage.

Of course, the price of a lot of stuff poor people have to buy in California is about to go up.  We are going to have to raise our campground rates by 20-25% to offset the labor cost increase.  But that is another story.

California Creates Another Setback of Unskilled Workers -- And Possibly A Setback for Immigrant Integation

It appears that California is going to increase its state minimum wage to $15 in steps over the next five or six years.  This is yet another body blow for unskilled workers in the state.  As I wrote a while back, it is already overly difficult to build a business based on unskilled labor in that state, and increasing the price people have to pay for that labor by 50% is only going to make things worse.  It is possible low-skill workers in large wealthy cities like San Francisco will be OK, as service businesses are still going to want to be there to access all that wealth, and will just raise their prices even higher to account for the higher wages.   For laborers in rural areas that are already suffering from high unemployment, the prospects are not very bright.

As most readers know, we run a service business operating campgrounds across the country, including a number in California.  Over the last  years, due to past regulation and minimum wage increases, and in anticipation of further goofiness of this sort, we exited about 2/3 of our business in California.

Our problem going forward is that in rural locations, sometimes without even electricity or cell phone service on site, we have simply exhausted all the productivity measures I can think of.  There appears to be a minimum amount of labor required to clean a bathroom and do landscaping.  Which leaves us the options of exiting more businesses or raising prices.  Most of our customers in California are blue collar rural folks whose lot is only going to be worse as a result of these minimum wage increases, and so I am not sure how far they will be able to bear the price increases we will need to cover our higher costs.   Likely we will keep raising prices until customers can bear no more, and then exit.

By the way, the 5-6 year implementation time is a frank admission by the authors of the law, not matter what they say in pubic to the contrary, that they know there will be substantial negative employment effects from the minimum wage increase.   They are hoping that by spreading it out over several years, those negative effects will lost in the noise of economic fluctuations.  The Leftist playbook is to do something like this that trashes the earnings of the most vulnerable low-skilled workers, and then later point to the income inequality of those low-skilled workers as a failure of free markets.

On a related note, one of the more interesting things I have read lately is this comparison of successful integration of Muslim immigrants in the US vs. poor integration in Europe.  Alex Tabarrok raises the hypothesis that high minimum wages and labor market rigidity in Europe may be an important factor in reducing immigrant integration.  He quotes from the OECD:

Belgian labour market settings are generally unfavourable to the employment outcomes of low-skilled workers. Reduced employment rates stem from high labour costs, which deter demand for low-productivity workers…Furthermore, labour market segmentation and rigidity weigh on the wages and progression prospects of outsiders. With immigrants over-represented among low-wage, vulnerable workers, labour market settings likely hurt the foreign-born disproportionately.

…Minimum wages can create a barrier to employment of low-skilled immigrants, especially for youth. As a proportion of the median wage, the Belgian statutory minimum wage is on the high side in international comparison and sectoral agreements generally provide for even higher minima. This helps to prevent in-work poverty…but risks pricing low-skilled workers out of the labour market (Neumark and Wascher, 2006). Groups with further real or perceived productivity handicaps, such as youth or immigrants, will be among the most affected.

In 2012, the overall unemployment rate in Belgium was 7.6% (15-64 age group), rising to 19.8% for those in the labour force aged under 25, and, among these, reaching 29.3% and 27.9% for immigrants and their native-born offspring, respectively.

Wow, I guess it is sure lucky California does not have a very large immigrant population.  Oh, wait....

Mark Perry's "Best of Venn Diagrams" .... But Where Did They Start?

Mark Perry loves to use the Venn diagram format to point out hypocrisy or inconsistent arguments.  He has a sort of best-of post with 12 of them here.

I am actually fairly certain the first one of these actually appeared here, on Coyote Blog.  This was the chart I made:

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Update:  Good lord I wrote Rick Perry instead of Mark Perry.  I am officially going senile.  Sorry Mark.

Another Trump Triumph -- He Has The Left Defending the American Economic System

The American Left generally spends most of its time telling us how much better things are in Denmark or France.  I can't find a lot of reasons to like Trump, but he has apparently convinced the Left that they need to defend the American economic model against other countries.  This post by Kevin Drum at Mother Jones reasd more like what one might expect from Mark Perry at AEI.

"We're a poor country now." I wonder how many people believe that just because Donald Trump keeps saying it? In case anyone cares, the actual truth is in the chart on the right. There's not a single country in the world bigger than 10 million people that's as rich as the US.

I agree!   In fact, not only are American rich richer, but the American middle class is richer and the American poor are richer.  From an earlier post, here is the purchasing power of individuals across the income spectrum in the US vs. Denmark

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The Miracle of Oil Production

Gasoline costs less than bottled water at your local service station, but look at what it takes to produce it:

Here is an offshore oil platform being towed out to sea.  As huge as it is, its height is nothing compared to the depth and reach of the network of wells that were drilled from it.

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And here is a refinery where the oil is processed into gasoline and other products.  This happens to be the Exxon refinery in Baytown, where I had my first job out of college

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I am pretty sure this is Pipestill (distillation tower) #8.   If so, I have climbed through every inch of the tall tower on the left

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Here is bottled water production in comparison

Home Ownership and Labor Mobility

Alex Tabarrok discusses some academic work that shows a declining inter-regional mobility in the United States which is causing local economic declines to last much longer than they used to last.

In a new paper, also cited by Leubsdorf, Danny Yagan at Berkeley suggests that reduced migration is only part of the problem. What has made the aftermath to the 2008-2009 recession so bad is that migration is low at the same time that it has become more necessary than ever. The 2008-2009 recession was especially localized, it hit some places harder than others and in a way that appears to be permanent. But migration has been too slow to solve the problem.

The usual story is that in-and-out migration equalizes wage, unemployment and employment rates across the nation. Some places may be harder hit than others but movement quickly makes the US into one labor market. In the aftermath of this recession, however, that isn’t happening for employment rates. Using a clever research design that looks at workers with similar education and skills doing the same jobs at the same large firms but in different locations, Yagan finds that location continues to matter years after the recession has ended. Workers who worked in the places hardest hit in the 2007-2009 recession have employment rates today that are 1% lower than similar workers in regions that were less hard hit.

It is probably unfair for me to comment on this because I have been highly mobile in  my life, having lived and worked in about 10 places as diverse as Houston, Dallas, Boston, Boulder, Seattle, Phoenix, St. Louis.  However, I will take  a shot at this.  Some of my hypotheses:

  1. Government programs to encourage home ownership have reduced mobility.  It is simply harder to move if one has a house to sell, and this was worse in the last recession, which was driven in large part by falling home prices, which made it even harder to move when one has an underwater home to sell.
  2. Political/Cultural redlining reduces mobility.  As an example, certain millennials want to be nowhere else but San Francisco, despite how absurdly hard it is to live there.  They will starve in poverty there before going to, say, Houston, which is an easy place to live when one is young but which many consider to be a evil redneck backwater.
  3. Use of Communication technology causes people to think they can reduce mobility when they perhaps can't.  I think a lot of folks with modern communication technology assume that location is irrelevant and that they should be able to do X work anywhere they want.   I think they are overestimating where many industries and companies are right now (though they may be correct in the future).  Just from tax compliance and regulatory perspectives, it is pure hell for a company in, say, Texas to have an employee in, say, California.  Plus I think there are still real networking and management reasons for employees to be concentrated in facilities.

 

The Fed Wins!

I have observed before that the central bank of every major industrialized country is trying to devalue its currency.  Since in some sense this is a zero sum game, they are all locked into a race to the bottom, a competition to see who can be most successful in hammering their consumers and individual savers in order to boost sales of their domestic companies dependent on export markets.

It looks like the US is winning!  Yay for us, we have destroyed our currency the fastest!  Our government has been most successful in making our domestic consumers relatively poorer vs. those of other nations.  Who says the Obama Administration can't do anything right?

The article goes on to point out something I have been saying for years -- that the unprecedented monetary and fiscal stimulus steps that governments are taking today at the peak of the economic cycle (though admittedly a relatively weak peak) is going to leave the tank completely empty when it comes to the next downturn.

While the ECB’s initial move to cut interest rates into negative territory in June 2014 sparked a sharp plunge in the euro, further cuts last December and last week have had little effect on the currency.

“The ECB’s hand has been played out,” said Alan Ruskin, head of G-10 foreign-exchange strategy at Deutsche Bank AG. “The currency market isn’t as responsive to the ECB anymore.”

Similarly, markets have ignored the Bank of Japan’s hints at its monetary-policy meeting this week of more rate cuts to come. Not only has the mechanism transmitting ultraloose policy into the real economy appeared to be broken, but some unconventional policy tools—such as negative interest rates—have been deleterious to banks and rattled financial markets.

And maybe that's OK - maybe at some point some government starts thinking about fixing structural regulation, taxation, and government resource reallocation policies that are the true source of economic weakness.

Utter Madness: Phoenix Has The Cheapest Water in the Country

The Arizona Republic reports that the Arizona Department of Water Resources has set six priorities for managing expected water shortages in the future.  The six are listed in one of those annoying click-bait page-flipping things, so I will summarize them below:

  1. Resolve water disputes
  2. Pursue reclaimed water
  3. Expand monitoring (of the public's water use)
  4. Look at water transfers (between communities)
  5. Go for desalinization
  6. Find funding (for large scale projects)

What is missing here?  Well I will give you a hint.  This article was on the very same page (at least online) of the newspaper -- Phoenix has the cheapest water in the country!

If you live in Phoenix, you’re probably paying one of the cheapest annual water bills in the country, even with the rate increase that took effect this month, according to a recent national report on public water systems.

The February report by Food & Water Watch said the lead-tainted water supply in Flint, Michigan, was the most expensive in the country, with customers there paying $910.05 a year. It said Phoenix residents paid just $84.24 a year, then the lowest rate in the nation.

A city water department official said the rates could be a little misleading – rates jump for heavy users, one factor that has helped Phoenix keep water use down even as the number of water users has risen sharply.

But even after the 3 percent increase that took effect March 1, analysts say Phoenix rates are probably still among the lowest, if not the lowest, in the country for residential customers who don’t use large amounts of water in a month.

This is absurd.  Why does the state agency need to go around spying on private water use and begging for funding when price is such an obvious lever to match supply and demand.  Raise the freaking prices!  Are we drawing from lakes and groundwater faster than they can replenish themselves?  Raise the dang price until demand falls to a sustainable level.  As an extra bonus, this would help solve the funding problem, and have it solved by water users themselves rather than taxpayers.

By the way, I ask these questions but I actually know the answers -- government officials don't want to take the heat when the prices rise.  They want to pander to the public and hand them populist goodies like cheap water, and then manage the inevitable water crisis with authoritarian actions like rationing and surveillance that increase their personal power.

And congrats to our newspaper:  It has article after article, day after day, listing all the dire water shortages that face the area, and then they write this article with nary a mention that having the country's lowest water rates might be related.

Cargo Cult Economics And Why We Should Stop Fetishizing Home Ownership

I have always thought that government policy to encourage home ownership was  counter-productive, even beyond its role in creating bubbles.  My sense is that those who advocate for such programs are engaging in what I call cargo cult economics.

Once upon a time, government officials decided it would help them keep their jobs if they could claim they had expanded the middle class.  Unfortunately, none of them really understood economics or even the historical factors that led to the emergence of the middle class in the first place.  But they did know two things:  Middle class people tended to own their own homes, and they sent their kids to college.

So in true cargo cult fashion, they decided to increase the middle class by promoting these markers of being middle class [without any consideration of which direction the arrow of causation ran].  They threw the Federal government strongly behind promoting home ownership and college education.  A large part of this effort entailed offering easy debt financing for housing and education.

I tend to be a lone voice in the wilderness on this (even those who oppose government programs for libertarian reasons often tend to fetishize home ownership).  But Ike Brannon at Alt-M seems to agree:

The pro-home-building folks aver that homeownership fosters civic involvement and helps people become more tied to their community, which encourages other behavior beneficial for the economy.  And for a good proportion of homeowners the majority of their net wealth is in their home, so it can be an important source of savings.

But another way to look at it is that correlation is not causation:  The reason that homeowners are more civic-minded and involved in the community is because such people are much more likely to have the wherewithal to save enough to make a downpayment on a house.  Ed Glaeser, the renowned housing economist from Harvard, puts little stock in the notion that homeownership has significant positive societal externalities.

What's more, there's some evidence that high homeownership rates have downsides as well.  In the last four decades the predilection for moving has slowed significantly:  only half as many people moved across state or county lines in any year this decade as was the case in the 1950s, for instance.  This is problematic because it means that our economy is worse at matching up workers with where the available jobs are.  The lingering unemployment in many rust-belt states would be less if some of their unemployed could be persuaded to move to another community where there are jobs.  There has been a decades-long move of people from the midwest to the Sunbelt, of course, but the data suggest there's ample room for more.  This hasn't happened in part because people are tied down by the homes that they own and are reluctant to sell while they are underwater.  That people are unable to ignore sunk costs isn't economically rational, of course, but it nevertheless governs how many people consider whether to move.

I Get This Same Comment All the Time -- Here is My Blanket Advice

Don Boudreaux writes:

This note is to an angry young man who describes Bernie Sanders as his and his girlfriend’s “hero” and as “the only candidate following humane economics.”  Sigh.

Mr. Claudio Morello

Mr. Morello:

Thanks for your e-mail.

You find my arguments against a $15 per hour minimum wage to be “totally uncompelling” because “labor is not a commodity like bread and electronics.”  In your view, “labor should not be subject to the bloodless laws of economics.”

I get this sort of comment all the time about it being wrong, even inhuman, to treat labor as a commodity subject to the laws of supply and demand.  I generally have two responses:

  1. For the guy who was just pushed out of a 10th story window, I am sure a more "humane" law of gravity would see him wafted gently to earth -- but all his wishing for such an alternate reality is not going to have it happen.
  2. Forgetting public policy for a moment, to the extent that you (the commenter) relies on other people hiring you to stay alive in this world, I can think of few things that would improve your well-being more than attempting to develop a basic understanding of why your labor might have more or less value to someone else.  Refusing to do so, or even refusing to acknowledge that your labor has some sort of economic value at all, would be like trying to launch rockets to mars while refusing to acknowledge the rules of celestial mechanics. .  Refusing to even think about why labor (and skills) might or might not have value in different situations seems to be a recipe for pretty low earnings over time.

Corporations Don't Want to Report Their True Earnings. Why is The Financial Press So Eager to Help?

I totally understand why corporations may wish to push the envelope on earnings adjustments to make their stock look like a better buy.  But why is the financial media generally complicit with this?  Take any earnings announcement you read about or hear on the TV -- almost every single time it turns out that the earnings number quoted by the press, at least in the headline or the TV sound bite, is the company's non-GAAP adjusted number, not their actual GAAP number.

I might be OK with this if this were being done for good reasons, ie if the financial press thought the adjusted number was somehow more representative.  But I don't get this sense at all.  It feels more like the press is just lazy and accepts whatever number is in the press release without digging further.   Often in a longer story you will find the GAAP number, but buried many grafs in.

Oh, and by the way, the two numbers are diverging:

click to enlarge

A good way to think about this chart is that, if you are not careful, you are paying for the bar on the right but getting the bar on the left.  Note that without adjustments, earnings fell pretty substantially in 2015.  It is not at all clear to me why we have not seen this story.

Why Exxon Provides a Good Analogy for the Central Banker's Dilemma

This article on Exxon stock seemed to be an allegory for the current problem central bankers face:

Earlier this month, Exxon Mobil (NYSE:XOM) reported Q4 2015 earningswhich, as expected, looked ugly considering the large decline in the price of oil over the last one and a half years. Exxon Mobil has long been one of the largest repurchasers of shares, spending a net of $89.74B on share buybacks during the 2010 through 2015 period. However, during the Q4 earnings release, management stated that share buybacks were being halted, presumably to preserve cash...

Contrast that with the strategy from 2008 when share buybacks were accelerated during the market fallout of the Lehman Brothers bankruptcy and the beginnings of what's now known as the Great Recession. Management reduced shares outstanding by 7.5% in 2008 alone...

Oil prices have sunk to lows not seen in more than a decade. The share price hit a low in the $60s in 2015 which hadn't been seen since late 2010. If you're of the belief that oil prices will rebound, eventually, then now should be the time that Exxon Mobil is ramping up the share buybacks not eliminating them.

This is the problem the author is highlighting:  Exxon ran up tens of billions in debt to stimulate the stock price in good times.  Now that times are bad, at least in the oil patch, the tank is empty (so to speak) and they have had to cease buybacks at the very time they would make the most sense (the same amount of money spent at lower stock prices would have higher impact on EPS).  The tank is empty enough that they might have to cut the dividend, an action with such negative consequences for stock value that it would likely undo all the effects of years of stock purchases.

I am not trying to beat up on Exxon -- I actually admire them as a well-managed company and pretty much every large corporation has gotten caught up in this unproductive Fed-inspired game of borrowing at close to zero and buying back stock (to my mind the financial equivalent of the Keynesian digging of holes and filling them back in).  But I hope you can see the analogy with the position of governments and central bankers.   For the last 5 years, when economic times have been good (alright, maybe just OK) governments have been deficit spending like crazy and central banks have been expanding their balance sheets with programs like QE to keep the economy stimulated.  But just as with the situation at Exxon, when the bad times come, bankers are going to find themselves with far fewer options than they had in 2008.

PS:  This is what Exxon really should have been doing the last 5 years -- hoarding their cash and borrowing reserves to be able to buy assets like crazy on the cheap in the next downturn.  They have always been able to do this in past downturns.  I suspect it may not be possible this time.

More Evidence Against My Least Favorite Legislation of the 20th Century

I have written about the National Industrial Recovery Act many times, a love-note from FDR to Mussolini's fascist economic system that was thankfully overturned by the Supreme Court.  Its intent was to make the corporate-crony state the default economic system of the US.

Essentially, the NIRA cartelized the US economy, creating government-sponsored cartels in every industry that would set prices and wages as well as output and quality.  You can imagine exactly how well upstart competitors would have fared under this system.  I am pretty sure, for example, that the government mainframe cartel would never have let apply, or even DEC, see the light of day.

Now, a couple of academics have laid the blame for the long duration of the Great Depression at the NIRA's doorstep.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.
In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Hmm.  Certainly wages and prices are going to be especially "sticky" if the government creates cartels to keep them that way.