All This Gloom About Unemployment

This one's a little dry, comes from a current even assignmenet were we were supposed to look at two articles detailing the current economic situaton through the lens of one economic indicator. I chose unemployment. The best thing about school is that it makes you write, even if it is not something you are wholly engaged in, just the process makes you better.

For the month of October, the unemployment rate dropped to 5.8%, the lowest rate in recent memory. Unemployment had been higher than it had been in a generation, topping out at 10%. The graph below shows the progress in the unemployment rate for the last ten years, showing its increase during the recession and the slow climb down to a more natural rate of unemployment.

Figure One

The steady decline of the last few years might be a cause for celebration, but two recent articles have found that the headline number is not the end of the story. Americans still have concerns about the labor market, in spite of the good news coming from the Bureau of Labor Statistics.

The first article is “Why Many Aren’t Celebrating Low US Unemployment,” by Josh Boak, an economics writer for the Associated Press. The article was published on the ABC News website. In his article, Boak looks at the current unemployment rate and tries to unravel the disconnect between the low unemployment rate and the current sentiment about the state of the economy. He leads off his article by noting how exit polls showed that a majority of the voters surveyed said that they cast their ballots based on “fear for the economy” (Boak 2014). He further explores the fact that the low unemployment rate is not the only piece of good news for the economy lately, specifically pointing out that home sales and auto sales have increased (Boak 2014)

            The good economic news is tempered by the fact that pay is increasing, but only in line with the low inflation that has been a part of the current recovery. This lack of growth has created the perception that worker’s standard of living are declining. This perception is compounded by another metric. Boak points out that the labor force participation rate has been stagnant for the last year, and has decreased since 2008. This bad news more than balances out the good news that is available. He cites polling done after the election showing “Roughly two thirds of those surveyed described the economy as ‘getting worse’ or ‘staying about the same.’ And 78 percent declared themselves worried about the direction of the economy” (Boak 2014). The worry will continue, as Boak ends his article citing an economist saying that wages will not grow fast for a while.

            Joining the chorus in a structurally similar article, Patricia Cohen wrote in the New York Times an article titled “Jobs Data Show Steady Gains, but Stagnant Wages Temper Optimism.”  In her article, Cohen cites the same job growth data Boak looked at, where unemployment is dropping and jobs are being added to the economy. She then turns and looks at some of the other issues that are bringing down the American worker’s morale. First, she looks at wage growth, where they have increased only two percent in the last year but almost not at all in the last couple of months. She then looks at the labor force participation rate that Boak looked at, bit she focuses on a slight uptick of the rate to 62.8 percent where Boak claimed that it had not moved. This increases gives Cohen some optimism, and she looks elsewhere in the economy to corroborate it, point out the ending of the Federal Reserve’s decision to end the most recent round of quantitative easing (Cohen 2014).

            Still, in spite of the good news, Cohen identifies that Americans are not that optimistic about the economy. She looks at the fact that productivity gains have not gone to workers like they had decades ago. She also looks at the optics of highly paid chief executive officers making many multiples of workers’ salaries. She then cites the same survey Book does in looking at Americans’ optimism about the future of the economy – a solid majority is not confident (Cohen 2014).

            Cohen gets deeper in trying to understand this divide than Boak does. She looks at the quality of the new jobs that have been created and which are pushing down the unemployment rate. She finds that part of the malaise in the job situation is that so many of the new jobs are low paid jobs in the service and hospitality sectors. These jobs have little bargaining power and thus they cannot help force wages up, a move which would make people happier about the state of the economy (Cohen 2014). She also looks at the persistence of long-term unemployment and the weakness in the world economy.

            Overall, Cohen strikes a much more optimistic note about the short-run path of the economy. Where Boak ends his article looking at the possibility of persistence of low wages, Cohen ends her article on a bright note, quoting an economist saying, “It definitely looks like things are slowly moving in the right direction” (Sinclair qtd in Cohen 2014).

            Both of these articles looked at the current unemployment situation and saw that though the news has been getting better, most people are still apprehensive about the state of the economy. Things are quantitatively getting better, but the perception of stagnation and even recession persists. What neither Boak nor Cohen touches on are ways to move the perception from backward-looking gloom to forward-looking optimism.

            One way to improve the public’s perception of the economy is to shrink unemployment even more. Looking at figure one, it is still above the trough that was reached in the last expansion. The easiest way to do that is to remove whatever structural employment exists. The minimum wage and labor unions create a wage floor that keeps the labor market from clearing (Krugman & Wells p. 222). If these artificial constraints on the labor market were cleared, then the equilibrium would be able to be reached. One thing to consider in that possibility though is that the natural rate of unemployment may have grown since the last expansion due to demographic factors. With the baby boom generation leaving the labor force, even a more flexible labor market may not lower unemployment enough to compensate for the political fall-out of such a move (Krugman & Wells p. 226).

            The preferable alternative to removing labor market protections is to foster a environment of growth. By looking at what the government can do to grow the economy, the people in the heartland will feel the economy growing by seeing it on their paychecks. At a time when the people are scared about the economy is the best time to fund infrastructure, education, and research (Krugman & Wells p. 257). Taking an “All of the above” approach will help in the long and the short run. The next time those polls are taken; there can be some movement on how many are fearful of the future.

References

Boak, J. ( 2014, Nov 8). Why many aren’t celebrating low US  unemployment. ABC News. Retrieved from http://abcnews.go.com/Business/wireStory/celebrating-         low-     us-unemployment-26776012

Cohen, P. (2014, Nov 7). Jobs data shows steady gains, but             stagnant wages temper Optimism. The New York Times. Retrieved from http://www.nytimes.com/2014/11/08/business/jobs-numbers-for-october-2014-reported-by-labor-epartment.html?_r=1

Federal Reserve Economic Data. (2014). Graph: Civilian Unemployment Rate. Retrieved from http://research.stlouisfed.org/fred2/graph/?id=UNRATE,

Krugman, P. & Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers

Haiku Review: John Maynard Keynes' Essays In Persuasion

Lots of stuff about

The gold standard before you

Get to the grand kids

Haiku Review: Economics: The User’s Guide by Chang

Good introduction:

Looks at many schools, sadly

There aren’t enough charts

Response to "Mariana Mazzucato: Government — Investor, Risk-taker, Innovator"

      The Talk can be Accessed  HERE.

 

     The most interesting part of the Mazzucato talk was the nugget that the drug companies were returning more of their capital to shareholders in terms of buybacks than they were using for research and development (4:41). I write this as I was thinking before seeing the talk that governments and large monopolistic corporations are the seat of innovation because they have something that short-term focused public companies do not have: time. There is a long history in the United States if innovation, from the railroads to Menlo Park to mass electrification to harnessing atomic energy to the microchip. Most of those were done through the government or with government facilitations. The transistor was developed at Bell Labs when AT&T was a behemoth of its own before the break-up and it was able to play the long game because its monopoly was protected as some sort of natural monopoly.

I was under the understanding that the drug companies were acted somewhat like AT&T. The argument is often made in public that one of the reasons that prices are so high for pharmaceuticals is because the cost of R&D is so high. Consumers pay so much because they have to find the molecules and then usher them through the FDA testing process. The costly drugs are not monopoly rents, the argument goes, but they are instead compensation for all the drugs that the companies tested but have failed. I had known that a lot of the fundamental research has long been funded by the federal government through grants to scientists, but that little nugget surprised me more than it should have. It is as if by not reinvesting the excess profits generated by longer patents, the drug companies violate the public trust.

      

   Like Mazzucato, I hope that the next revolution will be green (11:46), but in terms of green technology, I can only think incrementally. Solar panels are going down in price, to the point where electricity generated through the sun is reaching price parity with electricity generated though the burning of hydrocarbons. The first world will need to lead though, because solar power, as well as other green electricity generating devices, have their weaknesses. The biggest for solar power is that battery technology is the limiting factor. Research into capacitor or battery technology could help run the world of tomorrow.

The big issue is that a big part of the politicians in the world’s biggest economy believes some version of the idea that there is no climate change; there is climate change but it is part of a natural cycle; climate change is nothing that we can do anything about, even if it exists or was caused by human activity. The political resistance at this point where the United States needs to lead makes me think that if the next big innovation is a green innovation, it will be in spite of and not because of the US Public sector. There is a good chance that it will happen, as even some of the larger developing countries recognize the climate as an issue. If it does happen in spite of US political intransigence, it will ironically be that that US will be locked out and miss out on the gains and it will be the fault of the party that pays much lip service to the idea of American exceptionalism.

I hope that some green technology will be the next big thing, because as a planetary society, there is nothing that is needed more and has the potential to save the most lives than refiguring the global energy system. Either that or it will be something for people in the developed world to forget themselves for a minute, such as an immersive virtual reality with strong artificial intelligence.

      

       Broadly, entrepreneurship and innovation are positive for the economy’s continued growth. For example, even if many of the technologies existed for outside of Apple for the iPod, which led to Apple’s resurgence, and the fact that other companies had already, released portable digital music players, Steve Jobs came along and resurrected his mythos. He was able to put the elements together that existed already to make a product that was accessible to the masses.

In the same way a century earlier, Thomas Edison was able to grow his name and his company by finding novel ways to take advantage of the scientific discoveries of the age. James Clerk Maxwell was able to codify the equations that showed the relationship between electricity and magnetism: it took Edison to make the phonograph. Edison was able to formalize his innovation in his Menlo Park lab as the forerunner to GE, a founding company on the Dow Jones Industrial Index (Krugman & Wells, 2013, p. 255). People like to romanticize Tesla, as the lone inventor with suppressed genius ideas, but Edison got the lights shining in street.

This innovation is not without its risks. Before Edison got the lights shining in the street, there was an occupation called a “Lamplighter”. This man had the responsibility of going through the streets at dusk on the main thoroughfares and he lit the lamps in the streets. They were first oil lamps and then later the infrastructure in places turned to pressurized gas. When Edison perfected the electric incandescent light bulb, that man’s job was immediately threatened. There is hope that he would be able to be retrained to a different position at the department of public works. However, the efficiency gained by having bright, consistent light was greater than the loss of the poor lamplighter’s job. Let us hope that he did not find a new position driving a horse-drawn cart.

  

   Two things that the government can do to help promote grow are to set rules and to spend money.

Less glibly, one of the things a successful country has is property rights. This is not just being able to set up fences at the border of your property and know that the government and other private parties will acknowledge them. Some of the most useful property for encouraging growth is intellectual property. By providing a temporary monopoly on the fruits mental labor, the state can provide incentive for individuals and firms to create new things in the world, and to make gains form the mental work (Krugman & Wells, 2013, p. 257).  . There is a fine line though, as some patents and trademarks can serve not to facilitate innovation and thus impede growth. If the state makes the lengths of patents too long, then those who want to use the technology can be locked out. If the patent is too broad, then the potential exists for competing firms to inadvertently violate the patent exists. In short, the setting of these rules is very important to get right to provide innovators with the right amount of carrot, but not too much that they are bogged down in nonproductive litigation.

`           The second way to facilitate innovation is by helping the growth of human capital. In the United States, a majority of the funding for primary and secondary school comes from the local municipality. The institutions of tertiary education are funded by the state and federal government directly. Alternatively, even the private universities receive funds through government grants for research or through financial aid in the form of grants or loans. By helping the development of human capital, the state can let those gaining the capital in the form of greater education attainment go out in the world and be more productive.

References

Krugman, P. & Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers

Mazzucato, M. (2013, June). Mariana Mazzucato: Government — Investor, Risk-taker, Innovator [Video file]. Retrieved from http://www.ted.com/talks/mariana_mazzucato_government_investor_risk_taker_innovator.html

On Inflation

Parties to a contract want to take inflation into account. A problem arises when the expected inflation does not match the actual inflation. If, for example, a contract was negotiated anticipating 2.5% inflation and it came in at 1.5%,  the workers end up benefiting at the expense of the company.

To illustrate the advantage the workers gain at the expense of the company, assume that there were no pay raises in the contract other than that for the expected rate of inflation. This would mean that a worker making $10000 the first year would make $10250 in the second year and then $10506.25 in the third year of the contract. His real wage would be the same based on the assumption, having the same buying power as in the first year.

If inflation instead comes in at 1.5% instead of 2.5%, the company should be paying $10000 in the first year, $10150 in the second year, and $10302.25 in the third year to maintain the same buying power as the worker had in the first year. However, the contract was negotiated at 2.5%, so the employees benefit at the expense of the employer. In the example, the price of labor is the same in the first year. There is, however, a difference of $100 in the second year and then $204 in the third year. These amounts compound as even a difference of 1% adds up over time to make a material difference in a firm’s bottom line. Perhaps the next time they negotiate, the firm may look more carefully about its inflation assumptions.