Tag Archives: unemployment

Pew Research: What Does the Public Know? Not That Much

http://pewresearch.org/pubs/1378/political-news-iq-quiz

Pew Research has released a study, which you can participate in if you’d like, on what the public knows and what it doesn’t know about current events. I’m frankly not sure what to think about the results.

First of all, what I am sure of is what everyone will be sure of, which is that the results are pretty dismal for a democracy.  For example:

  • Only 23% of American adults know that “cap and trade” refers to energy and environmental legislation.
  • 58% of Americans think that Iran and Israel share a border.
  • Only 33% of Americans know that Ben Bernanke is the Chairman of the Federal Reserve Board.
  • Only 33% know that the Dow is in the range of 10,000
  • 82% do not know that Max Baucus is Chairman of the Senate Finance Committee that has been working on healthcare legislation.

Here are some real kickers:

  • Only 40% of Americans know that Glenn Beck is a TV and radio talk show host
  • 44% of American adults do not know that the “public option” has to do with health care

There are also some non-surprises.  Older people know a lot more about current events than younger people, and more educated people know a lot more about current events than less educated people.

What I’m not sure about is whether this changes my world view of politics.

After untold hours of arguing with conservative friends about the entire array of issues and philosophies wrapped up in politics, and having only ever convinced one or two to change their opinion on anything, I’ve come to believe that expending a lot of energy on convincing people of anything is futile.  Calories are far better spent finding the people who already agree and convincing more of them to get their asses off the couch to vote and make phone calls than the other side.  Turn out is everything.

Do these numbers challenge that?  Could it be that if we can explain cap and trade to the 77% of Americans that don’t know what it is before the other side can, we actually have an opportunity to win them over?  Could it be that the 77% of people who think cap and trade has to do with health care, or unemployment, or banking and finance reform can not be convinced otherwise?  Or could it be that the 77% of people who don’t know this are just way more interested in who is winning Dancing with the Stars and they are never going to be an important political force whether they understand or don’t understand because they are never going to vote anyway.  I’m not sure.

Aside from the obvious, as stated above, what do you think this study means for the pragmatic practice of politics?

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Taxing the Super Rich Does Not Reduce Jobs

Enough already!  Increasing taxes on the super rich does not harm the economy in any way whatsoever.

There are two popular theories about why taxes on the super-rich should be avoided and both are flat out wrong.

The first theory is that taxes shift spending power from consumers to government, and consumers spend money more effectively than government.

This does not apply to the super-rich though.  While a family making $250,000 a year may consume nearly all of what they make, the average annual income of the top 1% of families is over a million dollars a year.  At anywhere near a million dollars a year of income, the vast majority of families have reached a lifestyle they are comfortable plateauing at, they have saved enough to secure that lifestyle in retirement and “lean” times, and they are banking money away for their estates and heirs.  Once people reach a threshhold where additional income goes into inter-generational savings rather than consumption, additional income to them does not stimulate the economy.   Sure, there are exceptions.  Paris Hilton undoubtedly spends way more than a million dollars a year and every dime she spends creeates jobs for someone, somewhere.  Paris and her breed are the exception though.  Of the tens of thousands of families with million dollar plus annual incomes, most live in nice houses, in nice neighborhoods, with nice cars, they send their kids to nice schools, etc. but they don’t convert anywhere near their total income to economiic demand for goods and services.  Reducing that income by taxing it more will not reduce demand in the economy until tax levels get very high indeed.

The second theory is that wealthy people hire people and therefor they are the ones that create jobs.  If I may be so bold… bullshit.  Demand for goods and services on one side and investment capital on the other side is what creates jobs.  One million dollars of investment capital can come just as easily from ten people with one hundred thousand dollars, or a thousand people with one thousand dollars, as it can from one person with a million dollars.  Savings are pooled all the time… hell, the entire idea of publicly owned corporations is to pool savings.  If there is demand here and capital there, there will be jobs.  The capital does not need to be in the hands of a few very wealthy individuals.

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Make These Changes This Week, Fix the Economy by Next Week

Paul Krugman recently wrote that what is at the heart of the economic meltdown is a surplus of savings beyond what businesses are willing to invest. These savings have been bouncing around the globe looking for a return for over a decade.

Everywhere these excess savings have landed, they have bid the price of assets up to unsustainable levels, bid down the returns on those assets to zero or negative amounts, and created havoc and dislocation. These savings fueled the dot.com boom in the late 1990s, funded sub-prime mortgages from 2001 to 2006, poured into commodity markets in 2007 and 2008 creating bubbles in crude oil, mined minerals and metals, corn, rice, and other grains and farm goods, etc. These savings have since flooded into United States Treasuries, driving yields to zero and, sometimes, even negative.

To me, this points squarely to the root cause of our economic problems (surplus savings only tells part of the story) as well as the solution. Many will tune out my assessment without making it to the end of the next paragraph. For those with a little more patience than that, hear me out then engage me in debate. I value your constructive thoughts about the substance of this, ways to implement it, and better ways to explain it. Ready for half our friends to tune out?

Too much wealth has gotten too concentrated in the hands of too few people. It needs to be “redistributed.”

Wow! Did you see them go? Anyway, now that they’re gone, lets discuss this, and lets use the words supply and demand a lot.

Business uses people’s savings to create the supply of goods and services that will meet demand. Supplying goods and services to meet demand is what business does, so if business is not willing to invest savings to increase supply, it can only be because it sees no demand for what it would produce.

We can be very confident that there are still needs and wants all over the world. I have many needs and wants myself, and I’m just one me. Demand only occurs when people have enough money to buy the goods and services that will satisfy their needs and wants.

People can escalate through three economic levels. At the most basic level, people spend whatever money they earn trying to meet their basic wants and needs. They are pure consumers. Every dollar they earn becomes demand for a good or service.

As people earn more, they cycle back and forth between increasing their level of consumption and securing their level of consumption against downturns, emergencies and retirement by saving some of their earnings. People at this level, lets call these people the “middle class”, decide how much to consume based on an inverse relationship with savings returns. If there is a great financial incentive to save, they will opt to consume less, while if there is little or no financial incentive to save, they will consume more. To the degree that these people opt for consumption, they generate demand for goods and services. To the degree they opt for savings, they generate the ability to supply goods and services. The relative supply and demand of goods and services in the economy changes the relative value of supply to demand, and changes this group’s behavior accordingly.

Some people earn enough that, while it may or may not be at an extravagant level, they max out their desire or even their ability to consume and they have more than enough wealth to secure their consumption forever. People at the highest level create as much demand for goods and services as they care to, and still have money left over that must be saved. These people generate supply in excess of their ability to create demand.

When supply and demand get seriously out of balance, economics steps in with a heavy hand to pull them back together. If demand gets ahead of supply, inflation will occur. This reduces buying power, which reduces demand. If supply gets ahead of demand, unemployment will occur. When resources (be they land, savings, or labor) go unemployed, our capacity to create supply shrinks back in line with demand.

Lets revisit Krugman. What does it mean if there has been a glut of savings bouncing around the globe for over a decade? One thing it should mean, is that the return on invested savings should be zero and the middle class should be using as much of their wealth as possible to consume and create demand. They should be saving relatively little. Despite the middle class creating as much demand as it can, there is still so much extra supply that all these trillions of dollars of savings are still going… unemployed.

We like to think of markets as perfect. We assume that market prices reflect all known information and that they balance instantly. The existence of arbitrageurs proves to us that even tiny discrepancies in markets are balanced immediately.

Markets are not even close to perfect, however. Markets that are thinly traded often mis-price goods and services. There are seas of information that is legal to trade on that is not available to all market participants. If the employment market was perfect, wages would rise and fall daily, if not throughout the day, to account for the never ending fluctuation of the supply and demand of all the many talents and skills. Most workers, however, only see income adjustments once a year, if that, unless the disparity between what they are worth and what they are making becomes so egregiously great that they either quit or get laid off. The mega-trillion dollar market for unregulated bond insurance is so opaque no two players know the terms of any other players in the market at all. The mortgage backed securities market would require intimate knowledge of individual neighborhoods, houses, and families that just doesn’t exist to be able to accurately set prices.

Markets that are lacking in transparency, information, liquidity, etc. further become distorted by mass psychology. In lieu of useful information about what drives prices, people have a tendency to consider price changes themselves to be information and they, en mass, make erroneous decisions.

The inefficiency of our markets has made it appear, for the entire time that the real yield on savings was zero, that the yield was positive in many areas. The flood of money into mortgage backed securities fueled real-estate prices, which gave the false impression of returns on savings, which shifted the middle class erroneously from consumption to savings, created the illusion of demand where there was none, created the appearance of profits where there were none, etc. The unwinding of all of this distortion puts us in the confusing mess we are in today.

For all its complexity, however, ultimately, the real situation is fairly simple. There are people with huge amount of money who are incapable of creating demand because they are tapped out of goods and services they need or want. There are people with needs and wants who are incapable of creating demand because they have no money with which to purchase goods and services. Because demand for goods and services is so low, the demand for the wealthy people’s savings is so low, that yields on savings remain essentially zero. The excess of supply in the economy has now started a whirlpool in which labor, factories, land, vehicles, and all sorts of other resources are becoming unemployed alongside the excess savings and the cycle is building on itself.

The solution is to stimulate demand. Of course, this comes as no surprise… Congress recently enacted a nearly $800 billion program designed to do just that. But there are problems. The most serious problem is that supply is exceeding demand by trillions of dollars, not hundreds of billions of dollars. Government’s efforts to stimulate demand, while monumental, are tiny compared to what is needed. Another problem is that the stimulus program is a government program in the first place when it needn’t be.

Brief detour.

We can all debate what the proper size of government should be. My own opinion is that government can and does do a lot of great things for us and is not only necessary but wildly beneficial to us. It does many things that only a government can do. I think we often starve government of the resources it needs to do what we ask of it well, then we use its inability to do these things well as as excuse for not having it do them at all, or for further starving it. I think government should be bigger than it is today. Others disagree and that it fine. Ultimately, we should be making decisions about what we want government to do based on getting as close as we can get to a consensus of what things we want and how much we are willing to pay. Whether that is bigger or smaller is why we are a democracy. We should not be making government bigger or smaller because we need it to increase or decrease the demand for goods and services.

Back again.

Ultimately, what is needed are structural changes to the economy that will create disincentives to own wealth that is not stimulating demand. A portion of this excess wealth needs to be paid out, perhaps in as simple a form as a mandatory raise for all employees around the world, to the middle and lower classes that would have the ability to stimulate demand overnight if they only had money to spend! As people with needs and wants become able to stimulate demand, business will finally start to soak up the remainder of the savings in order to meet the new demand with new supply. This, finally, is the only way that the glut of savings can finally be eliminated so that the remaining savings that exist can actually generate returns sufficient to again place the middle class in its proper role of balancing supply and demand.

Additional Thoughts

Inflation

If all employees are given a mandatory raise of, say, 20%, won’t companies immediately need to raise prices by 20%, creating 20% inflation, and nullifying the effect of the raise? No. Labor is not the entire cost of goods and services. Technology, the cost of money (when it isn’t available for free), and raw materials also go into the cost of goods and services but would not see 20% increases. There might be 15% inflation, but that would still create an increase in demand beyond that which would be clawed back by inflation.

More on inflation

Just as unemployment is more harsh on some than others, so is inflation. Is it fair to charge so much of the economic recovery to savers? Our goal should be to have close to full employment of all resources with little inflation. Right now unemployment is ravaging some sectors of the economy. Later on inflation is going to ravage others. I submit that savers are already being ravaged by unemployment, though, because it is their very savings that are going unemployed along with the labor of others. While it is unfortunate that some of their savings will be lost to inflation, this is the only way for their remaining savings to once again start earning a positive return. This glut of savings has turned into an infection. While it is true that some people who have an infection may not want to see it lanced because, after all, it is their infection and they don’t want to lose it, it is the only way they can get healthy again.

If markets have set wages based on supply and demand, and now we’re going to increase them on a whim, aren’t we just adding a new distortion into the markets that will have to be worked out later down the road?

I don’t think so. First, I’ve already discussed the inefficiency inherent in accurately pricing labor. Second, in the decades since the Vietnam War, globalization has increased the labor pool so dramatically that the price of labor has been kept flat or nearly flat for many, many years. Globalization has also opened up new markets, so we would like to believe that the new supply of labor should be sopped up with the new demand for goods and services. This has not been the case though. For the very reason that the increased supply of labor has kept wages down, the increased supply of people with wants and needs has not translated sufficiently into an increase in the number of people capable of creating demand. This is one of the major factors, probably even bigger than US tax policy changes, behind the consolidation of wealth.

Only by increasing the ability of workers to convert needs and wants into demand can the global economy be brought back into balance.

A related factor is time. While it may be true that given enough time and enough cycles of unemployment and inflation that supply and demand will come naturally into balance, this process could will take decades. After all, not only do we need to account for dislocations that have built up over several decades since the advent of global trade, we need to account for the dislocations that haven’t even occurred yet because globalization is still in its infancy. All of the trends it has fostered are still being increasingly fostered today.

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Our Economic Death Spiral Explained in Bullet Points

Oh dear, what a mess we have now.  Here is a pretty ugly cycle to think about.

  1. The housing bubble peaks and home prices stop increasing.
  2. People who assumed they would be able to sell or refi before their adjustable rate mortgages adjusted… couldn’t.
  3. Many of those people, especially the least likely to be able to pay among them who had gotten “subprime” mortgage loans, defaulted on their mortgages and got foreclosed.
  4. The foreclosures hurt the value of bonds that had been sold to finance the loans.
  5. As the value of the bonds decreased, the risk exposure of bond insurers (sellers or financial instruments called credit default swaps) increased.
  6. As the risk exposure of these insurers increased, the likelihood of some of them defaulting on their insurance policies increased.
  7. Because the credit default swap market is completely unregulated (thanks to Phil Gramm and his Republican friends) it is impossible to know what the likelihood is that any of these insurers would default on their policies.
  8. Which has lowered the value of the credit default swaps that people have bought (the insurance policies).
  9. Credit default swaps are carried on banks’ balance sheets as assets.
  10. The amount of lending banks can do is dependent on their asset base.
  11. When the value of the credit default swaps went down, the value of the asset bases of the banks went down, and they became unable to lend to businesses because their asset to lending ratios were out of whack… they had become too risky.
  12. Because businesses and consumers haven’t been able to get loans, the real economy has gone into a nose dive.  Over 2 million jobs have been lost this year, including 500,000 in November alone.
  13. These newly unemployed people are beginning to default on mortgages that had never been considered risky and a new round of completely unexpected foreclosures has begun.
  14. This is going to further impact bond prices, which will increase the risk that bond insurers will default, which will further lower the value of credit default swaps, which will further lower banks’ asset base, which will further curtail their ability lend………..

Now we’re in a death spiral.  We can’t get out of it by just riding the current.  Yikes.

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