Tag Archives: jobs

Freeze-Frame Economics

Socialist policies have a way of freezing their object at a point in time, like taking a snapshot. Take, for example, laws intended to give workers a better income. European governments have been doing this for years, making their companies uncompetitive and raising barriers to new workers. That’s why youth unemployment is so high. Chart by Reuters.

unemployment-1024x1024They start with good intentions, of course. Everybody wants workers to have a better wage, time off, health care, and early retirement. There’s a moral hazard, though. Politicians can pass these laws all day long, because they don’t have to bear the costs. They will compete to befriend the working class and, whatever level of largesse might be appropriate, they will overshoot.

Wherever there is a good intention, there must be a tradeoff. Policy is all about balance. If you can’t see the tradeoff, then you haven’t understood the problem (or you have succumbed to a moral hazard).

We think France has the most absurd labor laws – see here, here, and here – though Italy may be worse. When companies can no longer support their “social charges,” they’re not allowed to reduce staff. Like a snapshot, socialist policies froze Europe’s workforce at a point in time. Those who are in, are locked into the good life ‘til retirement. Young workers are locked out.

If you’re a hardcore socialist, you may feel that companies should bear unlimited social costs. Any profit above zero means that workers are being exploited. If “the people” owned the means of production, then every penny could go to the workers. Wherever this has been tried, unfortunately, the result has been a freeze-frame economy.

At the time of the revolution, the Russian economy was all primary production and a little heavy industry. The new Soviet government took ownership of mines, farms, dams, steel mills and crude factories – all labor intensive, the best possible industries for socialism.

Fifty years later, it was the same grainy photograph. Outside the Soviet Union, steel production moved to electric mini mills, farmers enjoyed the “green revolution,” Shockley invented the transistor, and Sony gave us the Walkman. In the free world, competition drove innovation and human progress.

The causes and effects of the Soviet tragedy are well known, and we needn’t go into details. Our purpose is to show a general rule, which is that socialists invariably look at history synchronically. They seek to protect today’s workers in today’s economy – preserving them in aspic, as it were – and they end up condemning the workers of tomorrow.

See also: Second Class Workers


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Rule of Law

RuleOfLaw2014Remember that bit where Jon Stewart makes fun of Uruguay? Shown here is the latest Rule of Law ranking from the World Justice Project. Once again, Uruguay comes in just below America. They should be ashamed, although – their government is not quite as corrupt as ours.

Rule of Law does not mean a Congress full of lawyers churning out bespoke laws – or, worse, federal agencies writing arbitrary regulations. What it means is that everyone is treated equally by the law, everyone understands the law, and laws are reasonably stable over time.

Law experts say that average citizens routinely break federal law without any knowledge they are committing a crime.

Apart from the obvious impact on personal freedom, Rule of Law – or lack of it – has profound implications for our economy. Companies, especially foreign ones, will not hire if they face a shifting and arbitrary environment.

If the actions of the state are to be predictable, they must be determined by rules fixed independently of the circumstances – F.A. Hayek

Corruption figures prominently in the WJP report. When a big company can rent a government agency, as Comcast did here, that distorts the whole idea of capitalism.

This particular distortion of capitalism leads to secular stagnation. Big, obsolete companies use the government to protect their positions in the market, at the expense of new companies and new jobs. Below is the BLS chart of jobs created by startups.


The Rule of Law survey ranks America twentieth out of thirty in our income class – and lower on corruption. This means that a new employer entering from abroad, or a new startup company, will think twice about “country risk” before hiring here.

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Jobs, Wages, and Uncertainty

Bank of England’s Mark Carney discusses the English labor market here, in FT. Previously at Bank of Canada, Carney is the reason that country did not experience the Great Recession. That’s right – our neighbors to the north had no housing bubble and no crash. Since our bubble was primarily the result of monetary policy (and corruption) it is fair to compare central bankers.

The weakness of pay has, in effect, purchased more job creation. It has not resulted in an unusually high level of profits.

Instead of using inflation to camouflage lower wages – the standard Keynesian method – Carney lays it on the line. Britons have gone back to work for wages they’re not happy with. Once everybody has a job and the labor market is tight, then they will demand higher wages.

We wrote last month about the Federal Reserve’s indecision over slack in America’s labor market. What’s the best way to test that? Ask for a raise! Unions in England plan to strike next month. If they succeed, wage inflation will begin – and Carney can change policy.

So, what’s special about the English labor market? Do they have more patriotic employers, putting people before profits? Well, maybe. They are investing less in automation, hiring the cheap labor instead – tanking their productivity numbers – and they are taking less to the bottom line.

The motivation for such behavior, patriotism aside, is a stable tax and regulatory environment. As in Canada, English companies pay less tax – without having to join a bidding war for concessions and loopholes. They also have their socialist health care sorted out – it’s not efficient, but it is stable. We’ll have that, someday, when the administration stops issuing weekly changes to the law.

About half of [Aetna’s] premium increases … will be attributable to “on the fly” regulatory changes made by the Obama administration.

Finally, there is the regulatory regime we like to call Washington skills – in which well connected companies receive credits and subsidies, while their competitors are harassed by the IRS, EPA, and other agencies.

Employers are reluctant to add staff, in an environment of uncertainty. They cannot possibly plan new projects, creating new jobs, if they face unpredictable new costs. England merely faces the possibility that half the country will split off – nothing like the problems we have here.

See also: Rewriting health reform on the fly

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Keynesian Blather

YellenPolitical bloggers were not kind to Chairman Yellen’s keynote speech at Jackson Hole. David Stockman called it “Keynesian blather.” Someone else called it an insult to America’s intelligence.

The Fed Chairman makes an easy target, especially if you don’t understand the technical terms. After all, who cares if you’re unemployed for cyclical reasons or structural ones?

Jeremiah prefers to assume people are generally competent for their jobs. We downloaded the speech here. Remember that this is a keynote speech, kicking off a symposium on the labor market. So, when Yellen refers to the unsolved mysteries of employment, that doesn’t mean she’s confused – she is introducing the topics.

Jeremiah was pleased to see that Yellen does not take the headline unemployment figure at face value. She acknowledged the growth in part time employment and the drop in labor force participation. Here are a few of the topics:

  • Is labor force participation off because people have retired, or are they coming back? If people come back en masse, that will drive wages down.
  • Is there “pent up wage deflation?” If so, wages may jump once it has run its course.
  • Have the midlevel jobs gone, to Asia and automation, never to return?

You can see that these are all relevant to ordinary Americans, and relevant to Fed policy. The Fed needs to know whether there is still slack in the labor market, or if our current wretched economy is the new normal. The dual mandate requires the Fed to keep credit conditions easy as long as there is any chance it will help someone find work. This brings us to the Keynesian part.

Keynes reckoned that inflation could reduce unemployment, and this is why the Fed has a dual mandate instead of simply maintaining price stability. In fact, Keynes’ definition of full employment is the level at which inflation can’t help one more guy find work.

Men are involuntarily unemployed if, in the event of a small rise in [inflation], both the aggregate supply of labor willing to work for the current nominal wage and the aggregate demand for it at that wage would be greater than the existing volume of employment.

Lower wages will put more people to work – basic supply and demand – and the role of inflation is to give everyone a pay cut, by reducing the value of their nominal wage. This is a pretty incompetent way to create jobs, and it’s not even a good definition.

There is no magic formula for full employment, any more than there is a magic diet pill. Keynes didn’t have it and, when the symposium is over, Janet Yellen won’t have it either.

Labor is employed when entrepreneurs have profitable projects, capital to invest, and a stable political environment. As public policy, this means the rule of law and – a predictable tax and regulatory regime. Various surveys, including the Fed’s own Beige Book, have indicated this is what’s holding back the job market.

Keynes wrote a system of equilibrium equations, like the ideal gas law. In such a system, aggregate demand for goods cannot be more or less important, as a policy objective, than the aggregate demand for labor.

When companies are starved for workers, they compete by offering higher wages. You guessed it – full employment causes inflation.

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Potemkin Economy

It’s not so unusual for Jeremiah to agree with Paul Krugman.  That is, we agree on the nature and severity of our employment problem, which Prof. Krugman frames poignantly in his editorial.

These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started.

By the way, if you don’t know that Friday’s employment report was dismal, we invite you to peruse table B-1 and discover where the 204,000 new jobs were created.  One post calls them “dead end jobs,” while labor force participation continues its five year descent.

labor forceKrugman deserves credit for framing the problem.  Many pundits seized on the headline number and declared victory.  That’s propaganda.  You will be better informed if you can keep track of which pundits are political shills.

We differ from the professor, however, on solutions.  He seems to have dropped monetary stimulus, at last, but he is still promoting fiscal stimulus.  His editorial also features a straw man, in the form of “debt scolds” unwilling to finance the stimulus.

There are two good arguments against further fiscal stimulus, one practical and one philosophical.  We have already run trillion dollar deficits for five years, including the ARRA stimulus program.  This approach isn’t working.  One analysis found costs up to $500,000 to create a single job.

This brings us to the second argument, which is that we do not trust the federal government to administer a stimulus competently, or even honestly.  We would prefer to have value producing jobs in the private sector, rather than Potemkin jobs in the government.

In clinging to the textbook approach, Krugman is, so to speak, “fighting the last war.”  We differ from his approach because we have a different analysis of the root cause.

Keynes’ great insight was to reanalyze employment in terms of how entrepreneurs make decisions in the real world.  Entrepreneurs today have different reasons not to hire than they did eighty years ago.

Happily, Prof. Krugman does not have to visit the real world.  The Fed does that for us, in the form of their beige book survey.  Entrepreneurs today are fearful of what they perceive to be an anti-business environment in general, and health care reform in particular.

Boeing tangles with the NLRB, and lays off 5,800 workers.  J.P. Morgan tangles with the DOJ, lays off 19,000 workers.  ANR tangles with the EPA, lays off 1,200 workers.  We read stories like this every day in the business press.  It’s not cause and effect, but it creates a climate of fear.

Real intellects know when to adapt their methods.  If Keynes were alive today, he might just say, “let’s try helping the private sector, this time.”

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Gleaning the Truth

SebeliusJeremiah is always coaching you to seek the truth, so that you can plan – and vote – objectively.  This is harder than it sounds, because all news sources are biased.  Part of the fun is watching theories ripen into facts.  Here are a few we have been watching:


  • Employers are holding back on hiring, and cutting hours, due to Obamacare.  We started following this when it was a theory in the business press, and then we looked for it in the BLS figures, and now it’s in the Beige Book.

Many contacts also commented on reluctance to expand due to uncertainty surrounding the Affordable Care Act; some employers cut hours or employees.

  • Employment is restricted due to onerous regulation of business.  This is a perennial complaint from business, but now there is current research in The Economist.
  • Quantitative easing will never end.  This is typical of the cynics at Zero Hedge – the Fed has painted itself into a corner, addicted, enabling, etc.  Today, we have Societe Generale saying the Fed is more likely to increase QE than to taper it.

We are still watching this third one.  QE can’t go on forever, but we should know in January whether it’s ticking up.  The first one, about Obamacare – that’s a fact.  So, why do we see Secretary Sebelius boldly dismissing it?  Maybe she thinks you (and Jon Stewart) are stupid.

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More from the Skills Survey

We really like the way the OECD writes about skills.  They refer to a nation’s “stock” of skills, because skills are an earning asset, like roads and factories.  Without strong skills, we cannot expect to succeed in the modern economy.  This applies to us, individually, and to America as a whole.

Smart PeopleThe survey looks at variations in skill levels across nations and within nations.  We have already mentioned the impact of skills on inequality.  Here are a few more insights from the report:

  • In America, skill levels are inherited.  Jeremiah has discussed this before.  If you were born into the bottom quintile, chances are you will stay there, because our schools are no good.
  • We have an abnormally large proportion of these unfortunates.  The OECD calls them “below level 1.”  That’s a strain on our social safety net.
  • Older Americans are better at math than younger Americans.  The OECD calls that a “declining stock of skills.”  When Jeremiah’s generation dies off, you kids will be dead last in the world.
  • Having an education is not the same as having skills.  We rank near the top in going to college, but Dutch high school graduates have more skills.  Jeremiah thinks college in America is a fraud, and so does Simon Black.
  • The survey makes some borderline capitalist observations about labor force participation.  Tax and benefit systems can make work unprofitable for low-skilled adults.  This bit of arithmetic, they’re good at.
  • Employers complain of a skills shortage, even though unemployment is high!  That’s why we beg the INS for more H-1B visas.
  • Unions may lock workers in to jobs for which they’re unsuited, while locking out younger workers, and generally distorting the allocation of skills.
  • Immigrants must learn the host language.  We figured they would pick it up eventually, but the OECD says this is a big problem and requires government intervention.

Again, the OECD – Sec. Gen. Angel Gurria – is to be commended for an objective look at the issue.  Some media outlets have been spinning the results to suit an agenda.  The Economist, for instance, thinks that “more egalitarian societies have better skills,” an obvious misreading of cause and effect.

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