Category Archives: Unemployment

Federal Reserve discovers that paying people not to work equals fewer people working.

In case you didn’t know, the Chicago Fed reports:

A research paper published by the Chicago Fed has concluded that extra jobless benefits — unemployed workers can now get up to 99 weeks of benefits — may be contributing up to 0.8 percentage points to the current unemployment rate, which was 9% in January. The Chicago Fed paper said the extra benefits may still be worthwhile, given that in their absence workers may be forced to take jobs that represent poor matches for their skill levels. Also on Thursday, Minneapolis Fed President Narayana Kocherlakota said the natural rate of unemployment — basically, the smallest rate of unemployment that won’t lift inflation — ranges between 5.9% and 8.9%.

For those who are not economically literate, let me summarize: If the government pays people not to work, fewer people will work.

I don’t know why the Fed had to do a study to determine that. Maybe they were just trying to figure out not if it had an effect but how large the effect is. Or maybe it was just a study devised to keep a few economics employed during the recession.

What I really don’t understand is this line:

The Chicago Fed paper said the extra benefits may still be worthwhile, given that in their absence workers may be forced to take jobs that represent poor matches for their skill levels.

So the Chicago Fed thinks it is better to have people sitting around doing nothing rather than do a job below their current skill level? These people really do live in ivory towers.

The Absurdity of Minimum Wage Laws

The current minimum wage in the United States is $7.25 per hour. However, many states have imposed their own minimum wages because living in those states is more expensive. California, for example, has a minimum wage of $8.00. So why not get rid of the national minimum wage and let the states set their own? The Constitution gives the federal government no such power and this should be left to the states.

But even the states have a problem with minimum wages. Within a state, it may be more expensive to live in one city than another. For example, it is much more costly to live in San Francisco, where the minimum wage is $9.79, than in Fresno. So why not have each city set their own minimum wage as is being done in San Francisco? Why hasn’t New York City raised its minimum wage as it is certainly more expensive to live in  New York City than in Buffalo.

But wait. Even within cities there can be a big disparity in the cost of living based on neighborhood. It is much more expensive to live in Manhattan than it is in Queens. Even within Manhattan, it is more expensive to live in the Upper East Side than in Washington Heights. Even within neighborhoods, the cost of living in different buildings varies.

All this may seem quite absurd, but so is the minimum wage. Each person is an individual with their own needs and wants, their own cost of living. Broken down logically, each person has their own minimum wage at which they are willing to work. In other words, no government law can boost the minimum wage of all people. Or more accurately, we would need millions of minimum wage laws to help each state, each city, each neighborhood, each street, and each person or small group of people.

In reality, minimum wage laws creates winners and losers. Those whose incomes increase will benefit from the minimum wage, but at the same time those who can no longer produce enough profit at the increased wage will lose their jobs because of the minimum wage. And all consumers will pay more for goods and services as the government forces up wages.

The minimum wage sounds great in theory (for employees, not employers). Unfortunately we live in a reality where a minimum wage does more harm than good.

TARP was a waste of money, despite what the Treasury Department tells you.

The Treasury announced that the total cost of TARP would be just $50 billion. In their perverse logic, the Administration and media played this up as a government success story. But we really should look at TARP as an investment. Congress approved spending $700 billion for TARP, of which only $296 billion was spent. Looking at TARP as an investment, the government lost 16.9% over a two year period. And they call that a success!

What else could the government have done with the $296 billion? Since TARP was signed into law on October 3, 2008, the following instruments have produced these returns:

TARP Troubled Asset Relief Program -16.9%
SPY S&P 500 9.1%
TLT iShares Barclays 20+ Year Treas Bond 15.7%
IEF iShares Barclays 7-10 Year Treasury 19.3%
SHV iShares Barclays Short Treasury Bond 0.7%
GLD SPDR Gold Shares 57.8%
XLF Financial Select Sector SPDR -18.8%

All major markets (stocks, long-term bonds, intermediate-term bonds, short-term bonds, and gold) posted positive returns. In some cases, very good returns. As you can see, I added the Financial sector into that table, which declined slightly more than TARP. Most of TARP’s investment were in the financial sector. The small difference is largely a rounding error because I am looking at XLF’s return up to today whereas the Treasury is using expected returns as of some future date. And that is assuming you trust their accounting…

But this raises the question of why they invested in the worst performing market sector? Those of us who argued that they were throwing good money after bad were correct. Maybe Treasury lost less money than we expected, but we were still correct in predicting negative returns on this investment.

Of course, the government claims that TARP saved the financial system from utter destruction. Oh, to live in a world where you can make outrageous claims without any proof. Next thing you know, the government will claim that the American Recovery and Reinvestment Act of 2009, also known as the stimulus bill, “created or saved” millions of jobs, even though the unemployment rate has remained steady near the 10% level.

No sovereign debt crisis here in the U.S., but we’ve got other problems, namely jobs.

The United States may not be experiencing a sovereign debt crisis like Europe, which I have written about quite often recently, but we have our own problems. In Europe, 20 percent unemployment is making it very difficult to balance budgets. While unemployment is not as bad here, we are experiencing the worst economic recovery since the Great Depression. And today’s ADP report proves it:

Private employers unexpectedly cut 39,000 jobs in September after an upwardly revised gain of 10,000 in August, a report by a payrolls processor showed on Wednesday.

The August figure was originally reported as a loss of 10,000.

The median of estimates from 38 economists surveyed by Reuters for the ADP Employer Services report, jointly developed with Macroeconomic Advisers LLC, was for a rise of 24,000 private-sector jobs in September.

Employment fell 63,000 short of expectations, though last month was revised up by 20,000. ADP only measures private employment. The government report due out Friday also includes public sector jobs, which is expected to decline as census workers were recently laid off after the census was completed.

The ADP figures come ahead of the government’s much more comprehensive labor market report on Friday, which includes both public and private sector employment.

That report is expected to show overall nonfarm payrolls were unchanged in September, based on a Reuters poll of analysts, but a rise in private payrolls of 75,000.

Woh! These economists expect 75,000 private sector jobs were created last month when ADP said 39,000 were lost? Seems like somebody is way off the mark here.

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Sovereign debt crisis continues. Irish debt rating cut by Fitch.

A follow-up to yesterday’s blog titled “Sovereign debt crisis far from over. Moody’s may downgrade Ireland again.

Fitch Downgrades Ireland’s Rating on Cost of Banking Bailout

Fitch Ratings lowered Ireland’s credit grade to the lowest of any of the major rating companies and said there’s a risk of a further reduction.

Ireland was cut to A+ from AA-, reflecting the “exceptional and greater-than-expected cost” of the nation’s bailout of its banking system, Fitch said in a statement today.

The move comes a day after Moody’s Investors Service said it may cut the country’s rating. Ireland may have to spend as much as 50 billion euros ($69 billion) to repair its financial system, pushing the budget deficit this year to 32 percent of gross domestic product. Fitch said the rating could be lowered again if the economy stagnates and political support for budgetary consolidation weakens.

Ireland has injected about 33 billion euros into banks and building societies, including 22.9 billion euros into Anglo Irish Bank Corp. Anglo Irish may need up to an additional 6.4 billion euros of capital and a further 5 billion euros in the event of unexpected losses. Irish Nationwide Building Society may need a further 2.7 billion euros.

Fitch said the “timing and strength” of the recovery is critical to reducing the budget deficit. While the economy is rebalancing, “ongoing distress” in real-estate markets and uncertainty over the global economic outlook “weigh on growth prospects and fiscal outlook,” it said.

Irish consumer confidence plunged the most in more than four years last month due to the mounting burden of bailing out Anglo Irish and the surge in sovereign borrowing costs.

“Ireland has experienced a great panic,” said Austin Hughes, chief economist at KBC Ireland. There is a “risk that a sense of apocalyptic gloom may trigger a freeze in spending.”

Sovereign debt crisis far from over. Moody’s may downgrade Ireland again.

In a follow up to The sovereign debt crisis is far from over. In fact, it is just beginning. and Ireland bails out banks. Deficit 32% this year. Sovereign debt crisis continues., Moody’s may downgrade Ireland’s debt rating yet again. Marketwatch reports:

Ireland’s Aa2 credit rating is on review for possible downgrade, Moody’s Investors Service announced Tuesday, citing the rising cost of recapitalizing the nation’s crippled banking sector, as well as an uncertain domestic outlook and rising borrowing costs.

If Ireland’s rating is cut by Moody’s, it would “most likely” be by one notch, which would leave the nation with an A rating. The agency said it intends to complete the review within three months.

Hornung said the review will pay close attention to the government’s revised four-year fiscal plan, which is scheduled to be presented in early November. Ireland’s government has said it intends to bring its budget deficit down to less than 3% of gross domestic product — the European Union limit — by 2014.

In the second of those two posts, I had said that the bank bailout was a temporary stop-gap measure and that Ireland still has fiscal problems that need to be solved. At this point, there is no way to know if Ireland will develop a plan to bring down its budget deficit to 3% of GDP or if that is an empty promise. Additionally, there is no guarantee that such a plan would succeed.

Much depends on the economy. An economic recovery would certainly help Ireland achieve its goal, but another recession would make this virtually impossible. Moody’s is concerned about this situation, just as I am, and is prepared to downgrade Irish debt if the government’s plan disappoints.

People have this false assumption that since the sovereign debt crisis is no longer on the front page, the situation has been solved. Far from it. These at-risk countries still have huge deficits to contend with, even larger debts to maintain, high unemployment rates, and an angry population that is increasingly rioting in the streets. The problem is far from over and, I suspect, we will still be talking about it years from now.

Stimulus spending: the new perpetual motion machine.

Stimulus spending is like a perpetual motion machine. Sounds great in theory, but it doesn’t work. Just as machines must use up more power than they output, so too stimulus costs more than it produces.

If stimulus spending really creates jobs and improves the economy, the government could just stimulate the economy all the time and we’ll never have recessions or unemployment. We can achieve perpetual motion through big government! Or so they tell us.

Eighty years ago, Ludwig von Mises wrote:

It is obviously futile to attempt to eliminate unemployment by embarking upon a program of public works that would otherwise not have been undertaken. The necessary resources for such projects must be withdrawn by taxes or loans from the application they would otherwise have found. Unemployment in one industry can, in this way, be mitigated only to the extent that it is increased in another. From whichever side we consider interventionism, it becomes evident that this system leads to a result that its originators and advocates did not intend and that, even from their standpoint, it must appear as a senseless, self-defeating, absurd policy.

It is not just economists like Mises that predict the failure of stimulus projects. History predicts it as well.

Stimulus spending didn’t prevent the Great Depression. It didn’t prevent any recession since then. And I have yet to see proof that stimulus spending produced a net economic benefit when the costs of the government programs were weighed against the economic gains, if there were any at all. Which leads us to one of two conclusions: either (1) stimulus spending cannot work or (2) it can work in theory but government is simply incapable of applying the correct amount of stimulus at the correct time.

In reality, stimulus does have some short-term effect. The “cash for clunkers” program boosted auto sales briefly. The tax credit for home purchases boosted home sales briefly. Construction spending from the Recovery Act did help the economy slightly. The census lifted employment for a few months. But all these programs do is borrow from the future. In the case of “cash for clunkers” and home tax credit, it brought future sales into the present. In the cases of jobs programs and construction projects, the government takes money from the future (debt) and spends it today. That leaves the government with less money in the future and it will either need to reduce future spending or raise taxes, either way harming our economic future.

The Keynesian argument is that this stimulus spending during a recession and cutting back in the future will smooth out the volatility of the economy. First, the government is great at the spending during the recession part, but terrible at cutting back during the recovery. Keynes’ idea was to run a budget deficit during recessions and a surplus during booms. Instead, government runs a deficit during booms and an even larger deficit during recessions. Second, the government has no idea how much to spend on stimulus during a recession and when to cut back on that spending. The government can only guess at how deep the recession will be, when it will start, when it will end, and how strong the recovery will be.

But the government will not let economics or history stand in the way of its grandiose ideas. As Stalin used to say, “We are bound by no laws. There are no fortresses which Bolsheviks cannot storm.”

History has proven that stimulus spending does not work, just as the great economists explained. Yet, time and again voters fall for the same trick and beg our “benevolent leaders” in Washington to take our hard-earned money from us to spend for us.

God willing, voters this November will learn to say NO to Washington and the politicians. “Fool me once, shame on you. Fool me twice, shame on me!” As those great political thinkers from The Who sang, “Won’t Get Fooled Again.”