Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Economics Page 44 of 100

The Unemployment Rate Isn’t Used to Keep Unemployment Low (with Graph)

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On April 13, 2018

14 Comments

Years ago, I complained to my friend Stirling Newberry that the unemployment rate didn’t seem to track how good the economy felt, or how many people were in desperate need of employment.

The unemployment rate was, then, and is now, taken as a proxy for the health of the economy for ordinary people. However, I could see and feel that the economy was getting worse for ordinary people, and that fact was showing up in other statistics. Plus, unemployment rates that were considered a crisis when I was young in the 70s, were now considered acceptable.

(See: The Economy Has Not Recovered, With Graphs)

Stirling said, “You need to know who an economic statistic is designed for, and what they use it for.”

A little history is necessary here, about inflation. In the 70s, due to the oil crisis and other mishandled economic problems, inflation got out of control in the West. Very high interest rates were used to bring it down, by Chairman Volcker at the Fed. Western policy makers became obsessed with inflation. It was considered Enemy Number One. They decided that the worst cause of inflation was wage increases and called this “wage push inflation.”

To track this, they turned to a statistic called the non-accelerating inflation rate of unemployment (NAIRU). NAIRU was the rate below which the unemployment rate was assumed to cause inflation.

The unemployment figure measures the number of people actively looking for jobs, compared to those who have jobs, remember. Thus it measures the active demand, in the market, for a job. Therefore, theoretically, if there are too few people looking for jobs, employers are expected to have to raise wages to attract workers.

(This is, to be clear, when wages rise the most, which is something non-economists and non-oligarchs want to happen.)

If you are old enough, you will remember that during the 80s and 90s, and even into the 00s, when the unemployment rate would drop, the stock market would take losses. This is because stock investors expected the Federal Reserve to raise interest rates, which is bad for the economy and bad for stocks.

So, the unemployment rate from late 70s and on, has been used to determine if wages should cause inflation, and to then raise interest rates to make sure they don’t.

Not incidentally, the result is also to crush wages, because, essentially, wages that improve are nothing more than wages that increase faster than non-wage inflation.

The unemployment rate not only doesn’t measure how good the economy feels for ordinary people, it was actually used, with purposeful action, to crush wages.

You’ve all been waiting patiently for your pretty graph, so here it is.

NAIRU vs Unemployment vs Fed Funds

NAIRU (Civilian Unemployment Rate) vs Unemployment (Natural Rate of Unemployment) vs Effective Federal Funds Rate

You’ll notice that while effective federal funds rates (the green line) increase during low unemployment periods (the red line) before Volcker, it is after Volcker that they correlate strongly to whether the unemployment rate is approaching or below NAIRU. Before Volcker, the unemployment rate is often below NAIRU and people get a lot of raises.

Note, in particular, and with amusement, that the flat, blue line rate (the natural rate of unemployment) in recent years shows a period where unemployment has stayed above NAIRU. Note that Yellen started talking about increasing rates as the unemployment rate came closer to NAIRU.

Your wages were crushed, deliberately, supposedly to crush wage inflation.

And this is why unemployment doesn’t have very much to do with how the economy feels for ordinary people, especially not now (it effects how the economy feels some, but not much). Unemployment has to get below NAIRU and stay there for you to get real wages.

I will point out, for completeness, that the idea that wages are the most important source of inflation is questionable, but I’ll deal with that at a later date.

(Read: A More Detailed Look at the End of the Post-war Liberal Era)

Originally published Feb 17, 2006. Back to the top because it is an actually important post. We just recently had another case of the stock market declining due to low unemployment rate figures. This is why.

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The Postal Deal for Last-Mile Delivery for Amazon Is Bad

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On April 7, 2018

25 Comments

So, Trump has said that the US Postal Service deal with Amazon is a bad one.

It’s not costing the USPS more than the USPS makes, to be clear, and it isn’t the cause of the USPS’s problems: That’s a result of having to pre-fund pension obligations that no other government organization or private firm has to do, so that even though the USPS is operationally in the green, it shows as is in the red.

This was passed by a Republican Congress in an attempt to kill the USPS, which they don’t like on ideological grounds.

However, the USPS does under-charge Amazon and other companies for last mile delivery.

David Dayen, whom I respect, made the argument. This is an argument I heard before Trump was president, though this version is dated in 2018:

Nobody has the delivery infrastructure of the USPS, which visits 150 million locations 6 days a week. Shippers like UPS, FedEx, and Amazon pay the USPS to access that delivery network and have USPS carriers deliver their packages.

In other words, USPS is letting competitors use its monopoly infrastructure to offload their least profitable package deliveries.

You’d think this would fetch the highest rates for USPS’ network, but actually it’s the lowest. Who offers this kind of cheap service to the companies they compete with?

The competitors don’t really have a choice but to use USPS, they don’t have this infrastructure in place. And yet USPS gives it away for a song. The rate also appears to be flat regardless of size and weight of the package. Mail carriers are lugging around 50-pound bags of dog food.

The USPS is also severely undercounting these outside packages as a percentage of overall deliveries. The accounting on this is pretty wild. The economics of this makes no sense. While pre-funding retirement benefits is the sole cause of USPS’ financial woes, this appears to be a tremendous missed opportunity.

 So, basically, the USPS could charge a lot more, and it would still make sense for Amazon and other private companies to pay what they charge, but the USPS doesn’t. It’s a bad idea, to people (especially Amazon) who can afford to pay more and who, no, aren’t going to replicate the USPS last mile delivery, because it is way expensive.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

How to Solve London’s Housing Problems (and Canada’s)

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On February 12, 2018

33 Comments

So, two lovely facts about London’s housing market. First:

Londoners spend 72 percent of their income on rent.

Second:

Overseas buyers snap up the majority of exclusive London homes

These two facts are related.

This is a problem with an obvious solution, do not allow non-residents to buy housing in your country. Do not allow housing to be empty more than three months a year. If it is, and renovations are not actively ongoing (physically check to see if it is), then tax them at punitive rates (30 percent of the property value or more) and, if after a year the property still doesn’t meet the requirements, simply expropriate it, with no compensation.

Further, smaller countries CANNOT absorb the excess money of larger countries busy printing money and/or creating billionaires. Canada and Australia: I am talking to you with relation to China. You are pygmies and China is printing more money than every other major nation combined. You cannot allow Chinese to buy up real estate, or anything else in your countries, because they have enough money to buy everything at prices with which your locals cannot compete.

This is obvious. It is stupidly obvious. But various speculators and builders are getting rich, so it is ignored.

These housing price problems require more than just banning foreign buyers, but any solution starts there, and the problem cannot be solved without doing so.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Slavery, Amazon Version

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On February 2, 2018

94 Comments

Because Hell (a.k.a. working at an Amazon warehouse (and plenty other places)) is about to get worse. Amazon has patented wristbands which track where your hand is at all times AND can nudge you.

Amazon already tracks warehouse workers by the second, with supervisors watching their location.

This is hell. Absolute hell. It extends assembly line horror to a vast range of other jobs, allows a smaller number of supervisors (and soon AI) to watch them, and control them like flesh-robots.

Revolution is the only sane response to the extension of such technologies. And quite probably, revolution French-style.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Sears Canada Steals Pensions

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On January 20, 2018

79 Comments

So, Sears Canada went bankrupt. Their pension fund is underfunded. Pensioners will be screwed. As usual, before going bankrupt Sears paid large dividends and bonuses to its executives, but somehow didn’t have the money for its pensions.

This isn’t, but should be, illegal. Apologists may claim that if it’s legal, it’s not theft, but justice is not law, and fools who think it is should remember that everything the Nazis did was legal when they did it, as my friend Stirling Newberry often pointed out.

A society which regards its ordinary members as sheep to be culled for the benefit of its elites is an unjust society, and those who engage in such activities towards those ends are villains. Odds are, sadly, good that they will get away with it, but every once in a while, such offenses end in guillotines or bullets.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Major Governments Can Shut Down CryptoCurrencies at Will

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On January 14, 2018

50 Comments

Government can shut down the cryptocurrency experiment any time it wants. Government money creation worked because the government insists you pay taxes in their money and they have people with guns. Crypto exists as long as governments wants it to and no longer.

There is a great deal of triumphalism in the crypto-world, because it has made a bunch of people rich. People who get rich virtually always think it is because they are great people. They feel empowered and so on. (And, according to the research, generally become selfish jerks with a reduced empathic response.)

The simple power relationship is this: Any government can put the hurt on crypto and largely shut it down in their country simply by criminalizing it and having their taxation folks watch the entrances and exits.

Crypto can be badly hurt by three governments: China, the EU, and the US, in exactly the same way. Crypto is arguably in violation of a host of security laws as it stands, and could be made more illegal any time a regulator or government chooses to.

People with guns beat people with cryptography. Code is not law, and the people who thought it was were fools. Law is what people with something approaching a monopoly on violence in an area say it is, and nothing else.

Peer-to-peer financial networks are a good idea: Cutting out banks for exchanging money is a good idea. (Bitcoin is a bad way to do both, but that’s not this article. Other coins do a better job.)

But it must be allowed by those people who control organized violence, and if they choose not to, all your technical wizardry will not save your networks, even if some crippled, black web version remains.

Nor is money creation quite what you think it is. Money exists mostly because powerful people want to be able to coerce the non-powerful through either taxation or debt-farming. Other benefits are incidental, if appreciated.

That doesn’t mean that crypto can’t, in theory, grab money creation from banks (though co-optation is far more likely). It means that, like banks, whether crypto can do so rests on whether they can cut a deal with, and prove their usefulness to, state-sanctioned, organized violence.

This is all it is ever about.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Money Is Power and Billionaires Can Subvert Democracy

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On November 27, 2017

112 Comments

Money is the ability to tell other people how to spend their time: what to make, what to do. It is that simple.

The Washington Post has a story about how the Gates Foundation pushed the Common Core curriculum. The details are there, but the bottom line is that once they decided to do it, it happened fast:

The result was astounding: Within just two years of the 2008 Seattle meeting, 45 states and the District of Columbia had fully adopted the Common Core State Standards.

This wasn’t done “democratically,” it was done with money, which bought officials.

The biggest problem with vast wealth isn’t that it directly makes other people poor, it is that it makes rich people disproportionately powerful. They have so much money that they can buy the state.

When they do so, they usually do so in their self-interest. Sometimes, as with the Gates’s in this case, they do so out of a desire to good.

But their idea of good may not be the same other people’s idea of good. They have vastly more weight than ordinary people, and in an unequal society, they can buy people.

It is that simple.

One way vast inequality corrupts is that it makes some people powerful enough to overthrow democracy; in general (as with Citizen’s United), and in particular cases.

Most rich people are not good people. It is well established now, in the academic literature, that rich people have an empathy deficit, that they give less as a percentage of their wealth and income, and that (to put it unscientifically) they tend to become assholes. They don’t need to care what other people think, or about others’ welfare.

And even when they do try to do good, well, they don’t need to go through normal democratic processes; they just buy the results.

Nor are they effective. There is a weird myth that “the private sector” is why solar power is cheap now. That’s effectively a lie. Solar power is cheap now because countries subsidized the markets for years (Germany in particular), and because China pushed it as a policy as well.

The Internet exists because of the public sector. Also, for decades, the US government bought the vast majority of all low-to-high-end computers. If they had not, you would not have cheap, modern electronics. Anyone who says otherwise is either a liar or doesn’t know the actual history.

Money is power. When the government relies on rich individuals and corporations to do what should be done by government, it takes longer and produces less welfare than it should, and it leads to the capture of the government by the rich.

A 90 percent top marginal tax rate and punitive capital and estate taxes aren’t necessary because “government needs the money,” they are necessary so that the rich don’t become so rich they buy the State.

And that includes the ones who try to do some good, like Gates.

(More on rich states vs. rich individuals soon.)

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

Trump’s Policy on NAFTA Is Mostly Correct

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On November 22, 2017

84 Comments

Yeah, I know, Trump is wrong on everything.

But I agree with Thomas Walkom on NAFTA. The bottom line is that what Trump wants is what the left should want, and if it doesn’t, it isn’t the economic left.

And Trudeau’s pretty face and lovely abs don’t change that.

Trump wants to:

  • Raise the minimum North American content in autos from 62.5 to 85 per cent.
  • Have 50 percent of autos which qualify for NAFTA free movement be manufactured in the US.
  • Remove Chapter 11, which allows companies to sue NAFTA governments. (This has been horribly abused to stop environmental regulations)
  • A five-year sunset clause.

And Trudeau has said that if Chapter 19 doesn’t stay in, he’ll walk from NAFTA.(Chapter 19 allows us to take the US to court to see if domestic laws are applied. We’ve won such rulings and the US has just changed the law, as with softwood lumber.)

Frankly the changes that Trump wants to NAFTA are mostly good. The sunset clause simply means the deal must keep working, and it is far better than clauses which make it hard to leave deals.

Of course these changes aren’t all great, but they would lead to more jobs in all three countries, and I can’t see why that’s a bad thing. The bottom line is that countries not only have a right to say that access to their markets should benefit their citizens, they have a duty to do so.

The results of the work I do, like this article, are free, but food isn’t, so if you value my work, please DONATE or SUBSCRIBE.

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