Saturday, August 31, 2013

The Fight for Higher Wages

http://economix.blogs.nytimes.com/2013/08/30/the-audacity-of-the-fight-for-higher-wages/?emc=eta1

***************
"Strive not to be a success, but rather to be of value." (Albert Einstein)
***************

Jared Bernstein, former chief economist to Vice President Joseph Biden, saw an interesting intersection of two stories this week: first that the banks had an outstanding quarter with profits up 23% (primarily because they had to write off less loan losses), and, second that there were striking fast-food workers calling for an increase in their pay to $15 an hour (the average for these workers is roughly $9 per hour, up from $8.66 in 2009).

Putting this together with an upward revision in second quarter GDP that came out Thursday, corporate profits were at (or near) record highs as a share of national income while compensation "...fell again and is now at the lowest share it has been since the year (he) was born: 1955" caused Bernstein to conclude that something's broken in an economy that serves low wages to significant numbers of adults whose families depend on their earnings.

All this as the Conference Board (a business research group that is closely watched by CEOs) said on Thursday that its index of leading indicators increased .6% last month to a reading of 96. Some of the ten leading indicators that went up were: new orders for consumer goods and materials, new building permits issued, an index of stock prices and an index of consumer expectations.

Are corporate profits up partly at the expense of our lowest paid workers? 

Thursday, August 15, 2013

Justice Department Seeks to Block AMR/US Air Merger

http://www.nytimes.com/2013/08/15/business/justice-dept-alters-view-of-mergers-by-airlines.html?pagewanted=all

***************
"Management is efficiency in climbing the ladder of success. Leadership determines whether the ladder is leaning against the right wall." (Stephen Covey)
***************

I have to join Bob Crandall (retired CEO of American Airlines) who questions what the people who run our government are thinking. On Tuesday, the Justice department sued to prevent the merger of American Airlines and US Air. According to Justice, the merger will mean less competition and higher prices for consumers.

So, what was this same Justice Department thinking when they evaluated the mergers of Delta and Northwest in 2008 and United and Continental in 2010? According to Crandall, these combinations (between companies that were much more competitive with one another than are American Airlines and US Air) have demonstrated that consolidating companies to build a nationwide service capability, realize economies of scale and reduce excessive competition is a sound strategy.

By allowing those two mergers, the US government has essentially created a "duopoly" with two super majors, the rest of the airlines and Southwest. Allowing this merger (AMR/US Air) would have created three super majors and Southwest (with smaller specialty airlines like Alaska Air which is well run and serves a purpose). Neither American or US Air serves enough US or international cities to compete effectively with United and Delta.

And, let's go to bat for American. I am not a fan of their management but it should be pointed out that, when most of the other airlines went bankrupt after 9/11, American tried to make it without doing that. American tried to keep their maintenance centers here in the US when other airlines went to other countries where it was "cheaper" (I won't comment on what I think the quality of the maintenance done in other countries is.).

And let's talk about "prices" for a moment: the airline industry was "de-regulated" in 1978 because Senator Ted Kennedy introduced a bill that he and his staff felt would lead to his re-election because "de-regulation" would lead to lower air fares. It did. So routes could go to anybody that leased a jet from GE (there are jets no longer in use that leasing companies are and were anxious to reactivate). To make a long story short, prices on many routes fell below what it cost the legacy airlines (like American) to operate. Segway to today: now we charge for "pillows," luggage, changing your flight plans, etc. American couldn't get its costs down or its prices up enough to survive or make a healthy profit.

According to Eduardo Porter, from 1979 to 2009 the airlines lost $59 billion on their domestic operations and $8 billion on their international flights (per Severin Borenstein at the Haas School of Business, UC Berkeley). Since the 1990s, US Air, United, Northwest, Delta, and Continental have all filed for bankruptcy, a couple of them twice.

As Bob Crandall says, if the Justice Department wants to increase competition, drop their suit and clear the way for the creation of a third super major. Justice has it backwards: what they're looking at is an industry trying to survive and a brilliant CEO at US Air (Doug Parker) who, among other accomplishments, got all the unions at American to agree that the best way out of bankruptcy is to merge with US Air. Getting all of the unions at any airline to agree on what time it is constitutes an accomplishment, let alone what Parker did.

I can't imagine the impact on jobs at American if this Justice Department suit drags on. And how about the best managers at both companies running for the exits. The best managers will get other jobs.

For Justice, there's a way to save face: get both airlines to drop a few routes and then withdraw. 

Thursday, August 8, 2013

Sequestration's Private Sector Impact

http://www.nytimes.com/interactive/2013/06/26/business/Signs-of-the-Sequester.html?emc=eta1

http://economix.blogs.nytimes.com/2013/08/08/more-on-sequestrations-effects-on-the-private-sector/

***************
"Assumptions are the termites of relationships." (Henry Winkler)
***************

Catherine Rampell observes in today's nytimes.com that there are private industries whose employment is most dependent on defense funds, and which are therefore most likely to suffer from sequestration. She provides an excellent chart on "Military Dependent Employment by State." The definition of that term refers to the Top 5 Private Industries Whose Employment Is Sensitive To Changes In Defense Spending:

* Facilities Support Services: 51%                                             Share of employment within each
* Ship & Boat Building: 43%                                                     industry that is dependent on
* Aerospace Product and Parts Manufacturing: 34%                 military spending
* Scientific Research & Development Services: 31%
* Navigational, Measuring, Electromedical & Control Instruments Manufacturing: 21%

So, as many have pointed out, while private industry employment is struggling to stay in the black each month (125,000 new jobs each month barely covers new entrants into the workforce), government cutbacks don't just reduce government employment but also reduce "dependent" private employment. It looks like Washington State is ranked first in terms of share of employment reliant on military-dependent industries, followed by New Mexico.

So, here's what I'm seeing: the U.S. did not do enough spending into its own economy as the Great Recession hit (here I am joined by Warren Buffet and Paul Krugman) to come out of it with decent GDP growth. This was followed by "sequestration" that causes weak government spending into an economy where job growth isn't strong enough - there's a "subtraction" where there should be an "addition" each month in direct government and indirect government (private sector jobs dependent on government spending) spending.

There's still time to spend on things like infrastructure (much needed in the U.S.). Get growth back to 4% per year and then gradually reduce government spending where that's needed. At that point, tax receipts are coming in and government employment can be gradually reduced where appropriate (am I repeating?).

Where are the economists?

Monday, July 29, 2013

Climbing the Income Ladder

http://www.nytimes.com/2013/07/22/business/in-climbing-income-ladder-location-matters.html?emc=eta1

***************

"I suppose leadership at one time meant muscles. But today it means getting along with people." (Mahatma Gandhi)

***************

According to a new study that other researchers are calling the most detailed portrait yet of income mobility in the U.S., "where you grow up matters." The study is based on millions of anonymous earnings records and is the first to compare upward mobility across metropolitan areas.

So, climbing the income ladder occurs less often in the Southeast and industrial Midwest with the odds notably low in places like Atlanta and Charlotte.

According to Nathan Hendren, a Harvard economist: "There is tremendous variation across the U.S. in the extent that kids can rise out of poverty." The variation does not come simply from the fact that some areas have higher average incomes: upward mobility rates, Hendren notes,  often differ sharply in areas where average income is similar, like Atlanta and Seattle.

The "interactive map" alone is worth the time to look at the study data. A sweep of the color coded U.S. map yields (by county) the chances a child raised in the bottom fifth rose to the top fifth ($70,000 by the age of 30 or $100,000 by the age of 45) in his/her career.

The researches identified four factors that appeared to affect income mobility, including the size and dispersion of the local middles class. All else being equal, upward mobility tended to be higher in metropolitan areas where poor families were dispersed among mixed-income neighborhoods.

In previous studies of mobility, economists have found that a smaller percentage of people escaped childhood poverty in the United States than in several other rich countries including Canada, Australia, France, Germany and Japan. This latest study is consistent with those findings.

For me, I find it especially interesting that children who moved at a young age from a low-mobility area to a high-mobility area did almost as well as those who spent their entire childhoods in a higher-mobility area. But children who moved as teenagers did less well.

For economists, the comparison of metropolitan areas allows researchers to consider local factors that previous studies could not.

Brilliant work!

Thursday, July 11, 2013

Defining Prosperity Down

http://www.nytimes.com/2013/07/08/opinion/krugman-defining-prosperity-down.html?src=recpb&_r=0

***************

"A man who views the world at 50 the same as he did at 20 has wasted 30 years of his life." (Muhammad Ali)

***************

Paul Krugman defines last Friday's employment report as "not bad." He has reservations. I do too. Krugman defines his overall problem as the jobs picture. So do I.

The U.S. economy should be adding more than 300,000 jobs per month at this point, not fewer than 200,000. Krugman's "Economic Policy Institute" attachment provides an excellent perspective on that: we would need more than 5 years of job growth at this rate to get back to the level of unemployment that prevailed before the Great Recession. And, to quote Krugman: "Full recovery...may never happen."

We're certainly not going to get more "fiscal" stimulus from the federal government. With the austerity politicians in power, we're actually getting job eliminations in government. So, when we see the BLS (the U.S. Bureau of Labor Statistics) reports each month, the "plus jobs" numbers are now really private sector "up" and public sector "down."

Then, of course, there is the Federal Reserve which has done as much as it could with monetary policy stimulus and linking that to the unemployment rate. This "linkage" is an outstanding move but I've seen no numbers that show the U.S. unemployment rate is down to 6.5% (the Fed's magic number). And, whenever we get there, is 6.5% the new normal? "Normal" used to be 5% for full employment in the U.S. according to economists generally.

Again, according to Krugman, investment in equipment and software is already well above pre-recession levels basically "...because technology marches on and businesses must spend to keep up." And "housing" is definitely staging a comeback.

But, if housing is staging a comeback, then mortgage interest rates will go up (and are) so that means a somewhat slower growth in home sales, which is what we don't need.

I agree with Krugman's conclusion that there's a real risk bad policy will choke off our already inadequate recovery. It's like "Murphy's Law."

Krugman gives us the perfect definition of an example of what I call "political economics:" "If unemployment rises from 6% to 7% during an election year, the incumbent will probably lose. But, if it stays flat at 8% thru the incumbent's whole term, he or she will probably be returned to power. And this means that there's remarkably little political pressure to end our continuing, if low-grade, depression."

I was happy to see that Krugman supported what I've been saying lately: "I can't help recalling that the last time we were in this kind of situation, the thing that eventually turned up was World War II."

Thursday, June 20, 2013

The IMF On The U.S. Economy

http://economix.blogs.nytimes.com/2013/06/17/the-current-u-s-economy-text-and-subtext/?emc=eta1

 http://www.nytimes.com/2013/06/17/opinion/krugman-fight-the-future.html?partner=rssnyt&emc=rss

***************

"A competent leader can get efficient service from poor troops, while on the contrary an incapable leader can demoralize the best of troops." (General John J. Pershing)

***************

If I could put two brilliant minds together and see how the IMF views the U.S. economy, that would be my objective for these thoughts.

Jared Bernstein's view on what the IMF has just published is that they see the U.S. stuck in a "sloggy," "backward-leaning," L-shaped recovery: "The United States economy, with considerable prodding from fiscal, financial (the bailouts), and monetary help, exited a historically deep recession in the second half of 2009, but has been growing relatively slowly since then." Not enough stimulus for not long enough.

IMF: "Underlying fundamentals have been gradually improving." Bernstein: "Whose fundamentals...? At times like this, there's a risk that the economy is doing well, EXCEPT FOR MOST OF THE PEOPLE IN IT!" (my caps)

IMF: "The modest growth rate of 2.2% in 2012 reflected legacy effects from the financial crisis and deficit reduction..." Bernstein: "Current growth rates are not fast enough to put much downward pressure on the unemployment rate...(20 million who are un- and underemployed). Moreover, the IMF predicts slower growth (1.9%) this year."

IMF: "...house prices and construction activity have rebounded, household balance sheets have strengthened, labor market conditions have improved, and corporate profitability and balance sheets remain strong..." Bernstein: "All true, and all helpful developments, especially the housing part, but there's a large imbalance between improving labor market conditions and corporate profitability...In fact, the compensation share of national income is at a 48 year low, the profit share at an all-time high."

Bernstein: "The picture painted in broad strokes by the IMF is correct and not all without hope. As they say, things are improving, albeit too slowly. But in every case, we could be doing better were it not for policy mistakes."

Krugman refers to an article in the IMF Survey magazine titled "Ease Off Spending cuts to Boost U.S. Recovery." The title speaks for itself. But, Krugman has an issue with Christine Lagarde, the fund's head, who called on us to hurry up and put in place a medium term road map to restore long run fiscal sustainability. Krugman's gripe: "Why, exactly, do we need to hurry up? Is it urgent that we agree now on how we'll deal with fiscal issues of the 2020s, the 2030s and beyond?"

Krugman's answer: "No it isn't. And in practice, focusing on 'long-run fiscal sustainability' -- which usually ends up being mainly about 'entitlement reform,' aka cuts to Social Security and other programs -- isn't a way of being responsible. On the contrary, it's an excuse, a way to avoid dealing with the severe economic problems we face right now."

So, the time for big decisions about the long run is not yet: "And, because the time is not yet, influential people need to stop using the future as an excuse for inaction. The clear and present danger is mass unemployment, and we should deal with it, now."

In addition to being a Nobel Prize winner in economics, Krugman authored a book published in 2011 entitled: "End This Depression Now." The book eloquently makes the case for a burst in government spending to jump start the economy. Proof that he's right is the underwhelming GDP growth in the U.S. since the original "stimulus" was enacted. Both Krugman and Warren Buffet said, at the time, that it (the "stimulus") would not be enough, and they have subsequently been proved right.

I'm going to guess that things will start moving again by 2020. They could have started "moving" again a lot sooner with more spending and cost cutting later on after things got better.


Tuesday, June 11, 2013

The Unemployed Economy

http://economix.blogs.nytimes.com/2013/06/07/long-term-jobless-still-a-bleak-picture/

http://www.nytimes.com/2013/06/10/opinion/krugman-the-big-shrug.html?emc=eta1

***************

"We talk about quality in products and services. What about quality in our relationships, quality in our communications, and quality in our promises to each other?" (Max De Pree)

***************

I think I'm living in an alternative universe but Annie Lowrey and Paul Krugman are helping me with that. Economists and politicians are actually happy that unemployment is down to 7.6%! Lowrey points out that long-term unemployment counts 4.4 million workers that have been out of a job for more than six months. That's not a statistic - that's people!

If you break down the demographics, the number of people (May, 2013) who report being out of work for less than 5 weeks has almost returned to the same level as in 2007. But the number of people unemployed 5 to 14 weeks is about 25% higher. For those out of a job 15 to 26 weeks, it's 78% higher. And, the number of long-term jobless, those unemployed for more than 27 weeks, is 257% higher! So, the longer a person is out of work...

Krugman defines normal (pre-crisis) as an economy adding a million or more jobs each year, enough to keep up with the working-age population. Normal meant an unemployment rate not much above 5%. And, while there was some unemployment, normal meant very few people out of work for extended periods.

Back then (pre-crisis), I was arguing that I didn't want to see an economy where 5% unemployment was what economists thought was necessary for things to hum along smoothly. Ridiculous.

Krugman goes on to help me with the language of economics: "For more than three years, some of us have fought the policy elite's damaging obsession with budget deficits, an obsession that led governments to cut investment when they should have been raising it, to destroy jobs when job creation should have been their priority. That fight seems largely won -- in fact I don't think I've ever seen anything quite like the sudden intellectual collapse of austerity economics as a policy doctrine."

Krugman goes on: "But while insiders no longer seem determined to worry about the wrong things that's not enough; they also need to start worrying about the right things -- namely, the plight of the jobless and the immense continuing waste from a depressed economy. And that's not happening. Instead, policy makers both here and in Europe seem gripped by a combination of complacency and fatalism, a sense that nothing need be done and nothing can be done."

There's a reason why Krugman has a Nobel.

Alan S. Blinder, writing this week in the Wall Street Journal (6/10/13 Opinion), points out that the Brookings Institution's Hamilton Project estimates each month what it calls a jobs gap defined as the number of jobs needed to return employment to its prerecession levels and also absorb new entrants into the labor force. The project's latest jobs-gap estimate is 9.9 million jobs. At a rate of 194,000 a month, it would take almost 8 more years to eliminate that gap.

To quote Blinder: "So any complacency is misguided. Rather, policy makers should be running around like their hair is on fire."

Blinder has concrete ideas about what to do that could work. Speaking of "fire," I'm thinking of that old saying about "Nero fiddles while Rome burns." Nobody in government is even surfacing ideas about what to do on the employment front.

Short term, we're not in a "recovery." We're in a "non-recession" because the GDP numbers are up and not down. Long term, I'm guessing appropriate growth will be back by 2020. But, at what price?