Their Great Depression

http://online.wsj.com/article/SB10000872396390444873204577537232812750926.html?mod=WSJ_Opinion_LEFTTopOpinion

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"The word impossible is not in my dictionary." (Napoleon Bonaparte)
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Mort Zuckerman kicks off his "Opinion Journal" article (7/23/12) by quoting Ben Bernanke (Federal Reserve Chairman) that the U.S. economy is "stuck in the mud."

Zuckerman's interpretation of that remark is the same as mine: "...there has been no recovery since the theoretical ending of the recession in June of 2009."

I am part of a very small generation of babies born during WW II. As a child and adult, I have experienced (or read about) pretty much everything that has happened in the U.S. since WW II.  So, I can relate to Zuckerman when he says that "For the 80% of Americans born after WW II, this is the Great Depression."

If you don't think so, check the numbers. Again Zuckerman: "The most recent signal of a weakening economy comes from the U.S. consumer, with the Commerce Department reporting last week that retail sales fell 0.5% in June, far below the expected 0.2% increase. A stunning 70% of U.S. retailers missed their sales targets in June, the third consecutive month that sales have weakened and the worst showing since November 2009."

So many numbers get thrown around by so many people (and there will be more since this is an election year) that it's almost impossible to look at the subject of what I call "true unemployment". But, let's go with Zuckerman: "...official unemployment rate - 8.2%," add "discouraged workers" (who have dropped out since the recession began in early 2008 - nearly 8 million) - 12%," add "part- time workers" who would like to be full time - 14.9%. So, true unemployment is 15%.

One of the most stunning statistics I've ever read is Zuckerman's statement that "Fewer Americans are working today than in the year 2000, despite the fact that our population has grown by 31 million (!) and our labor force by 11.4 million." He goes on: "Today, a record number of Americans have been out of work for more than 6 months, and a record number of households have at least one member looking for a job."

Unfortunately, all of these numbers get politicized but facts are facts. I have pointed out for years now that getting Paul Krugman (a decorated economist whose blog has been the most widely read in the world) and Warren Buffet (a dedicated and highly successful capitalist) to agree on what time it is would be an achievement. Yet, they both agreed at the start of the U.S. recession, and since, that not enough money was spent to get the economy back to life. Spending on infrastructure (as Mark Zandi has continuously pointed out to Congress and anyone else who would listen) here in the U.S. is much needed (roads and bridges) and creates jobs where the spending from those workers adds more jobs (or, as Zandi calls it, a 1.5 multiple). That spending should be larger than it was and could have supplied taxable income to support municipalities currently facing bankruptcy.

I have no fear of this type of spending "causing" inflation. Once the spending (large and careful) starts up again, jobs and taxes will support what's needed without inflation (there's way too much slack in the economy - just watch the "Fed" - they're promising to hold interest rates down thru 2014, or is it thru 2016, or later than that?). Once the GDP growth rate is back up around 4% to 5% again, cut back wherever it's appropriate in big government - nobody will object.

Spending on infrastructure worldwide in a public/private partnership is a recommendation from one of the most respected economists in the world: Justin Yifu Lin, chief economist of the World Bank and one of the architects of China's dramatic economic growth. Lin, a University of Chicago PhD in economics suggests that infrastructure spending in developing economies circles back to demand for the products made by developed economies (like construction equipment, etc.). I simplify, but to read more, read "Bridges to Somewhere" by Lin in "Foreign Policy" (September 1, 2011).

Every idea and every hope has to start somewhere. We need to do something.      

 

Law School

http://www.nytimes.com/2012/07/15/opinion/sunday/an-existential-crisis-for-law-schools.html?scp=1&sq=An%20Existential%20Crisis%20For%20Law%20Schools&st=Search

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"The uncreative mind can spot wrong answers, but it takes a creative mind to spot wrong questions." (Antony Jay)
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In a study reported on in the NY Times on Sunday, only 55% of 2011 law school graduates had a law-related job within 9 months after graduation. These are jobs that require passing the bar exam. If you include "jobs helped by a law degree" and "professional non-legal jobs," that number jumps to 67%.

This data was from a study by William Henderson of the Indiana University School of Law, who analyzed recent data from the American Bar Association.

28% were unemployed or underemployed: "And at the 20 law schools with the highest employment, 83% were working as lawyers. At the bottom 20, it was a dismal 31%."

Here's another quote: "These numbers are far worse than jobs data going back a generation and should be a deep embarrassment to law schools, which have been churning out more graduates than the economy can employ, indulging themselves in copious revenues that higher tuitions and bigger classes bring in. A growing list of deans acknowledge that legal education is facing an existential crisis, but the transition to a more sustainable model will be difficult and messy."

The article goes on to point out that, in 2009, twice as many people passed bar exams as there were legal openings and that this could go on for years.

Not everyone can go to medical school - by that I mean that, if an undergraduate student wants to go on to get a professional certification that sets them up to better compete for employment, medical schools have stayed exclusive and preparation to get into them had to start back in high school. The "law profession" hasn't been that smart. Consequently, if a student wants to go to law school now in order to better compete for professional employment, it better be to a Top 10 (or Top 15) law school.

When I'm asked by students about "grad school," I always encourage them to go because one more degree can do nothing but help (especially if it's an MBA, if you're a business student, etc.). But, with law school, I now have to tell them that too much depends on LSAT scores that probably are out of reach for even currently very successful lawyers in the generation ahead of them.

So, for the class of 2010, the average law school debt was $98,500 (or $1,200 per month in loan payments over 10 years). How many of those students are even in an employment situation to pay that kind of money back?

The law profession is letting itself down.

Positive Reports On Jobs

http://www.nytimes.com/2012/07/06/business/economy/positive-reports-on-us-jobs.html?_r=1&ref=business

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"It takes two to speak the truth: one to speak and one to hear." (Henry David Thoreau)
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So, the NY Times reports this morning that: "The number of people seeking unemployment aid in the U.S. fell last week to its lowest level since mid-May, suggesting layoffs are easing and hiring could pick up."

They also reported that the "four-week average" (for unemployment applications), which smooths out weekly fluctuations, dipped 1,500 to 385,750. And that, when weekly benefit applications consistently fall below 375,000 "... it generally suggests hiring is strong enough to reduce the unemployment rate."

That's the good news. The Times also pointed out that the manufacturing sector contracted for the first time in three years based on data from the Institute for Supply Management which was reported on Monday. That's a closely watched statistic that I've referred to before here.

The Times also pointed out that "...consumer confidence fell for the fourth straight month based on June figures." To me, that's counter-intuitive to lower gas prices (which are always rising at this time of year) and improved housing market figures.

But, this is short term data. Elsewhere, there's a headline in today's Dallas Morning News business section: "Experts See High Jobless Rates Lasting Years." It basically refers to the fact that economists in the latest Associated Press Economy Survey expect the national unemployment rate to stay above 6% - the upper bounds of what's considered healthy - for at least four more years: "If the economists are correct, the job market will still be unhealthy seven years after the recession officially ended in June, 2009. That would be the longest stretch of high unemployment since the end of World War II."

Further: "Those in the survey expect unemployment to still be 8% on Election Day, and a majority predict it won't fall into normal range until 2015, or later."

This group opinion would be hard to argue with unless something were to happen that stimulated GDP growth more than what is currently anticipated.

U.S. Manufacturing Shrinks

http://money.msn.com/business-news/article.aspx?feed=AP&date=20120702&id=15289567

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"It is not our job to protect the people from the consequences of their political choices." (Chief Justice John G. Roberts, Jr. on the Supreme Court's health care ruling)
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The headline here is that U.S. manufacturing has shrunk in June for the first time in nearly three years. The Institute for Supply Management (ISM) index has been closely watched by those of us in business for the last 30 years. This is essentially a trade group of purchasing managers that puts out a number each month which gauges manufacturing activity very accurately. When the number is above "50," things are good. Below 50, not so much.

The ISM index number for May was 53.5. The index for June was 49.7. It's not just that the number was below 50. It's that it was going in the wrong direction and had dropped 4 points month-to-month. It's the lowest reading since July, 2009 - a month after the Great Recession "officially" ended.

Economists said the index was consistent with GDP growth of 1.5%. There are many economists that feel it takes 2.5% GDP growth to keep the unemployment rate from going up.

China keeps an ISM index which is computed the same way. While I don't know the "number" for June, I do know that their number "grew" in June by the slowest pace in seven months.

The saddest part of the U.S. number is that it overshadowed more positive news on housing where U.S. construction spending rose for the second month in a row. And gas at the pump, where prices are usually going up at this time of year, has literally dropped 60 cents a gallon from its 2012 peak.

But, the ISM number is consistent with the overall hiring numbers where employers have added an average of 73,000 jobs per month in April and May. Dreadful. The first three months of 2012 averaged 226,000 jobs per month added to payrolls.

Maybe the only positive sign here is that there are some good numbers mixed with the bad!

Blinder On Stimulus

http://online.wsj.com/article/SB10001424052702304765304577478561041473358.html?mod=WSJ_Opinion_LEADTop

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"Example is not the main thing in influencing others ... it is the only thing." (Albert Schweitzer)
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Alan Blinder is an economics professor at Princeton and has served as Vice Chairman of the Federal Reserve. In his article published last night, he suggests that, with legions of construction workers remaining unemployed while we all drive over roads and bridges that need repair, just does not make sense.

He's right but we appear to have a "political economics" (my term) dividing line between the Democrats who want to help state and local governments maintain their level of spending (which has dropped 6.4% since its 2008 peak). According to Blinder, most Republicans reject this idea "...even when it saves the jobs of teachers, fire fighters and police officers."

Blinder has some solid ideas about what to do about this problem that he hopes will avoid "partisan ideology."

One of those ideas is on budget policy: "...we need a two-pronged fiscal package. In the near term, we need modest stimulus, focused tightly on creating jobs. But that stimulus should be paired with a vastly larger dose of long run deficit reduction - perhaps ten to twenty times larger than the stimulus - over the ten year budget window.

Blinder's ideas on public investment and education are important and also doable. I strongly recommend reading them. And, Congress should read them too!

Schumpter On Dishonesty

http://www.economist.com/node/21556548/print

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"All human development, no matter what form it takes, must be outside the rules; otherwise, we would never have anything new." (Charles Kettering)
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Looking at the "Schumpeter" blog section of "The Economist," there's a post ("A tissue of lies") that features a social psychologist looking at why people lie and cheat in business (and even business school).

I didn't realize that I could have gotten my MBA (at least, over recent years) at Concordia College in the US Virgin Islands. In that particular institution, Mark Howard an attorney for BSkyB, a broadcaster, proved in a cross-examination that his pet schnauzer got very high grades having completed his MBA (in what appears to be record time).

Further, I find that in a survey of American graduate students, 56% of those pursuing an MBA admitted to having cheated in the previous year, compared with 47% of other students.

Schumpeter points out that the Sarbanes provision that makes misstated financials a criminally liable act for a CEO or CFO is a step in the right direction.

Schumpeter suggests that Dan Ariely's new book "The (Honest) Truth about Dishonesty," will reinvigorate the discussion. As a social psychologist who has spent years studying cheating (and teaching at the Duke Fuqua School of Business), Ariely contends that the vast majority of people are prone to cheating. He gets to a "vast majority" by including the "fudging" category: forgetting to put a few coins in an honesty box, etc.

Ariely has some interesting examples of fudging but his bottom line is: nudge people to police themselves by making it harder for them to rationalize their sins.

Some good thoughts.

Deflation

http://www.businessweek.com/articles/2012-06-05/five-charts-that-show-deflation-is-a-growing-threat

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"There ain't no rules around here. We're trying to accomplish something." (Thomas Edison, Inventor)
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So, three years after the U.S. recession technically ended (June, 2009), there's still the threat of deflation. The consumer price index rose zero percent in April from March because falling energy prices made up for any other rising prices.

According to Peter Coy (article attached), "With slow growth and [weak] job creation, there's a risk...that the general price level will actually start to fall, as it did for several months at the end of 2008 in the teeth of the financial crisis. Deflation is good for shoppers but it's terrible for people who owe money because their incomes shrink while their debts don't. It's also bad for workers because it's a sign of economic weakness, pay cuts, and layoffs."

I like what Coy has done with his "5 Charts" depicting the deflationary forces at work. The first is crude oil price per barrel: dramatic and it's showing up at the pump. Number 2 is the "Commodity Price Index" which tracks 22 basic commodities (butter, steel scrap, rubber, sugar, corn, etc.), is down 7% since March 1.

The third deflationary chart is the "output gap" which traces the difference between what the economy is able to produce "...if it's running at top manageable speed and what it's actually producing." According to the CBO (Congressional Budget Office - an organization that has no political axe to grind), the output gap is around 5.5% of GDP. Obviously, excess capacity, at whatever level, puts downward pressure on the price of labor and equipment.

The fourth chart "10 Year Treasury Yield" ("...canaries in the inflation coal mine..."), has fallen to 1.5%. That's the lowest in the last 50 years.

The fifth chart (Number employed at all levels of government) shows government employment falling. This chart shows all levels of government employment actually falling 2.7% since June 2009, really offsetting some of the growth the private sector has managed to show during that period.

Not surprisingly, it was reported this week that both Paul Krugman and Larry Summers were advocating for more "stimulus" in the face of weak economic growth indicators. Krugman has been consistent about this since the original stimulus happened: he said it wasn't enough then and now he sees that being proven out. Summers was there as the original (President) Obama economic "czar" so, in his case, whatever he advocated then, he's saying now was not enough. Of course, this is the same Larry Summers who was defrocked as president of Harvard and carped about "...no adults being in charge..." while still working for (President) Obama as the economic czar.

So, "deflation," we'll see.