Free Markets, Free People

Dale Franks

Dale Franks’ QandO posts

February Employment Situation

Once again, the headline unemployment number for February, which droped from 9.0% to 8.9%, hides much weakness in employment, despite the 193k new payroll jobs. Indeed, the BLS’ own U-3 unemployment rate, which is calculated in a similar fashion to mine, increased from 9.8% to 10.4%.

For my methodology, the numbers look like this:

Civilian noninstitutional population: 238,851,000
Historical participation rate: 66.2%
Proper labor force size: 157,641,660
Actually employed: 138,093,000
Actual unemployment rate: 12.4%

At the end of the day, we need another 8 million new jobs to bring us back to full employment.

Observations: The QandO Podcast for 27 Feb 11

In this podcast, Bruce, Michael, and Dale discuss the demonstrations by public employee unions in Wisconsin, and the state of the economy.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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Observations: The QandO Podcast for 20 Feb 11

In this podcast, Bruce, Michael, and Dale discuss the demonstrations by public employee unions in Wisconsin, and the wave of protests across the Mideast.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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Observations: The QandO Podcast for 13 Feb 11

In this podcast, Bruce, Michael, and Dale discuss the situation in Egypt, and CPAC.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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Unemployment Calculations (Updated)

I‘ve gotten some questions about how I do the unemployment calculation every month, and the wide variance between my rate and the official rate. It’s quite simple, although there are some caveats to the data, which I’ll cover in a methodology discussion below.

First of all, the data is all available from the Bureau of Labor Statistics, here. This is the retrieval page for the historical “A” tables of the employment report.  You only need to retrieve historical data, in the following series: Civilian noninstitutional population, Participation rate, and Employed.

You have a choice, by the way, of choosing seasonally adjusted data or not. Seasonal adjustments smooth the numbers a bit from month to month, but not enough to be a major concern. There are pros and cons to the seasonal adjustments, but I’m happy either way. I use non-seasonally adjusted, so there’s more month-to-month variation, but it smooths out over longer time horizons anyway.

The BLS actually creates the employment/unemployment series from two different statistical surveys. One is the Household Survey, which asks households who is employed, who’s looking for work, and who has dropped out of the labor force. This is the series used to calculate the unemployment rate. The second series is the Establishment survey, which asks businesses how much hiring and firing they’ve done. This gives us the number of non-farm payroll jobs that have been created. It generally leaves out the self-employed, agricultural jobs, households, etc., so it doesn’t tell you much about unemployment. It mainly tells you about the rate of job creation. So, to calculate unemployment, we really only need to look at the Household survey’s historical data.

The first step is to calculate the historical labor force participation rate. This is complicated, conceptually, although not technically.  All you have to do, technically, is download the participation data in excel, and run an average between two dates.  Conceptually, you have to try and figure out what good dates are.  There are…issues with this.

You don’t want to go back too far in time, because you are trying to capture the current labor force’s participation, not the participation of your dad’s generation. Labor force participation rates change over time, so the numbers need to be relatively current. I really didn’t want to project the numbers back into the 90s, for example, when the participation rate was solidly above 67%.

You also want the time frame to reflect at least one full economic cycle, so you can capture all the variation between an expansion and recession.  But, you don’t want to choose an end date in the current economic cycle, because that skews the data up or down depending on where you are in the current economic cycle.

The dates I chose are January 2000 to Dec 2009.  That takes data from right after the peak of the 90’s expansion, to right before the steep decline in labor force participation in the current recession. That’s where I get the 66.2% historical labor force participation rate. I could now include 2010 in that rate, which would introduce a slight downwards bias to the historical rate, but not much, yielding a participation rate of 66.1%. If I drop the rates from 2000, and go with a 10-year moving average (2001-2010), it drops to 66%. But, of course, that means that we’re including the current decline in participation, which hides, to an extent, how steep the decline actually is.

Now, there is a big question mark that is really impossible to address at the current time, which is whether or not the current decline in labor force participation is skewed by the Baby Boomer retirements which have begun as the first-year cohort of the Baby Boom hits 65 this year. The logical supposition is that such a large bolus of population retiring and passing out of the system will cause the participation rate to decline. How big of a decline?  I dunno.  We’ll really only know the answer to that question at the next peak of economic expansion, when the participation rate hits a new cycle high. I think it’s already started, though, and, indeed, started in the early 2000s, when the participation rate dropped a full percentage over several months, and then stayed in the 66% range, vice the 67% range of the 1990s. I think–though I can’t be sure–that we’re seeing a fair amount of early retirements among Baby Boomers who are affluent enough to do so.

The upshot of all this is that the selection of dates for calculating the historical average participation rate is very subjective. My calculation is, therefore, arbitrary, although, I think, logically reasoned out. It has a long enough time-line to be a reliable average across an economic cycle. It is not so far in the past that it skews the data. It is not so recent that current declines–or advances–skew the data. But it is arbitrary, and I’m sure others could come up with other ones. And, of course, when we hit another economic peak, the whole thing will have to be recalculated again to catch all those Baby Boomer early retirements.

In any event, once you’ve got the historical labor force participation rate, then all you need to do is multiply that by the civilian adult non-institutional population to derive the size of what should be the current labor force.

You then divide that into the size of the “Employed” population to come up with the unemployment rate.

The equation for all this would be:

1. Population x Participation Rate = Labor Force,

2.- (Labor Force/Employed) + 1 = Unemployment Rate

So, using this last month’s unemployment figures:

238704 * .662 = 158022

-(139323/158022 ) + 1 = 11.8%

And that’s how it’s done…assuming you correctly set up your Excel spreadsheet. As I was writing the formulas above, I noticed that the Excel spreadsheet had the division backwards, and was inflating the unemployment rate. I’ve corrected the post below on the Jan Unemployment Situation.

UPDATE:

While I learned about figuring the average, all it does is pique further interest in determining the number of individuals who are underemployed or have simply given up and have dropped off the statistical graph.

How would you address those two questions and solve for both?

I wouldn’t.

First, we already have a measure on unemployment that covers under-employment/part-time work, called the U-6, which already part of every monthly release. The BLS already does that work about as well as can be expected, so there’s no reason for me to reproduce it. As for those who’ve just dropped out of the labor force, we already see that on a monthly basis via the participation rate, and the labor force size that the BLS reports.

What we don’t know is why people are dropping out of the labor force. The “A” tables keep tabs on the number of discouraged workers, but we don’t have any read on who just decided to retire, or whose spouse got sick and needs them home to care for them, or who just thought taking up mainlining China White would be a good way to pass the time, or whatever.

Ultimately, if they’re out of the labor force, they’re no longer of concern to the statisticians at the BLS. What it really boils down to is how you define the “labor force” and that’s a pretty subjective measure, no matter how you cut it. The BLS has decided that if you’re not employed or actively looking for work, you’re not in the labor force. I’m sure there’s any number of people who would be in the current  labor force under different circumstances, or who’ve been in it in the past, and who will be in it in the future.  But I don’t know how you’d inquire into those myriad of reasons people aren’t in the labor force this month, and come up with a way to quantify that.

January 2011 Unemployment Situation (Updated)

Today’s unemployment situation data is…wierd.  Most noticeable is that the Civilian Non-Institutional Population declined by 185k people, from 238,889k to 238,704k.  Did a lot of people die last month? (Update: Ah. It was an annual population adjustment by the BLS. Carry on.) At the same time, we continue the trend of large increases in the population that dropped out of the labor force, with 319k dropping out last month. Since January, 2010, 2,039k people have left the labor force. On the plus side, 117k more people say they are employed this month than last month.

Still, that 9% unemployment rate is an artifact of 504k people disappearing from the population, not the creation of new jobs, something the anemic 36k new payroll jobs number makes clear. Also, the adjusted U6 unemployment rate surged From 16.6% to 17.3%. In fact, U-3, U-4, U-5, and U-6 all rose sharply.  U-3 (Total unemployed, as a percent of the civilian labor force) rose from 9.1% in December to 9.8% last month. So, we got that goin’ for us.

Getting to the numbers, for a more accurate view of unemployment:

Civilian non-institutional adult population: 238,704
Historical labor force participation rate:
66.2%
Proper labor force size:
158,022
Actually Employed:
139,323
Unemployment Rate:
11.8%

UPDATE: Well, this is embarrassing.  I’ve made a calculation error in the Excel spreadsheet, which provided an incorrect unemployment rate, above.  I reversed the division between the labor force and the number of employed persons.  I noticed that while writing the post above, on how I calculate the number.  I’ve corrected the Excel spreadsheet, to prevent the error from recurring in the future.

Observations: The QandO Podcast for 30 Jan 11

In this podcast, Bruce, Michael, and Dale discuss the situation in Egypt.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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After Mubarak

It’s difficult to have any sympathy for Hosni Mubarak, or any other member of Egypt’s current ruling elite. Egypt has been ruled by a succession of authoritarian dictators since 1954, when Gamal Abdel Nasser took control of the Government in 1954, a dictatorship continued by Anwar Sadat and Hosni Mubarak, in turn. One always hopes that a popular movement to overthrow a dictaror will be followed by a flowering of democracy, but, sadly, that rarely happens, historically, and is even less likely to happen if Mubarak is toppled.

In all probability what will follow Mubarak in Egypt will be a government run by members of the Muslim Brotherhood, and their allies.  This means that Egypt’s most likely post-Mubarak government will be an Islamist, radical government, similar in many respects the Islamic Republic of Iran.

As Lawrence Wright points out in The Looming Tower, Mubarak’s jails have been an incubator for Islamist radicals. And why should we expect otherwise? The liberal, Western, Democratic states have been fairly supportive of Mubarak, and Sadat before him, ever since Sadat disavowed warfare as a method of destroying “the Zionist entity”, as Israel is generally known by the Arab states. Even among proponents of democratic reform inside Egypt, the support that the West has given Mubarak has made the West appear to be, at best, amoral, and, at worst, positively duplicitous. This has undercut the influence in the popular culture of Egyptian proponents of Western-style democracy.

As a result, it has been the Islamists who have seen their influence rise among the general population in recent years.  Indeed, the Islamist influence on Egyptian culture is immediately noticeable by looking at the following pictures posted a year ago by Pajamas Media. The pictures are of the graduating classes of Cairo University in 1978 and 2004.  Notice how the women are dressed.

Cairo University Graduating Class, 1978

Cairo University Graduating Class, 1978

Cairo University Graduating Class, 2004

Cairo University Graduating Class, 2004

The devolution from the modern era to a more conservative past is obvious.

The upshot of all this is that a post-Mubarak regime is likely to be undemocratic, Islamist, and hostile to the West in general, and the US–and, of course, Israel– in particular.  With Egypt having such a large population and corresponding cultural influence on the rest of the Arab world, there is much reason to believe that that a post-Mubarak Egypt will be the cause of a significantly less stable, and more troublesome environment in the Middle East.

Our policy failures in Egypt have been bi-partisan, and made for ostensibly the best of reasons, but their results seem likely to be disturbing. Still, it’s difficult to see what other choices were available to us.  Had we imposed too much pressure on the Mubarak regime to democratize, the end result would likely have been either a) much the same as we are facing now, or b) simply caused Mubarak to turn to China to replace the security and stabilization support provided by the West.  Sadly, the policy options we faced were those presented by the real world, and not the idealized world we might wish for. Although, one notes, had we forced Mubarak into the arms of the Chinese, we might have more acceptable moral support to offer the proponents of Egyptian democracy at the present moment.

Now, we don’t even have that.  The Egyptians are going to do whatever they’re going to do, and we have little choice but to sit by as passive observers.

Book Review: The Politically Incorrect Guide to Socialism

I regularly receive review copies of new books from Regnery Publishing. Occasionally, one stands out above the rest, such as Kevin D. Williamson’s The Politically Incorrect Guide to Socialism.

I am not a huge fan of many of the Politically Incorrect Guides.  While they are all relatively enjoyable reading, all to often they suffer from a shotgun approach to their subject, in that they try to bring too many threads together in a relatively brief book, rather than telling a single, compelling story.  Williamson’s Guide does not suffer from this problem, but rather sticks to a simple, powerful theme. From the democratic socialism of Sweden and India, to the authoritarian socialism of Hugo Chavez’s Venezuela, to the hard communism of the Soviet Union, Williamson exposes and explains the central problem of socialism: The futility of central planning.

The trouble with socialism is not that it redistributes income to create perverse incentives–although it does do that–but rather that it attempts to do something that is literally impossible, which is to centrally plan the economy.  Indeed, even planning relatively small parts of the economy are impossible. To illustrate this problem, Williamson uses the relatively simple problem of trying to plan for milk production:

There are 115 million households in the United States. If we imagine a weekly milk consumption budget for each of them, that’s 5.9 billion household weeks to plan for. Adding in a fairly restrictive list of variables–call it zero to twenty quarts a week, four levels of fat content, organic/non-organic, soy/dairy, and three flavor options, you end up with around 6 trillion options to choose from…

If they took just one second to consider each of these options, it would take them 190,128 years just to tun through the possibilities of one year’s milk consumption in the United States.

Ah, but if it were only that simple. Milk consumption is, alas, variable over time.  Some families may use more milk making ice cream in the summer months. Some families may decide to reduce consumption for health reasons.  The actual demand for milk–or any other good, for that matter–is essentially unknowable in any rational sense.

In country after country, covering a variety of issues, Williamson points out how, time after time, the record of socialism is one of utter failure. Whether it’s the provision of food, housing, education or medical care, Williamson demonstrates how central planning invariably produces worse outcomes than free markets.

Except, of course, for those who are planners or their associates.  Things always work well for them.

In addition to his central thesis, Williamson demonstrates, along the way, how the inability to use price signals further hampers the ability of socialism to rationally match supply with demand, because economic calculation is impossible in the absence of real price data. And, perhaps even more importantly, he inquires into why the central planning impusle is ultimately antithetical to liberty and democratic governance.

This is definitely a book for the layman. Williamson explains in clear, simple language, the fundamental economic and political principles that make socialism so damaging. He doesn’t delve deeply into abstruse theoretical arguments, but rather looks at the controversial policies of the last few years to detail their shortcomings with with clarity and simplicity that should strike a chord with even those who have a minimal understanding of economics or politics.

I highly recommend this book.

Observations: The QandO Podcast for 23 Jan 11

In this podcast, Bruce, Michael, and Dale discuss the sudden end of Kieth Olberman’s “Countdown”, the Republicans’ proposals to cut government spending, state bankrupties, and much more.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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