Free Markets, Free People

Economy

The Federal Government vs. the Private Sector: wages, benefits and total compensation

Reading over the CBO’s analysis and comparison of private sector wages vs. federal government wages revealed some interesting things.  The CBO broke down its comparison by education – or lack there of.

It seems that if you have a college degree or a professional degree, pay is about equal in the private and government sectors (although benefits are greater if you work for government).  If you have a PhD, you’re much better off in the private sector.

But, if you’re a high school grad or college drop out, the Fed is for you.

Wages:

Federal civilian workers with no more than a high school education earned about 21 percent more, on average, than similar workers in the private sector.

Benefits:

Average benefits for federal workers with no more than a high school diploma were 72 percent higher than for their private-sector counterparts.

Total compensation:

Federal civilian employees with no more than a high school education averaged 36 percent higher total compensation than similar private-sector employees.

Now I note this for a very simple reason.  Who do you think is attracted to federal service vs. who do you think might seek employment first outside of federal service?  And what effect do these inflated wages and benefits have on the labor market?

It is sort of like the subsidy/tax question.  If you subsidized something you get what?  More of it.   If you tax it you usually get what?  Less of it.

Well, if you pay wages and benefits far above the market to a certain segment of the population, who are you likely to attract?

And are we necessarily best served by that?

I don’t have anything against high school grads.  I’m simply illustrating a point.  This isn’t a market driven phenomenon.  It is, however, something that will effect labor markets.  It is sort of the opposite of the Medicare problem in the health profession.  Medicare artificially bids down the price of health care to the point that as it continues to lower its payments, more and more health care providers refuse to take Medicare patients.

In this case we have government artificially bidding up the price of labor with arbitrary wage, benefit and total compensation numbers (they’re obviously not tied to private market compensation except somewhat in the case of college or professional degrees).  And, of course, you have to factor in government unions as big reason for this.

What it means is government will take potential workers from the market that might have worked in the private sector at a lower wage.  Now, certainly, there’s no shortage of labor at this point in our economy, however, you get the point.   If we were in such a place (you know, like a recovery with a rapidly expanding private sector?) then you’d have government bidding up wages artificially – and we all know what that means to consumers.  Higher prices.  And to potential employers – higher wages and benefits.

The result – well, probably reduced hiring.  Because any good business is going to do a cost-benefit analysis to determine whether the job they’re considering adding is worth the price they’ll have to pay in wages and benefits.   This is probably one of many factors, at this time, which point to the “no” button.

It is this sort of intrusion in markets (in hundreds of ways driven by government) that distorts them, artificially moves the equilibrium point and causes prices to rise and unemployment to stay high.

~McQ

Twitter: @McQandO

Economic Statistics for 31 Jan 12

Today’s economic statistical releases:

The Employment Cost Index rose 0.4% last month, 2% from last year, as wages are showing upward pressure at odds with the slow economy.

The Chicago Purchasing Manager’s index fell from 62.5 to 60.2 as Chicago area business conditions cooled slightly.

S&P Case-Shiller report their home price index shows continued erosion in prices, down -0.7% for the month on a seasonally adjusted basis. Remove the seasonal adjustments, and the picture is even worse, with the 20-city index down -1.3% for the month and -3.7% from last year.

The Consumer Confidence Index slid from 64.5 last month to 61.1 this month. The Conference Board says the estimate of current conditions is weak.

The State Street Investor Confidence Index fell to 92.4 from last month’s 99.3.

In weekly retail sales, ICSC-Goldman reports a lackluster 0.1% increase for the week, up 3.9% from last year. Redbook is also relatively muted in the January sales increase, coming in at 2% above last year.

~
Dale Franks
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Economic Statistics for 30 Jan 12

Today’s economic statistical releases:

Personal income rose 0.5% in December, while personal spending remained unchanged. On a year over year basis, income rose 3.8 %, while spending rose 3.9%, once again exceeding the rise in income. The Core PCE Price Index, an inflation measure,rose 0.2% for the month, and is up 1.8% over last year.

The Dallas Fed Manufacturing Survey shows that manufacturing picked up the Texas Fed District last month. The general business activity index rose from -3.0 in the prior month to 15.3, and the production index rose to 5.8 from -1.3.

~
Dale Franks
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A comparison of catastrophic scenarios

Consider the following generic proposition:

“System Y is a complex system, and its destabilization would have a dramatic negative impact on society. Factor X is known to influence System Y, and the growth of Factor X is believed to destabilize System Y and even make it possibly vulnerable to catastrophic Failure Mode Z.

“Therefore, for the good of society, it’s extremely important to reduce Factor X. Everyone must make sacrifices to avoid Failure Mode Z. “

If any particular values of System Y, Factor X, and Failure Mode Z come to mind when you read that, please note them before you read the rest.

Whether such a proposition is valid in the real world depends on many things. For example, is it proven that Factor X’s growth contributes to the destabilization of System Y? What is the probability that the current rate of growth of Factor X will cause System Y to fail in some way. What’s the probable timeline involved? What are the likely negative results if System Y becomes unstable? Are there results from the past of such systemic failure, and if so what can we learn from them about the probabilities and outcomes in this case?

Let’s take a look at a couple of real cases of the proposition.

First, let’s consider

System Y = global climate

Factor X = carbon dioxide

Failure Mode Z = significant global temperature rise with attendant sea level rise and other forms of extreme environmental degradation

With this particular substitution, most of those on the left would vigorously assure us that the proposition was valid. They would then tell us that, in order to reduce carbon dioxide, drastic measures are needed, even though those measures have some very undesirable side effects on various members of society.

Next, let’s consider

System Y = US or world financial system

Factor X = government spending and debt

Failure Mode Z = financial system meltdown, in which financial institutions fail en masse, and normal commerce is halted or seriously disrupted

Now, if we make this substitution and present the proposition to a typical leftist, their reaction would be quite different. They would very likely not agree that drastic measures are needed to reduce spending and debt. Based on recent arguments from the left, they would look to comparatively small changes to address any dangers, such as raising taxes on rich people, or “rooting out fraud and waste”. Such changes have been tried before, and clearly are not a long term fix, yet the left keeps insisting that they are sufficient to head off potential financial catastrophe.

They would certainly not be in favor of dramatic reductions in Factor X in this case. They would be very concerned about the effects on society of the spending reductions, and would likely even resort to hyperbole to highlight those effects. They might even say that those who advocated dramatic reductions in spending and debt were cruel, heartless people who were simply unwilling to do their part for other, less advantaged people.

Let’s first assume, just for the sake of argument, that both forms of catastrophism are real dangers. I think they actually are quite different in the amount of danger they pose, but for now let’s pretend that they are both serious dangers that could result in catastrophes affecting many millions of people in drastic and awful ways.

In that case, why would the left react so differently to the presumed obvious solution of reducing Factor X?

I believe the real reason the left supports drastic measures in the first case but not the second is fairly obvious. In the first case, the reduction of Factor X (carbon dioxide) requires a dramatic increase in government size and influence. In the second case, the reduction of Factor X (spending and debt by various governments) requires a dramatic decrease in government size and influence. In fact, it calls into question the entire viability of the welfare state. (More on this below.)

Of course, those on the right are subject to the symmetrical analysis. One might conclude (in fact, the typical leftist would almost certainly conclude) that the right makes such decisions solely based on their distaste for big government. They don’t accept the first proposition because it increases government, while they accept the second one because it decreases government.

However, as I said earlier, there are a lot of other factors in play. The probabilities involved and the historical analogs are quite different.

In the climate change case, there is no historical example of the climate system failing by going into a catastrophic mode. There have been ups and downs due to natural causes, but no mass extinction, for example, has been clearly traced to runaway temperature rise.

We have some geological evidence about climate change. Geological examples are necessarily fuzzy, but the best ones we have go the other way. We know that ice ages are not uncommon, and in fact occur on a semi-regular basis. We know that one ended about 10,500 years ago, and that ending (i.e. the warming that went with it) was probably a major factor in the spread of modern humans around the planet.

We know that there have been periods when the climate was warmer or colder than average, and we also know that mankind has generally fared better during the warm periods.

So there’s no tangible example from history or geology that should fuel fear of catastrophic warming. All we have are models. They have a short baseline, and even in that baseline, they have shown serious flaws. Other factors such as solar variability appear to have a greater influence than mankind’s carbon emissions than most of the models include. (This ignores the strong possibility of outright incompetence, fraud, and other human factors that cast doubt on the models.)

You can read a recent summary of the state of that argument in this article. A few extracts:

“…the data was issued last week without fanfare by the Met Office and the University of East Anglia Climatic Research Unit. It confirms that the rising trend in world temperatures ended in 1997.”

 

“CO2 levels have continued to rise without interruption and, in 2007, the Met Office claimed that global warming was about to ‘come roaring back’. It said that between 2004 and 2014 there would be an overall increase of 0.3C. In 2009, it predicted that at least three of the years 2009 to 2014 would break the previous temperature record set in 1998. So far there is no sign of any of this happening. But yesterday a Met Office spokesman insisted its models were still valid.”

 

“Meanwhile, since the end of last year, world temperatures have fallen by more than half a degree, as the cold ‘La Nina’ effect has re-emerged in the South Pacific.

‘We’re now well into the second decade of the pause,’ said Benny Peiser, director of the Global Warming Policy Foundation. ‘If we don’t see convincing evidence of global warming by 2015, it will start to become clear whether the models are bunk.”

 

Climate change has been vigorously discussed on QandO, so there’s not really any need to go further. It’s enough to note that the entire case for climate catastrophism looks a lot shakier than the left wishes to acknowledge. And again, we don’t really have any historical examples to learn from, and the geology is fuzzy.

However, on the economic side, we certainly do have examples of system failure. From Roman times to the Weimar Republic, we’ve seen that an economic system can certainly fail from too much spending and debt.

Further, the economic models have something in them the climate models don’t – clear and obvious exponential factors at work. Compound interest is one such factor that no one can deny. It’s also the opinion of many (including myself) that the spending curve for most welfare-state governments exhibits an exponential shape.

We know that exponential growth cannot go on indefinitely in the real world. Eventually, the amounts outstrip the boundaries the real world will tolerate. This is often expressed by the saying “What can’t go on forever, won’t.”

There are other differences. Climate change, if it happened at all, would happen over a span likely measured in decades. No one outside silly movies is saying that a city such as New York would go to being underwater, or too hot or too cold to live in, in a matter of weeks or months.

Financial failure, on the other hand, could happen quite suddenly. Most people would not be prepared for it, and that would cause the suffering to be worse.

Finally, it’s not clear how much of the populace would be negatively affected by significant warming of the earth. Some would clearly benefit – just ask the folks who live in Greenland. Others could suffer, of course. However, remember our history – humankind does better in warmer periods. So there would have to be a dramatic runaway spiral on heat to get into territory where the net effect would be dramatically negative.

I’m not saying it couldn’t happen, but the probabilities for that look ridiculously low and we have no historical, archeological, or geological examples to point to.

However, an economic catastrophe in the US financial system would affect almost everyone here, and many others around the world. Certainly those with lots of assets could ride out the effects better (“women and minorities hardest hit”) but hyperinflation on the Weimar scale wipes out even huge fortunes. Plus, our financial system is more complex than ever, and we now have a society utterly dependent on its smooth functioning. In the Great Depression, a majority still lived on farms and grew their own food. They were insulated from the very worst effects. Not true today – if the system really broke down, a lot of people would grow hungry quickly. You can write your own ending from there, but it’s pretty much certain to involve civil violence, looting, etc. Because we’re in uncharted territory in the complexity of our society and our financial system, it’s not inconceivable that outcomes could involve depravation and widespread violence never seen in this country (though I think that’s an unlikely, worst-case possibility).

So to summarize: the left is frantically worried about climate change, even though the outcomes are quite murky. They are ready to take drastic action right away, even though those murky effects might be quite a ways into the future, if they can just get those Neanderthal righties to accept the consensus, etc.

But they are quite blasé about an approaching catastrophe that is much more likely, has historical parallels, has effects that could be worse for more people, and could happen in very short order.

How can this be? If what I say is correct, how can they support dramatic intervention to mitigate climate change, but not support dramatic intervention to mitigate economic meltdown?

Because accepting the possibility of economic catastrophe means rethinking their entire philosophy. Intervention to mitigate economic meltdown means dramatic reversal of the welfare state. Most of those on the left are mentally unable to accept that possibility, and will therefore resort to any level of rationalization necessary to reject it.

Thus, I conclude that most leftists have convinced themselves that an economic catastrophe is wildly unlikely to occur, just as those of on the right simply don’t believe that a climate catastrophe is likely to occur. As I outlined above, I think their conclusion is logically unsupportable, whereas I think doubting a climate catastrophe is completely supportable.

Given 2008, given the spending curves, given the obvious incompetence and mendacity of our politicians, how can they doubt the strong possibility of economic catastrophe? Well, in their lifetimes, there has always been one more set of kludges that kept the system stabilized for a while. They can rationalize that, if certain selfish parties just give in to another set of kludges, things will work out fine. They simply ignore historical parallels, or come up with rationalizations for why they don’t apply to our present circumstances. Some have abysmal math skills, and don’t intuitively grasp what an exponential effect really means, so they don’t give such factors any weight.

They also take comfort in the idea that they are fighting for the poor and downtrodden, and cannot conceive of a world in which the welfare state is not the framework where they do that. To them, preventing a catastrophe that has not yet occurred by taking measures that are sure to hurt such people is simply unthinkable.

I think this is insanity. Even if we accepted the most aggressive Republican proposals currently out there, they don’t even turn the tide against spending and debt. Fall 2008 gave us a pretty clear warning that the system is no longer stable. If the financial catastrophe occurs, it will hurt everyone, and it will hurt the poor and downtrodden the worse – far worse than spending reductions that gradually start reducing the welfare state.

This leads to a troubling corollary. Most leftists don’t really seem to believe the system is vulnerable to catastrophe, but, based on behavior, neither do establishment Republicans! If they did, last year’s dance around the debt limit would have a far different character to it. The establishment Republicans are engaged in only a slight variation in the “kick the can” strategy favored by Democrats, and the only reason they vary at all is the influence of the newly elected, tea-party-backed contingent in the House.*

In 2008, both the establishment Republicans and the Democrats in Washington panicked. For a while, it looked like the catastrophe might actually be imminent, and that scared them spitless. They authorized huge, unprecedented levels of spending and debt, mostly because of their fear.

They don’t seem scared now. Even though it ought to be obvious that you don’t solve a debt crisis for the long term by adding a lot more debt, and even though their measures certainly did not achieve the predicted results on growth and employment, they have lapsed back into their mental fiction that nothing that bad is really going to happen.

I’ve pretty much stopped listening to them. The coalition of welfare state leftists and establishment Republicans are living in a fantasy land. I don’t think they will really believe in the possibility of economic meltdown until it actually happens or is so imminent that it can’t be denied. As Heinlein said:

“Human beings hardly ever learn from the experience of others. They learn; when they do, which isn’t often, on their own, the hard way.”

Then, since they’ve never really considered it possible, when/if it happens, they’ll be clueless about what to do. When they take additional panicked action, it’s likely to make things worse instead of better (as I think many of the actions in 2008 did).

Make whatever preparations you think necessary. I don’t think financial catastrophe is inevitable, but I do think it is the most likely outcome, whether it’s ten years from now or twenty years or next month. I have a bumper sticker on my car that sums it up: “Believe in yourself, not the government”.

(*) I concede the possibility that some DC politicians know we might be facing economic catastrophe, but have concluded that they can’t do anything about it politically, so they might as well keep playing the business-as-usual game. I regard that as dishonest and cowardly. If we are to prevent the catastrophe, one of the absolute pre-requisites is that people understand that it could happen, and are therefore willing to endure the measures to prevent it. Also, obscuring the possibility of financial catastrophe in the guise of “not scaring the people” is condescending, arrogant, and makes it more likely that the catastrophe will actually come to pass.

Economic Statistics for 27 Jan 12

Today’s economic statistical releases:

The advance estimate for 4th Quarter GDP came in at 2.8% annualized growth. This beats the 3rd Quarter’s 1.8%, yet still falls below analyst expectations of 3.1%. GDP was up 1.6% over last year, a relatively anemic rate of growth.

The University of Michigan reports their Consumer Sentiment index continues to rise, coming in at 75, compared to 74 from two weeks ago.

~
Dale Franks
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Economic Statistics for 26 Jan 12

Today’s economic statistical releases:

Durable goods orders for December rose a sharp 3%, and ex-transportation orders were up 2.1%. November orders were also revised upward sharply to 4.3% from 3.7%

Initial claims for unemployment rose 21,000 to 377,000. The 4-week moving average still dropped, however, to 377,500.

The Bloomberg Consumer Comfort Index rose 1 point to -46.4.

The Chicago Fed reports its National Activity Index rose to 0.17 in December from -0.46 the prior month. The 3-month moving average stands at -0.19, which is slightly below-trend growth.

New home sales in December fell 2.2% to a disappointing 307,000 annual rate, well below analyst expectations of 320,000.

The Conference Board reports that the Index of Leading Economic Indicators—which has received a huge revision to the components that make it up—rose 0.4% last month. In the LEI, money supply has been removed in place of a new credit measure, and deliveries have been dropped in favor of the ISM New Orders index. As part of this makeover, previous months have been revised sharply downward to 0.2% and 0.6%.

~
Dale Franks
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Economic Statistics for 25 Jan 12

Today’s economic statistics are all about housing:

After last week’s huge rise, the MBA is reporting a sharp pullback on mortgage applications. The composite index fell -5% last week, with the purchase index off -5.4% and refinance index down -5.2%.

FHFA reports house prices rebounded a bit, up 1% for the month, but still down -1.8% compared to last year.

The Pending Home Sales Index fell to 96.6 from 100.1 this month. Pending home sales volume is down -3.5%.

~
Dale Franks
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Economic Statistics for 24 Jan 12

Today’s economic statistical releases:

The week has started slowly, as there were no releases yesterday, and only minor releases today.

Retail sales, as reported by Redbook, have slowed substantially in January, as last week was…weak, and so is this week, with the year-on-year same-store sales rate falling 0.5% 2.8%. ICSC-Goldman Store Sales also fell steeply, down -1.4% from last week, and up only 2.8% from last year.

The Richmond Fed index rose strongly from last month’s 3 to 12 this month, indicating expanding growth in the richmond district’s manufacturing sector.

~
Dale Franks
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Davos elite: Capitalism is the problem

That is certainly the premise at work in Davos as “political and economic elite”, who’ve served us so well to this point, meet to plot discuss modifications to capitalism.

Economic and political elites meeting this week at the Swiss resort of Davos will be asked to urgently find ways to reform a capitalist system that has been described as "outdated and crumbling."

"We have a general morality gap, we are over-leveraged, we have neglected to invest in the future, we have undermined social coherence, and we are in danger of completely losing the confidence of future generations," said Klaus Schwab, host and founder of the annual World Economic Forum.

"Solving problems in the context of outdated and crumbling models will only dig us deeper into the hole.

"We are in an era of profound change that urgently requires new ways of thinking instead of more business-as-usual," the 73-year-old said, adding that "capitalism in its current form, has no place in the world around us."

Show me “capitalism” at work somewhere, please?  Social welfare, in its current form, driven by high taxation and deficit government spending, is what “has no place in the world around us”.

The dirty little secret these “elite” won’t admit was that their premise that capitalism could forever fund their social welfare states is absolutely wrong and failing.  They’ve killed the goose that laid the golden capitalistic eggs.  It isn’t “capitalism” that is failing.  It is their social welfare system that is “outdated and crumbling”.

These are just the same people who got us into this mess trying to shift the blame from unsustainable policies founded in socialism to something which has kept their socialist utopias functioning for more years than they would have had it not been there.

And we should also be precise about what it is that has kept them stumbling along this long … a mixed economy, not capitalism.  A mixed economy which has featured less and less capitalism as the years have gone by.  Capitalism in its defined form exists in few, if any places in this world.

Margret Thatcher’s warning that the only thing wrong with socialism is you eventually run out of other people’s money has come true … again.  The agony was only prolonged because some free market mechanisms were left to at least partially function over all these decades that the Europeans (and now Americans) were constructing their little social welfare houses of cards.  The elite simply refuse to see that reality and now seek another target to which they can shift the blame.  The ultimate in “can kicking”. 

The eurozone’s failure to get a grip on its debt crisis and the spectre this is casting over the global economy will dominate discussions.

"The main issue would be the preoccupation with the global economy. There will be relatively less conversation about social responsibility and environment issues — those tend to come to the fore when the economy is doing well," John Quelch, dean of the China European International Business School, told AFP.

"The main conversation will be about a deficit of leadership in Europe as a prime problem," he added.

The deficit in leadership isn’t just found in Europe.  It is found worldwide.   And it isn’t a deficit of leadership from capitalists, but instead a deficit of leadership within the ranks of the political elite.  They continue to do or try to do the same things that have gotten us into this mess and expect different outcome.   We all know how Einstein defined such activity.

It is interesting to note, too, that the Euro elite are now ready to pitch “social responsibility (however they define that – does that mean the welfare state?) and environmental issues” over the side.

But, in fact, it is more than just that which they should be considering abandoning.  The problems they face do not find their root in a capitalist system or within capitalism itself.   In fact, capitalism could be their savior, if they only gave it an opportunity.

However, they’d also have to abandon most of the social welfare state to do so.

No, their primary problem is to be found with the institution that has attempted to control their economies and which constantly gets in the way of any capitalistic successes in the name of social justice. 

Government.   And more to the point, government spending driven by high taxes and borrowing.  It requires a deficit in intelligence not to understand that.

In essence Davos will be the elite – the social welfare elite – trying their hardest to shift blame on a system they’ve done the most to try to kill over the decades (even while using it to extend the life of their social welfare states).

Controlling government, taxation that provides disincentives to business, labor rules that prohibit firing bad employees, mandated early retirement and generous welfare benefits are not the problem of capitalism.

They are the problem of large, intrusive and socialist leaning governments.

But, apparently, that won’t be a part of the discussion in Davos.

~McQ

Twitter: @McQandO