Employment: Why “government spending” should be shelved in favor of encouraging private investment
In macro terms its really fairly simple. We have always come out of busts with booms. Wondering what the next boom is going to be and how to help it launch itself is where government should be looking and trying to act – not at deficit funding government make work projects and future energy schemes still some decades from reality.
For instance – a little look into the not to distant future and a scenario that would help us in both the balance of trade and employment, arenas (the latter almost immediately).
But also, we will help to satisfy burgeoning demand for petroleum in Asia, South America and Africa. Yes, the US is an oil importer. But if we import less, that will help to satisfy world demand just as much as if a new exporter appeared on the market. If we import a billion barrels a year (2.74 million barrels a day) less, at current prices that works out to $100 billion off of our huge trade deficit. This could also be a huge engine of job growth. We now have about 2,000 rigs drilling, and more are being added all the time. For each rig there are the roughnecks, the service companies, the drilling pipe and casing producers, the local service providers, etc. It is big business, and growing fast.
Fortunately, we have lots of places to drill, in various shale formations around the country. (It’s not “shale oil” in the classic sense, better to call it, “shale associated oil”). For those who think that Yankee ingenuity is a thing of the past, just look at our oil and gas industry. It serves as a powerful testament to the power of the free enterprise system that a great many people chipping away at the same problem can come up with creative new ways of extracting oil from the earth that a centralized government program of oil production would never (and has never) originated. You don’t see these new drilling techniques coming from Russia, which is still sadly statist in its efforts to exploit natural resources.
We have the resources, we could be exploiting them now (relatively speaking) and have them benefit our economy while we do the pie-in-the-sky energy research the Democrats think is the panacea to all our problems. I’ve never understood their insistence on ‘either/or’ in that regard. Why can’t we do both simultaneously – which seems both logical and would help do exactly what they claim they want – employ Americans.
Timothy Siegel’s point about innovation is well taken as well. One of the reasons we’re moving past the peak oil predictions of the past is because of innovation from private oil companies that is allowing them to extract harder to reach and exploit oil and gas at a reasonable price. We, as a nation, should be encouraging that instead of doing everything in our power to cripple such innovation.
Instead we get solutions like those below from the left. Government should spend money when one of the greatest engines for economic revival is left sitting at idle while the administration figures out how to get more sugar in its gas tank.
It’s freakin’ nuts.
~McQ
Twitter: @McQandO
Dems double down on government spending in face of stimulus fail
It seems “insanity” has indeed gripped the party of the left. That is, doing the same thing over and over again and expecting different results:
House Democrats this week have amplified their calls for new spending on infrastructure and other federal projects in the face of May’s discouraging job-creation figures.
Even as Republicans are insisting on "trillions" of dollars in spending cuts, Democrats maintain that a targeted injection of additional federal dollars in the near-term would go a long way toward reversing the hiring slump. Friday’s disappointing job report, they say, only bolsters their case.
I’ll again remind readers that it was the Obama administration and Democrats who said that if we’d give them the almost one trillion dollars in borrowed stimulus money, they’d keep unemployment under 8%. And, of course, the plan was to spend all that money on “infrastructure and other federal projects”.
Worked real well didn’t it?
Now, with much of every dollar spent still coming from borrowed money, they want to repeat the failure while saddling the economy with even more debt?
It all comes down to what they believe the role of government to be:
"The American people, while concerned about the deficit, place much more emphasis on job creation, and they see a role for the government," Rep. Raul Grijalva (D-Ariz.) told The Hill. "A fast injection of job stimulus on the public side would help tremendously. … It [the job report] helps our argument about investment."
No. It wouldn’t “help tremendously”. If that were the case, the stimulus would have helped “tremendously” and we’d be looking at less than 8% unemployment as promised instead of 9.1%. But as is obvious to everyone but Democrats, it didn’t help at all. In fact, considering that 9.1% unemployment rate, it can be argued that things got worse.
That’s because where the government actually could help, it won’t, can’t or isn’t willing to help. Deregulation, for instance. Make it easier for businesses to do business and hopefully expand and hire. They can quit making war on the private sector as well. The NLRB’s shameless politically motivated attempt to shut down Boeing in South Carolina at the behest of unions. The seemingly permanent moratorium in the Gulf of Mexico and the slow-walking of the permit process that has crippled domestic oil and gas production and cost thousands of jobs and millions, if not billions, in economic impact. Cut taxes and leave more in the pockets of both consumers and business. Cut spending – deeply – and quit borrowing money.
Unfortunately, all that is boring economics and at conflict with the “government is the answer” mindset that is prevalent in Democratic circles:
Rep. Earl Blumenauer (D-Ore.) said that only in Washington is targeted new spending being demonized.
"Once you get outside the Beltway, almost everyone agrees that we should be rebuilding our crumbling infrastructure and investing in clean American energy that reduces our dependence on oil," Blumenauer said.
I have no idea where this guy gets this nonsense, but I live out here and I don’t hear anyone claiming that the solution to our problem lies in “rebuilding our crumbling infrastructure” and “investing in clean American energy”. Not once have I heard the typical Americans I know ever mention those two options as how government should be responding.
So either Rep. Blumenauer has selective hearing, or he’s making it up on the fly. Most people I’ve talked too are convinced that government is the problem, not the solution. That government can contribute to a recovery by getting the heck out of the way, quit throwing road-blocks in front of business, reduce taxes and cut spending and getting its own house in order.
But double down and increase spending on make work and pie-in-the-sky energy projects?
No, not what I’m hearing. At all.
~McQ
Twitter: @McQandO
The QandO Podcast for 05 Jun 11
In this podcast, Bruce, Michael, and Dale discuss Weinergate, employment, and the budget.
The direct link to the podcast can be found here.
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.
Bad job numbers
I’m sure they’re “unexpected”:
Private-sector employment growth decelerated sharply in May, according to Automatic Data Processing Inc.’s employment report released Wednesday, in another possible sign of a sputtering U.S. recovery.
Employment in the nonfarm private business sector rose a seasonally adjusted 38,000 in May, well below the 175,000 increase expected by economists. In April, private payrolls showed an increase of 177,000, ADP said.
“This is exceptionally weak,” said Eric Green, chief market economist at TD Securities Inc. in New York.
“This was a dismal report, indicating a significant slowdown in job creation after six months of solid gains,” said Nicholas Tenev, economist at Barclays Capital Research.
“Sold gains?” Yeah, not so much. We’ve yet to hit the threshold of job creation – about 300,000 or so – necessary to tread water, much less be adding jobs. The gains we’ve seen in the past six months have been “positive” in that there were net jobs created, but 38,000 is about 10% of what we need per month to begin to chip away at unemployment.
The government will report its version of the numbers on Friday (the above is the ADP report):
On Friday, the government will report on U.S. nonfarm payrolls for May, data that also include government workers.
Economists polled by MarketWatch are looking for a gain of 175,000 in payrolls and for the nation’s unemployment rate to tick lower to 8.9% from 9.0% in April.
That would mark a slowdown from the healthy 244,000 jobs added in April.
It would also tell us that there is no real slowdown in hiring government workers, wouldn’t it – you know, despite “budget woes”, etc. And note too that we again, despite “a dismal report”, see economists saying the unemployment rate will “tick lower” to 8.9%? Yup, the Ministry of Truth is available to feed you whatever data you want to believe (which may explain why “improvements” in the unemployment rate don’t seem to boost consumer confidence at all). Again, not being at the “tread water” level with job creation, you have to wonder how the calculations are figured and what is being considered and not considered to anticipate the unemployment rate coming down in the face of “a dismal report”.
Dale has covered the real numbers for quite some time – well into double digits. But there is indeed a larger question out there – is the workforce actually shrinking and the old norms no longer the standard by which we should measure unemployment. I.e. are older workers looking at the job market and saying, “to heck with it, I can retire and I’m going too”?
Don’t know for sure, but regardless, the numbers from ADP remain “dismal” for May.
~McQ
Twitter: @McQandO
Is the economy set on "rebound"?
That’s kind of what some pundits are hinting with the latest "official" unemployment numbers.
But as the three of us noted on yesterday’s podcast, that number is only a slight glimmer in an otherwise dark picture. And the underlying unemployment numbers (and trends) don’t really support the reduction of last week (the number of new private sector jobs was not enough to maintain the unemployment number). Or said another way, it is most likely a temporary blip. Another ominous development that doesn’t bode well economically is the precipitous rise in oil prices and the impact that will have on any recovery. In a word, the impact it will have is "bad".
Oil is one of those commodities that has a very broad impact on economic activity. It is, until an alternative or substitute is found, the literal life-blood of our economy.
How does oil staying in the $104 to $107 a barrel range sound? Not very good, obviously. As one refiner told me, his only control over how much the fuel he refines costs when it leaves his refinery is the economies he can wring out of his equipment, but the cost of the goods coming in are beyond his control. So that cost per barrel is what he’s paying as the crude shows up at his refinery for processing.
How long will it stay over $100 a barrel? Well, many are saying quite some time:
Oil prices climbed to near $106 a barrel Monday as intense fighting between Libyan government forces and rebels appeared to be turning into a civil war and raised the prospect of a prolonged cut in crude exports from the OPEC nation.
By early afternoon in Europe, benchmark crude for April delivery was up $2.25 to $106.67 a barrel, the highest since September 2008, in electronic trading on the New York Mercantile Exchange. The contract had gained $2.51 to settle at $104.42 a barrel on Friday.
[…]
Citigroup said it raised its 2011 average forecast for Brent crude to $105 from $90, but doesn’t expect the violent protests in North Africa and the Middle East to spread to Saudi Arabia, the world’s largest oil exporter.
"We assume that output disruption is maintained through the second quarter," Citigroup said in a report. "Output disruption, or at least the threat of, will support a fear premium for the rest of 2011."
As mentioned in the article, most now view the war in Libya to be a civil war. And, reports today say that Gadhafi’s forces have had some successes against rebel forces (apparently neither side is particularly swift in the combat portion of battle). Reports also point to other countries possibly helping the rebels. And we know there are "friends" of Gadhafi, mostly found in the socialist South and Central American countries, who will try to help the dictator maintain power.
The initial shock of the turmoil in Libya has worn off the markets and they are now looking at a prolonged reduction of capacity with Libya off line. And, we’re seeing unrest in other Arab oil producing states as well. Unrest, or instability, drives the price of oil up.
So it isn’t surprising that in the last two weeks, the price of gasoline rose at its second fastest pace ever:
Gasoline prices in the United States posted their second-biggest increase ever in a two-week period, due to the rise in crude oil prices stemming from the turmoil in Libya, an industry analyst said Sunday.
The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the previous survey on Feb. 18.
The most it ever jumped was in 2005 when hurricane Katrina hit. But that was soon solved because the event itself wasn’t prolonged as is a civil war. So chances are, this isn’t the end of the rising price of gasoline.
As you might expect our national leaders have managed to put us in a position where we essentially have nothing to answer with domestically. In fact, as I recall, we’ve been told repeatedly for the last 20 or so years that bringing significant new assets on line would take at least 10 years or so and thus, I guess, shouldn’t be done. Er, yeah, ok and where would we be now if we had committed to that 10 years of bringing them on line 20 years ago? At least better off than we are now.
And most likely not talking about using the strategic reserve I’d bet. FYI, the strategic reserve is not supposed to be a tool for the use of politicians to drive down the price of gasoline when their failed energy policies show up at the pump. It is a reserve for use by our military in case we’re cut off from the foreign oil we’ve become even more dependent upon.
But back to the economy.
Does anyone really need an explanation of the impact higher fuel prices will have on a barely recovering economy (not to mention unemployment)? And, with the specter of inflation rising – not to mention food prices – how likely is the impact to be “minimal”?
Yeah, it’s not.
And, as usual, we’re in a basically no-win situation thanks to the foresight of our elected leaders and their wonderful job of putting a practical energy policy in motion. A 10 month drilling moratorium (and the jobs that go with it) with no real end in sight.
Brilliant.
So to the original question – is the economy set to rebound?
Unfortunately if it was, it most likely will be one of the shortest rebounds in history.
~McQ
Observations: The QandO Podcast for 06 Mar 11
In this podcast, Bruce, Michael, and Dale discuss the situation in Libya, and this week’s employment numbers.
The direct link to the podcast can be found here.
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.
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.
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.
December Unemployment
The employment numbers from this morning are no cause for any sighs of relief, yet. The number of persons employed increased faster than the increase in population–which seems to be unusually small compared to recent months.
In any event, according to my calculation method, this is where we stand (all numbers in thousands):
DECEMBER 2010
Civilian Non-Institutional Adult Population: 238,889
Average Labor Force Participation Rate: 66.2%
Proper Labor Force Size: 158,145
Actually employed: 139,206
UNEMPLOYMENT RATE: 13.6%
The labor force participation rate continues to decline, coming in at 64.3% this month, a 30-year low. The actual size of the labor force was 153,690. Using the historical average participation rate of 66.2%, that means the current labor force is running with about 4.45 million fewer workers than it should.
This month’s non-farm payroll increase of 103k new jobs is really just a drop in the bucket. We would need 11 million jobs created to get the unemployment rate back to 5%. Even if there were no increase in population at all, we would need to create 300k new jobs per month for 37 months to get those 11 million jobs back. The only possible bright spot is that, this year, the first of the baby boomers hit 65 and begin retiring. So maybe the actual labor force participation rate is due to naturally drop, as is the size of the labor force.
All we have to do, then, is figure out how to pay social security to more retirees with a shrinking labor force. That should be fun.