Tuesday, May 26, 2015

Lesson 3 Productivity: Not Such a Mystery

Alan S. Blinder wrote an article a couple of weeks ago in the Wall Street Journal called “The Mystery of Declining Productivity Growth ” (May 15). Who doesn’t like a good mystery? So I picked up the article and started looking for who killed Cock Productivity.  And then it hit me. This could be Lesson 3. All of you HomeEc majors are going to love this one.

Now that you have GDP under your garter belt it is now time to master another macro indicator, productivity. And it is a good one to master. Productivity is important, misunderstood, and controversial. And because productivity is the result of dividing two numbers, it is arithmetically challenging.

Productivity is important because it is a key driver of a nation’s output growth. We all have t-shirts that say Go Growth because we have fallen prey to this macro mantra. Recall that GDP is like a mountain of stuff. We like the mountain to get bigger each year. Macro says it gets bigger each year if we have one or more of the following:
            More labor producing stuff
            More capital (plant, equipment, software, etc) producing stuff
            More Productivity (Better ways of producing so that using a given amount of labor and capital gives you even more stuff)

Productivity is misunderstood. First, it is defined as output per unit of labor input. (Note: for those of you who know the difference between a two-factor and a one-factor production function please ignore my using labor productivity rather than total factor productivity. It seems easier to discuss this topic using labor productivity. I realize that technically it is not correct. But it does no harm for my purposes here).

To calculate productivity you therefore have to divide output by the number of labor inputs. People love rising productivity as much as a grilled cheese sandwich on white bread. Suppose Lila goes to a yoga camp and comes back to the factory all stretchy and happy. Her experience at that yoga camp means that Lila can now produce 10 Nehru jackets each day instead of her former best output of 7. She is still just 1 worker – but now her productivity is 10 instead of 7.  Her boss, Mohammed, is quite happy with this result. Getting more work out of Lila and paying her the same means Mohammed can afford more chicken wings and wheat beer at the Upland Brewery on Friday night. Of course, since Lila can produce so much more in a given day, Mohammed has other choices – he can reduce the price of his Nehru Jackets and/or give Lila a pay raise.

Do you see why we like productivity to increase? Workers who become more productive lead to higher output, higher profits, higher wages, and lower prices. Slower growth or lower growth of productivity is not good and leads to the opposite. So companies and countries try very hard to improve worker productivity.

Rising productivity is good but it is pretty complicated. A second reason for misunderstanding is that if Lila can produce so much, maybe old Mohammed can fire Adore, her co-worker who has been known to read Herman Hesse novels on the production line. That doesn’t sound so good. Higher productivity can lead to a reduction in employment. Some of you are old enough to recall when the tractor replaced the horse.  A lot of horses and agricultural workers got replaced when tractors increased the productivity of Ag workers – the ones who could master those new-fangled tractors.

Like Hillary Clinton therefore, productivity has a checkered past. This leads to controversy. One controversy has to do with the question of employment. Some productivity gains are very bad for some workers who get displaced by the new technology. But recall – stronger productivity also means more output, increased competitiveness, higher wages and so on.  The higher output can lead to more employment. A new technology causes an initial employment decline and it may take years before the output effects generate more employment. So it is a tough call for politicians to actively promote increased productivity – even though it is the key way to increase GDP for the future.

Okay we are almost done and it is getting close to 5 PM and I can hear JD screaming for me. Here is where we get to the mystery, whodunit, and then the solution. Alan Blinder notes that productivity growth slowed in the USA since 2005. It is barely crawling at 1.3% per year compared to a rate of 2.9% before that. You used to be able to dunk the basketball. Now you can barely touch the bottom of the net using a trampoline. This is a serious decline.

Blinder in his Alan Blinder sort of way says this is both a problem and a mystery. We should solve this mystery. But in my humble opinion Prof Blinder may have been spending a little too much time lately in Colorado and Washington State. He lays off this mystery to things like getting free services off the Internet and how much of the current tech boom (Facebook, Twitter, Snapchat) creates employment but not much output. He also says that businesses are churning less and that means less output from entrepreneurs.

There might be some truth to Blinder’s story but being one of the liberal persuasion it seems that Blinder simply does not want to admit to a whole other set of factors that might be important enough to have cut productivity growth by more than half. These items are not a mystery. Two recent articles offer a totally different view from Blinder– and suggest that the mystery is not very mysterious.

Martin Feldstein writes “US Underestimates Growth” (WSJ 5/19/15) and concludes that measurement problems during a time of rapid technological change underestimate GDP. The output and productivity are there – it is just that the government’s methods to measure them are not flexible enough. Feldstein goes on to say that approaching the productivity problem needs to address why firms are not buying more capital, why workers are not joining the labor force, and why smaller firms are not innovating. His advice is to focus on reducing tax disincentives and reforming taxes so firms want to invest and workers want to work. This,of course, is basic supply-side economics.

Dan Mitchell’s conclusion is pretty obvious from his title. “Big Government Is an Anchor on America’s Economy, Undermining Investment and Wage Growth” (WSJ May 16, 2015). Mitchell focuses on the thousands of new regulations imposed on financial, banking, and other firms in the years since 2008. These regulations create additional costs and uncertainty that prevent firms from expanding more and from workers actively seeking employment. 

Feldstein and Mitchell emphasize productivity problems that seem pretty obvious. I am not sure why Blinder sees this slowdown as such a mystery. Maybe his ideology does not include supply-side solutions and this we are left with mystery. I wonder what Sherlock Holmes would say about all this. 

Tuesday, May 19, 2015

A More Positive Take on Givers and Takers

Candidate Romney and Republicans were rightfully castigated for inelegantly dividing us into givers (who pay most of the taxes) and takers (who receive entitlements).  Thus this terminology is tainted much like PBR is no longer considered a luxury good. Even if there might have been a valid point made with these unfortunate words, the truth is that both sides of the political spectrum have used them to recruit and to divide us.

So let’s start over. I want to give a fresh interpretation to givers and takers and I want to prove to you that these words need not divide us. In truth, I think if  you read on you might see that these same words can bring us together in important ways. Okay I am pretty optimistic and am making a huge claim. But given our present state of discord, what can we lose? Despite all we give and have given, we still have shameless ghettos, too many homeless people, growing addictions and too many children growing up with single parents amid violence. As a young man in the 1960s I never would have believed that we could give so much money in the next half-century and still not make better headway against social and economic problems.  

I want to start this discussion with the givers. Since I make a lot of typos, let’s simplify and called them Gs. Americans are Gs. So are people from other countries but the tradition of giving is prevalent in American culture. Think of all the things we give every day. We give money and we give our time. We serve on boards and committees of local not-for-profits and we attend Habitat for Humanity building parties. We give to the the local Boys and Girls Club and Stonebelt. We give time and money to local food banks and often contribute to national charities like United Way and the Wounded Warriors Project. We support NPR and many local radio stations like KEXP in Seattle. Of course we also pay taxes to local, state, and federal governments to support many programs. Clearly we give and we usually give generously. People of most ideologies and parties give. Giving unites us. We might have our favorite or least favorite charities and programs but the point is that we are a people that gives. 

The Giving USA Foundation estimated that Americans gave $335 billion to charities in 2013. About two-thirds of that was given by individuals. Another $5 trillion is paid into local, state, and federal government taxes each year. 

Why do we give so much? There are many reasons we give. We give to the government to stay out of jail. Some give to gain tax advantages. We give to impress our neighbors and colleagues. We give because we believe it is the right thing to do. Most religions teach that we feel better and are better persons when we are charitable. Christians teach that God gave up his only son to save us. This makes me wonder why God only had one son and no daughters, but let’s save that for another post.  The Golden Rule says to treat others as we would have them treat us. Maybe there are other reasons we give but I have gone to few spiritual meetings where the main idea is that personal salvation and enlightenment come from selfishness at the expense of others.

Okay so we give and we give a lot. To satisfy this strong need to give is to need someone to take. If we want to be a G then there had better be some takers or Ts. So we can’t divide on this score. In advanced mathematics we would say G=T. This says that having Ts is a good! It is not a bad.  If a G is good then a T is good.

Some of you are biting your finger nails all the way down to your toes. But I am getting there so gulp down a little more JD and be patient. Order some Nachos La Torre if you think that will help.

So G is good and T is good. Here is the next thing that unifies us. We don’t want our hard-earned money wasted. Okay – Charles is rich enough that he wastes a lot of money, but Charles is special. If most of us give we want to see it have impact. We want it to help. If we give $100 to a charity and we find out that $99 of it went to pay an administrator and only $1 went to a poor person,  we probably would quit giving money to that charity. Or if that charity was not careful in using our money so that it didn’t really help anyone, we wouldn’t be happy with that one either. Republicans and Democrats do not disagree about this point either. We want our giving to go to Ts and to have full impact on them.

Amazing. Nothing to disagree about so far. To have Gs we have to have Ts. We want our money to be effective and not  wasted.

So what is the problem? I think the problem starts with the Gs. The problem is that we not only like to give but we are busy people. We are also trusting people. When I give money to one or to many government or non-governmental organizations I don’t have the information or the time to make sure my money and your money is used well. I simply trust that if someone works for one of these organizations, they are going to be capable, and competent and caring and honest. I don’t  have time to check it all out. Sometimes it takes years or more before we find out that some part of government or some local charity is not getting the job done. 

The problem or the challenge is that making sure our money is well spent is haphazard.  Sure there are plenty of people discovering inefficiencies and corruption in the system of giving and taking – but these audits are not an objective, consistent, and effective enterprise. Companies evaluate employees. S&P evaluates the financial strength of companies. Agencies watch over pharmaceutical companies to make sure drugs are safe. Teachers are evaluated by students and principals. We have a society wherein many activities are continuously and consistently monitored and evaluated. But we have few trusted institutions for private and public giving and taking.

So what happens in the absence of this monitoring of giving and taking? What happens is that we either do it randomly or we let politicians do it for us. And those politicians sometimes use a lack of transparency as a way to empower themselves. Party X tells you that the programs of Party Y are bad. Party Y tells you that the programs of Party X are bad. And then the media have a ball with all that. The Republicans are mean people who hate the poor and want to kill poverty programs. Democrats are silly people who think rich people and corporations are evil and need to pay much more in taxes. Come on. Really?

So what’s the point? What can we do? First, quit talking about Gs and Ts. Second, let’s get more serious about evaluating how all this G is used. Is it not possible to have a bipartisan or an otherwise objective approach to evaluate government programs? In  today’s political arena, we get the opposite of this sensible approach. What we get is defensive, debilitating allegations and behaviors. Why can't Democrats be the ones who lead honest evaluations of the effectiveness of poverty and other entitlement programs? Or should they continue to yell and scream when Republicans dare to limit growth in spending on a specific entitlement? Why can't Republicans lead the way in pointing out corruption or waste in their favorite programs? Or do they mostly relish a fight to the finish to always get more money for their programs regardless of their impacts?

So there we are. We need takers. Regardless of party or ideology, we also need our money to be well spent. But we have a system that either avoids the right data or purposely distorts it. We let politicians hide the truth and exploit our ignorance for ideological or party ends.   The solution to the problem is simple. If everyone else has to expose their activities to oversight and objective evaluation, then why can’t government programs be subject to real and frequent business audits? Gs would be happier because they would believe their money is being better spent. And Ts would benefit from the reduction in waste and corruption. 

This is a task that unifies us and puts politicians on notice that we won’t be conned. It isn’t really about Gs versus Ts or Rs versus Ds. This is all about the public having proper oversight over representatives who have infinite capability to raise tax giving through our tax system. 

Tuesday, May 12, 2015

Lesson 2 GDP and US

Advanced Annualized GDP in 2009 dollars for the first quarter of 2015 was reported to equal $16.3 trillion. For those of you who are not good with trillions or counting zeroes, that amount is more than what Roseann Barr used to weigh. After the GDP number was announced the stock market had a fit, virgins sought lovers, and the press wrote 7 million stories. Rush Limbaugh was, well, Rush Limbaugh.

A couple of weeks ago we talked about me doing a better job of teaching macro to those of you who don’t wake up each morning thinking about supply and demand and Paul Krugman in skivvies. It is one thing to try to capture macroeconomic events; it is another thing to try to explain economic events to people who think an asset is an anatomical part. So this is Lesson 2 and it involves an economic indicator that was announced with great sound and fury last week. You would think that Bruce Willis had grown hair but this kind of frenetic reaction is often the case. Gross Domestic Product is one of those national macroeconomic indicators that tell us how our national economy is doing. It doesn’t tell us everything and it doesn’t often warrant all the commotion but it does have its place and communicates something to us. Of course, like when the doctor says your heartbeat is registering 23 beats per minute, you start asking a lot of questions about the future. And that’s where it gets more interesting. The same is true for GDP.

First, the actual words I used above came from the Bureau of Economic Analysis table in which it was presented to us. It uses words like, first quarter, annualized, advanced, and 2009 dollars. Each of these technical words has meaning and each word helps you understand GDP.

But before we discuss those words, recall that GDP is a measure of national output or production. It is how much we produced. In the first three months (first quarter) of this year, we apparently produced $16.3 billion of goods and services. GDP is not a measure of beauty nor is it an infallible measure of national welfare. It is just output.

The word Advanced means that even though this number was published after March 31 when the quarter ended, it is considered advanced. It will take a lot longer before the full story about Q1 is known. In a month or so we will get a second reading. And that will be followed by even more revisions.

Annualized means that we wave a magic wand and transform the quarterly number into a yearly or annual equivalent. If Hillary Clinton played for the Indianapolis Pacers and she scored 7 points in the first quarter, you could say she was scoring at “a full game pace” of 28 points. Of course, if her hair got mussed we will never know how much she might have scored in the whole game. Accordingly, we actually produced something more like $4.1 trillion goods and services in the first quarter. If that pace kept up for four quarters, it would translate into roughly $16.3 trillion. When it comes to GDP “talking annual smack” is more understandable than “talking quarterly smack.”

I feel the need to have a smoke even though I don’t smoke.

We still need to say a few more words about measuring national production. Note that it is easy to think of all the goods and services piled up in a big mound. It would be a big mound but you can imagine all the cars and trucks, and buses, and haircuts that got produced in Q1 2015. The big question is what happens after we die. But another big question is how we actually measure that really big pile of stuff.  And the answer is pretty easy. If something got produced in Q1 then only three things could have happened to it: (1) It got finished and went to a buyer who forked over some money for it. Or (2) it got finished and is sitting in finished goods inventories because it was too ugly to buy or (3) it didn’t get finished and half of a truck is sitting somewhere waiting to be completed.

The stuff that got finished and sold is said to be final demand. Final demand is broken down by who gets the goods and services. It is traditional to break it down into two parts – Donald Trump and the rest of us. No just kidding. It is broken down into four parts – Consumption measures goods and services going to households; Fixed Investment measures stuff going to firms like plant and equipment and also new houses; Government spending measures goods and services purchased by governments; and Net Exports measure the net purchases of the foreign sector.

Okay, one more thing. GDP is supposed to measure the quantity of production (sometimes referred to as real GDP) but we all know that when this stuff is sold as Final Demand that it is purchased at the latest (Q1 2015) prices. So with another magic wand, poof, we remove all the price change since 2009. The stuff this year gets valued as 2009 prices so as to not muddy the physical output measure with price change.

Here are a few things we know from the recent GDP data announcement. At $16.3 trillion in Q1 it was the highest output ever recorded in the USA. Way to go team! It was a mere $10 billion higher than production in Q4 2014. Compared to a year before GDP was up $500 billion. Compared to Q1 2008 it was almost $1.5 trillion higher in 2015. Clearly that pile of stuff is getting bigger.

None of the above seems to warrant champagne and wild parties with scantily clad ladies playing beach volley ball. But the truth is that we do not get excited about GDP because of its past value. We get excited because the past values are our latest clues as to what might be happening in the future. The future does excite us. We want to be ready for the future. Firms need to decide how many people to hire and what to pay them. Households must decide whether to buy that new refrigerator. GDP yesterday might tell us something about tomorrow’s economy. Or it might not. Consider some of the facts told about GDP in Q1 2015:

            The Q1 increase was small because of temporary negative things like a dock strike and bad weather
            The Q1 increase was small because the foreign balance deteriorated.
            The Q1 increase was small because after four quarters of strong growth, firms cut back on buying equipment and building new structures
            The Q1 increase was small because state and local governments cut spending and the federal government spent less on national defense
            Consumers continued buying at a decent clip in Q1

These facts help firms, investors, and the rest of us think about what might happen in the future. Q1 has come and gone but this report helps us think about our decisions today that impact the future. The report doesn’t tell us the future and it doesn’t make our decisions. But it does give us something to think about as we move forward. And as we do we will also pay attention to the latest information about other indicators like employment, wages, and Bill Clinton’s speaking fees. 

Tuesday, May 5, 2015

4 Men in a Room by Guest Blogger John Succo

Government officials are legally allowed to lie to the public; something about Plato and the good of the Republic.

Central bankers are not. Thus the common quality among them for obfuscation and rhetoric. But in their last minutes they did lie about consumer sentiment, or they can’t think straight, maybe both. They also can’t predict things very well, wrong much more than they are right. Clouded thinking derived from their own academic hubris. Their analysis is more selected than stochastic. Someone once mentioned an ivory tower. And now the Prince of them all is advising PIMCO. Good luck.

We have negative nominal interest rates in Switzerland. I can’t tell you why until my final exam question is answered, but I bring it up to talk about the ridiculousness of it.

Capitalism doesn’t work at zero and negative interest rates. The price of money is nothing or worse? Think about that. How does anyone save to invest; capital formation stops. Everyone runs for the stock market. They borrow money to buy stocks even, the greatest carry trade ever. Margin debt is untenable.

And our central bankers convince the masses that this is perfectly legitimate. Consumer sentiment is now saying it’s not, something is very wrong. Pension funds are solvent because they insist they can earn 8% on their assets in a  0% world; if they were realistic they would all be underfunded. What happens when they go to sell their stocks that they have piled into pretending they can pay for their liabilities? Who is going to buy from this mass exodus.

The 4 men in a room who manipulate the stock market think they can. Heck they buy everyday smoothing out any corrections, keeping the ball rolling and the rich socialists happy. Socialism locks in the wealth of the already wealthy and stifles nasty competition they don’t want. The 4 men have infinite capital to do this, or so they think. When real selling comes knocking they will find out they really don’t.

Until then they just keep on keeping on. They have directives so it’s not their fault. Their directors have directives, so no one can be faulted.

The public ignores this when things are going well. People are inductive not deductive, preferring empirical evidence before they change their minds. But markets though non-linear are ultimately deterministic so the rub will come. Then they will have new empirical evidence supporting the old empirical evidence they have already forgotten.

Central banks have fostered $50 trillion more in global debt since the last debt collapse, amassed at much lower interest rates and most of it government debt which has zero productivity. That’s economic socialism and is sowing the seeds to destroy the last vestiges of capitalism.

John Succo graduated from Indiana University with a graduate degree in finance concentrating in option pricing theory in 1984. His work bio includes stints at Morgan Stanley, Paine Webber, Lehman Brothers, Alpha Investments, and Vicis Capital. In 2012 he became an adjunct professor for Indiana University and created IU Capital, a synthetic multi-asset fund where students manage risk around a variety of asset classes including equities, fixed income, currencies, commodities and derivatives.