Tuesday, August 25, 2015

Where Have All The Workers Gone? By Guest Blogger Buck Klemkosky

In June 2015, employers added 223,000 jobs and the unemployment rate fell from 5.5% to 5.3% – the lowest rate since April 2008. In July, employers added another 215,000 jobs, but the unemployment rate stayed at 5.3%. Why would adding about the same number of jobs lower the unemployment in June but not July? The primary reason was that 432,000 people dropped out of the labor force in June and a much smaller number in July.

One of the unexplained phenomena of the six-year economic recovery and expansion has been millions of people dropping out of the labor force. The Bureau of Labor Statistics (BLS) has been tracking the labor-force participation rate since 1975. BLS tracks the number of workers eligible to work, including all those 16 years and older who are not in the military and not institutionalized, mostly those in jail or prisons. In July, the BLS reported that 93.8 million Americans were not in the labor force or wanting to be in the labor force as the participation rate was at 62.6%, a 38-year low. There were 58.6 million Americans not in the labor force in 1975 when the BLS began keeping records, 80 million in 2008, 90 million in July 2013 and 93.8 million today.

It is estimated there are 250.9 million in the civilian population 16 years and older, not in the military or in institutions. Of those, 157.1 million participated in the labor force by either holding a job or actively seeking one, of which 148.7 million were employed. This is how the labor participation rate of 62.6% is calculated. At the end of 2007, the participation rate was 67%. If the participation rate was still 67% , there would be 168 million Americans working or seeing work – about 11 million more than today. The question is why aren’t those 11 million working or seeking work?

Part of the question may seem obvious; people are retiring, especially the Baby Boomers, the 75 million born between 1946 and 1964. Every day, about 10,000 Baby Boomers turn 65. While the absolute number of Americans over 65 who have retired has increased, the labor-force participation rate of those 65 or older has actually increased. The participation rate for those ages 55-64 has also increased, driven almost exclusively by the increased labor-force participation of women. Those retiring after age 55 can account for 2-3 million of the 11 million missing workers.

Another logical explanation of the lower labor-force participation rate is the larger number of those aged 16-25 who are in college or training programs. This is part of the Generation Y or Millennial Generation, those born between 1980 and 2000, which is larger in absolute numbers than the Baby Boomers. According to the Organization for Economic Cooperation and Development (OECD), the percentage of the U.S. population in that age group not in education, training or employed has increased from 12% in 2007 to 15% at the end of 2014. So there are more than 1 million younger people who are not working, seeking work or getting an education. They are discouraged about job prospects and have dropped out of the labor force.

The prime working age is 25-54 and that is the core of the U.S. workforce. In July, 77.1% of this group was employed, better than the 75% employed at the bottom of the labor force in 2010. However, it is still 2.8% lower than the 79.9% prime-age employment rate of December 2007. While the Great Recession was harder on prime-age men than women, the recovery rate was better for men than women. Still there are 3% fewer prime-age males working today than in December 2007 and 2.2% fewer prime-age women. While many in the age group are undoubtedly also seeking employment if not working, it appears that this may be more structural than cyclical. In 2000 the employment rate for workers aged 25-54 was 81.6% up from 72.5% in 1982, but has since fallen to 77.1%, so there are several million Americans in the prime working age of 25-54 not working or seeking work.

If college and retirement can’t explain the millions of workers who have dropped out of the labor force, what can? Government programs and incentives can explain part of the missing workers. There are 11 million people in the U.S. who receive Social Security disability benefits today versus 5 million in 2000. While not all of these people are of prime working age, the majority are, so this accounts for many of the workers missing from the labor force. Other programs such as the Affordable Care Act also have provided disincentives to work as insurance is now available to those not working or seeking work. Food stamp recipients are also at an all-time high, 30 million more than in 2000, and some of the missing workers may be subsisting on this entitlement program.

The U.S. was supposed to become a cashless society. But the amount of cash in the U.S. economy has grown to $1.4 trillion today, 2.6 times the amount of cash in the economy in 2000. Cash has grown much faster than either GDP or the population. This suggests a growing underground economy that has evolved to be worth an estimated $2 trillion. Given 120 million households in the U.S., this underground economy works out to more than $16,000 per household. Many workers exist in this $2 trillion cash-based economy and avoid taxation, government regulations or being accounted for in the labor force.

Education, retirement and disability can account for about half of the 11 million potential workers. The other half are missing in action. If not, the unemployment rate would be higher than 5.3%. Adding just part-time workers who want to work full time to the unemployed takes the rate, known as U6, to 10.4%. Adding those who have dropped out of the labor force would take the unemployment rate much higher.

This missing workers phenomenon seems to be basically a U.S. issue. Since 2000, America’s labor-force participation rate has declined more than in any other developed country, even though the U.S. economy has fared better. And the U.S. is one of only three countries out of 38 developed countries with a declining labor-force participation rate. In the longer term it is important to get the participation rate up because growth of real GDP is a function of growth in number of workers and growth in real output per worker. For the decade 2005-2014, the annual growth of the working-age population, 16-64, was only 0.7%. This was one of  the reasons for the subpar economic growth of 1.8% annually in that decade. The BLS forecasts the growth of the working-age population to be 0.4% annually in the 2015-2024 decade. Getting the missing workers back into the economy is essential for U.S. long-term economic growth. If a declining work force is not enough of a problem, productivity growth per worker as well as wage growth are also at multi-year lows. But that is another story.

Tuesday, August 18, 2015

Lesson 7 GDP: Hitting on Fewer Cylinders

GDP makes my heart flutter.  GDP is to macroeconomics as corn and oak barrels are to bourbon. Each quarter the Bureau of Economic Analysis publishes data on US GDP along with revisions of many of the numbers for past quarters. These announcements generate a lot of oohs and ahhs. Most of us want a bigger number each quarter because it shows how sexy we are as a nation. A higher GDP means our nation produced more stuff. That usually means more people were employed, companies made better profits, and Donald Trump passed more gas. In quarters when GDP slows or declines, we have sad faces and we ask friends and relatives – what did we do to deserve such a fate?

So when the latest numbers came out recently for Q2 2015, I decided to see what’s up. Like you I know that the US economy is not growing as fast as we want it to grow. I know that because Joe Biden said so. Also the stock market said so and has been side-ways waffling as it tries to decide if we are ever going to grow as in the good old days when Gene Autry rode Lassie. For example, in the 8 years from 2000 to 2007 the average annual growth rate of real (as opposed to unreal) GDP was about 2.5%. Although that was nothing to write home about, real GDP rose by an average of only 1.1% in the following 8 years – from 2008 to 1015. Both time periods included recessionary quarters.

If you are good with numbers you realize that 1.1% is less than 2.5% and that makes for a lot of unsmiley faces on the BEA’s Facebook account. If you are even better with numbers you could proudly announce that our national growth rate was only about 44% of what it was. Clearly we have been experiencing a prolonged slowdown.

This post is not about blame though I do blame a lot of people. You can ask my spiritual advisor/bartender about all that. What this post is about, however, is looking deeper at real GDP to see if we can identify weak spots. The IU football team has a weakness in the defensive secondary such that even when the offense scores 179 points against any opponent, we always lose in the last seconds on a Hail Mary Pass. By focusing on the weak spots we might be better able to understand why we are doing so poorly.

There is more than one way to look more deeply at real GDP. Today I am looking at the buyers of all that stuff we produce. The BEA breaks down the buyers into four groups – shirts, skins, stripes, and plaids. No that’s not right. The four key buying groups are households, firms, governments, and foreigners.

Average values of GDP contribution for the two eight year time periods are found in the below table for key GDP components by purchaser.  These contributions are measured in percents but are not the percentage change for the category. These contributions show how much GDP would have grown in that time period were it only for that one component. 

For example, from 2000 to 2007 of those 12 categories, Spending on GDP for Consumer Services accounted for GDP growing by about 1.14% over those eight years. Since GDP grew by about 2.5% per year, spending on consumer services alone accounted for a little less than half of that growth.  There were six buying categories that made major contributions well above zero percent.

Now let’s see what changed in the next eight years. Recall that real GDP grew by only 1.1% on average from 2008 to 2015. Consumer services alone accounted for .56% of that. That is a healthy share but notice that it is half the 1.14% of the previous eight years.

More strikingly is that only three other sectors were supporting 0.10% or more growth per year from 2008 to 2015. In 2000 to 2007, 8 buying groups accounted for .10% or more points of GDP growth. Growth has become much less balanced from 2008 to 2015. The household is driving the wagon, albeit slower. Business firms are smoking Js in the back. The government seems more willing to increase transfer payments than spend more on goods and services.

Worse, most of these buying groups contributed much less to GDP growth in the last eight years (compared to the previous eight years)
58 points less for Consumer Services
29 points less for Consumer Durable Goods
25 points less for State and Local Governments
21 points less for Consumer Nondurable Goods
18 points less for Federal Government Spending on National Defense
13 points less for Business Equipment
12 points less for Business Structures
  9 points less for Exports to Foreign Buyers

What can we make of this? Economic growth continues to be disappointing because we are not spending.  We are essentially hitting on no cylinders because the weakness comes from households, firms, governments, and foreign buyers. We have this widespread lackluster performance despite strong government stimulus and a central bank that keeps interest rates at zero. As government spending turns away from military and other goods to social programs the impact of government at all levels of GDP seems to be lacking. More worrisome is the behavior of businesses. Why are they so unwilling to bet on a vibrant future? 

Contribution to Real GDP
       00-0         08-15        Change
        Durable goods
        Nondurable goods
         Intellectual property products
        National defense govt
        Nondefense govt
        State and local govt

Tuesday, August 11, 2015

Humpty Dumpty Monetary Policy

Humpty Dumpty sat on a wall. Humpty Dumpty had a great fall. All of the king’s horses and all the king’s men couldn’t put Humpty Dumpty back together again. No wonder baby boomers are screwed up. What kind of story is that to tell a kid? I think it affected all those adults who work for Ms. Yellen on the Federal Reserve Open Market Committee. Or maybe it was JD? 

The FOMC met again and I am told the caviar was delicious. Once again they had pouty faces and wrung their hands and worried that they could not possibly begin a sane and sensible monetary policy with interest rates above zero. So it made me think of Donald Trump. No not really. It made me think of Humpty Dumpty. The Fed believes our economy is like Humpty. If the FOMC begins to raise the Federal Funds Rate above zero then the economy will fall off its wall and will be shattered beyond repair. Seriously. If they had announced a new target for the FFR at 0.5% would Humpty really fall off the wall and be shattered beyond recognition? Would the US economy rapidly disintegrate? Would people be unable to afford Uber rides and take home pizza? Would Whole Foods have to reduce prices to competitive levels?

So I wanted to delve a little deeper into this issue of why the economy might be so fragile that even a tiny return to monetary policy normalcy might be dangerous. Do we really have a Humpty Dumpty economy? Let’s take real GDP growth. It is true that it is averaging less than 2% of late. But most forecasters believe it has settled into a rate of growth of about 2-3%. Keep in mind that real GDP usually averages about 3% per year so 2-3% isn’t exactly a gutter ball.  The unemployment rate at 5.5% is actually better than the 5.7% average since the 1950s.

Larry Larry Larry. Look harder. My hand-wringing friends would point out to me that there are lots of scary spiders in the corners that speak to weakness. Investment in plant and equipment has been weak. Workers are dropping out of the labor force. Net exports are threatened by a strong dollar. China cannot find its way out of a China shop. And Hillary Clinton can barely buy groceries on the family income. But come on. There are ALWAYS signs of strength and weakness in any economy on any day of the week. And while many of these problems are worrisome – do they really mean we are in a Humpty Dumpty economy in which our Fed must keep interest rates at zero?

Is the Fed Funds rate out of line? I looked at that. The Fed Funds Rate is basically zero now or to be more exact somewhere around 0.12%. The FFR averaged 4.81% since the 1950s. That means that sometimes it was higher and sometimes lower than 4.8%. The FFR ranged from 0.94% to almost 18% from the mid-1950s to 2007. Note that it was never zero until after 2007. 

If we exclude the most recent extreme FFRs since 2008, there were only seven quarters since the early 1950s when the FFR was around 1%. These seven quarters were not bunched together as they occurred in 1954, 1958, 2003 and 2004. 

Clearly at zero percent today there is no precedent for such low and persistently low interest rates. Recession is not the reason to have zero interest rates for years upon years. We had 9 recessions between 1953 and 2001.  These recessions were as short as 6 months and as long as 16 months. The great recession of 2007 lasted 18 months. Of course it has been over since the middle of 2009. It has been over for 6 years. We should be closer to average policy. We should be closer to a FFR of 4.8%. Yet is zero.

Some of you experts want to point out that I should be using the real FFR . That is, I am comparing apples and oranges because the expected future inflation rate affects the level of the FFR. They would point out that our FFR is so low now because inflation is so low. So I deflated the FFR by the inflation rate (of personal consumer expenditures) and found that the average REAL FFR from 1954 to today was about 1.52%. Today’s zero FFR is a real FFR of -2%. By that measure we find that the real FFR is 3.52 percentage points below average.

Whether measured in nominal or real terms there is no question that today’s monetary policy interest rate is way out of line for anything close to normal times. This implies that the Fed thinks the economy is like Humpty Dumpty.  But is it? And is there any harm done by having non-normal policies during normal times? I think so. 

Tuesday, August 4, 2015

Lesson 6. Sandersonian Economics

I was watching Hogan’s Heroes re-runs the other day when a genie in a bottle suddenly appeared and waved a magic wand over my glass of JD. Suddenly I was watching a video interview of Bernie Sanders. As some of you may already know Bernie Sanders is running for President of Bloomington’s People’s Republic. No, that’s not right. Mr. Sanders is a Democratic candidate for President of the United States. Since I am not prone to voting for Democrats for President I mostly have ignored Sanders and have focused on imagining naked mudslinging fights between Hillary Clinton, Donald Trump, and Geraldo.

Anyway since I seemed to be captured by my new recliner chair and couldn’t find the eject button, I sat there and watched Mr Sanders answer a bunch of questions. And it hit me. This guy is good. He is the real thing. He says he is a Socialist and he really is. Yet unlike other Socialists who invade neighboring countries and otherwise make Vlad the Impaler seem cute and cuddly, Sanders was bright, and thoughtful, and persuasive. Wow he was good. Hillary does not stand a chance against this guy.  

You are waiting for a punchline but there isn’t one. Instead of a punchline is an economics lesson. Sanders is interesting and persuasive and will continue to attract potential voters. But like last week’s post wherein I worried about politicians putting the tough stuff off until later, this post worries that the things that make Sanders so appealing are pipe dreams or worse, false dreams. Suppose you wake up from a vivid dream in which Taylor Swift asked you to run away from your wife and family so you could be her business manager. You wake up and immediately run away from your wife and family. Wow what a mistake when you learn that she does not even need a business manager.  

If that didn’t convince you, then yawn, it helps to have a lesson about macroeconomics. In macro everything is driven by economic growth. Economic growth is the Tom Cruise of Macro.  I would put that in caps but readers have been known to throw things after seeing stuff in all caps. Germans, Greeks, and even people living in Burnsville North Carolina believe this. Economic growth is like an elixir that fixes almost everything. Stronger economic growth means stronger job growth and higher wages.

Liberals and conservatives agree with the importance of economic growth. Conservatives like Milton Friedman ignored the short run and said it would probably fix itself. Liberals like John M. Keynes and Paul Krugman sweat and fret whenever we have short-term problems slowing economic growth. Krugman shouts to Janet Yellen – man the rudders and full steam ahead…or something like that. If there is a recession then priority #1 (in all caps) is to do whatever can be done to get economic growth back to normal or beyond.

Conservatives and liberals will throw half-eaten snow cones at each other with respect to which policy to use to restore growth. But notice – they both want more growth. Growth is what we want. In a growth economy everything is easier – finding jobs, quitting jobs, buying expensive bourbons, etc.

But if you listen to Sanders, there is little said about economic growth. Sanders wants to penalize rich people. Sanders wants to help the average guy. Sanders wants to reduce income inequality. Sanders want more justice. Sanders wants environmental sanity. And it is hard to argue with his logic. Rich guys are getting richer. Poor guys are not. The average guy/gal is having a really tough time keeping up. Environmentalists keep the pedal to the metal with respect to the data.

So to me – Joe Macro – I agree that there are a lot of problems and challenges out there. I agree that we have witnessed a reallocation of goods and a redistribution of income. I agree that there are many tough difficulties and challenges. But the biggest challenge is to not throw the baby out with the dirty bathwater. 

Sandersonian economics says – if we tax the rich and/or give more transfers to the poor, income distribution will be improved. It sounds obvious enough. If it was good enough for Robin Hood then why can’t it work on 93 Valentime Lane?

That’s a good question and ought to be answered. Just because Sanders and Paul Krugman say it is so, that doesn't make it true. For one thing does the Sanders policy really have a permanent impact on the rich/poor balance? Does the policy effectively overturn the things that prevent the poor from getting richer?  Second, taking from the rich and/or giving to the poor might negatively impact economic growth and that slowdown might hurt the poor more than the rich. Third, given the tenacity and complexity of all the problems Sanders seeks to address, do we really trust Sanders and Congress to go about using our national resources wisely to eradicate them?

I admit and agree that globalization, industrialization, environment, China and major global and national shifts are impacting Americans. Our history is full of examples of similar challenges (when textiles moved south or when energy prices quadrupled in the 1970s, etc). We need to address our challenges and mitigate the problems that are so lucidly explained by Sanders. But we should not be lulled into believing that identifying a problem is the same thing as solving it. 

If Sanders wants my vote he will go beyond simple slogans. Sandersonian economics should explain why his way of attacking the most pressing problems will work and why he won’t end up making us all worse off when his programs damage our ability to grow. Or he needs to explain why his programs will not slow economic growth. Or maybe it is easier to say what the public wants to hear and no more.