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Our Thirty Five Years of Mythological Economics

trickle down economics

The only problem with this cartoon version of  Trickle Down economics is that the bird at the top should be getting larger as the years extend.  Likewise, the birds in the middle range should be getting more stressed as they attempt to stay on their middle income perches.  It’s a nice touch that the background is in blue, suggesting we’re about to be washed up in a tide which only serves those who are perched high enough to avoid drowning.

Meanwhile, the  best response to the sentence “A rising tide lifts all boats,” is “Where Are The Customers’ Yachts?”  For those who have not yet read this 75 year old classic – it’s still available, and still germane to American economics.  It was true then, and true now.  The problem is that the financial sector has hijacked significant portions of our economic thinking, in ways that have left us prone to being bedazzled by BS.   Thus, we’d prefer to rail against the Wall Street Casino rather than believe we’ve been following some very foolish advice offered, in turn, by some very foolish, and very self serving,  people. And, there are people challenging the BS rendition of American capitalism.

Those who missed Mrs. Clinton’s speech at the New School (NYC) on our economic challenges can view the C-SPAN broadcast here. (55 minutes)

The initial response from journalists was “Hillary’s bashing Wall Street.” [Reuters] This makes for a convenient headline – Beltway Shorthand for her support for regulation of Wall Street investment bankers’ transactions – however, it doesn’t come close to adequately summarizing what both candidates Clinton and Sanders have been saying about financialism in American economics. The Beltway Media is missing the point, perhaps because it doesn’t fit neatly into a template predetermined by editorial policy, or a simplistic code for easy lead paragraphs.

The point is that we have had 35 years of what President George H.W. Bush called Voodoo Economics (although bless his heart he promoted it like any good Republican), and it doesn’t work in the real world. Why? Because the mythology violates the simple principles of American capitalism:

”So here’s an idea worth spreading. In a capitalist economy, the true job creators are consumers, the middle class. And taxing the rich to make investments that grow the middle class is the single smartest thing we can do for the middle class, the poor and the rich.” [LAT]

With this basis in mind, let’s tackle some of the mythology and deal with a bit more economic reality.  We might as well start with the “job creators” sound bite.

#Job transference is not necessarily job creation.  Yes, Home Depot has about 340,000 employees. [USAT]  However, in order to achieve those numbers, how many local hardware stores went out of business, or had to shave employment numbers, because they were hard pressed to compete with the Big Box Stores?  Of the 340,000 Home Depot employees only 21,000 were salaried, the rest were working on a temporary basis or for hourly wages.  The average hourly wages for employees in the retail sector are $14.36 per hour. [Monster] Further, we know that about 1/3rd of all retail sector employees are working part time. If we take a closer look we find that the median wages for retail employees (full time) in building materials and garden equipment were about $12.21 per hour. [BLS]

So, we have to ask ourselves, if a Big Box Store moves in an puts a local supermarket or hardware store out of business, does that translate into “job creation” or simply the transference of personnel from one job into another – possibly lower paying – job?

#Low wages make stocks attractive and the overall economy weaker.    The largest fast food chain in the U.S. has approximately 440,000 employees. [USAT]  And, what do food service preparation employees earn?  About $19,300 per year, or approximately $9.28 per hour. [BLS]  The average weekly hours for all employees are currently estimated as 25.8 per week, and for nonsupervisory employees at about 24.6 hours per week. [BLS] Significantly, before we fall into the hype-vat argument about the “kid’s first job,” only about 30% of fast food workers are teenagers, another 30% are between the ages of 20 and 24, and the remaining 40% are 25 years of age and older. [CEPR]

From the shareholder perspective it makes perfect sense to keep wages low, employee turnover high, and continue to appeal to those who have a “quarterly value” vision of America.   From the perspective of other business owners in the area, those low wages translate to minimal disposable income, which means fewer customers for their products and services.  In short, the yacht at the top is sailing along while the little boats bounce around the rocks.

#Wealth created from indebtedness doesn’t trickle anywhere.  Median household earnings are slowly, very slowly, emerging from the last Recession.

real median household income If we find more jobs transferred from, say, smaller local firms to larger national ones, or more jobs are being created in sectors like food and beverage service with notoriously low wages, then we might expect to find household incurring debts to maintain a middle income life style.

Consumer indebtedness, which was down to 4.88% of disposable income in the fourth quarter of 2012, is now back up to 5.30%. [Fed]  There are a couple of ways to see this, first as an indication that people are feeling better about assuming credit card or personal debt because their incomes are more stable, or secondly that while they’re feeling a bit better, the credit card has become a way to keep afloat.  However, those debts are the basis for altogether too much of what constitutes Wall Street wealth accumulation.

Household debt Whatever amounts of these debts are securitized means that they’ve gone into the Wall Street Casino to be used as the basis for hybrid financial products.  So, what’s been happening to the securitization of auto loans?  It’s “coming back strong” but not at “pre-crisis levels.” Translation: It’s not a bubble. [FRB ATL]  It’s lovely to know the Federal Reserve doesn’t consider the securitization of auto loans at the Bubble Level, but it’s also a bit worrisome to note that what is gained from that securitization isn’t trickling down anywhere near the automobile product consumer.

Nor is there much happy news about securitization and the student loan business.  ZeroHedge offers this gloomy prospect:

“So just as we have been warning about for sometime now: an underestimation of the impact of deferral and forbearance and weakness in the job market is likely to trigger defaults on billions in student loans and because these loans comprise the collateral pool backing ABS sold to investors, the ripple effect is magnified and we wonder if the July 2007 moment for the student loan-backed ABS market may come sooner rather than later.”

The ‘wealth’ produced on Wall Street is based on the loan the students took out to pay for educational expenses, securitized, tranched, sliced, diced, and repackaged for the ‘benefit’ of the investors – those who may very well get burned in this round of Securitization Bingo.

Evidently lost on the Sultans of Securitization is the simple fact that an asset based security requires someone to be able to afford the purchase of educational services or automobiles, or the other stuff on the credit card – the original assets.

It’s one thing to announce that “middle class incomes” are back where they were in 1995 – and another thing entirely to notice that the costs of college tuition are up 61% since ‘95; that home prices are up 13%; that the price of gasoline is up 94%; and that Big Mac is up 28%. [moneyCNN] These numbers aren’t the sort to make anyone comfortable who’s taking out the student loan or buying the house. Eventually, even Wall Street may have to take notice of the fact that no matter how much revenue it can generate in terms of ABS and the hybrids related thereto, if American consumers can’t generate sales – and jobs – then investors are caught trying to ride the bubbles.  Bubbles always pop, that’s why they’re bubbles.

The ‘wealth’ from the sales, and hedges, and bets, on asset based securities, again, trickles down nowhere near the average home owner or car buyer.  However, no one is arguing that ABSs don’t have value.  They are a way to spread the risk around, and that’s positive.  They are negative when we see them mask intrinsic cracks in American capitalism, and negative when we see that the revenue generated never quite manages to trickle back down to the local economies perhaps in the form  of better roads, better schools, better parks, better libraries, and better public services like broadband.

Candidates Clinton and Sanders aren’t “bashing Wall Street,” they are simply trying to point out that the lurch from one bubble to the next isn’t a productive way to run an economy, and lunging from one volatile market to the next isn’t the way to insure that the capacity of the average consumer to purchase the assets on which the securities are based remains steady and profitable for everyone.  If Wall Street can’t divest itself of its 35 Year Investment in imaginary economics, and can’t restrain itself from short term financialist thinking, then someone has to be the adult in the room.  The adult is called reasonable regulation, and that’s all they are asking.

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Work Pay Live?

Want to see what a “recovery” looks like in terms of job openings? Here’s the FRED graph:

Jobs by category 2014 Note the increasing line for total non-farm jobs, and the almost parallel line for total private sector job openings.  What can we tell from the two lines at the bottom — that government employment and jobs in education and health services have not seen the increases indicated in the total job market or in the private sector job market.

What makes the greenish line (education and health care services) line so disturbing is that two health care related sectors — health care support and health care practitioners/technical — are projected to grow by 28% and 22% respectively by 2022.  [BLS]  Education, library/media, and training positions show a projected 11% increase in this decade. [BLS]

As we might expect given a aging population, personal care assistance jobs are projected to increase to 580,800 by 2022, and home health aide positions are projected to increase to 424,200 in the same period. [BLS]  That’s the good news for job seekers, the less exciting news is that personal care aides earn an average of $19,910 per year, while home health aides earn an average of $20,820. [BLS]

The third highest projection for new jobs comes in the retail sales category, 434,700 but with average earnings of $21,110.  The only high projection category which would put an employee in ‘middle class’ territory is that of registered nurses, with a projected need for 526,800 in the next few years and estimated average earnings of $65,470 annually. [BLS]

Federal Poverty Guidelines 2014Unfortunately, what we have here is a situation in which three areas of projected high job growth over the next 18 years (personal aides, retail sales, and home health care) are jobs which would not support a family of four on a single income above the federal poverty guidelines.  The estimated $19,910 a personal care aide is estimated to earn annually would barely keep a three person family at the poverty line.

If we extrapolate the numbers, by 2022 we will have an increased number of home health aides, each earning approximately $20,820.  That’s about $10.00 per hour, or a total contribution of $8,831,844,000 to the national economy.  This sounds nice until we get out MIT’s Living Wage Calculator.

A living wage for a adult + one child in Reno, Nevada is currently calculated at $20.39 per hour. For a family of four it’s about $19.22.  [MIT]  The current estimated wage for home health aides ($10.01/yr) doesn’t come close to either living wage calculation.

How about our retail sales person?  Nationally, we’re projected to need about 434,700 more of them by 2022. The 2012 median wage in retail sales is $21,410 or about $10.29 per hour.  How does this compare to the Living Wage Calculation for Las Vegas, Nevada?  One adult + one child would need an hourly wage of $20.67 and two adults and two children would need earnings of $19.50/hr. The $10.29 isn’t close — again.

There are at least three elements to consider in all these numbers. (1) Those jobs which are now identified as high growth tend to be in low wage positions; (2) Low wage positions don’t meet the Living Wage standards; and (3) If we continue to pay relatively low wages for high growth area jobs then we can reasonably expect to have more families qualify for public assistance.

Oh, but if we raise minimum wages for employees what of the KIDS?  For starters, most minimum wage workers aren’t children. Yes, most young people start out earning minimum wages, however this group only constitutes 19.8% of all minimum wage earners. [BLS table 1]  80.2% of all minimum wage workers are over 25.

If we drill down into the table we find that those “kids” aged 16-19 comprise about 5.4% of the minimum wage workforce, and men over 25 constitute 39.4% of the minimum wage workforce, while women over 25 are 40.8% of that total.   In short, it doesn’t do for us to hide behind the kid’s jeans during any attempt to argue that raising the minimum wage will be “bad for them.”

Well, there’s always that old canard that increasing the minimum wage reduces job growth.  For all the numbers tossed into the speculative pool — the FACTS of the matter don’t match the mythology.

Once more from the MIT economic study:

“Dube’s research looks at the effects of minimum wage differentials across state borders where the minimum wage is higher on one side of the border than the other. His research looks at the service industry, which he said employs the majority of minimum wage workers. According to his findings, both the short and long term effects of the increased wage on unemployment were negligible.”

What does raising the minimum wage do?  The Dube Study looked in that corner as well:

“Finally he added that work done by economists at the Federal Reserve showed minimum wage increase led to significant increases in purchases of durable goods. “From a perspective of stimulating demand, minimum wages will tend to increase demand by increasing the purchasing power of those workers.”

So, on one hand we have negligible impact on employment levels versus significant increases in the purchases of durable goods — which one sounds like a better common sense option?

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Governor Sandoval and the New Normal

SandovalNevada Governor Brian Sandoval (R) was pleased to comment as follows on the June unemployment numbers for the state:

“I am pleased that we have now seen job gains, relative to a year ago, in each of the past 30 months,” Governor Brian Sandoval said. “What’s more, gains have been recorded in nearly all sectors of the economy so far this year. However, in order to help pave the way for additional improvement, more work remains to be done.” [Sandoval, 7/18 pdf]

The Governor is pleased with our “non-stop” job growth, and happy that the U.S. Chamber of Commerce, which measures economic well being by (1) low rates of taxation, (2) how difficult it is to bring a suit for damages against corporations, and (3) the fuzzy notion of “business lending,” is touting Nevada’s great economy… [LVSun]

Let’s dispense with the Chamber Chatter first.  Businesses led by owners, managers, and executives who have more self awareness and a more rational comprehension of their immediate environment than the average miniature dachshund — “We’re big enough,” No, wait, maybe we’re not…” — know that the only reason to hire anybody to do anything is because the needs of customers for goods or services cannot be met by current staffing levels.   No business owner hires anyone because of tort litigation requirements, marginal tax rates, and “business lending.”  These categories are ultimately extraneous to the determination to hire additional employees, and only come into play if all other considerations are equal.   These criteria are just about as closely related to hiring decisions as (1) the mean temperature in the region, (2) the availability of canned spinach, and (3) statutes pertaining to aromatherapy.

Any business owner who predicates his or her hiring decisions on criteria other than the demand for goods and services on offer, and the consequent level of staffing necessary to keep customers satisfied,  isn’t going to be in business very long.  We might as well declare Nevada the perfect place to do business because (1) we have great climatic diversity, (2) bicycle fatalities are below 3% of all vehicle deaths each year (UNLVpdf), and (3) we have five species of native trout. [NDOW]

In short, the Chamber of Commerce chatter evaluates Nevada’s business climate based on their own legislative and political agenda, and not on relevant criteria for making micro-economic hiring decisions.

Meanwhile, back at the Governor’s happy comments.  “Job levels in Nevada have risen by 23,600 (2.1 percent) through the first half of 2013 with growth seen in all major sectors except professional and business services. The leisure and hospitality sector added the most jobs, with payrolls growing by 7,400 (2.3 percent).” [DETR 7/18 pdf]

For some sectors, like construction, there was almost nowhere to go but up.  For others, like professional and business services the results have been less than stellar.  This “picture” looks like this:

Nevada Job Growth by sector

Leisure and hospitality (read: hotels, resorts, and gambling) did add a significant number of jobs, but as in the case of the construction sector there was much ground to be made up.

Nevada Tourism 2013Note the plunge in visitor volume from 2008 to 2010.  [NVRA, pdf] Thus, if we give credence to the maxim that staffing decisions are made to accommodate an increase or decrease in the demand for goods and services, it’s relatively obvious that increasing visitor volume will yield increasing staffing levels at hotels and casinos.

However, there’s another fly in this ointment.  Nationally, the average earnings for a person working in the leisure and hospitality sector of the economy are $13.46 per hour, with average weekly hours amounting to 26.1 per week. [BLS] That calculates out to approximately $1405 per month, or $16,862 per year for 12 month employment.   The Department of Health and Human Services advises that a family of four with annual income at or below $23,550 has hit the poverty line. [ASPE]  The good news — we have more L&H jobs in Nevada, the bad news — this is all too commonly low wage employment.

Now, let’s look at the sector that didn’t fare so well: Professional and business services.  By definition these are:

“Activities performed include: legal advice and representation; accounting, bookkeeping, and payroll services; architectural, engineering, and specialized design services; computer services; consulting services; research services; advertising services; photographic services; translation and interpretation services; veterinary services; and other professional, scientific, and technical services.”  [BLS]

In other words, these are jobs at the higher end of the wage spectrum.  Meanwhile, the Governor’s office continues the happy talk:

“While there is more work to be done, if current projections hold, more than 50,000 jobs will have been created by the end of the year since the governor took office,” his communications director Mac Bybee said. “Gov. Sandoval made it clear from his first days in office that he would make job creation and growing our Nevada economy job one and he has done just that.” [LVSun]

It isn’t that 50,000 isn’t a nice number, but at some point the question needs to be posed — What kinds of jobs are these?  Are they the type of employment which sustains a middle class lifestyle or the type that can all too easily qualify a family for nutrition assistance?

The Other Sector

Another persistent drum beat in this blog is that it doesn’t do to speak of growth in the nation’s or a state’s gross domestic product without clarifying this figure includes the public sector.   The slashing done in the wake of the Mortgage Meltdown and Housing Bubble debacle is well documented in this article from the Las Vegas Sun in 2011.   When higher education budgets are cut, so are middle class jobs; so are teaching positions, positions for police and firefighters, parks and recreation program and facilities directors and staff….  These are salaries which are spent in local economies, for local goods and services, and which are now gone from the overall equation for enhanced economic growth.

If the new normal is that we have to adjust our expectations to address the declining contribution of public sector purchasing and personnel decisions then we have to assume lower rates of economic growth as measured by the GDP.

The test for the Governor should not be whether or not he can preside over the restoration of low wage jobs in a recreation based economy. It should be whether or not  his economic plan incorporates ways to diversify the state’s economic base so as to increase the number of jobs which relate to professional and business services and to the public sector jobs which correlate to quality of life in the state, and the attraction of enterprises which value transportation infrastructure, education and workforce training, and research coordination in their formulas for potential locations.

We’ll have to wait to see what the New Normal might be?

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