Obama's Awesome Recovery Will Doom Romney!!

That seems to be the attempted meme Obama surrogates are trying to spread. Today in the NY Times an op-ed (or maybe more accurately a blog post) makes such a claim. He provides a rather strange graph that attempts to illustrate this. What he's showing are total jobs created by each president - but for Obama only, he eliminates his first year. He then plots these total jobs on a graph (that has no numeric value on the X-axis) and proceeds to draw lines connecting the dots as if it were a time series. Rather bogus, I'd say - but the man is a History professor, apparently, so I guess we shouldn't expect him to be even minimally competent working with numbers.

Yes, it's true, Obama inherited a very dire situation, but that should have made it easier for him, not harder. When a recession is shallow (as in 2001 and 1991), you're not going to get very dramatic levels of job growth coming out of it. But when lots of people are thrown out of work in a deep recession, that's when you can make real hay on the jobs front. This is what happened in 1983 after the brutal 81/82 recession when unemployment exceeded 11% (it barely went over 10% this time around) - the economy roared. So let's compare Obama's recovery to Reagan's to see just how awesome this recovery really is:

Not even close. But it's even worse than that. Today, the population (non-institutional adults) is 36% greater than it was then - so job growth should be stronger. In fact, job growth hasn't even kept up with the growth in population. A look at job growth net of population growth is downright shocking:

There's just no putting lipstick on this pig - this is one ugly recovery.

Stuctural or Cyclical?

There's a little skirmish going on between the Keynesians and the more conservative economists over the underlying source of our current travails. Team K (Keynesians), most prominently represented by Krugman, insist the problem is lack of aggregate demand which can be solved by government the handing out jobs. Team S (Structuralists), insist unemployment is structural, meaning the unemployed lack the proper skills to be productive in today's economy, and so such government intervention would be useless. Here's the K-Man:

What does it mean to say that we have a structural unemployment problem? The usual version involves the claim that American workers are stuck in the wrong industries or with the wrong skills...but...contrary to what such stories suggest, job losses since the crisis began haven’t mainly been in industries that arguably got too big in the bubble years. Instead, the economy has bled jobs across the board, in just about every sector and every occupation...So all this talk about structural unemployment isn’t about facing up to our real problems; it’s about avoiding them, and taking the easy, useless way out. And it’s time for it to stop.

It sounds to me though that it's the Keynesian-approach that is the easy way out. Who wouldn't want increasing wealth to be as easy as spending a whole bunch of government-created money? No one who believed that such policies could work would object to doing it. Tyler Cowen, from Team S, responds here. While characteristically opaque, I think what Tyler is saying is that "structural" unemployment need not be concentrated in specific industries, but can be manifested in widespread chronic unemployment. Let's remember that this Great Recession wasn't a shot out of the blue - we had the Internet Bubble bursting in 2000, followed by 6 years of very anemic growth accompanied by a massive housing bubble. This has been going on for quite awhile.

One thing I don't hear too many people discussing these days is the apparent unwillingness of Corporate America to train their own workers. There is much gnashing of teeth over the dearth of STEM graduates and it is indeed distressing seeing so many young people graduating college with useless majors like journalism and communications. But in past decades people with non-technical degrees - or quite often just high-school graduates - could get hired by a large corporation and learn COBOL or accounting basics or whatever. A few months ago I heard the chairman of Caterpillar complain on SquawkBox about the lack of trained mechanics to service their high-tech equipment. No one on the panel asked him why Caterpillar doesn't train them.

One obvious disincentive is poaching - companies get real sore about investing in employee training only to have newly-trained workers leave for a higher salary. In the old days, presumably, a mutual sense of loyalty limited this problem. But such ideas are now quite passe. Corporate America's view of colleges is now much like the NFL's - a recruiting ground for fully-trained star players who only need some additional coaching on some organizational specifics. It's probably a no-brainer for any young person that if you're smart enough to do well in engineering or computer science or quantitative analysis that's how you ought to proceed. But if you're not - and the vast majority are not - it's pretty tough to figure out which field is going to get you somewhere. When companies did their own training, that kind of took the guess work out of the equation.

My feeling is that Krugman is wrong and we cannot cure our ills by artificially boosting aggregate demand - and that the problems run deep as the Structuralists contend. But this structural problem is much deeper, and no one is really thinking very deeply about what to do about it.

Krugman's Delusion

What nerve, huh? A loser-blogger calling out a Nobel-Prize-winning-Princeton economist for being deluded about economics! Well, that's what I'm doing. I must admit though that there are others far more deluded - there are those who think we're in some sort of real recovery right now. Krugman knows that's not true. But he seems to think that all we need to do is pump a whole bunch of money into the economy and, Voila!- we'll have our recovery.

In next Sunday's NYT Magazine, Krugman takes on Bernanke for not doing more to push along the recovery - things like pumping more money into the economy. What Dr. K does not understand is that what the economy is suffering from is not some technical imbalance like a vitamin deficiency. The economy is suffering from a deep fundamental problem - we are not increasing our output sufficiently to raise our standard of living. What's worse is that the growth we've had over the last 10 - 30 years was largely fraudulent, an illusion concocted by debt (and I'd argue all the growth of the last decade was completely fraudulent). Thus, our standard of living exceeds what we have truly earned and we continue to pile on debt just to maintain the ruse.

This is why the middle class has been stagnant for decades now - there's been no real fundamental growth. If economic growth were organic and true, then the resulting affluence would accrue to everyone. But since the average person is not any more productive in any real sense, the increased affluence has largely gone to those who have excelled at figuring out how to finagle the systemic leverage to their advantage - and to that small segment of the population who have actually become more productive (Silicon Valley, for example).

Most economists seem to think that money makes the economy function. Money allows the economy to function smoothly, of course, since a pure barter economy would be impractical. At best proper money management can help an economy function at its optimal level, but it can't actually increase production. Increased production can only come from people producing more.

But all else being equal, a society with more and more elderly people is not going to be producing more. All else being equal, a society with less-and-less STEM graduates is not going to produce more; and one with more-and-more people with lower innate human capital is going to produce less. And of course a society that increases its production of non-durable goods and services at the expense of tradable goods is not going to be producing more.

Despite the deep recession we just experienced, we have yet to fully pay the piper. The government seems to have finally given up on any serious efforts to prop-up the housing market, but the big banks have yet to realize their losses. Meanwhile, horrific deficits loom over us like dark storm clouds. We have not had sustained growth in excess of 3% since the 90's, so we can't literally grow ourselves out of these deficits. Our only recourse will be to inflate our way out.

Somehow or other we - as a society - need to figure out how we're going to pay the piper. The most just and constructive approach would reward those who have avoided leverage and punish those who have exploited leverage. But the Krugman approach - inflating our way out of debt = would of course do the exact opposite - reward the debtors and rape the savers. But it's even more critical to be fair at the institutional level. We cannot allow high-leverage banking to be a lucrative profession in relation to actual productive enterprises. We'll never approach the 4-5% per annum growth levels of the post-war years again, but we can get ourselves back in a respectable, true 2-4% level. But it won't be easy. More on that later.

The Fourth Way

The start of the presidential election season - when a bevy of opponents battle in undignified jostling for their party's nomination and a hapless chief executive transitions the White House from executive mansion to re-electioncampaign headquarters - is often cause for lament that there isn't an alternative to this partisan bickering. But the alternative that everyone seems to want - a Third Way - a centrist course - is probably the worst. Studies have shown that the average conservative is dumber than the average liberal (it's an average, not you - calm down - think of all the left wing college professors) - but the dumbest of all are moderates. Being a moderate often means you lack the imagination and knowledge to take a real position on the issues.

But since both parties are messed up, what alternative is there? The best way is to pick and choose from the more extreme positions of each party - not too blend them together. Neither Republicans nor Democrats are always right and always wrong - but splitting each issue down-the-middle Solomon-like is no solution. Taking the best ideas from each optimizes policy. But that is really hard to do, since the result is alienating others on your side while failing to win over the side on the issues where you remain in disagreement.

Take an issue where the Democrats are clearly right - raising taxes. I would argue that taxes need to be raised on everybody - but especially the wealthy. Unfortunately, Republican ideologues will not hear of it. On O'Reilly a couple months back, both Ben Stein and Wayne Rogers - two conservative money guys - both assured O'Reilly that raising taxes on the wealthy will not cause any economic dislocation. Stein even pointed out that there is no correlation between higher economic growth and low taxes. [In fact, the opposite is probably true. Our finest growth occurred from 1947 thru the late sixties, when marginal tax rates were in the 77 - 90% range, and tax shelters were the norm - allegedly the most inefficient tax policy of all. And the 90's had overall higher growth than the 80's or (obviously) the 00's, despite higher taxes that decade.] But O'Reilly wouldn't hear of it - he prefers his ideological certainty that higher taxes just have to restrict growth over any facts that might contradict it.

The concept of a "living wage" is also a Democrat idea that should be our policy. How to implement that is not entirely clear - but certainly U.S. corporation ought to be sacrificing some level of profit and/or executive compensation so that American workers can afford to raise a family is a decent dwelling in a decent neighborhood. I'm not sure that I'm in favor of how Democrats would like to accomplish this - i.e., heavy unionization, as I feel labor unions are political animals unto themselves that ultimately harm the very communities and industries they infiltrate. But the main benefits of unionization - decent pay and fair and safe working conditions - ought to be national policy. Yet such a simple concept immediately runs afoul of modern Republican dogma that in order to compete in a global economy firms must operate unfettered by any considerations other than profit maximization.

Suppose a new kind of Republican candidate bargained with Democrats - offering a Living Wage policy for an end to the Diversity Regime? Tax increases on the wealthy in exchange for a big rollback in the Federal bureaucracy? Big investments in Green technology in exchange for rolling back restrictions on oil, gas and nuclear technology? Dramatic reductions in defense spending in exchange for a dramatic cutback on immigration, a border fence, and large-scale deportations?

I don't know if such deals could ever be pulled off, but I contend that exchanging policies like that would be far better than attempting to split the difference on any one issue.

The Most Awesomest Recovery

An economist named Karl Smith, who writes at a blog called Modeled Behavior, seems to have invented a statistic that finally can demonstrate what an awesome recovery we are in. He calls it the "Labor Soakage Rate". I don't know if he actually did invent it - he doesn't make a point of claiming he did. But if you Google "Labor Soakage" you'll find references to his blog post and a bunch of stuff on soaking up water leaks and the work needed to do so. So I'd say he invented it.

At any rate, he's using it because it appears to show a very steep rate of job growth. He calculates this "soakage" rate as the percentage change in employment minus the percentage change in the civilian population from one month to the next. So, even if jobs are being lost, and the percentage change in jobs is negative, as long it's better than the prior month, the graph will trend upwards. So it in no way measures the magnitude of job growth, or even lets us know anything about job growth itself - it only tells us about the rate of change in the change - the 2nd derivative, basically - and that this change in the change is very high!

Now maybe this is a useful statistic - if people working in banks had looked at the 2nd derivatives of housing prices, a lot of pain might have been avoided. And of course generally it's useful to find peaks and troughs. But all you've needed to be doing over the last few months is pay attention to the weekly unemployment claims numbers - which have generally dipped below 400k of late - to know that there is some turnaround in the labor market. But this statistic gives you no feel for the what kind of recovery we're in. For that, I'd prefer to compare the actual magnitude of job gains.

One other dubious approach he takes is to compare this recovery to the last one - but early-2000's recovery was routinely derided as the Jobless Recovery. So it's not much of a comparison. Plus, that recession was relatively shallow, as was the 1991 recession. The last recession to rival this one for depth was the 1982 recession, where the jobless rate actually exceeded 11% at one point. But the economy began to recover sharply in 1983. The current recovery is now in its 29th month. The chart below compares the accumulated increase in employment net of civilian population growth over the first 29 months during the recoveries from the 1982 and 2008 recessions (or the Reagan vs. Obama recoveries, if you will). You can see what a dud this recovery is.

From this view, one can't even discern any improvement in the current labor situation whatsoever.

Yet it's hard to pin the blame on Obama. This dismal job situation has been pretty much the "new normal" since 1999. Note this chart, which shows total accumulated job creation net of population growth since the 1982 recession.

From 1983 thru 1999, the economy managed to create at least one new job for each additional adult. But since job-creation peaked at 6 million accumulated net new jobs in December 1999, there has been a steady erosion in the number of working people with respect to the adult population, with only a slight flattening of the decline during the housing boom. Another way to look at it is that in this century, the civilian adult population has added 30 million more people than jobs have been created. The most obvious trend behind this is the baby-boom retirement explosion, but high levels of immigration is no doubt involved as well. Not that immigrants are jobless, but clearly ten-or-so million jobs have gone to immigrants that have not gone to the native-born.

Is there any way out? Over the next decade, the baby-boom retirements should peter out, and baby-boomers should start dying in earnest during the 2020's. So if you're young enough, I suppose there's some reason to hope.

Young People Saving Money - What a Disaster!

The madness behind Keynesianism can be found in an article today in the Times ("As New Graduates Return to Nest, Economy Also Feels the Pain") featuring uber-Keynesian Mark Zandi of Moody's. Saving money is bad, you see - and squandering it on useless frills is what the economy needs. What Zandi wants young people to do when they get their first job is to get their own place and start spending that money.

Every year, young adults leave the nest, couples divorce, foreigners immigrate and roommates separate, all helping drive economic growth when they furnish and refurbish their new homes. Under normal circumstances, each time a household is formed it adds about $145,000 to output that year as the spending ripples through the economy, estimates Mark Zandi, chief economist at Moody’s Analytics.

Clearly Zandi has learned nothing. That he didn't foresee what was coming is rather unfortunate, given that he's chief economist of a corporation charged with rating risk. But not to have learned from what happened is unforgivable. Zandi, Krugman and their ilk seem to believe that some weird event happened in the heavens - like a supernova that lights up the night sky - that spooked people and has led them to irrationally withdraw from the economy.

 But as we all know what happened was that people learned - when the bubble burst - that debt must actually at some point be repaid and can't be perpetually rolled over, that future high incomes are not guaranteed, that the amount of disposable income available is not infinite, and that future expenditures cannot always be paid out of current income.

 So what these young people are doing (at least according to this article's narrative) is staying a few more years with Mom and Pop to maybe save a few bucks for one of those down-payment thingies that used to be so popular back in the Middle Ages for buying houses. But apparently Zandi, on the other hand, is aghast that they're not frittering their incomes away in the expectation of landing a negative-amortization loan for a home costing twice what they can afford. Yeah, that's how a society builds wealth, Zandi - by spending.

How Much Are You Paying in Taxes?

Greg Cochran alerted me to an Op-Ed in the WSJ ("My Response To Buffett And Obama") by the former CEO of Amex, Harvey Golub, claiming "of my current income this year, I expect to pay 80%-90% in federal income taxes, state income taxes, Social Security and Medicare taxes, and federal and state estate taxes." And Greg pointed out that with the maximum FIT rate at 35% and NY/NYC at ~12%, Medicare < 3% and FICA maxed out at 6k, and considering the deductibility of state and local taxes and other exemptions, he's unlikely to pay much more than 44%. We have give him the benefit of the doubt that his income is primarily subject to NY/NYC tax, otherwise it's beyond preposterous. (He's also ex-Chairman of the Board of AIG - which gives more weight to his being more mendacious than simply innumerate.)

But what truly amazes me about this is that in searching on this article in Google News, I couldn't find any article that directly questions this "80 to 90%" tax rate assertion. There's some push back in the comments section in this Accounting Today article, but no one seems to be able to actually sit down and work out the numbers. Innumeracy reins supreme! And then there's that bizarre mentions of "estate" taxes. So this blog post can be considered a public service - the only refutation of Mr. Golub's article in the webosphere that actually looks at numbers. As I write this it occurs to me he might also be paying some serious real-estate taxes - and perhaps he's counting that in his equation (and what he means by "estate" taxes?).

Apparently the way it works in NYC is that property taxes on single-family dwellings are 17% of 6% of assessed market value. It sounds like these valuations are rather dodgy in themselves, but let's assume he owns a $10 million dollar unit (I'm guessing he pays little property taxes on his "golf" homes in New Mexico and Florida). So that would work out to about $102k per year.

So, if that property tax explains the "80 to 90%" tax rate (let's call it 85%), then we have

.85Y = .44Y + 102

which equals Y = $248. So if his property is worth $10m, that means his income could only be $248k. Generally, his ~85% tax rate is possible if his NYC property is 40 times greater than his income. Maybe he should move.

We're Goin' Down, Down, Down, Down

After Friday's astonishing lows, the markets really shot its load today, just crashing through any of the support levels that anyone imagined existing just a week ago. Meanwhile, we (i.e., us Americans) are throwing another $30 x 10^9 AIG's way. As the Dow approaches 6000 and the S&P 600, the meltdown of our economy appears inevitable, without even the remotest suggestion from Washington that the bailouts will even be rethought, never mind end anytime soon. This is working out more serendipitously than Obama could have ever dreamt.

What, you say, I'm crazy? Why would the president of the United States want to see his nation's economy implode? Why would he wish to see his grand plans for a greener, more educated, more health-insured, more economically-just America jeopardized by its going bankrupt?

Now I'm not saying this is part of some grand plan. I'm not even sure Obama realizes what's happening. But clearly he does not consider imploding markets a cause for concern. As far as he's concerned, he's already taken care of that. He signed an $800b stimulus package. He's proposed a budget to vastly increase spending on education - we all know that education pays for itself multiple times over (sometimes 10 times!). And of course all that energy "investment" in the budget - that will solve our industrial problems.

So this market-crashing stuff is just a temporary distraction - a bunch of rich whiners throwing a little tantrum. Besides, if things don't pick up as expected, we can just throw another $800b out there. The only real danger to the economy right now is that people are trying to save money - that's always been the problem, in fact, all that net worth greedy people like to build up, which only serves to further disadvantage those who have a different approach to personal finance.

Standing stalwart behind the president are the titans of the media. To help sell his prescriptions he can count on the New York Times, Washington Post, Time, Newsweek, NBC, CBS, ABC, CNN, and NPR. These organizations - and many more across the country - will be certain not to let a single credible, skeptical voice intrude on their cult-of-Obama storylines. To be sure, they will talk to various Republican and pseudo-conservative tools who blabber on incoherently about tax cuts and saving the housing market. But they won't talk to a single person who will actually discuss what's actually wrong with the financial system and what must be done to set it right. As far as the opposition like Fox and WSJ? See the above re: tools.

Indeed, the stars couldn't be more perfectly aligned for the triumph of Obamanomics. The market crash is wiping out people's 401k's as well as any pensions that might still be out there. Then between the stimulus package(s), the various bailouts and the super-budgets, the dollar will be next to dive as neither China nor Japan will be able to afford to fund them. This will serve to wipe out whatever cash savings these saps will have attempted to protect. Ownership of gold, of course, can simply be declared illegal.

And so with existing savings effectively wiped out and further savings impossible (due to their being no safe place to invest), Americans will have no trouble funding Obama's dreams. Yes We Can indeed. The persistence of a few huge zombie banks, completely dependent on the Obama administration for their existence, will provide the streams of "capital" to fund administration-approved "private" ventures - the various health "insurers" and green "entrepreneurs" that will spring up in Obamaland. Any income that might have been dumped into savings in the past will now be redirected to "investments" in education and infrastructure. (Can I use any more scare quotes?)

Granted, this was not Obama's precise plan back when he and David Axelrod decided he should become president. Obama envisioned that as POTUS he could harness this incredible wealth-making machine that is the USofA to accomplish all the things he would have liked to have accomplished as a community organizer if being a community organizer didn't totally suck. You know, like back when he was still talking about how "white folks' greed runs a world in need". So what to do when the white-greed machine blows a serious gasket? How do you redistribute money that's disappeared?

Well, for one thing, there isn't so much inequality anymore. The meltdown is much harsher to those with positive net worth - they've seen much of that disappear. If you have no savings, you've got nothing to lose. If you bought a house you couldn't possibly afford, and you had a crappy credit rating to begin with, you walk away. That helps. But if you can keep insolvent firms operating with bailouts, you can then also control the disposition of their revenues. Favored constituencies can continue to get "loans" regardless of ability to pay, salaries can be capped (or reduced by eliminating bonuses, which are really just a variable salary component). Private firms looking for funding will also need to play by the rules, such as locating in the right places, hiring the right people, supplying the right amounts to right locations. And why not?

You can't really argue that America's resources have been well allocated over the last 20 years. Who's to say that Obama's ideas aren't as good as anyone else's? All those quants working on Wall Street were not just wasting their talents - they were being used to wreak havoc. Put them to work developing new energy sources, designing mass transit systems, or send them off for a year of community service in the cities. And the rest of us not-so-mathematically gifted technocrats? The new age will have lots of rules and will require careful management - there's a vast bureaucracy to man (or person). We still need to work, only we'll just have to work a decade or two more than we might have thought. But that's okay - we'll have lots of vacation time, and there will be lots of part-time jobs.

So, as you watch the markets collapse, ask not why Obama doesn't do anything, but why should he?