Saturday, October 13, 2012

Why October's Jobs Numbers Make Sense



The latest jobs numbers have caused quite the stir.  You have liberals proclaiming the president has rescued the economy from its previous downward spiral and you have conservatives crying corruption and manipulation of the statistics.  Both are wrong and here is why.

Let's start with the idea that the numbers were manipulated.  Yes numbers can be manipulated and yes there are political incentives for this to happen, but going down that road does not take us anywhere.  You can not and should not pick and choose when you want to trust statistics.  It is much more productive to look at what the statistics are telling us than claiming manipulation.

The official numbers show unemployment going from 8.2% to 7.8%, but what does that actually mean?  The official numbers measure "Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work" divided by the total labor force.  These numbers don't take into account people who have stopped looking for work or who are under employed, i.e. working part time when they want to work full time. If you look beyond the official numbers and look at U-6 unemployment(which includes people who have stopped looking and people who are underemployed) you will see that a large portion of the decline in unemployment was the result of more part-time workers.  Seasonally adjusted the U-6 statistics show that unemployment went from 14.7% in August to 14.7% in September.  

Even though U-6 did not change last month, total unemployment has gone down over the last four years.  The questions that we need to ask now are how this happened and does this mean the economy is "fixed"?

Question One "How"

Over the last 5 years $5.866 Trillion dollars has been pumped into the economy with an additional $6.259 in committed spending.  That is about 30% the size of the entire US economy that we have spent.  So what happens in the short run when this much money is pumped into the economy?  Well you are going to see an increase in economic activity.  More people are going to be hired, people have more money to spend because the Federal Government is directly subsidizing these activities.  It similar to a man who has not slept in two days and drinks 5 espressos, of course he is going to wake up, but does this fix the underlying problem?

Question Two "Is the economy fixed"

This question of whether or not the economy is fixed implies that the economy was/is broken, which is too long of a story to give justice here.  Instead let's discuss whether or not the economy is going in the right direction.  Have the actions of government over the last five to six years put the economy in a better position for the long run?  Do you think that the massive amounts of new financial reform, new health care reform, and the trillions in spending have helped the economy?  It is hard to believe that banks are going to more efficiently allocate capital when they have to fear Dodd-Frank and the Consumer Financial Protection Bureau that it created.  It is even harder to believe that health care prices are going to decrease when health care reform increases demand for that product through an individual mandate.

Lastly, in reference to the stimulus, resource allocation matters.  Let me say that again, "resource allocation matters".  People have different and diverse knowledge and preferences, which impacts their spending habits.  Think of how a 16 year old girl would spend $100 versus a 60 year old man.  It is obvious that there would be a difference here in how the $100 was spent.  In a more general sense think of the Federal Government versus society as a whole.  There are knowledge and preference differences here as well.  A million dollars in the hands of the Federal Government is going to be spent differently than if left in the pockets of individuals.  The question is who is more productive with their money and in whose hands would we see more economic growth with that money?  The answer to the question of whether or not the economy is fixed or is moving in the right direction depends a lot upon what the answer to the question above.



FRED Graph

FRED Graph

FRED Graph

Monday, September 3, 2012

National Debt, National Deficit, and Federal Spending 2003-2012

With the election around the corner people are constantly throwing around economic statistics particularly around the nation debt, deficit and federal government spending.  I got tired of hearing misrepresentations of the statistics, so I composed these two charts.  The first chart shows national debt, deficit, and spending 2003-2012.  The second shows the change of each of these categories.  The intention of this chart is not to support any political party.  The point of the charts is to provide the true statistics.




Wednesday, July 4, 2012

Real Unemployment (U-6) vs Official Unemployment, How Should We Measure?

The chart below is the result of data from the Bureau of Labor Statistics.  In red the "Official Unemployment" rate is shown, in blue "U-6 Unemployment"* is shown, and in green the spread of these two measures of unemployment is shown.

U-5 Unemployment measures:"Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force", which some argue is a more accurate way of measuring employment.

As you can see if we used the U-6 measure we would be reporting unemployment as 14.3% vs 7.9% as of May 2012.



To see the data for yourself visit http://www.bls.gov/webapps/legacy/cpsatab15.htm

Sunday, March 25, 2012

Downfall of Unionization and Rise of Licensing

The chart below comes from an economic study on the impact of licensing requirements on the economy.  This graph shows data from 1950 to 2008 illustrating how over the last 50+ years the amount of occupational licensing has increased while the amount of unionized workers has decreased!  Read the whole paper at http://ftp.iza.org/dp5505.pdf

Saturday, March 24, 2012

The Difference A Mile Makes(Gas Price Differences Between States)

In economics 101 we learn about the impact that taxes and subsidies have on supply and demand.  The usual example that is given is a situation where the sales tax for widget A is increased.  As a result the demand curve shifts left resulting in a new before tax price and quantity demanded of widget A.  We then see that when you add in the sales tax, the price of widget A increases(P1 to P2) relative to when there was not tax(see below).




Despite being told that this impacts us in our everyday lives, the concept of taxes having a real impact on prices is still abstract for some.

To make this concept a little more concrete lets look at the differences in gas prices between US States.  Here is a list of the taxes that individual states charge on every gallon of gasoline as of January of 2012.  Here is a link showing the lowest to the highest average daily gas price by state.

When you compare these two sets of data you see that the states with higher gas taxes tend to also have higher overall gas prices.  Just drive from Williamsport Pennslyvania(has 15th highest gas tax in US) to Rochester New York(has the highest gas tax in US).  Rochester on 3/24/12 had an average price of 3.978 per gallon while Williamsport had on average price of 3.900, a difference of 9.78 cents.  The state averages differ by 15.7 cents.  The state gas taxes differ by 16.7 cents.

Part of this difference is a direct result of this tax difference.  When you look at the 25 states with the highest gas prices 21 of them also part of the 25 highest gas taxing states(Do remember that there are MANY other factors(supply and demand factors) at work here and that this is not a scientific comparison, just food for thought).


Just remember whether you believe higher taxes are right or wrong, taxes WILL impact prices!







Thursday, March 22, 2012

An Essay on The Principle of Population Thomas Malthus

In 1798 the famous economist Thomas Robert Malthus introduced his essay on the principle of population with:

"At the end of each day, the world now has over two hundred thousand more mouths to feed than it had the day before; at the end of every week, one-half million more; at the close of each year, an additional eighty million.  Aware of these alarming statistics, many national governments, influential institutions, and private enterprises are trying to encourage increased production of all the necessities of life, particularly food, in the hope of preventing mass starvation...there has been enough success in recent years to forestall, at least temporarily, a major disaster..."

200 plus years later at the end of each day there are over 490,000 more people, 3,430,000 more each week, and 178,360,000 more people each year.
Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2008 Revision, http:/esa.un.org/unpp, Friday, June 26, 2009; 3:41:46 AM. 


Despite population growth more than doubling it is less expensive to maintain the basic necessities of life than any other period of history!  Food production has increase exponentially, prices have decreased, and land usage has remained constant.  Check it out here.

One example:

Sunday, March 11, 2012

Environmental Benefits of Innovation

Over the last 50 years the earths population has more than doubled.

With such a large increase in world population you would think this would mean a larger portion of land and people would have to be devoted to producing food.  You would also think that this would have a negative impact on the environment through the cultivation of land, fertilizer run-off, etc.

Fortunately over the last 50+ years agricultural innovations have been developed and implemented which have   resulted in a decrease in the amount of land used for agriculture and an increase in land productivity.  Some of these innovations came from genetics others from engineering.