Month: August 2012

The Job Growth President

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Both incumbent President Barack Obama and Republican challenger Mitt Romney are making the case to American voters that each has better policy answers for future job growth.   Obama touts total job gains of 4+ million jobs since the recession ended.  Romney points out that this is less than half of the 9 million jobs lost since the end of 2007.

An economy is a dynamic resolution of the tension between supply and demand among all the people, companies and governments that participate in that marketplace.  Obama’s approach focuses on the demand side of the economy and believes in government borrowing and spending to temporarily take up the slack in private sector demand. The stimulus of government spending is supposed to both support and kickstart demand in the private sector, particularly consumer demand.  The fault of focusing on the demand side of an economy is that “demand-siders” presume that the supply side of the economy will naturally increase production to meet the sustained or increased demand.  In 2009, the Obama administration, together with a Democratic House and Senate passed a stimulus bill that included a lot of money for sorely needed infrastructure projects.  Democrats, most of them demand-siders, simply assumed that there would be a number of “shovel-ready” projects on the drawing board, projects that would employ construction workers laid off during the severe housing decline.  Since demand-siders do not pay as much attention to the process of producing or constructing something, they were dismayed that there were so few such projects ready to go.  Decades of labor, environmental impact and traffic impact regulations had dramatically increased the planning time required for many highway improvement projects.  At a meeting with his council on stimulus planning, Obama commented wryly, “Shovel-ready was not as shovel-ready as we expected.”

Romney’s approach focuses on the supply side of the economic dynamic.  “Supply-siders” believe that the government’s role in the economy should be limited; that government should remove many regulatory barriers and hinderances to the producers of economic goods and services.  The fault of this approach is that it presumes that consumer and inter-business demand will naturally increase as producers are able to make more goods and products available at a cost that has been lowered by the removal of hurdles to production.  The producers will hire more workers, will buy goods and services from other businesses who will hire more workers;  demand will inevitably increase which will support and stimulate more production.  Many adherents of the supply-sider hypothesis believe that defense of the country is a government’s primary proper role.  They advocate a large amount of military spending but regard taxation as a barrier to production.  These two competing and antagonistic ideas – more military spending, less tax revenue per dollar of economic activity – has resulted in large budget deficits which contradict the professed fiscal frugalness of many in this ideological camp.  Libertarians advocate a more consistent supply-side philosophy, arguing for lower military spending in addition to reduced government spending on social programs. 

Demand-siders argue that workers are both producers and consumers.  Supply siders contend that workers are consumers but not producers; workers are a cost of production.  Demand-siders focus on domestic civilian consumption.  Although supply-siders do not focus on consumption, they do emphasize military consumption.

Who is right?  Both of them and neither of them.  The political discourse and election structure aims to separate people into ideological and emotional teams; over the past decade many politicians who were less polarized in this debate have lost their seats.  A hundred years ago, this country began a transition away from party leaders picking candidates for national office to a primary system whereby voters would choose candidates.  In the two decades after World War 2, our political system made a complete transformation to a primary system, which has produced two increasingly polarized political teams.  A small group of voters in each political camp now elects the candidates for national office; in the last presidential election, less than a 1/4 of registered voters voted in the primaries.  We have traded a system where party bosses in a backroom picked candidates to one in which a small contingent of passionate people pick candidates.  We need a new system.

In his “Believe in America” plan Romney asserts that his policies will foster stronger job growth. (Long version and Short version).  They include reducing the corporate income tax rate, more free trade agreements, more oil and gas leases, reducing federal retraining programs and a 5 percent reduction in non-defense discretionary spending, a relatively small reduction in federal spending of $20 billion, or 1/2 of 1% of total federal spending. (Discretionary spending is government spending which excludes those social programs like Social Security and Medicare and Medicaid whose spending is on “auto pilot”).  Romney’s proposals are consistent with a supply-sider philosophy.

Beginning with the conventions in these next few weeks, both political campaigns are about to go into full court press during the remaining days before the election in November.  Each candidate will argue that their approach will foster job growth.  What neither candidate will tell us are some of the complexities that continue to trouble economists who study the labor market.  Why has job growth been rather anemic during the recoveries of the past thirty years?  Below is a chart of the year-over-year (yoy) percent gain in employment.

Notice two changes in the pattern:  the frequency of job losses has decreased but so have the employment gains during recoveries.  Economists at the Federal Reserve have analyzed the factors for this long term trend and concluded: “The analyses discussed here suggest that weak labor demand is the primary explanation for prolonged unemployment duration observed in the recent recession and recovery. The weak recovery of employment is similar to the jobless recoveries that followed the 1990–91 and 2001 recessions. This suggests that the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions. ” (Source)  The authors of the study analyze and isolate several factors to account for the change, including changes in how the numbers are reported, the longer duration of unemployment benefits, and the reduced manufacturing production in this country which would respond quickly during recoveries and recall laid off workers.  Weak labor demand is the chief culprit of anemic job growth and the lengthening duration of unemployment.  Why?  In the past thirty years, underdeveloped countries in Asia, India and South America are now offering a ready supply of un-educated or moderately educated workers.

The increase in the global labor supply is a particularly challenging problem because it is accompanied by an increase in productivity; i.e. less workers are needed to produce a unit of something.  Obama’s answer to this problem is more government support for educating young people and retraining those in the workforce whose skills are not suited to the changing demands of producers.  Obama has essentially given up on jobs for low and moderately educated U.S. workers other than government spending on infrastructure projects.  He hopes that American workers can command more of the global market for highly skilled workers. 

Romney wants to reduce federal retraining programs for workers and turn that task over to states.  He hopes that, somehow, someway, businesses with lower production costs will hire more workers.  More oil and gas drilling will employ more moderately educated workers but even Romney knows that these job gains are modest relative to the entire labor market.  More defense spending will employ workers in defense industries but many of those jobs require higher skills; lower skilled workers will benefit as a consequence, as part of an economy that supports defense contractors and military bases.  Increasing the number of soldiers reduces the number of available workers and reduces unemployment.

Neither candidate proposes to address an intractable problem:  too many workers around the globe.  Below is a chart of the y-o-y change in the number of people employed.  Due to a glut of workers, the structure of the labor workforce in this country is inherently weak.  The chart below shows the drastic drop in employment.

A winning economy, like a top-rated tennis player, blends strategies.  Politicians and players that strictly adhere to a school of thought or a school of play lose out to those are able to see and employ the benefits of differing strategies.

 

Medicare Reform

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A week ago, presumed Republican presidential contender Mitt Romney announced his pick for vice-president – Congressman Paul Ryan.  Ryan has authored a budget plan which has passed the Republican house but was stopped in the Democratic Senate.  The addition of Paul Ryan, a man who focuses on policy issues, should elevate the debate between both presidential campaigns and present a clear choice to the voters.  A signature feature of Ryan’s budget is the transition of the Medicare program from a pay for service program to a voucher program; i.e. seniors would be given vouchers to purchase insurance from private insurance companies. During this decade, Medicare expenses are projected  to grow 3.5% per year, while the annual increase in private insurance costs is estimated at 5.4%.  These estimates were compiled by the Kaiser Family Foundation from a number of sources, including the Congressional Budget Office (CBO), the Center for Medicare and Medicaid Services (CMS), Medicare Trustees Report, Census Bureau and others (Source)  The Ryan plan phases in the voucher plan for Medicare so the difference in annual cost increases this decade would not impact anyone – yet.  The plan applies only to those 55 and younger.  In the decade of the 2020s, the difference in annual cost increases would be borne by newly retiring seniors on fixed incomes.

A chart from the Kaiser Family Foundation shows a breakdown of who has paid for medical care for the past fifty years.  I’ve marked it up to show the categories more clearly. (Click to enlarge in separate tab)

In the coming months, we will hear much debate on the Medicare program.  In 2010, the total program cost was $519 billion and increased to $555 billion in 2011, an annual increase of 6.9%.  This was only slightly above the 6.7% growth rate in spending since 1985  (Source).  Medicare costs are projected to rise to $902B in 2020.

Underlying Paul Ryan’s transitioning of Medicare to a private insurance program is the belief that competition in the private market place will reduce the growth in costs.  This cherished assumption has not proved to be the case in the health insurance market, particularly the small business and individual group markets, which have seen annual increases of 10% or more in the past decade.  A June 2012 survey of insurance agents showed that costs were expected to rise from 12 – 20% this year.  My company has seen only one year when the annual increase in our small group insurance plan was less than 10%.  Competitive quotes from other health insurance carriers were even higher.

Who pays for Medicare? 

Income and general taxes pay 42%;  seniors pay 13%; Medicare taxes on salary and wages pay for the other 37%.  The total Medicare tax is 2.9%; the employee pays 1.45%; the employer pays the other 1.45%.  The CBO has estimated that the Medicare program will largely stay in the black for the next ten years but admits that its projections depend on whether existing laws or policies remain in place. 

Who benefits from this?  The answer might seem obvious – seniors, of course!  Less obvious is that the Medicare program benefits the children and family of seniors.  Without the Medicare program, many families would need to help support Mom and Dad because of the impact of sky high medical insurance premiums and medical costs on a senior’s fixed income.  

What other solutions are there to the escalating costs in the Medicare program?  We could, God forbid, share the costs of the program out among all taxpayers.  In 2010, the IRS reports that there was $8 trillion in adjusted gross income reported on individual income tax returns (Source)  A 4.6% tax on that amount would have covered the entire expense of the Medicare program, including all Parts – A, B, C and D.

The problem is that voters like government programs but don’t want to pay for them.  Politicians know this and that is why almost half of the cost of the Medicare program comes out of general tax revenues, where they can remain out of sight to most voters on election day.

Should any politician propose that taxpayers actually pay for something they value, they would be pilloried from all sides.  The rich have spent a lot of time and money lobbying to have a large part of their income exempt from Medicare taxes.  Lobbyists for the poor would argue that the poor simply can’t afford it.  AARP would loudly protest that insurance costs to seniors are already too high. The middle class would point to the rich guys and say, “Take it from them.  They can afford it!”

We get the government and the Congress we want and we want fairy tales.  The politicians know we want fairy tales so most of them tell us fairy tales. When the reality check comes, many of get up and say we have to go to the bathroom, then duck out.

I have a lot of respect for Ryan’s sincerity and chutzpah.  I think his solution passes on too many of the cost increases to seniors in the future.  Perhaps some other politicians might take a cue from Ryan and take on other controversial topics like just a teeny-tiny bit of regulation of assault weapons.  Any takers?

Gimme More Government Limits

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Many companies do not want limited government.  A smart company dumps as many costs as it can into the public sector, thereby increasing its profits.  WalMart is one such smart company, going so far as to provide their many low paid employees with literature on government social programs that will help the employee cope with the low wages WalMart pays.  Smart companies crusade local governments to upgrade their fire departments and the delivery pressures of their water systems in order to save the company money on its business insurance.  The cost is shifted and spread out to the public and the owners of companies in the upgraded area put the profits in their pocket. Smart established companies like regulations which establish a barrier to entry for their competition, particularly in businesses that have low capital requirements to start up.  Smart companies lobby local and state governments for more licensing laws which present one more cost and regulatory hurdle for small businesses trying to gain a competitive foothold in an industry.  Smart companies argue that licensing is needed for public safety.  Would you want an unlicensed fishing guide?  Of course not!  Here is a partial list of occupations requiring a state license in my state.

The IRS is now requiring most tax preparers to be licensed as a Registered Tax Return Preparer, which includes “competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.” (IRS Source)  How many independent tax preparers who do tax returns for a few months a year will bother with the cost and time to establish and maintain their credentials?  Many low income workers, especially those with marginal reading skills, feel more comfortable having a tax preparer fill out the amount of their W-2s and do the relatively simple calculations required to file the short form 1040A.  The IRS could have exempted those preparing 1040As, but it didn’t.  Did the IRS enact these regulations in response to a law passed by Congress?  No.  Surely the IRS must have studied this problem for several years before issuing these new regulations?  The IRS spent all of six months before issuing these rules.  One can only wonder who and what prompted such a swift review and enactment of these regulations.  The logic is the oldest one in business:  reduce the supply of preparers and those that remain can charge higher fees.

I am not a tax preparer so I don’t have a dog in this fight.  I’m sure there are instances of tax preparers filing more complex tax returns which the preparer does not have the knowledge to prepare.  But why use an axe when a paring knife will do?  The only solution may be tax reform, the holy grail of simplicity and practicality that continually eludes our elected representatives.

11 Year Labor Recession

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Sitting down?  Good.  Put the kids to bed?  This is not suitable for young minds.  Below is the number of employees per capita during the past fifty years.(Click to enlarge in separate tab)

Job growth after the recessions of the 1960s, 1970s and early 1980s were fairly steep.  The declines in employment were fairly mild in the 1960s and 1970s.  The back to back recessions of 1980 through 1983 led to the first sizeable drop in employment but that became the new normal for employment declines.  In the early nineties, we experienced another equally dismal decline and the employment recovery this time was not so hearty but eventually employment levels exceeded the previous peak before the recession.  In the beginning of the 2000s, we experienced yet another steep decline but this time was different.  China had joined the World Trade Organization (WTO) in 2001 and many manufacturing jobs were shipped off to newly built facilities in China.  Our labor market has never recovered.  The housing bubble during the 2000s led to some growth but we never surpassed the peak before that 2001 recession.  Per capita employment is now at the same depressed level that it was in the early nineties.

During this election season, we are hearing a lot of rhetoric about job growth and job loss but it is mostly focused on the past 4 – 5 years.  We need to step back and understand just how long this sub-standard job growth or job recession has been going on – over a decade.

The swell of the boomer generation is only just beginning to retire.  Some in their early sixties who have lost a job and can’t find another have simply given up and are retiring early, taking an involuntary 25% cut in retirement benefits for the rest of their lives simply because they need the money to pay the rent or mortgage, to buy food and pay the utility bills.  Look at the chart again and understand that job growth policies need to be dramatic to climb up above the employment peak of 2000.  What is dramatic?  Tax incentives for businesses to relocate factories in the U.S. and tariffs on imported goods to protect American manufacturing.  Over the past decades, politicians on both sides of the aisle have chopped away at tariffs until the U.S. has the lowest tariffs of all developed countries.  With each decade have come more tax and employment policy disincentives to hire workers here in the U.S.

Which candidate for President or Congress has discussed or advocated policies that would dramatically spur growth?  None that I have heard.  “More drilling for oil” or “more energy jobs” may add some jobs but the number is insignificant in relation to the problem.  “Infrastructure investments” may likewise promote some jobs in the construction industry but the job gains are tiny fractions of the large scale job growth we need.

Look at the graph again – this time without my scribbling.  Every gray horizontal line is 6 million jobs.

Let’s zoom in on the past 13 years. Each gray line is 3 million jobs.

To reach just the same level of per capita employment at the peak of 2000, we need 12 million jobs!  So here’s the question I have for all members of Congress and for both candidates for President:  what policies do you advocate that will help create 12 million jobs? 

Government Unemployment

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Since the beginning of 2010, approximately 1.3 million government workers have lost their jobs.  Most of these jobs are at the state and local levels and have affected women more so than men.

The initial payouts from the stimulus bill passed in the spring of 2009 went to state and local governments to help them cope with declining tax revenues.  This federal support (all of it borrowed) helped to soften the effect of the recession on women earners, leading some observers to call the recession a “mancession”.  The unemployment rate for men shot up far above that for women.

 

As stimulus spending declined in 2010, government workers, particularly teachers, lost their jobs as state and local governments made hard choices to balance their budgets. 

Have they gone too far?  Below is the ratio of total population served by each government worker and it is at a historic high.

Each government worker is “servicing” one extra person more than the thirty year average of just under 15 people per worker.  Second only to the law of gravity is the law of averages; we will return to average, resulting in an increase in government jobs.  Politics is a bloodsport.  In the coming years, Republican politicians in office will take credit for the inevitable addition of these government jobs as the “result of our pro-growth policies” when it is anything but.  The reality is that Republican political leaders and strategists wanted to choke off funding for government jobs while the other party was in power.  The individual carnage of unemployment serves the aims of those desiring political power.  Should Republicans take the Presidency and make gains in the Senate in the upcoming elections, they will stuff their rhetoric about limited government in their pockets, then  announce that – surprise, surprise – the job cuts at the state and local levels have been too much.  The spending spree will continue.

Unemployment Measures

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When the Bureau of Labor Statistics (BLS) issues their monthly labor report, the headlines quote an unemployment rate and the number of jobs gained in the past month.  In addition to those headline numbers, a newspaper article may cite a Civilian Participation Rate, the number of long term unemployed, discouraged workers, etc.  To the casual reader, all of these numbers swirl around, making it difficult to see a clear picture.  Below is a pie chart breaking down the approximately 313 million people of the U.S. into various segments. (Click to enlarge in separate tab)

When you read about the Civilian Non-Institutional Population, it is all the people in the country except for those who are under 16, in the Armed Forces, a nursing home or prison.   A better term might be “non-restricted”, i.e. those who are, by definition, free to choose whether they want a job or not.  “Persons not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years and over. (There is no upper age limit.)”  (BLS Source )

This population number becomes the divisor (the bottom number of a fraction) for the Civilian Employment Population Ratio (EMRATIO), which calculates the percentage of employed people to the Non-Institutional Population.

When you read “Civilian Labor Force” that means “”The sum of the employed and the unemployed constitutes the civilian labor force” (BLS Source)

When you read about the unemployment rate, this is the U-3 employment rate.

Sometimes you will read about the “true” or “real” unemployment rate, although often the speaker or author can not define what is “true” or “real”, showing a lack of knowledge about the various employment rates.  What they are usually referring to is the U-6 unemployment rate, which includes discouraged workers and those who are working part time because they either can not find a full time job or business is slow and their hours are reduced.

A casual reader of American History will remember the WPA, a government project that put up to three million people to work during the 1930s.  Projects included the Hoover Dam, Grand Coulee Dam, the Lincoln Tunnel linking Manhattan and New Jersey, Carlsbad Caverns, the Great Smoky Mountains National Park and public buildings throughout the U.S.  But who knew that a large part of the unemployment report itself was a WPA project begun in 1940? (BLS Source)

Personal Income

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To understand why so many people are still hurting, take a look at the graph below.  This is per capita inflation adjusted income less what are called transfer receipts – government payments to people like Social Security, food stamps, Unemployment insurance, etc.  Previous recessions have seen a flattening of income and a few have seen a decline in income but nothing like what we have experienced during this past recession.  The “cliff” is a decrease of 12.5%.

Including transfer payments from the government, the decline is only 8.5%.

The difference is about $1.5 trillion dollars per year that goes to people to pay bills, to pay for housing, to buy food and medicine.  Almost all of that money gets spent.  It is true that government is borrowing to pay out that money but without that extra “juice”, we would no doubt have been in a depression.

The federal government is about to hit the $16 trillion mark in debt.  Eventually interest rates will go up and the government will have to pay several hundred billion dollars more each year in interest payments on that debt.  That is billions of dollars that won’t be available for people or guns.  The worst of the decline is over.  Now is the time for us to stop shouting at each other and talk earnestly about some really tough problems.

Adults Wanted

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The end of another month ending involving billing customers, paying taxes, balancing the bank accounts and closing the books.  Each month it becomes apparent that one of the reasons why there is not more robust job creation is the “invisible” employee costs, both in dollars and in the business owner’s liability.  By invisible, I mean that these costs are typically out of sight and out of mind to most employees.  These costs are quite visible to the owner who, failing to account for them in their business pricing, soon goes out of business.

These costs were designed to be invisible to employees because if most employees knew all the costs, some politicians might lose their jobs.  A paycheck with a gross amount of $1000 might have $200 or more taken out for taxes and health care premiums.  The net amount of the paycheck is $800, which is what we get to spend on bills, rent/mortgage, food, transportation and a movie. We grouse about the $200 in taxes but that $200 pales in comparison to the invisible costs that don’t show on that paycheck stub.  Most of these costs are mandated by either Federal or State law and include Workmen’s Compensation insurance, Unemployment Insurance, Liability Insurance, and Social Security and Medicare taxes (employer’s half).  The cost of these mandates goes into neither your pocket or the employer’s pocket. Benefit costs include health insurance, retirement contributions, education reimbursements, vacation and sick pay.  Mandated costs and benefits can easily add $500 to $1000 in cost to that $1000 gross paycheck amount.  In addition, there are indirect costs which include office and production equipment, rent, utilities, and transportation, as well as the internal costs of accounting, supervision, and training.  After those costs, that $1000 gross paycheck can have a final cost of $2500 or more. 

The indirect costs are simply a part of any business; they are the costs of producing a dollar of revenue to the business.  My chief concern is the invisible insurance and tax mandates whose costs are hidden from employees.  By making the employer, not the employee, responsible for the payment of these costs, politicians could more easily sweep them under the rug.  Some people strongly object to the health insurance mandate but how many protest or are even aware of the Unemployment Insurance mandate or the Workmen’s Compensation Insurance mandate?  Many are not aware simply because the cost is paid by the employer.  While the employer may write the check, the employer “deducts” the cost from the employee by lowering the gross amount that they can pay to an employee.

I am not making a case against these insurances and taxes that add a safety net for workers.  What I do object to is the surreptitious way that lawmakers have enacted them in order to hide the magnitude of the costs of these safety programs.  Because these mandates are structured as a payment from the business and not the employee, Workmen’s Comp, Liability, and Unemployment Insurance are rated based on the company’s industry classification and claims history.  An employee who has worked twenty years without an accident is charged the same amount of money as his/her co-worker who does not pay attention to safety regulations and common sense.  The same holds true for liability insurance; a thoughtful employee and a careless employee pay the same amount.  In some construction industries, Workmen’s Comp and Liability insurance can be 20% or more of gross pay – not a trivial amount.  Should a careless driver and an accident-free driver pay the same amount in auto insurance?  Of course not.  Yet that is how Workmen’s Comp, Liability and Unemployment Insurance are rated.  Since there is no individual worker history, no individual experience rating, there is no direct cost tied to a worker’s actions.  An employee can become naturally divorced from the consequences of their actions.  Often an employer will not add another employee if they are not sure whether he/she will be able to keep them on six months from now.  The reason is that many, if not all, states will increase the unemployment insurance rate for that business when the employee is let go in six months and files for unemployment insurance.  It can be more cost efficient for an employer to pay some overtime to existing employees to make up the extra work till the employer is sure that business volume is on the increase. 

Unlike the other insurance mandates, the health care mandate at least makes individuals personally responsible for their own insurance.  With no direct responsibility for their own Workmen’s Comp, Liability and Unemployment insurance, employees are effectively treated, in the eyes of lawmakers, like teenage children.  A host of state and federal employment regulations only confirms that status.  In the eyes of our laws,  employees are not quite adults.  Employers are treated by state employment agencies as though they were the parents of not quite fully responsible teenagers and the burden of proof is on the employer to show that the employer complied fully with regulations.

How did we get here?  During the second World War, the Federal Government was running up extremely large war costs and experiencing severe cash flow problems.  One problem the government had was that tax payments were not due till March 15th of each year (in 1954 the date was changed to the current April 15th), which meant the government had to borrow a lot of money each month.  Many people were not paying all of their taxes, either income or the Social Security tax enacted several years prior.  The problem of collecting delinquent taxes presented yet another costly headache for the government.  A noted economist of the time, John Kenneth Galbraith, suggested a solution last used eighty years earlier during the Civil War:  make employers withdraw the taxes before they paid their employees.  This would both solve the problem of timely collection of taxes and curb much of the delinquency.  It would be much easier for the government to go after the far fewer businesses in the country than millions of individual taxpayers.  Thus the withholding system was born again. (A history of taxes)

Once the mechanism of withholding was in place, politicians realized what a boon this was.  Taxpayers dislike taxes and the politicians who enact them. Politicians could now increase existing insurance costs and mandate new ones without the taxpayers – the voters – constantly being reminded of these now invisible costs.  Politicians simply had to change the law, then notify a relatively small number of businesses to pay more.  That created a new problem for business owners.  Politicians had effectively deflected the disapproval of voters onto employers.  When an insurance cost goes up, it is difficult for an employer to say to an existing employee that the employer will have to reduce an employee’s hourly wage or salary to make up for this increased cost.  For subsequent hires, an employer can reduce the hourly wage or salary that they will offer to a new employee.  The employer has two alternatives:  raise the price it sells its product or service; or eat the increased cost.  Employers complain about this state of affairs long and loud. They form trade groups and lobby their state legislatures.  The politicians get the better of a bad situation:  listen to loud protests from a lot of voters and possibly get thrown out of office or have to listen to a relatively few employer lobbyists.

I am not advocating the abandonment of the withholding system, which does solve the problem of timely tax payments.  I am advocating for a system that directly charges those who are going to benefit from the safety net that exists – the employees.  This is no longer the paper and pencil age of World War 2.  Digitized records would enable most state and federal agencies to assign individual ratings to employees based on their history.  A new or existing employee presents their individual rating for various types of insurance to the employer and the employer deducts the amounts and sends to the appropriate agency, just as they do now.  The difference is that the employee gets to see what he/she is being charged for and might in some cases be able to control some of those costs.  Instead of being paid $20 an hour, an employee might be paid $34 an hour.  The cost to the employer is the same.  For many of these mandated costs, the tax write offs to the employer are the same; it is a cost of producing business income.

What can we do about it?  Press your elected representatives for individual ratings for these insurances.  An employee who has never filed for unemployment insurance pays the same as a person who has collected six months of unemployment insurance last year.  Does that seem fair?  Why have an employee half and an employer half of the Social Security and Medicare tax?  It all comes out of the employee’s pocket in the long run.  Why the game of hiding the costs?

Imagine a world where an employer can have a bit more sales volume, hire an employee and let them go if sales subsequently fall off.  An employee who is let go would then make the choice of whether to collect unemployment.  They might absolutely need the unemployment insurance and that would affect their individual unemployment rating the same as it does when we file an auto insurance claim.  They might try harder to get another job or switch to a different job in order to keep their individual unemployment rating pristine.  It would be the employee’s choice.

Imagine a world where the employee controls what they put away for retirement.  If you want to put away $6,000 a year tax free into a 401K retirement plan, why shouldn’t you?  Why have the charade of the employer matching your contribution by some percentage?  How did we get to the point where employee compensation is a haunted house of smoke and mirrors?  

Imagine a world where an employee is not bound to an employer for insurances and benefits and tax benefits.  Imagine a world where the employee has choices.  Imagine a world where the employer pays the total of the employee cost to the  employee and the employee then sees the true scope of deductions.  In fact, we do have that world now.  Employers are increasingly using subcontractors and temporary agencies as a way to sidestep the burdens of employment.  From the BLS July Labor Report: “Temporary help services has recovered 98 percent of the jobs lost during the most recent downturn.” (Source).  Tell your state and federal representatives that you would like a different world – one in which you are treated like an adult.

Labor Report – July

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Skipping into the Oval Office Friday morning, President Obama’s campaign manager called out with glee, “Mr. President, 163,000 jobs!”
“Buy, buy, buy!” traders shouted on the floor of the N.Y. Stock Exchange.
“Let’s take a six week vacation!” John Boehner, the House Speaker, cried out.
Concentrating on the .1% uptick in the unemployment rate, Presidential contender Mitt Romney said, “the president’s policies are to blame for not having gotten the economy back on track.”

What to make of these conflicting numbers?  Economists and market watchers were anticipating a gain of 100,000 jobs.  Economists guesstimate that a growth of 150,000 jobs per month is needed to absorb the increase in the working population.  163,000 is above 150,000; so how did the unemployment rate tick up from 8.2% to 8.3%?

The headline job gain number comes from the Current Employment Statistics program, a monthly survey of 141,000 businesses and government agencies that represent almost a half million worksites.  This “Establishment Survey”, as it is sometimes called, counts jobs, not people.  The addition of two part time jobs will count as two jobs even if only one person is working those two part time jobs.  Not all businesses return their survey forms to meet the monthly deadline so the Bureau of Labor Statistics (BLS) estimates the results and this first estimate becomes the headline number that gets so much attention from the market and political pundits.  The following month the BLS issues a 2nd estimate, followed by a 3rd estimate a month later.  The chart below shows the differences between the 3rd estimate and the first estimate (BLS source ).  As you can see, the revisions can be substantial. (Click on graphs to open in a separate tab)

On September 2nd, 2011, the BLS released their August report showing a gain of 0 (zero!) jobs.  The stock market sank 2.6%.  The 3rd estimate, released in November, showed job gains of 104,000, not 0!  The BLS will further revise the job gains for a particular month as state unemployment reports and other data becomes available to the BLS.

These job gains are seasonally adjusted.  One of the seasonal adjustments for July is the customary shut down of auto factories in July.  This year, in response to demand, auto manufacturers did not shut down their factories but the BLS makes the adjustment regardless.  Several analysts reason that this seasonal adjustment accounted for about 25,000 of the 163,000 jobs gained.  Despite all these shortcomings, the CES is regarded as the more accurate count of jobs.

The unemployment number comes from a separate monthly survey of 60,000 households conducted by the BLS.  While the Establishment Survey does survey small businesses, it misses a good chunk of the really small businesses, the mom and pop operations, that form an important backbone of the economy.  The Household Survey is often thought to overestimate the total number of jobs in the economy but it gives a detailed picture of the workforce and the unemployed.  From this survey we learn of the age, racial, and education characteristics of the employed.  Each month I look at two aspects of this survey: the growth or decline in what I call the core work force, those aged 25 – 54 years old, and the larger workforce aged 25 and older.  The actual number doesn’t matter as much as the increase or decrease in the adult work force – the trend in job growth.

The graph below charts the year over year percent gain or loss in the core work force.  It is still positive, leveling off after climbing up from negative territory a year ago.

For a bit more perspective, let’s zoom out and look at the past 20 years.

A graph of the year over year percentage gains in the larger work force aged 25+ shows that we have just about reached the high point of job growth during the 2000s.  We would need to at least maintain this level of growth to make up for the job losses during this past recession.  We would like to see job growth more like those we experienced during the high tech boom of the 1990s but the investment in new technology during the 1990s was particularly strong.  A catalyst for such a fundamental growth in the economy is not on the horizon.

The market experienced what I think is a relief rally on Friday.  Persistent troubles in Europe, a slowdown in the growth of China and other Asian emerging economies, lackluster employment reports for May and June, and a tepid 1.5% GDP growth in the second quarter had spread fears of a coming double dip recession. Had the BLS issued a job gains estimate of 50,000, for example, the market would have probably declined 2+%.  Back in April of this year, I wrote about an employment indicator that has been a reliable predictor of recessions.  When the percent change in the unemployment level crosses above zero percent, it’s time to get into the storm cellar and batten down the hatches!

-1% is an indicator of a rebounding labor force midway in a recovery from a recession.  I’ve marked up a thirty year chart of the year on year (y-o-y) percent increase/decrease in the unemployment rate to show the trend.  Had we not shipped so many jobs to China after they joined the World Trade Organization in 2001, we might have had the spurt of job growth recovery that we experienced in the early eighties. 

As the chart below shows, that kind of strong post-recession job growth is not the norm.

Larry Kudlow, a CNBC host, and other “supply sider” pundits are presently making the case that Presidential contender Mitt Romney will usher in a new era of the same kind of unusual job growth we experienced in the 1980s.  Anything is possible, of course, and hosts of financial shows make their money by making headline predictions.  Those of us without a TV show must pay more diligent attention to the law of averages, to the probable, not the possible. That law of averages makes it unlikely that either a President Obama or a President Romney will achieve historically unusual declines in unemployment.  In Britain the slow news months of summer are called the “silly season”.  In these few months before the election, Americans will experience a truly silly season, not for the slowness of news but for the sheer deluge of outlandish and annoying political ads making accusations and far-fetched claims. After that silly season will come another silly season, the Christmas shopping tournament!