The absurdity of blaming capitalism for inequality - Part 1.

I was reminded of this Picketty quote, recently.  The now famous r > g formulation:

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

And, it occurred to me how strange the identification here is with "capitalism".  Classes of elites living off of returns ("r") are hardly the invention of modern capitalism.  I suppose r has been aided by the state-supported defense of property rights, which do lie at the heart of the capitalist revolution.  But, as described by North, Wallis, and Weingast, the innovation of modern Western capitalism has been to extend those rights universally.  Pre-Victorian landed elites earned "r" well before Adam Smith was kicking around.  Capitalism extended their ownership rights to the peasant class.

So, two astounding innovations in human society mark modern capitalism.  Legally, the state supports ownership of property for essentially all individual citizens.  And, both culturally and legally, you aren't your brother's keeper.  Your extended family has no claim on your savings.  Both the landed elites and the peasants of a Jane Austen novel would find that incomprehensible.  As would just about any other human being that lived any time between them and Cro-Magnon hunters.

I may have linked to this before, but here is an Econtalk podcast with Mike Munger, where he & Russ Roberts discuss the practical results of microfinance.  From the summary:  "Munger argues that cultural forces make it difficult for some families to save, and the main value of microfinance is to allow a higher level of savings. Families are willing to save via microfinance even though returns can be negative."  That is because, for common people in pre-capitalist societies, "r" is -100%.

In a similar vein, here is a Robin Hanson post that I have linked to before about familial/tribal sharing dynamics. 

For the pre-capitalist landholding class, gross returns were positive, but these same family effects were in place, so that returns were generally consumed, and net "r" was negligible.  This meant that "g" was negligible.  This context is a context where social standing is fixed for generations, and where practically all economic inequality is inter-familial - because net r is negligible.

So, in this context, gross r is high and limited-access, and g is negligible, because net r is negligible.  The innovation of modern capitalism was to say, you're not responsible for your cousins or even your brothers any more, culturally and legally.  This meant that returns weren't all consumed - individuals could accumulate capital outside of land more easily.  Net r rose, and this allowed g to rise, too.  And, for the first time, trading, innovating, being productive, engaging in self-improvement, meant that peasants could have some r, too.

Given this history, the identification of r > g with capitalism and familial class stratification is strange.  A positive gross "r" is not a product of capitalism and a positive net "r" is due to capitalism, specifically related to the breakdown of familial class stratification. *

This misunderstanding leads to strange perspectives, such as this New York Times Magazine essay from Eric Spitznagel, about the relationship between him and his ultra-rich financial speculator brother.  The article is sprinkled with his concern for persistent inter-familial inequality, with lines, such as: "Mark wasn’t born rich. If he were, I would be rich, too."  But, even as he says this, he seems to take for granted that he has no legitimate claim to any of his brother's wealth.  He settles for wrestling his brother for their deceased father's keepsakes.  What an oddity.  Here's a writer angry about the stranglehold "the rich" have on our society and the unlevel playing field their families have compared to the rest of us, even as his brother is a living example of extreme income mobility.  And, along with all of this, the subtext of the piece is his frustration about the fact that he has no claim on his own brother's wealth.  He seems unreflective about how unusual this lack of fraternal support is in human experience and what a radical contrast this makes with the author's own concerns about the familial determinism of wealth.

I have linked to this Robin Hanson post before.  He points out how selective we are about which kinds of inequality we concern ourselves with.  One point he makes is that inequality between siblings accounts for 3/4 of inequality within a modern nation.  I suspect it is fairly common for most Americans to survey their siblings and cousins and find nearly the full range of American economic distribution.  Think about that...  Pre-capitalist economic station was almost completely predetermined by family.  Think of Jane Austen characters.  Their lives are filled with status decisions - status decisions determined overwhelmingly by what family they are born into or marry into.

So, 3/4 of the inequality of modern capitalist societies has indeed been created by capitalism.  This inequality now dwarfs all the forms of inequality that existed before.  This is an inequality otherwise known as economic mobility.

And, thinking further about our problems with inequality, the most profound problem it creates is the unlevel field of opportunities available to the members of a particular generation.  The complaint is that the rich can invest so much into the human capital of their children that the differences in opportunities between children become grotesque, and this leads to an intergenerational persistence of income inequality, because children of the rich capture a choice education in the high paying professions.

But, again, I say, step back a minute and think about what we are taking for granted here.  The idea that the rich would concern themselves with helping their children be productive is also result of capitalism.  As Deirdre McCloskey outlines, along with the ideas that individuals could accumulate capital and that the legal defense of capital wouldn't be limited to a small group of people, came the idea that productivity was tolerable.  This has become such a fundamental part of the Western point of view that we have to remind ourselves that it is unusual.  Again, thinking of Jane Austen characters, or even of people in many pre-capitalist societies today, for peasants, human capital would be largely unattainable or pointless.  For the landed elite, it would be insulting.  Traders and commercial innovators - producers - became tolerable, and capitalism was the result.

Because of the capitalist revolution, not only is being personally productive tolerated today, but we would find it incomprehensible to imagine it another way.  In fact, we are concerned about it!  We say: It's not fair that rich kids get the opportunity to be more productive!  Today, high income workers work longer hours than low income workers.  Imagine the look of confusion you might get from a pre-capitalist gentleman if you told him that in your society, the poor work fewer hours than the rich and the government is implementing school lunch programs to make sure poor kids don't ingest too many calories.  He wouldn't just have a hard time understanding how that could be.  Those words literally could not form that sentence.  You might as well speak martian to him.  Don't even try to explain to him that you're outraged by how the richest kids have an advantage in attaining productive employment.  He'll think you're crazy before you even get to that.

Economists like Bryan Caplan point out that much of education is costly signaling.  This is a contrarian stance today.  We want to believe that education is about human capital.  But, pre-capitalist elitists would have, again, thought us strange.  Universities that weren't meant for monks were meant to create wealthy men of letters.  Before capitalism made productivity cool, signaling was the point of it.

If we want less familial determinism, widespread growth, and social mobility, we are describing capitalism.  I am not saying that it can lead to these outcomes.  It is these things, in contrast to every other sustainable human system.  "The wretched refuse of your teeming shore" that give up their families to come taste a little bit of "g" wherever capitalism flourishes know this, even if we, like the proverbial fish in water, have forgotten.

We should certainly strive for better conditions for all our citizens.  But, if the problem is rent-seeking, then we need more capitalism, not less.  Capitalism didn't make rent-seeking obsolete, but where it functions well, it simply dwarfs it in magnitude.  In some ways, this point is just semantics, but framing clearly matters regarding our conclusions.

So, "When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based."?

If you are familiar with the struggles on the show Downton Abbey, that is what capitalism in the 19th century did to rentiers.  It wasn't that they had changed at all.  It's just that the rest of the world passed them by.  It's just that the son of the guy that used to shovel their stables was now driving a Model T.  Production outside the estate had eclipsed production inside the estate.  Their previous workers now garnered higher wages, and even if they could have survived that, their estate couldn't possibly provide the standard of living that a world full of aspirational productive people now saw as normal..... "g" happened.

Musing about the change in some equations when we adjust some variables by a few tenths of a percent and project the trends for a hundred years can be an interesting exercise, but we shouldn't forget that there was a regime shift in the world that created change that overwhelms these considerations.

*  (Regarding the breakdown of family, keep in mind that another way of saying this is that there was a breakdown in nepotistic thinking and acting.  An increased trust and honesty among strangers is the other side of the coin here.  Blood is thicker than water, but for the modern capitalist society, our moral and legal code calls for law and honest dealing in trade to trump blood.  This is yet another cultural, moral, and legal aspect of Western life that is foundationally capitalist.  The world might exist within 6 degrees of separation, but there are a least 4 or 5 degrees between me and the guy that wired my house for electricity or the guy that canned the peaches I ate at lunch.  I wouldn't have a way of even finding out about the guy that canned my peaches, or grew them, or shipped them, but there they were on the shelf for about a buck.  I bought them and ate them and never for a moment doubted whether these strangers were worthy of my trust.  Some of them would probably just as soon kill me as feed me, if they ever were able to get to know me.  But they helped feed me today, nonetheless, and they, likewise, didn't think for a moment what sort of idiot or heretic or infidel or greedy speculator might be sustaining himself today with their product.  Again, this isn't a cause or result of capitalism.  This is capitalism.  In fact, it may be true that capitalism denies us one of the most human of needs - the need to develop and compare judgments about each other.  This is certainly a large part of being human and being in community, and it is nearly impossible to engage in this primal activity through commercial transactions.  This is probably the main benefit of pushing more and more commerce into the political realm.  It's difficult to measure, but a lot of people gain immense personal value announcing to each other their opinions about how much teachers or fry cooks should be paid, or passionately insisting on the fine print details of insurance contracts between firms and people who are as distant strangers to them as the peach canner is to me.  Politics clearly serves this need much better than commerce does.  Without politics, if I was buying a suit at a store, and before I left, I approached the manager and said, angrily, "I was going over your firm's health insurance policy the other day, and noticed that it only covers the incision method of vasectomies.  Who the hell do you think you are?!  These workers have a right to non-incision vasectomies, you monster!"  The manager and the workers would be all like, "The hell, dude?  What do you care?  Do you want the suit, or do you not want the suit?"  Whole arenas fill up to hear fiery speeches about the minutiae of your employment contract.  And the crowds get angry - pitchforks in the streets kinds of angry.  You may be someone who prefers to have these matters settled in private.  But, think of the rest of us.  Thank goodness, politics gives us an outlet to express our concern for our fellow man in this cold, uncaring capitalist world.  I mean, sure, if you have a strong personal belief, capitalism might allow you to quietly impose that belief in the way you negotiate your commercial contracts.  But, through politics, if you're in the right faction of the moment, you can impose your beliefs on everyone - loudly, with parades, and speeches.  This is clearly a human demand where capitalism comes up short.)

The Counterintuitive Conundrum in Housing

Soberlook had a recent post on housing rent that serves as a great starting point into the problem of conceptualizing the conundrum of the housing market in the current context.   They point out that household formation continues to be slow, along with recovery in home building, and the problem appears to be a supply problem, as rent continues to outpace wages, pricing renters out of the housing market:

The tricky thing to think about here is, how do we increase supply?  By paying the builders to build more homes.  How do we do that?  Well, the clear bottleneck right now is the real estate credit market, which has flat-lined for 7 years.

Housing supply will rise when housing credit comes back.  And this will likely coincide with a significant increase in home prices.

So, to make houses more affordable, we need to make them more expensive.  I doubt I'll be winning any elections with that slogan, but I'd be happy to have someone explain to me how it's wrong.  If anyone wants to try, please keep in mind that prices of durable assets have denominators.

Here is a graph, using the Federal Reserve's measure of 30 year mortgage rates, the median price of new homes, and the median household income, to estimate the mortgage payments over time, relative to income.  They are currently at the bottom of the long-term range.  I have argued that when the real portion of long term interest rates declines, this should actually make the equilibrium mortgage payment go up.  So, if rates increase due to an increasing inflation premium, we should justifiably be at the top of the range.  And, keep in mind that, ignoring any changes in the inflation premium, real long term rates can go up more than a percentage point and still be at historically very low levels.

Interest Rates Should Have Risen More (updated)

I have been disappointed in the movement of interest rates so far this year.  I have been positioning myself to trade volatility around a range of rates that corresponds to a first rise in the short term rate in the first half of 2015.

The market has basically come to agree with me.  Here is a graph of the changing expectations of the market.  When rates shot up in the summer of 2013, the initial rise expectations shot all the way back to the fall of 2014, which was too optimistic.  Then, they fell all the way back to the winter of 2015, which was too pessimistic.  And, as employment has shown improvement this year, the expected date of the first increase has crept back to spring 2015 - currently around April or May.  This is precisely where I wanted it to go.

But, I expected this to correspond to forward rates for June 2016 Eurodollars of just over 2% and for June 2017 of just over 3%.  Instead, rates have trended around a mean of about 1 5/8% and 2 5/8%.  If that had been my target mean, it would have been perfect for this trade.  (Basically, buying when the price declines and selling when it increases, profiting from random movements over time.)  But, the farther the price moves from my target, the harder it is to profit from the position.  Why haven't the prices followed the market expectation?

The reason is that the slope of the yield curve has declined while the expected date of the rise has moved back.  Late in 2013, the slope was up to around 33 bp.  (Rates would be expected to rise 33 basis points per quarter after the initial rise.)  For reference, in the past two cycles, during the rate recovery period, short term rates rose at a pace of 50 to 75 bp per quarter.

So, what's going on?  I think that the market has been surprised by how healthy the economy has remained in the face of the tapering of QE3.  This diminishes inflation fears and also signals a hawkish intention from the Fed.

But, I think this reflects the Wizard of Oz view of the Fed's interest rate policy.  I think that there is a systematic underestimation of how much Fed policy chases the Wickesellian interest rate.  I think the Wickesellian rate is probably already above zero.  This is part of the reason that we have seen an acceleration in economic activity and employment this year.  QE3 appears to have been only slightly accommodative, for reasons I don't completely understand, and so its taper has probably not changed the objective stance of monetary policy that much.  But, before QE3, a non-QE zero rate policy was probably disinflationary.  The increase in the Wickesellian rate over the past 2 years means that at the end of QE3, a non-QE zero rate policy will probably be inflationary.  (As a small caveat, I do think that home prices will start rising again with the expansion of real estate credit at commercial banks, and that this will be deflationary, with regard to the measured CPI.)

Since the Wickesellian rate is so opaque, there is a tendency to vastly underestimate its movement.  So, by the end of 2014, with no QE, Fed policy will be increasingly inflationary.  It seems to me that the Fed is signaling that they intend to raise interest on reserves along with the Fed Funds rate in order to raise rates without sucking up all those excess reserves.  If that's the case, then rates will be rising sooner and at a faster pace than currently expected.

But, even if the Fed starts buying up treasuries, there will be a decent amount of institutional inertia involved, and there simply is no way that they will start buying them quickly enough to chase down the rising Wickesellian rate.  If QE3 was only very slightly inflationary, then reverse QE3 will probably be only very slightly deflationary.  And if there was some sort of inverse causal relationship between QE and the expansion of bank credit, then reverse QE might even accelerate commercial bank real estate credit.  This will probably cause home prices to rise and the Wickesellian rate to rise, rents to moderate and measured inflation to moderate, with the net effect of keeping the Fed looser than it appears, at least as long as there isn't a freak out if home prices start rising too quickly.

So, I think the expectation of a slowly rising rate is backwards.  Rates should be right where I expected them to be.  And I blame all of you for messing it up.  ;-)

Update:  Scott Sumner offers an alternative explanation.  He thinks the flat yield curve reflects the disappointing GDP numbers.  He has a good point.  I have been putting more weight on the employment numbers than the GDP numbers, to a certain extent.  Here are some graphs which show the historical relationship between employment and real GDP relative to recent movements.  GDP growth was outpacing employment growth in the early part of the recovery, then abruptly moved below trend in 2011, and has bounced around with the long term trend as the upper limit since then.

In the end, it will depend on whether GDP rebounds to reflect the labor market or the labor market moderates to reflect the GDP performance.  I expect the former, but that's only one man's forecast.

However, I do think it is important to distinguish between the eventual level of interest rates, which I agree with Scott, will probably be low, and the speed at which they get from here to there.  My speculative position is that they will end up lower than the current forward market price, but that they will get there more quickly than the market currently has priced it.  I go into that topic here.

Update #2:  In response to input from Benjamin Cole, I adjusted the scatterplots for hours worked.  I thought he made a good point, so I was surprised to see that it weakened the long term correlation between labor growth and GDP growth.  It does pull the relationship closer to the long term trend back in 2010, but hours worked has recovered from the cyclical drop, so it doesn't change the recent relationship between real GDP growth and employment growth, during which real GDP growth has been low, but not outside the historical range.

Emergency Unemployment Insurance Post Mortem

When I originally looked at the North Carolina Emergency Unemployment Insurance topic (NC terminated the program 6 months early, in June 2013), it looked like the state experienced both strong gains in employment and some decreases in labor force participation, combining for very strong declines in unemployment.

But, when I last looked at it, after data revisions that came out in February, the unusual gains in employment disappeared in the revised data.  NC still saw very large decreases in unemployment, but they now appeared to be almost entirely from a decrease in the labor force.

This suggested that, if the same trend was going to hold for the US after the end of EUI in December 2013, we would see an acceleration in the declining Unemployment Rate, but that this would come substantially from declining Labor Force Participation.  Further, I noted that, since EUI participation seems to skew older, that to the extent LFP did dip, that decline would come in the older age groups.  The decline in LFP that happened earlier in the recession skewed younger, and we should see this LFP in the younger ages recover or level out, even as EUI ended.

The July employment report seems like a good place to review the data and see what has actually come to pass.

Here are the national labor force participation and employment-population ratio from 2011.  These results look similar to the original pre-revision North Carolina data.  There has been a strong rebound in EPR since the end of 2013, and LFP has dipped slightly from trend.  The dip in October 2013 was related to the government shut down, so it is a little difficult to identify the causes, but LFP has fallen below trend at a point in the cycle where we would expect it to start recovering cyclically.  (Note, I just placed the trend lines in the graph manually, with the LFP decline approximating the demographic decline I have found in other analysis.)

Here, I break out LFP and EPR by age group.  I use weighted moving averages to clean up the noise a little bit.  Here, we can see that, within the age groups, generally, LFP had turned down for most of 2013, and has flattened out in 2014.  EPR had flattened out in 2013 after recovering in 2012.  This is odd, since GDP improved in 2013, compared to 2012.  But, across age groups, there has been a distinct shift upward in both LFP and EPR in 2014.  In a previous post, I noted the unusual rise in unemployment rates for workers above 45 years old during the EUI program.  There was a skew to older workers in EUI, and I think here we can see a slightly sharper change in the 45-54 age group in LFP and EPR.  But, whatever is affecting labor markets, whether EUI or the myriad other factors, the bulk of the effect is across age groups.

I don't think we can attribute the drop in LFP in 2013 to the impending end of EUI because there was not an unusual decline in EUI beneficiaries in the months leading up to the termination of the program.  So, this data gives an even more positive picture of employment trends coincident with the end of EUI than the original data did at the end of the program in North Carolina.  And, given that this data comes out of the Current Population Survey, it won't be revised.

On another topic, which I hope to visit soon in another post, this should tell us something about potential unemployment numbers moving forward.  There is a lot of sandbagging on unemployment forecasts because of the expectation that workers will be moving back into the labor force, so that even though employment might increase, the unemployment rate will moderate.  But, as we can see here, a strengthening trend in LFP has already been happening while the rate of decline in the unemployment rate has been accelerating.

In past cycles, there have been times where an increase in LFP coincided with a flattening in the trend of the unemployment rate.  But, this has tended to happen at full employment levels.  With slack in the labor market, I expect to see a continued comovement in these measures.  There are complementarities within the economy that, in a context that isn't constrained by capacity in the labor market, could mean that increasing LFP is actually partly responsible for the accelerating decline in the unemployment rate.  If this is the case, there could be some significant positive surprises ahead in both employment and GDP.

What a disappearing middle class doesn't look like

An interesting post the other day at KPC.  From the article, about engineering services in India:

Outsourcing is good for business and for society. Offshoring is…even better. . . .

My first exposure to Indian business and technical talent came in business school, where it was the Indian students who ruined the curve for the rest of us. But they were among the very few who had the family resources or the sheer audacity to get themselves to the US to compete in our market. For every one of them, there were…thousands just as sharp, coming out of the Indian engineering programs and remaining in India.. . . .

When a major project is won by one of the big Indian engineering firms, they may hire 5,000 software engineers to help on it. The firm will show up at a campus and hire – everyone. Literally make an offer for 1,000 people all at once; “All E.E. and Computer Science majors, report tomorrow.” Try to do that in America. 

The capitalist revolution is expanding, and it's a wonderful thing.  Material aspirations are real for many first generations around the world.

This reminds me of one of the facts about American life that undermines the widely held belief in the death of the American middle class.  That picture of India is the picture of a place where people aren't middle class but aspire to be.  People who are struggling, work.

Even if you could go hire 1,000 engineers in American universities, you'd still end up with 700 Asian engineers.

College is widely attended in America.  If the middle class is dying, it's not for lack of education.  And, once you're there, you can choose among hundreds of areas of study.  They all basically cost the same and take the same amount of time.  But, some require more work.  And the harder subjects generally pay more - engineering, sciences, computer & technology.  The main difference is - how hard do you want to work for the next 4 to 6 years in order to increase your lifetime earnings?  Now, wouldn't you think latest "first generation that will be worse off than their parents" would be clawing and fighting to get the spots in those subjects?  Yet, how many American universities would literally be closing down those departments if they didn't have immigrant students to fill up the classes with?

So, economically bipolar America is characterized by a bidding war on homes and mass enrollment in higher education, where students pay higher and higher fees to acquire the lowest paying, least challenging degrees, while Chinese and Indian students fill in the empty seats in difficult applied math and science programs?

It's pointless to be arguing about the legitimacy of 2 point shifts in the Gini coefficient.  That story is so wrong, it shouldn't even be an option on the multiple choice quiz - even the kind where "D" is always just a bad joke the teacher made up.

If you are becoming middle class, you become an engineer.  If you are middle class and know you're staying there, you study sociology, where you read neo-Marxist textbooks about the end of the middle class.

HTCH

Well, Hutchinson Technology had an interesting quarterly earnings report.  The conference call was before trading on Friday.

They did report a decent estimate for next quarter's sales of 110-115 million units (about 130 million is break-even), which will still leave them with a slight loss, but probably positive cash flow, adjusted for any noise in the quarterly numbers.  They projected 25-30% of sales as DSA next quarter, roughly in line with last quarter's guidance.  In last quarter's conference call, they projected the coming quarter to be nearing 30% DSA, the December quarter to be nearing 40%, and the following quarter to possibly be 60%.  The ramp up in DSA always seems to be three quarters away.  Maybe the DSA numbers will finally come in on schedule.  Management forecasts have been fairly accurate on other matters in the time I have been following the firm.  They will have higher revenues on those new programs.  So, it still seems likely that in the core business, they will not only be cash flow positive as we move ahead, but probably profitable in 2015.  Analyst estimates on yahoo aren't that optimistic, but I'm not sure how the bullish quarterly estimates for the December quarter square with the 2015 annual estimates, especially in the face of management estimates of DSA growth.

So, more of the same optimism, but not quite here yet, on the core business, which has been the state for longer than I would have preferred.  There is a bundle of bonds that are putable in 2015, which is a potential cash flow issue, but I don't think this warrants concern.  The bond market seems to agree.

But, they are finally providing some details on the new revenue sources.  They are using their technologies to market a new product that stabilizes the lens on smartphone cameras.  They were very optimistic about their technological position on this product, and the potential profits here are tremendous.  This is a huge free option on the value of the enterprise.

Now there are several questions, some of which are very difficult to quantify: How quickly does DSA continue to ramp up?  How much added market share do they capture in the DSA programs?  How quickly and how deeply do the new smartphone products expand?

The answers to these questions could justify an eventual price 10x the current price.  So, there is the additional question of how forward looking the market for the firm's shares is.  With the level of uncertainty here and management's 7 year track record on revenue, that isn't likely to be very far.  The market did respond well to Friday's report, but even here, compared to the level of efficiency we normally see in the stock market, this is the picture of inefficiency.  Here is the graph of intraday trading on Friday, after the conference call that finished before the market opened.

I suspect that the weekly, monthly, and quarterly stock charts will have a similar appearance.  In a microcap with high levels of uncertainty and large scale changes in sentiment, the market usually eventually gets to where it should get, but it can be very logy about it.  That is really the necessary condition for financial speculation - markets that are efficient but logy.

July 2014 Employment, More EUI Data, Data on Too-High Wages, and Conceptual Problems with Interpreting Job Creation

Oops...so much for that gap down.  Pictures and discussion below the fold.

July 2014 Employment Preview

I don't have a lot of detail to post about this month's employment report.  As I've mentioned, the insured unemployment rate has continued to decline along with initial unemployment claims.  The oldest post-EUI unemployment cohorts are now past 26 weeks, so the improvements in insured unemployment should have a positive effect over and above any continued improvements in unemployment coming from the end of EUI and the continuing slow decline of very long term unemployed workers.

Here is a simple model of unemployment, based on the long term linear relationship between the unemployment rate and the insured unemployment rate, with a trend built in for very long term unemployed.  This suggests an unemployment rate of about 5.9%, with an expected range of about 5.7-6.1%.  Consensus is being reported at 6.1%.  I think this could be another month with a surprise gap down.

The final data point is projected.  Remaining points are historical. 

Here is the other graph I have been posting with total unemployment and insured unemployment.  There have been some recent stories that suggest the former EUI recipients have been coming back into the labor force in a healthy way.  As I've mentioned, much of the long duration unemployed had timed out of EUI and the behavior of those still on EUI had become much more normal than it had been early in the program, since labor markets in general are more normal.  So this is only half the story of long duration unemployment.  But, it is good to see the pattern start to be confirmed.  I think another part of the story that probably caused the EUI debate to lose steam is the trend that I have seen where the short duration unemployed started exiting unemployment faster after the end of EUI, so states have probably been seeing many fewer unemployed workers becoming newly eligible for an EUI program.

EUI was passed, almost unanimously, and signed by President Bush, in June 2008.  It was by far the most aggressive and generous EUI program in US history.  It baffles me that in July 2014, after having been passed with broad bi-partisan votes, it is being used as a political cudgel when the portion of the unemployment rolls that it would apply to is completely recovered.  Even as far back as December, very short term unemployment hit an all time record low.    I trust The People's Romance will soldier on.

Regulatory Predestination and the Right to Exit

Tyler Cowen linked to a couple stories yesterday that touched on a similar theme, I think.

School Choice

First, was this NY Times Upshot story about school principals' estimation of school poverty.  According to the study, principals in the U.S. greatly overestimate levels of poverty among their students.

If I understand the variable on the x-axis properly, this is the percentage of principals who believe that more than 30% of their students come from disadvantaged homes.  If the problem in the US was related to socioeconomic segregation, then this number would be low, since most principals would have only a few disadvantaged students and a few principals would have many disadvantaged students.  If these principals have a reasonable perception, then this would imply that there is massive poverty in the US that is evenly distributed among schools.  As the article points out, widely distributed poverty among a 30%+ portion of the population doesn't seem objectively reasonable.

There are a number of subtle and complicated issues here that I won't begin to understand.  But, this fits with a set of cultural peculiarities that seem to be in place right now in the US.  First is the apparent socioeconomic factor in school performance.  US students who are poor seem to do especially poorly in school.  And, many educators and public education advocates appear to put a lot of weight on this idea - both in terms of advocating that public schools in poor neighborhoods need more public support and in terms of assigning responsibility of poorly performing schools and students to their poverty instead of to the educational institutions and their faculty and staff.

In short, we have school districts that are compulsory institutions, school leaders who attribute student failures to poverty, and school leaders who overstate the level of poverty in their schools.  Is there a bit of constructed fatalism here?  It seems to me that if we arranged a stronger right of exit and choice in primary education, we wouldn't even need to answer that question.  Dismayingly, one reason that public school advocates give for opposing the right to exit is that many poor children will be failed by a system that requires their parents to shop for the best school.  No doubt, there will be many failures of this kind, and it would be a tragedy that requires some sort of safety net for the children who fall through the cracks.  But, especially in light of evidence such as that from the Upshot article, the layers of fatalism in defense of coercion are a potential red flag.  If the attitude of many families to their local schools and the attitude of the schools to those families are both fatalistic - and clearly they are, in both directions - then how does this become anything but a vicious cycle?  Is there really more than one reasonable answer to inner city families in places like DC and LA who take to the streets demanding choice?

Dodd-Frank

The other piece was an excellent piece by Robert J. Samuelson in the Washington Post about Dodd-Frank.  He discusses the fact that Dodd-Frank might undermine the Federal Reserve's role as lender of last resort.  In a system with banking capital and reserve regulations and a public monopoly on currency creation, this might be the Fed's most important tool for crisis prevention.  Yet, this role has been categorized as a "bailout" in the accepted narrative of the recent crisis where private banks and financiers recklessly drove us over a financial cliff, only to be rewarded with "bailouts".

This is a right-of-exit issue again.  Because, what if that narrative is wrong?  What if the crisis was a product of a mishandling of currency production by the Fed, and playing the lender of last resort was one of the important tools the Fed used to save us from their errors?

As with the school issue above, this is an empirical question, but because of the complex nature of the subject, the interpreted facts become a product of the narrative itself, and so the narrative exists above and before the empirics.  The narrative is predicated on an assumption that markets consisting of thousands or millions of professionals devoting their professional lives to safely interpreting a complex ecosystem of human interaction are so uniformly driven mad by greed that they predictably join in consensus behavior that self-destructs.  Only a committee of high priests, chosen by the President and approved by the Senate, can stand above the fray and save us from these savage lemmings.

In a sane world, the transcripts of the FOMC meeting from September 2008 would have discredited this point of view. (Talk about too big to fail.).  The Fed was forced over and over again to substitute emergency liquidity for the sane, conventional liquidity that they refused to supply, and almost everyone seems to agree that the emergency liquidity is the one thing we definitely want to avoid repeating the next time this happens.

Then there are people like Ron Paul, who appear to be radicals, and who call for the abolition of the Fed.  But they are in complete agreement on this matter.  They also think it was the liquidity that was the problem.  Paul is supposedly the free market extremist, but he also thinks his view of the marketplace should be trusted over the millions of professionals who actually spend their working time trying to allocate capital.  He thinks they are savage lemmings, too, stupidly rushing off the cliff together and taking the economy with them, apparently because they can't forecast monetary policy as well as Mr. Paul can!  How is he any different than Barney Frank?

This is just textbook dogmatism (with a bigoted mindset) at work.  There is a widespread set of beliefs about the finance sector that is predicated on ungenerous, illogical, morally loaded presuppositions about how the financial world works.  The financial industry is a target you can safely treat with reflexive cynicism and receive social approval for it, among practically any political or social faction.  Is it that crazy to imagine that this leads to constructed narratives that - shock! - use finance as the antagonist?  I don't say this to paint financiers as victims.  That's not my point.  My point is that cheap cynicism and bigotry makes people stupid.  And stupid people have stupid opinions and support stupid policies.  The danger for me here is to use this as an excuse to dismiss all opinions that differ from my own.  But, so much of what I hear with the banks as the heavy and the Fed as the hero just appears to use convenient preconceptions, with no connection to facts.  In hindsight, nobody would have wanted to own banks over the past decade compared to other equities.  I know, Goldman Sachs owns the Treasury Department, and CEO's walked away with millions of dollars while firms failed, etc. etc.  These things, and many more, are true.  But, show me a bigot that doesn't have a briefcase full of incontrovertible facts in their defense.  I know this is a very convenient point for me that makes my argument non-falsifiable.  But, it happens to be true.  There are a lot of problems out there.  But, please.  Assuming that an entire industry, including financial representatives as well as high wealth individuals with their own capital on the line, will behave destructively pro-cyclically, but that a committee of political appointees won't, is madness.  It's believable if you're reflexively cynical about it, though.

The Fed transcripts from 2008 are damning in this matter, but you can't reason someone out of something they weren't reasoned into.  This intellectual framing is made possible, as with the school issue above, because there is no right to exit.  We are captives of our monetary and banking regulation framework.  I can buy or sell assets if I disagree with the marginal investor.  If I'm right, the marginal investor pays, and if I'm wrong, I pay.  Tread very carefully if you disagree with the marginal investor, by the way.  But, if I disagree with Chris Dodd, Barney Frank, or Ron Paul, I'm screwed either way.  If Ron Paul wants to give me the right of exit from a monopoly liquidity provider, more power to him.  But, if he wants to saddle me with some monetary policy based on what he thinks the S&P 500 should be going for, then he should go buy some puts and leave the rest of us alone.  At least he gets it half right, which is better than Dodd, Frank, and the rest of the folks writing the legislation that Mr. Samuelson is reviewing.

The Latest in Minimum Wage Politics (updated)

I really try to avoid posting about weak arguments for things that I disagree with, but I took a few minutes to look this over in another context, so I figured I'd make it a quick post.

Last month, the Center for Economic and Policy Research released a press release about job growth and MW.  They said that 13 states had increased the minimum wage in December 2013, and that those states had outperformed the average state in job growth since then.

Now, obviously this analysis is a bit weak to begin with, and I don't want to bother with all the details.  But, I was surprised, to begin with, to see that 13 states had increased MW.  I have spent a good deal of time looking at disemployment related to Federal MW hikes, which I have treated as a sort of event study.  If states were really increasing MW at this pace, it would be much harder to track the effects of future hikes with national data.

But, CEPR explained that 9 of the 13 hikes were simply inflation adjustments.  So, they had lumped together 9 states that had increased MW by 1.7% with 4 states that had increased it from 4% to 14%.  I thought this was a strange choice.  So, I copied the data from their article and graphed it to show the scale of the increases.

This outcome is being touted as evidence supporting a 40% increase in MW.

Now, even though I've looked a little harder at this than CEPR did, this still doesn't come close to being useful information.  So, I wouldn't want this post sent out as evidence against MW increases, either.  It does suggest that people who were very excited about this press release can be a bit credulous, although I'm sure we all can be credulous sometimes.


PS.  Mark Thoma links to this New York Times editorial that smugly touts the CEPR report with gems like:

That hasn’t stopped those opponents — especially in the restaurant industry — from attacking the findings. But their only argument is bluster.

and:

What is clear is that there is no need to fear a minimum wage increase — unless, apparently, you are a restaurant lobbyist, whose job depends on keeping wages low for already very low paid waitresses, waiters and fast-food servers.

The editorial even notes that 9 of the 13 MW hikes were only inflation adjustments, but apparently the editors weren't curious enough to wonder if that was a problem and were undeterred from their harrumphing.  It's funny that Mark Thoma sees fit to spread the news on this analysis.  Back in January, when this post of mine attained 15 minutes of fame, he linked to Tyler Cowen's post on my analysis, and added a rebuttal from Kevin Drum, to make sure nobody got the idea that my analysis was definitive.  I had put some effort into creating a way of measuring the various episodes of national MW hikes over the past 60 years as events.  After seeing the feedback of skeptics, I added to my analysis, and ended up with this.  I'm sure it's not PhD level work, but I think it introduces some significant signs of MW-based disemployment.

In any case, if, on a scale of 1-10, measuring if work is definitive, my little bit of analysis is a 3, the CEPR thing is about a negative 4.  Dr. Thoma thinks the titillated NY Times editors need some help getting the word out about it.

Oh, and, that Kevin Drum rebuttal actually included the phrase: "But but but....." unironically.  My graph actually caused him to type "But but but....".  I thought people only did that mockingly.  He wanted to dispute long term changes in teen labor force that weren't really related to my analysis.  In finance, we're used to event type studies because we see a lot of information shocks, like quarterly reports, that affect prices.  Like, what happens to the stock price over the next month after a company reports a positive earnings surprise.  That kind of thing.  That event based price behavior would be unrelated to the sort of broad changes in sentiment that would lead to changes in returns over long periods of time.  Maybe in economics they don't do that kind of analysis as much, or maybe this is a method of analysis that is discredited in some way I am not educated about.  I was just looking at the negative kink in employment that seems to happen a few months before MW hikes and persists for about 2 years.  I admittedly did not append any analysis about complicated long term trends and their causes to my discussion.

PPS.  To Dr. Thoma's credit, in the list of links that included the New York Times editorial, he also had a link to Stephen Gordon at the Worthwhile Canadian Initiative blog that discussed how recent increases in the Canadian minimum wage might be related to drops in teen employment.  It looks to me like this recent Canadian teen employment behavior is pretty similar to the scale of teen disemployment that I found in the US.  The New York Times editors should get on this story.  Apparently, Mr. Gordon is in the pay of US restaurateurs.