Tag: unemployment rate

More Sub-Par Employment Numbers

The Labor Department just released its monthly employment report and the White House is probably not happy.

There are several key bits of data in the report, such as the unemployment rate, net job creation, and employment-population ratio.

At best, the results are mediocre. The unemployment rate generally gets the most attention, and that was bad news since the joblessness rate jumped to 8.2 percent.

What makes that number particularly painful is that the Obama Administration claimed that the unemployment rate today would be less than 6 percent if the so-called stimulus was adopted. But as you can see from the chart, squandering $800 billion on a Keynesian package hasn’t worked.

While that chart is probably embarrassing to the White House, I think the most revealing numbers come from the Minneapolis Federal Reserve Bank’s interactive website, which allows users to compare employment data and GDP data for different business cycles.

I looked at those numbers a couple of months ago, so I could compare Reaganomics and Obamanomics, and the difference is startling. The Reagan policies of lower tax rates, spending restraint, deregulation, and tight money generated much better results than the statist policies of Obama.

The most recent numbers, shown below, aren’t any better for the Obama Administration.

But I suppose the good news is that the United States is not Europe. Government is even bigger on the other side of the Atlantic and many of those nations are in the middle of a fiscal crisis and the unemployment rate averages 11 percent.

Sort of makes you wonder whether there’s a lesson to be learned. Maybe, just maybe, bigger government means weaker economic performance.

Do Inflation Expectations Drive Consumption?

After proponents of the Federal Reserve’s second round of quantitative easing (QE2) abandoned the argument that QE2 would spur growth by bringing down interest rates (only after rates increased), the new defense became “we intended for rates to go up all along, as a result of increased inflation expectations.”  Since few would argue for increased inflation, or expectations of such, as an end in itself, the claim was that increases in inflation expectations would drive households to consume more, which would in turn causes businesses to hire more, bringing down the unemployment rate.  But does this chain of reasoning withstand empirical scrutiny?

It turns out looking at the historical data on inflation expectations, as collected at the University of Michigan, that inflation expectations and household savings rates (the inverse of consumption rates) are positively correlated.  Now of course correlation doesn’t mean causality,but what the data suggest is that instead of consuming more when inflation expectations increase, households have actually saved more.  This positive correlation also holds for the second half of the data series, so it’s not simply the result of a downward trend in either inflation or savings.

To review, the latest argument for QE2:  increase inflation expectations, which is assumed to increase consumption, which is hoped to increase employment.  The problem I’ve had all along with this position is that the only thing we know for certain is the first part, QE2 would increase inflation expectations.  The hope that it would increase consumption and hence employment was just that:  hope.  Given the disconnect we’ve seen between consumption and unemployment over the past 18 months, the third link in that chain is also a weak one.   So what do we have at the end of the day:  certain costs with fairly speculative and uncertain benefits.  And here I was thinking that reckless speculation was the sole province of the private sector.

Are U.S. Multinationals to Blame for High Unemployment?

Many Americans believe the unemployment rate remains stubbornly high because U.S. multinational companies have been outsourcing and offshoring jobs to low-wage countries at the expense of jobs at home. And they believe this in part because politicians and the media tell them it’s so, even though it isn’t.

Consider this story today from the Associated Press under the provocative headline, “Where are the jobs? For many companies, overseas.”

Corporate profits are up. Stock prices are up. So why isn’t anyone hiring?

Actually, many American companies are–just maybe not in your town. They’re hiring overseas, where sales are surging and the pipeline of orders is fat.

More than half of the 15,000 people that Caterpillar Inc. has hired this year were outside the U.S. UPS is also hiring at a faster clip overseas. For both companies, sales in international markets are growing at least twice as fast as domestically.

The trend helps explain why unemployment remains high in the United States, edging up to 9.8 percent last month, even though companies are performing well: All but 4 percent of the top 500 U.S. corporations reported profits this year, and the stock market is close to its highest point since the 2008 financial meltdown.

But the jobs are going elsewhere. The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9 percent, says Robert Scott, the institute’s senior international economist.

Where to start? First, look back at the reference to Caterpillar, the quintessential U.S. multinational company. If more than half of the employees the company has hired this year are outside the United States, doesn’t that imply that the company also hired workers within the United States, perhaps several thousand?

In fact, as I noted on p. 101 of my Cato book Mad about Trade, Caterpillar and other U.S. multinationals tend to hire workers at home when they are hiring workers abroad. When global business is good, employment tends to ramp up throughout a multinational company’s operations, whether in the United States or abroad. (Earlier this month the Dayton (Ohio) Daily News ran a story about Caterpillar hiring 600 new workers at a local distribution center.)

It is simply false to argue that, if U.S. multinationals did not add jobs to their operations abroad, those jobs would be created at home. The opposite is much closer to the truth. Over the past 30 years, the change in employment of U.S. multinationals in their U.S. parent operations and in their affiliates abroad has been positively and strongly correlated. When hiring grows abroad, it grows at home, and when it lags at home, it lags abroad.

And when U.S. companies do hire abroad, their aim is not typically to cut wage costs but to reach new customers (as I explained in an earlier op-ed). That’s why U.S. multinationals employ far more workers in high-wage Europe than in low-wage countries such as India and China. In fact,  according to the most recent numbers from the U.S. Commerce Department, U.S. multinationals employed five times as many workers in Europe (4.82 million) in 2008 than they did in China (950,000).

If U.S. companies are forced to reduce their operations abroad in the name of fighting unemployment at home, they will be less able to compete in global markets and less able to expand production and employment in their domestic operations.

Even Keynesian Accounting Can’t Find All That ‘Stimulus’

From January 2009 to the present, President Obama and his team have repeatedly made grandiose claims about the economic benefits of shoveling money at shovel-ready projects or green jobs.  “It is largely thanks to the Recovery Act that a second Depression is no longer a possibility,” said the President.   He also claimed that lavish spending alone (not Federal Reserve actions or bank bailouts) is what prevented the unemployment rate from “getting up to … 15%.”

If any of that were remotely close to being true then, as a matter of simple accounting, rising federal spending would have shown up as a huge offset to falling GDP in 2009, and also as a major component of the modest increase in GDP growth in early 2010.   On the contrary, the table below shows that the increase in federal nondefense spending contributed only two-tenths of one percent (0.2) to the change in GDP in 2009.  That was no better than 2008 when the Recovery Act did not exist.  If nondefense spending had not increased at all in 2009 (unlike 2008) then GDP would have fallen 2.8% rather than 2.6% — scarcely the difference between a recession and a “second Depression.”  If nondefense federal spending had not increased at all in 2010, the economy still would have grown at a 3.6% pace in the first quarter, 2.1% in the second.  Cutbacks in state and local spending were a trivial damper on GDP growth last year, contrary to recent speculation, and real state and local spending rose significantly in this year’s second quarter (unlike the first).

This is just an exercise in crude Keynesian accounting, not economics.  Yet it nonetheless makes the stimulus bill look like a huge waste of money.  The reason Keynesian accounting is no substitute for economics is that governments can only spend other peoples’ money.  To claim that such spending is a net addition to “aggregate demand” is to ignore those other people — namely, current and future taxpayers.

Nobel Laureate Robert Lucas put it this way:

If the government builds a bridge … by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash.  It has no first-starter effect.  There’s no reason to expect any stimulation.  And, in some sense, there’s nothing to apply a multiplier to.  You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge.  And then taxing them later isn’t going to help, we know that.

Senator Bunning’s Unappreciated Gifts

Sen. Jim Bunning (R., Ky.) blocked “extended” unemployment benefits beyond their scheduled expiration on February 27. That thwarted bill would also have put off, again, a scheduled 21 percent cut in Medicare payments to physicians. Democrats were outraged. But why?

Bunning just wanted to use leftover “stimulus” money to pay for the benefits. Why not? Such transfer payments accounted for over 80 percent of stimulus spending last year.

Besides, as Federal Reserve policymakers noted, the evidence is overwhelming (see here and here) that extending unemployment benefits from six months to nearly two years has raised the unemployment rate by a percentage point or two. I’ve waited since 1991 for someone to prove I’m wrong about that. Nobody has, because nobody can.

If the maximum duration of jobless benefits were trimmed by 13 to 20 weeks (which is all that’s at stake), they would still be far more extended than ever before. But the unemployment rate by the time of this November’s elections would be much lower than otherwise. Would Democrats prefer to go into the elections with an unemployment rate near 10 percent or a rate below 9 percent?

As for Medicare, slashing payments to physicians is the Democrats’ favorite way of paying for expanding Medicaid enrollment and health-insurance subsidies for the non-poor. If they really think that will work, how can they possibly object to saving money sooner rather than later?

[Cross-posted at The Corner]