Tag: unemployment

Wednesday Links

Correction: Charles Mahtesian at Politico Did NOT Agree with Chris Matthews

In my recent Wall Street Journal article, “The Myth of Corporate Cash Hoarding,” I quoted Chris Matthews of MSNBC’s Hardball asking Politico’s Charles Mahtesian an apoplectic question about businesses “sitting on their money” just to keep the economy weak and hurt Obama’s reelection chance in 2012.   Then I carelessly added an erroneous superfluity −writing that “Mr. Mahtesian concurred.”

My apologies to Charles Mahtesian (and congratulations for having had the good sense to disagree with Chris Matthews).

In reality, Mahtesian wisely dodged Chris Matthews’ bizarre interrogation about corporations willfully refusing to spend idle cash until after 2012 election.  Mahtesian instead switched to talking about business going “whole hog” during the 2010 congressional election (this show aired September 27).

Here is the transcript:

MATTHEWS:  You know, a great question, Charles, that wasn‘t on my list to ask, but I‘m going to ask you because you seem like a sophisticated guy of many parts.  Do you think business can sit on those billions and trillions of dollars for two more years after they screw Obama this time?  Are they going to keep sitting on their money so they don’t invest and help the economy for two long years just to get Mr. Excitement, Mitt Romney, elected president?  Would they do that to the country?

MAHTESIAN:  Well, I won’t touch the first question, Chris, but…

MATTHEWS:  That was all one question, bro!

MAHTESIAN:  Oh!  I prefer splitting the two.  I’d say that I think what you’re going to see the business community do is really go whole hog at this election right now because either way, you know, I think they can envision a scenario in which they lose … because, for example, number one, if the president has a Republican House, that’s probably going to be a rough scenario for them anyway because that’s what the White House wants if they want to get elected in 2012 — re-elected.  So, probably the best-case scenario for them.


MAHTESIAN:  So you know, either way, I mean, I think they — they weigh the equities, and you know, see it as a 50-50 endeavor.

MATTHEWS:  Anyway, I just hope business starts spending.

Comparing Reaganomics and Obamanomics

Ronald Reagan would have been 100 years old on February 6, so let’s celebrate his life by comparing the success of his pro-market policies with the failure of Barack Obama’s policies (which are basically a continuation of George W. Bush’s policies, so this is not a partisan jab).

The Federal Reserve Bank of Minneapolis has a fascinating (at least for economic geeks) interactive webpage that allows readers to compare economic downturns and recoveries, both on the basis of output and employment.

The results are remarkable. Reagan focused on reducing the burden of government and the economy responded. Obama (and Bush) tried the opposite approach, but spending, bailouts, and intervention have not worked. This first chart shows economic output.

The employment chart below provides an equally stark comparison. If anything, this second chart is even more damning since employment has not bounced back from the trough. But that shouldn’t be too surprising. Why create jobs when government is subsidizing unemployment and penalizing production? And we already know the so-called stimulus has been a flop.

None of this should be interpreted to mean Reagan is ready for sainthood. He made plenty of compromises during his eight years in office, and some of them were detours in the wrong direction. But the general direction was positive, which is why he’s the best President of my lifetime.*

*Though he may not be the best President of the 20th Century.

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.

Is There an Inflation-Unemployment Trade-off?

Much of what drives the policy choices of Ben Bernanke and the Federal Reserve is a belief in the ability to trade higher inflation for lower unemployment, known within the economics profession as the “Phillips curve.”   But does this trade-off actually exist? 

While its true that many have found a negative correlation between inflation and unemployment prior to 1960, looking at U.S. data, this relationship appears to have broken down in the mid-1960s, just about the time policy-makers thought they could exploit it (Lucas critique anyone?).

It is hard, looking at the graph, which displays the annual change in consumer prices over the previous year and unemployment, to see much of a relationship.  In fact, since 1960, the correlation between changes in CPI and unemployment has been positive.  We have generally seen rising unemployment along with rising inflation.  Of course, one might be concerned that the stagflation of the 1970s is driving this result. But looking at the data since 1980, there still remains a positive correlation between inflation and unemployment.  While I am not arguing that inflation causes unemployment (after all, correlation is not causation), it should be clear from the data that there is not some exploitable trade-off that policymakers get to choose.

The Richmond Fed also has a great history of the Phillips curve that is well worth the read.  Perhaps Fed President Jeff Lacker should bring copies to the next FOMC meeting.

How’s that Stimulus Working, Mr. President?

The Bureau of Labor Statistics announced this morning that the unemployment rate jumped to 9.8 percent last month. As you can see from the chart, the White House claimed that if we enacted the so-called stimulus, the unemployment rate today would be about 7 percent today.

It’s never wise to over-interpret the meaning on a single month’s data, and it’s also a mistake to credit or blame any one policy for the economy’s performance. But it certainly does seem that the combination of bigger government and more intervention is not a recipe for growth.

Maybe the President should reverse course and try free markets and smaller government. After the jump is a helpful six-minute tutorial.

Fed Can’t Serve Two Masters

Last week Congressman Pence and Senator Corker announced a bill to end the Federal Reserve’s dual mandate of price stability and maximum employment.  Before getting into why this is a good start, what exactly is the dual mandate?  Section 2a of the Federal Reserve Act, which sets the Fed’s monetary policy objectives, directs the Fed to:

maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Building upon the notion of the Phillips curve, which suggests an historical relation between inflation and unemployment, some have read 2a as implying that the Fed should pick an inflation-unemployment trade-off that improves social welfare.  It is this perceived “trade-off” that dominates the current actions of the Federal Reserve. Quite simply, Fed leaders, such as Bernanke, believe with a little extra inflation we can get more employment.

The problem is that this isn’t so.  As soon as policymakers tried to exploit this trade-off, in the 1960s and 1970s, it disappeared.  From about 1961 to 1966, it did indeed appear that one could choose a mix of inflation and unemployment.  But from 1966 until 1980, when Volcker moved to bring down inflation, inflation and unemployment were positively correlated.  It appeared that all we got was more inflation and more unemployment.

Despite the painful experiences of the 1970s, Bernanke seems intent on repeating those mistakes.  Which gets to me to the point of removing the dual mandate.  It forces the Fed to focus on the only thing it really has any influence over: inflation.  It also removes the temptation to exploit an inflation-unemployment trade-off that never existed in the first place. 

Now given Bernanke’s views on price stability, eliminating the dual mandate can only be a first step.  We ultimately need to remove the discretion of the government to indulge in the Phillips curve fantasy.