A New Long-Term Unemployed Entitlement?

Posted on April 15, 2013 by nedthehead

The Atlantic published an article about the problem of long-term unemployed. Apparently there is something magical about being 6 months unemployed such that a person becomes almost unemployable from that point on.

http://m.theatlantic.com/business/archive/2013/04/the-terrifying-reality-of-long-term-unemployment/274957/

The author concludes with a policy prescription:

It’s time for the government to start hiring the long-term unemployed. Or, at the least, start giving employers tax incentives to hire the long-term unemployed. The worst possible outcome for all of us is if the long-term unemployed become unemployable. That would permanently reduce our productive capacity.

The government should start hiring the long-term unemployed – I’m trying to figure out if that is a serious proposal? The author leaves the implementation details up to the reader to imagine, so let’s imagine them:

What work will they do? Will these be fulfilling jobs? If not, why not? If so, who in the world would ever take an unfulfilling job in the private sector if all you have to do is wait 6 months and become entitled to a fulfilling job working for the government?

How long will the job last? Will it be short term or long term? If short term, it’s hard to see how that is going to “trick” private sector employers into looking at the participants’ resume again. Hiring manager thought process: “I see you were unemployed for 6 months, then employed by the government for 6 months, and now you’re unemployed again. Remind me: why am I more likely to hire you now?” If long term then how will we ever afford this, and why would anyone, once hired, ever look for work in the private sector or anywhere else?

How will the participants be selected? I can envision a couple of options:

1) Everyone gets hired – so this is a true, new entitlement. Anyone and everyone who is unemployed for more than 6 months gets hired by the government.

2) Political process – people unemployed greater than 6 months get hired according to who has a friend or family member working for the “Department of Long-Term Unemployed”. Although, if you had a friend working for such a department wouldn’t you have an in for one of our existing government jobs?

3) Merit-based process – the government will review the resumes and hire only the best and brightest of the long-term unemployed. Because I’m sure the government is better at picking out those diamonds in the rough than 6 months worth of private sector resume reviewers.

4) Lottery – random draw for government jobs! Woo hoo!

Note that (2), (3), and (4) don’t solve the problem which this program was initially designed to solve, which is “the long-term unemployed become unemployable [and] permanently reduce our productive capacity” – it just reduces the number by a few.

How will these new employees be organized? Will we set up a new organization in the government, with some hired as managers, and others worker bees? Will we hire one executive long term unemployed per one hundred worker bees? Or are we going to just randomly plug these people into existing government organizations? If there were a match with their skills to the mission of the organization they probably would have already been hired. The point was that we are hiring them as an entitlement so it doesn’t matter what their skills are at all.

I’m not questioning that employers discriminate against long-term unemployed, and agree that it is a problem for the macro economy, and especially for the individuals who cannot find work. However, starting a government program to hire the long-term unemployed is a not a solution.

Debt Won’t Save You If The Inflation Hits

Posted on April 10, 2013 by nedthehead

One of the issues that people seem to bring up to me the most is inflation, particularly hyperinflation. When people see charts like this one that show a vastly increasing money supply they are rightly concerned. One possible course of action I hear a lot is something along the lines of “hey that’s why I’m going to take out a bunch of loans so I can pay them back with cheap dollars and I’ll be protected.” Not a bad concept, and indeed it will work for a few, but based on this story about inflation in Iran (from Greg Mankiw’s blog) it’s not something I would give a very good chance of actually working if/when the time comes:

http://m.theatlantic.com/magazine/archive/2013/04/my-hyperinflation-vacation/309263

As in all cases of runaway inflation, there are winners among the losers. Iranians with foresight and the ability to borrow have profited enormously from the past year’s inflation. Many Iranians complain, Salehi-Isfahani of Virginia Tech told me later, that only the most politically connected people get significant loans from banks, so there is an inherent iniquity in the ability to profit off severe inflation. It’s easy to see why credit is rationed in Iran: the interest rate facing borrowers is fixed at 21 percent, so an inflation rate of about 30 percent means an automatic real rate of return of nearly 10 percent, just for borrowing.

This dynamic, in which savvy borrowers win big while people on fixed incomes, like the old and the retired, lose their savings, reproduces exactly what we’ve seen in previous inflation episodes elsewhere. “Hyperinflation is among the most cruel forms of government expropriation,” William Masters says. “If the government says it’s going to take your farm away, at least there’s a kind of visible honesty to that.” If you bought a large farm in Zimbabwe in 2000 and had a 30-year fixed-rate mortgage, in 2008 you could have paid that mortgage off with the 10-million-Zimbabwean-dollar note framed in Masters’s office, and expected change back in the transaction. But if you’d been in the more common situation of eking out some small savings, over many years, you’d find that your industry and foresight had been nullified, your thin cushion of savings yanked from under you.

So if you’re hoping to employ a “take out big loans to win” strategy – good luck with that. You’re likely much better off with stable money.

Apple Stock Growth = U.S. Dollar Inflation?

Posted on April 8, 2013 by nedthehead

I had an interesting conversation with a young man out on the campaign trail yesterday about stocks and the economy. He started out trying to convince me that Apple was an amazing investment prospect. He made points such as:

A) Excluding cash on hand Apple’s P.E. ratio is 5
B) At Apple’s current cash accumulation rate they will have more cash than the company’s worth in 4 years (can’t remember what the actual number was, but it was something really low)

As the conversation continued I asked him about his thoughts about inflation of the U.S. dollar, to which he summarily dismissed the prospect pointing out:

C) Long term mortgage rates are at 3.0% – obviously the market is not concerned about inflation so neither am I

So he was perfectly happy to accept that the market was right on inflation, but refused to see the 5 P.E. ratio assigned to Apple stock as the market being right on its long term growth prospects (which it clearly thinks are not good).

Can anyone give me a good theory explaining why the free market is right about inflation, but wrong about Apple? It seems to me that buying Apple stock expecting growth is the same as taking out a big loan expecting inflation.

Property Rights in Singapore

Posted on March 22, 2013 by nedthehead

The Wall Street Journal reports on causes of increasing wealth in Singapore:

http://online.wsj.com/article/SB10001424127887324662404578334330162556670.html?mod=e2tw

“Singapore has long been a magnet for rich expatriates and multinational corporate executives. They are attracted to the city-state’s low taxes, virtually crime-free streets, pro-business policies and predictable government”

Note that every one of those policies are facets of property rights. Well, assuming “pro-business policies” means that their property is protected and not that the government uses its coercive power to aid them.

“Unlike the West or even places like the Middle East, though, much of the new wealth being created in Asia is emerging in countries where rich people see their assets at risk, either because of unreliable governments or unloved ones. The Chinese alone are reportedly exporting billions of dollars, saying they no longer trust their government and want to put their money elsewhere. Indians and Indonesians have likewise been looking for a place where they can stash cash to avoid high taxes or work with international-class wealth managers, while steering clear of the unpredictable policy shifts in their rambunctious—and some say, corrupt—democracies.”

Again – property rights are the number one consideration. If you can develop a society that protects them strongly, you have a gold mine. We’ve watched that for the last two hundred years in America and we see it now in Singapore. It’s hard to overestimate how much value you possess when you have a super strong right to that value.

“But what really checks all the right boxes for many of the world’s ultra-rich is Singapore’s obsession with order, predictability and control, all of which give comfort to individuals whose fortunes have recently gone down the drain in many parts of the world.”

That is what seems to be lost on the whole Cypress/EU ordeal. The short-run win is stability. But, long-term, all that matters is how secure your property is. Capital is super liquid and slippery. You steal it and it can run away in a hurry. If government makes decisions based on a 20-year horizon, these things are a no-brainer. Eventually, even if it takes a decade (but almost always shorter), financial stability will return. Those with a rock solid right to their property will go to work growing and exchanging that value, but those that don’t have a strong right will continually scramble to protect it from theft. You tell me which society will be more successful a decade hence.

On the Minimum Wage

Posted on February 14, 2013 by nedthehead

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/obamas-2013-state-of-the-union-address-in-graphs/

“The minimum wage. Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9 an hour. This single step would raise the incomes of millions of working families.”

Ok, let’s declare it: No one who works full-time should have to live in poverty. If you work and you are living in poverty, we will give you enough money to get out of poverty. That’s what the Earned Income Tax Credit is. But, that’s not what government wants. They want a slice of the value so they demand to take control of poor people’s labor. Why do they want to make it illegal for someone with the ability to produce $8.90 of value to work? So, what they are really proposing is: “No one who works full-time and has the ability to produce more than $9/hour in value should have to live in poverty.” I say that we go with the original statement and drop the $9 clause. Let’s introduce some equality and say that all Americans should have the right to work no matter how much value they are able to produce.

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/13/four-things-to-know-about-obamas-minimum-wage-increase/

“So, if you believe one set of literature, Obama’s plan will increase wages without reducing employment. But many labor economists think the plan has real costs.”

Wait, “think the plan has real costs”? Of course it does! Ask any person the question, “Does having the ability to work and provide for yourself and family have any value?” Then ask them: “Would you pay for such a right if you were denied it?” Every. Single. Person. that you interview would answer yes to both questions. So, if there is a real cost, where does all of the property go? There is obviously property seized so it has to be transferred somewhere, right? Luckily we can measure that:

“economist Adam Ozimek makes a smart point. According to a 2007 study by the CBO, an increase in the minimum wage to $7.25, like that eventually passed that year, would increase wages by $11 billion, of which $1.6 billion went to poor families.

By contrast, increasing the Earned Income Tax Credit for large families (as happened in the stimulus bill) and for single people would cost $2.4 billion, of which $1.4 billion would go to poor families. The EITC option costs one fifth as much to society but does about as much good for poor families. That suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.”

$11B transferred and $1.6 to poor families. Surely a large portion of that $11B transferred comes from the very poor whose work is now made illegal. So, the plan is to take billions from the very poor to transfer $1.6B to the poor.

“That suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.”

Ultimately, I guess that it just depends if “help(ing) families escape poverty” is, in fact, the goal. The proof will be in the politicians’ votes.

Baby Boomers Lower Their Taxes, And Look To Pass the Buck?

Posted on January 30, 2013 by nedthehead

Here’s a chart showing declining tax rates in the United States.

Source: http://www.ritholtz.com/blog/wp-content/uploads/2013/01/Tax_Rates_All.png

This chart got me thinking about democracy and generational conflict in America, specifically as it pertains to public debt. It seems that the Baby Boomers are trying to coax the Millennials into their camp by offering them help with student-loan debt. The problem is that always and everywhere when property rights aren’t equally protected, the politically vulnerable are the ones that suffer. So, in a democracy, who are the politically vulnerable? Those not in the majority. Who is the majority in the USA circa 2013? The Baby Boomers. So, who is going to benefit from the weak property rights? Baby Boomers. Who is going to suffer? Everyone else.

So, the Millennial are not part of the Baby boomers and thus have a giant target on their back. But, they are a fairly large cohort so they represent a threat to the Baby Boomers. So, the BBs effectively tell the Millennials, “Join our gang and we will loot ‘The Other Guys'” The problem is that “The Other Guys” are people not in BB (including the Millennials). So, the BBs set up a smoke screen and claim that all the money that they demand is going to come from “The Rich”. Ri-i-i-ght. We’ve seen the tax rates drop like a rock for BBs while they have been in their peak earning years (see the chart above!) including for the rich Boomers. The money is going to come from the Millennials. So, the Baby Boomers are bribing the Millennials with their own money and they seem to be taking the bait. The BBs are going to coax the Millennials into the “no property rights allowed” camp and then once the locks are broken on the safes, turn around and loot them.
Brilliant. It’s not “The Rich” that get looted when property rights get destroyed. In every regime it’s the politically weak – or in a democracy, those not in the majority.

Thoughts on “You Didn’t Build That”

Posted on August 10, 2012 by nedthehead

Some thoughts from some smart people on President Obama’s Roanoke Speech:

http://econlog.econlib.org/archives/2012/08/the_presidents.html

To me, the speech was not troubling because the President was picking on the little guy. It is also not troubling because he shows a preference for government solutions over private solutions. It is troubling because he is making the case why business owners don’t deserve a strong right to their property. He has made the case why he won’t strongly defend their property rights. This is terrifying because we know that if the government will not defend property, it is lost. Period. The property has value and value is pursued by humans. If the government will not protect your property, it will be lost. I would even go so far as to say that without government, there is no property. And here we have the leader of our government explaining why he will not protect it. This terrifies me. The first rule of property: If you don’t protect it, you lose it.

WSJ Interview with George Shultz

Posted on July 16, 2012 by nedthehead

Some interesting areas of the interview:

“For Mr. Shultz, the tax issue is not just about rates—though he believes lower rates often produce more revenue than higher ones, and “it’s the revenues you’re looking for”—but about predictability.

He asks me what sports I like. “Let’s talk about football. . . . You want to know the rules and have an impartial referee, but you also want to make sure somebody isn’t going to come along and change the rules in the middle of the game. . . . Now it’s as though we have all these people who have money on the sidelines and we say ‘Come on and play the game,’ and they say ‘Well what are the rules?’ and we say ‘We’ll tell you later.’ And what about the referee? Well, we’re still struggling for who that’s gonna be. . . . That’s not an environment designed to get people to play.”

Mr. Shultz cites the handling of the auto bankruptcies as an important deviation from rules-based economic policy. The question was “are we gonna have a political bankruptcy or a rule-of-law bankruptcy? Political bankruptcy was chosen. So the result is that the unions got paid off and the regular creditors didn’t.”

Every now and then, you just have to step back and ask yourself, “Why are making this so hard?” We’ve got all of the brightest minds in the country pouring over how to fix the malaise we are in. But even a miracle cure would be negated if the economy has no confidence in the rules. All of the brillance of the best economists is for naught if we can’t get some of the basic fundamentals right. Leave it to the 91-year-old guy to bring us back to reality.

“That would be ObamaCare, of course. “I fear that the approach to controlling costs in the health-care business is moving more and more to a wage-and-price-control approach. And one thing you know from experience is when you control the price of something, you end up getting less of it. So if you control the price of health-care providers, you will have fewer of them and that’s gonna wind up as a crisis. The most vivid expression of that . . . was Jimmy Carter’s gas lines.”

Another obvious point but somehow gets lost in the debates.

Pro-Market vs. Pro-Business

Posted on July 9, 2012 by nedthehead

Luigi Zingales draws an important distinction between the two:

Ideologically, the Republican establishment doesn’t appreciate the difference between being pro-market and being pro-business. Many businesspeople want free markets only when they’re trying to enter a new market; when they’re already in a market, they lobby for barriers to entry and protection from competition. A pro-market advocate defends freedom of entry in all cases. Failure to understand this distinction makes the Republican establishment too timid in criticizing business when it undermines free markets.

I agree, and this is an important distinction. When politicians pass legislation which seemingly hurts business (tighter regulations on banks, as an example) people think it must be because those politicians are fighting for the people to the businesses detriment. The opposite is usually the case – even though the regulations hurt the businesses, they hurt the businesses’ competitors more. So even though the big banks face higher costs to comply with the regulations, the smaller banks literally go out of business because of the costs. In this case the big banks win because they face less competition.

Education Financing

Posted on June 14, 2012 by nedthehead

From a New York Times op-ed on Education Financing:

To avoid the next credit bubble and debt crisis, we need to eliminate government subsidies and link tuition financing to the incomes of college graduates.

Yeah I agree we need to eliminate government subsidies but I don’t think we “need…to link tuition financing to income of college graduates.” We don’t need to do anything. That’s the beauty of private property. No one cares more deeply about optimal financing regimes for education than the owner. Leave the government out of it completely.

Between 1977 and 2009 the real average cost of university tuition more than doubled.

So, let’s hear it, Gen Y, has the government helped with your desire for an affordable education? No? Why not? Well, it turns out that people counseling you to support the transfer scheme of college financing aren’t necessarily doing so in your best interest…

Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan.

That’s right, kids. Your college professors, university administrators, college football coaches, loan agents, etc. that encourage you to make “the most important investment of your life” might be a little more interested in their own financial well-being than yours. Surprising, I know…