The May 5, 2013 New York Times has an interesting piece on youth unemployment. Economics writer David Leonhardt interviews economists about the youth underemployment rate. (Based on the description, the measure used appears very close to the Bureau of Labor Statistics’ U-6 rate.) The article points out that the underemployment rate in the 25 – 34 age group is 26.6%, well above even France (22.0%).
The article goes on to note that economists cannot explain why the youth underemployment rate is so high, especially compared to the year 2000 when the same rate was 18.5% for the U.S. While it would be interesting to examine the annual rates between 2000 and 2012, I don’t have time for that today. Instead, let’s just look at current unemployment rates by age group. The graph below shows that the unemployment rate in the 25 to 34 age group is about two percentage points higher than any of the four older groups.
Here’s some speculation. I’ve written many times about the heightened uncertainty in the economy. This has been created by the Obama administrations regulations, including Obamacare, the Dodd-Frank financial reform bill, and the host of regulations emanating from the EPA, the Bureau of Labor Statistics, the Civil Rights division of the Justice Department, and a host of other areas.
Economists have known for decades that hiring a new employee is not completely a matter of acquiring the quantity of labor that makes the marginal revenue product of labor equal to the wage rate. There are a variety of theories, most of which complement each other: efficiency wages, labor hoarding, and so on. Many of these theories were developed to explain the procyclical behavior of labor productivity. Productivity tends to rise during expansions and fall during downturns. The simplest explanation for this is that hiring an employee entails a certain amount of “setup costs.” These include advertising, screening, interviewing, and training. Therefore firms will try to hang on to workers even when demand decreases — at least if the firms believe the decrease in demand is temporary.
Think about a business faced with regulatory uncertainty as described above. If they hire a 25 year old, they hope to keep this worker for many years. But if they hire a 65 year old, they expect that worker to retire soon. Hiring the 25 year old exposes them to a much longer cost if the risk turns around and bites them. And they would have to possibly lay off the 25 year old. All they have to do with the 65 year old is wait a few years.
The media are in a kerfuffle over the April jobs report. Lots of jobs created, the unemployment rate fell, what’s not to like?
There’s a reason economics is called the dismal science. Economists have this nasty habit of pointing out the discrepancies between belief and reality. The April report is no exception.
Just for kicks, I’ve dissected the first four months of employment data from BLS. These numbers are all from the current population survey (CPS) so they are consistently sourced. Results are not promising. The reported unemployment rate fell to 7.5% in March. Using just about any other measure that’s reasonable, 7.8% is a better estimate. BUT, if you look at the measure BLS calls “U-6″ things get really bad. What’s U-6? Here’s what BLS says:
Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers
Aren’t you happy you asked? For April, 2013, U-6 was 13.9%, up 0.1% from March.
As always, my methods are transparent. Click here to download the Excel workbook that has all the calculations and numbers cited here (and a whole lot more).
 OK, since you asked, I did two other calculations. Between January and April 2013, the labor force decreased by 273,000 people. My first calculation added all those folks back in and assumed they would all have been unemployed. You don’t believe that? Frankly, neither do I. So I calculated the net change in those who are not in the labor force but want a job. That’s not the same as “discouraged workers.” If you care about that, e-mail me and I’ll be happy to send you a two-page extract from the BLS “Handbook of Methods” that describes the process in detail.
On May 1, 2013, “Marketplace” aired a segment about inflation. The show extolled the many benefits of “a little more inflation.” This is a Marketplace MegaFail inflation edition. Titled “Should we bring inflation back from the dead?,” reporter David Gura listed these benefits from just a touch more inflation:
- Housing prices would rise and fewer homeowners would find their houses underwater.
- Those who have borrowed to, say, buy a car would get to pay back their loans with cheaper dollars.
- “Companies could raise prices, that could lead to higher salaries, ‘and assuming they can control their costs, that could be beneficial to their profit margins; that could be beneficial to them expanding their business, creating jobs; that could be beneficial to their shareholders.’ “
Frankly, these statements are incredibly stupid. Inflation means prices and incomes are rising at about the same rate. Any increase in salaries will just keep pace with inflation, leaving the consumer with unchanged purchasing power. The only way people who borrow can pay back with cheaper dollars is if the inflation is a complete surprise. If the inflation is expected, it will be part of the interest rate on the loan. Finally, higher housing prices? Give me a break. Even if housing prices rose, the real net wealth in your house wouldn’t change much because the higher price level would eat up the price increase.
This morning, Kai Ryssdal was a guest on KQED’s Forum program. He proudly declared that Marketplace did not employ any MBA’s or economics Ph.D.’s. After this embarrassment, perhaps Mr. Ryssdal should reconsider his hiring policy. Or at least talk to economists who know what they’re talking about. We’re not that hard to find.
(I suspect Marketplace will be removing this story from their website soon. As a public service, you can click here to get a pdf version of the transcript.)
 From the transcript, quoted from David Blanchflower, the Bruce V. Rauner Professor of Economics at Dartmouth College.
 From the transcript, quoted from Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin Wallace University.
 Another priceless gem from Prof. Jacques, see footnote 2 above.
by Swifty Johnson[*]
It is a melancholy object that has come to our attention; namely, that there are a number of barriers to graduation in the state of California that could easily be eliminated. These barriers are, in ascending order: the obligation to learn to write; the necessity of learning to do sums, the onerous requirement to think analytically, and finally, professors themselves. We have come upon a solution to this nagging problem in public higher education; it will result in a four-year, 100 % graduation rate. It is as follows:
Present the first-year student with a tuition bill for the next four years of his or her university education, said bill becoming due immediately and to be paid through grants, loans, the student’s own accumulated inheritance from recently and timely-deceased grandparents, or the third mortgage his or her parents can negotiate as a lien on the family’s ancestral suburban home. Alternatively, it may be possible to garnish the student’s wages at Starbucks for the next fifty years. Immediately upon the check’s clearing and being deposited in the coffers of the state university, issue the baccalaureate degree to the student in question.
Subsequently, provide the student a PIN number that will allow him or her to gain access to unlimited massive, online training courses which, at his or her discretion, can be pursued for enrichment, skill-building, and virtual laboratory experimentation. Or not.
The outmoded concepts of “seat time” and required courses having been replaced by a completely elective and at-will higher education system will also provide the added benefit of freeing up acres of university buildings and property to be leased, at great profit, to the private businesses that have developed these wondrous online tools for their use in team-building seminars and golf tournaments.
Professors will no longer need to be retained; most professors will have been transformed into holograms. A robust administration, however, is necessary to be kept in place so that the system can be centralized and regularly assessed and so that, on the first day of classes, which will also be the day of commencement celebrations, someone can be present in full academic regalia to distribute the diplomas and to smile for the cameras of proud aunties and uncles while doing so. At all costs, graduation celebrations must proceed as usual in order to mark this singular, significant event in the lives of these proud undergraduates.
Make no mistake: this is as foolproof a plan as solving the Irish famine by telling the populace to devour their own children.
[*] Swifty Johnson is the nom de plume of Prof. Susan Gubernat, Professor of Creative Writing, California State University, East Bay. Prof. Gubernat was kind enough to give me permission to reprint her writing in my blog. If I have inadvertently introduced any mistakes, I apologize (and will correct them asap).
Reports today put the Cyprus haircut at 60% of deposit balances in excess of €100,000. This is startling, as rumors were in the vicinity of 40%. What happened?
In reality, I have no idea. But this is a blog so I’m allowed to speculate. €100,000
“But Prof. Lima,” you say, “we thought Cyprus banks were closed. Where did those deposits vanish? And how did anyone get to them?”
Kids, if I knew the answer to that I’d be either retired or in jail. For sure I wouldn’t be writing this blog. But here’s a guess. Cypriot banks have, according to rumors, quite a bit of experience with various methods of moving funds around. And you can be sure that the Cypriot bankers were far more afraid of the Russian mafia than the European Central Bank. I’ll go out on a limb and speculate that the Russians will not be getting much of the haircut. A whole bunch of their deposit balances are no longer there. Leaving the suckers …, er, strike that, the regular customers holding the bag.
Which leads me to remind you of a simple fact. If there’s going to be a run on a bank, it’s best to be near the beginning of the line. Or have a high-speed internet connection directly into the bank’s computers.
If you’d like actual information, the New York Times has a pretty good article.
Most taxes influence behavior. At its most fundamental, this is the basis for “supply-side economics.” As the Wall Street Journal observed several years ago, different taxes can be expected to have different supply-side impacts. Among other factors, the available of close substitutes for the activity being taxes will influence the extent to which the volume of an activity is altered. I want to focus on how taxes helped create the baby boom.
In 1944, a new wartime “cabaret tax” went into effect, imposing a ruinous 30% (later merely a destructive 20%) excise on all receipts at any venue that served food or drink and allowed dancing. The name of the “cabaret tax” suggested the bite would be reserved for swanky boîtes such as the Stork Club, posh “roof gardens,” and other elegant venues catering to the rich.
Specifically, I’m talking about the upsurge in the U.S. birth rate after World War II. Most people assume that returning U.S. forces were anxious to settle down and start a family. There was undoubtedly some added inducement based on their experiences during the war. As Dr. Johnson once observed, “Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”
A Tax on WHAT?!?
But there was another factor. According to an op-ed column by Eric Felten in today’s Wall Street Journal, there was a “cabaret tax” of 30 percent imposed in 1944. Mr. Felton describes the tax thus → → → → →
The purpose of the tax was to raise revenue for the war effort. Ostensibly, the rich were to be soaked (sound familiar?). But the good ol’ Bureau of Internal Revenue (now the IRS) weighed in shortly after the tax bill was passed, saying,
“A roof garden or cabaret shall include any room in any hotel, restaurant, hall or other public place where music or dancing privileges or any other entertainment, except instrumental or mechanical music alone, is afforded the patrons in connection with the serving or selling of food, refreshments or merchandise.”
In other words a tax originally aimed at the wealthy was expanded to cover virtually anyone who went out to dance. Again, this should sound familiar.
One impact of this tax not explored by Mr. Felten is that fewer couples went out to dance. They stayed home instead. And since they were young and newly-married, they entertained themselves as best they could. The result: the postwar baby boom.
The Rest of the Tax Story
There was one large loophole, however. Clubs that featured only instrumental music (no singing) and did not allow dancing were exempt. Mr. Felten describes this as the beginning of the bebop era. No singing, no dancing, just instrumental music.
Everyone should know the rest of the story. A tax imposed to finance the war effort somehow did not get repealed after the war was over. The tax rate was reduced to 10 percent in 1960, fourteen years after the end of the war. It was finally eliminated in 1965, just short of its 20th anniversary.
The next time you wonder why many of us support automatic sunset provisions in laws, think about this tax. (A sunset provision is a specific date on which the legislation expires if it is not renewed by another bill passed in Congress and signed by the President.) “An unlimited power to tax involves, necessarily, a power to destroy,” Daniel Webster made that statement before the U.S. Supreme Court in McCulloch v. Maryland (1819). Similar sentiments were voiced by Chief Justice John Marshall writing for the majority. Can’t repeat that too often.
The other day I mentioned to an acquaintance — let’s call him Mr. X — that I had earned about 10 percent per year betting against the Obama administration’s economic policies. I’ll reveal my not-so-secret method shortly. But first I wanted to deal with the reply from Mr. X: if I had put my wealth into the stock market at the beginning of 2012 I would have made a killing.
This is, of course, tantamount to waving a red flag at an angry bull. Today I finally had a few minutes to pull some data together. Before looking at the data, however, I’ll point to an obvious flaw in my acquaintance’s logic: forecasting the past is always easy. Did he put his wealth into the stock market at the beginning of 2012? I doubt it very much.
But I did get curious, so I grabbed Mr. Excel and headed over to the St. Louis Fed’s FRED database to get the S&P 500 and Dow-Jones Industrial indexes. Here are the results. (I have not included dividends because I’m lazy.). Since January 1, 2000 the annual rate of return on the S&P has been 0.45% and the return on the Dow 1.62%.
But, of course, that wasn’t the question. What have the same returns been since January 1, 2012? Considerably better. The S&P is up 14% and the Dow 9.91%.
But we all know the real question: how has the market been doing since January, 2008 when President Obama took office? The S&P has averaged 1.82% per year and the Dow slightly better at 2.13%. Neither of those numbers look real inviting.
As always my methodology is transparent. You can download my Excel workbook by clicking here. But a warning: I’m using the FRED Excel plugin for Excel for the Mac 2011. Those using Excel for Windows are advised to proceed with caution.
So what’s my secret? A TIPS fund. TIPS are Treasury Inflation Protected Securities. They are issued by the U.S. government and are fully indexed for inflation. Once I saw the drastic actions the Fed was taking with its balance sheet and the monetary base, I became very frightened. Heck, I still am. I shifted a big chunk of our retirement accounts to a TIPS fund managed by TIAA-CREF. Since I got scared before most other people, I am enjoying the large capital gains on this fund. Here’s the bad news: it’s probably too late for others to take advantage of this opportunity. Sorry folks.
In a way, the legislation has a head start: Last year, in an effort to bring down textbook costs, Mr. Steinberg won passage of a law requiring free online textbooks for the 50 most popular introductory college courses, and in the process created a faculty panel — three members each from the University of California, California State University and the community college system — to choose materials.
The new legislation would use that panel to determine which 50 introductory courses were most oversubscribed and which online versions of those courses should be eligible for credit. Those decisions would be based on factors like whether the courses included proctored tests, used open-source texts — those available free online — and had been recommended by the American Council on Education. A student could get credit from a third-party course only if the course was full at the student’s home institution, and if that institution did not offer it online.
Today’s New York Times includes an article about a potentially disastrous bill wending its way through the California state legislature. I’ve written about devaluing the bachelor’s degree before. If this bill passes, that will become devaluing the bachelor’s degree, fast track edition. My lovely wife has made numerous insightful comments about this. Unfortunately I’m very busy this week (and probably next week, too) on a project with a tight deadline. For now you’ll have to settle for this brief note.
In brief, this law would force public colleges and universities in California to accept transfer credit for online courses. The courses would be approved by an already-existing panel →→→→→→
Yes, you read that correctly. Nine — nine — faculty members get to make this decision for the rest of us. If anyone can take the time to find out who those nine people are, I would appreciate it. But there’s one more statement made by State Senator Darrell Steinberg:
“We want to be the first state in the nation to make this promise: No college student in California will be denied the right to move through their education because they couldn’t get a seat in the course they needed,” said Darrell Steinberg, the president pro tem of the Senate, who will introduce the bill. “That’s the motivation for this.”
In other words, students deserve a bachelor’s degree. They have a “right to move through their education.” And here I thought the faculty had something to say about who gets a degree and who doesn’t.
Color me nauseous.
[Update March 12, 2013: Sarah A. Hoyt has written an autobiographical tale about the damage public schools are doing to children. Highly recommended.]
“Low-information voter” is the term applied to voters who really don’t bother investigating issues in any depth before they vote. I have argued elsewhere that lack of information is only half the problem. The other half is their apparent inability to process information in any meaningful way. They cannot discern the logic that if A causes B and B causes C then A must cause C.
In this article I’ll offer an example of one of these voters. I’ve transcribed about 15 minutes of a Science Friday episode made over two years ago. The complete transcription is at the end of this article, along with a complete citation and a few observations that are not transcribed directly. I have done my best to accurately transcribe the audio, but there may be errors remaining. If you spot any mistakes, please let me know so I can correct them. (As far as I can tell the audio of this segment is not available for downloading and no transcript seems to exist at ScienceFriday.com.) The subject under discussion was vaccines and autism. This article relates vaccines, autism, and low-information voters.
One of the guests on Science Friday January 7, 2011 was Dr. Paul Offit, the author of Deadly Choices: How the Anti-Vaccine Movement Threatens Us All. Dr. Offit has examined the many, many studies done on this subject and has concluded that there is no causal relationship between vaccines and autism. At about 8 minutes 15 seconds into the interview, host Ira Flatow takes a call from Leslie in Oakland (presumably California).
Leslie opens with a statement that includes this: “… I think he’s cherry-picking when he cites this one study that has been widely discredited when there are literally dozens of studies whose methodologies have been impeccable and have not been discredited.” She is referring to the discredited work by Andrew Wakefield that seemed to show such a relationship. (A summary of Wakefield’s “research” is in the following section.)
Dr. Offit replied by detailing the problems with Wakefield’s work. He then pointed to fourteen separate studies on three different continents, each including hundreds of thousands of children, that unanimously reported that vaccines don’t cause autism.
Ira Flatow then asked Leslie whether there was any amount of research that would change her mind. She replied yes, with disparaging references to “… the yahoos who just don’t look at scientific processes at all and people who blindly trust what clinicians tell them …” adding that there was “something between” the two groups. She then states that “… the vast number of immunizations that you’re requiring at such a young age really is taking a toll on the immune system. I think that’s just logic.”
Dr. Offit patiently replies that the number of immunological components in all 14 vaccines combined was 160. By contrast, each of the 100 trillion bacteria that our bodies host contain somewhere between 2,000 and 6,000 immunological factors. If the human immune system was really that fragile, the human race would have died out millennia ago. (There is additional talk about the mercury in preservatives, but today’s childhood vaccines no longer contain thimerosal, the preservative that includes ethyl mercury.)
Leslie replies, “I can’t accept what you’re saying. It just sounds like pap to me, it sounds like panacea. A two year old cannot accept this kind of chemical onslaught.” But, of course, two-year-olds have the same 100 trillion bacteria on their skin that all of us have. After a few more interruptions, the following exchange ensues:
Ira Flatow: “… Leslie, it doesn’t look like anything he’s going to tell you is going to change your mind.”
Leslie: “Well, I’m not hearing anything that sounds credible to me as an educated adult.”
Got that? Leslie was presented with a mountain of scientific evidence. She simply refused to believe it. It’s not a lack of information. It’s an inability to process information when it’s presented.
A Longer Summary
The guest on Science Friday was Dr. Paul Offit, the author of Deadly Choices: How the Anti-Vaccine Movement Threatens Us All. Dr. Offit has examined the many, many studies done on this subject and has concluded that there is no causal relationship between vaccines and autism. At about 8 minutes 15 seconds into the interview, host Ira Flatow takes a call from Leslie in Oakland (presumably California).
Leslie opens with a statement that includes this: “… I think he’s cherry-picking when he cites this one study that has been widely discredited when there are literally dozens of studies whose methodologies have been impeccable and have not been discredited.” She is referring to the discredited work by Andrew Wakefield that seemed to show such a relationship. Wikipedia describes Mr. Wakefield’s “study” thus:
On 28 January 2010, a five-member statutory tribunal of the GMC found three dozen charges proved, including four counts of dishonesty and 12 counts involving the abuse of developmentally challenged children. The panel ruled that Wakefield had “failed in his duties as a responsible consultant”, acted both against the interests of his patients, and “dishonestly and irresponsibly” in his published research. The Lancet immediately and fully retracted his 1998 publication on the basis of the GMC’s findings, noting that elements of the manuscript had been falsified. Wakefield was struck off the Medical Register in May 2010, with a statement identifying dishonest falsification in The Lancet research, and is barred from practising medicine in the UK.
In January 2011, an editorial accompanying an article by Brian Deer in BMJ identified Wakefield’s work as an “elaborate fraud”. In a follow-up article, Deer said that Wakefield had planned to launch a venture on the back of an MMR vaccination scare that would profit from new medical tests and “litigation driven testing”. In November 2011, yet another report in BMJ revealed original raw data indicating that, contrary to Wakefield’s claims in The Lancet, children in his research did not have inflammatory bowel disease.
Wakefield’s study and public recommendations against the use of the combined MMR vaccine were linked to a steep decline in vaccination rates in the United Kingdom and a corresponding rise in measles cases, resulting in serious illness and fatalities. Wakefield has continued to defend his research and conclusions, saying there was no fraud, hoax or profit motive.
Leslie is willing to admit that the Wakefield paper is invalid. But she refers to the “dozens of studies whose methodologies have been impeccable and have not been discredited.” Of course she never gives a citation for any of them.
Dr. Offit replies with an explanation of the many fraudulent aspects of Wakefield’s paper. He then goes on to say that, “… if you want to answer the question, the way you answer that question is that you look at hundreds of thousands of children who did or didn’t get MMR vaccines to see whether the incidence of autism is greater in the vaccinated group. That’s been done by fourteen different groups of investigators on three different continents and the answers have been very clear and consistent and reproducible. So we can say with comfort that MMR vaccine does not cause autism.”
Ira Flatow then asks Leslie whether there is any amount of research that would change her mind. Leslie replies, “”Oh, absolutely. This is what I’m saying is that he’s presenting a false dichotomy. There is something between the yahoos who just don’t look at scientific processes at all and people who blindly trust what clinicians tell them, of which there are a number, many, many people. You know, getting 26 vaccines, in some cases before the age of two, is a devastating thing for a person’s immune system. I’m 49 and …”
Mr. Flatow attempts to interrupt the incessant flow of words without a great deal of success. When he finally gets her attention he asks her for evidence that the 26 treatments (actually 14 vaccines, some have multiple doses) have detrimental effects. She mentions the preservatives that use mercury (which has been removed from all childhood vaccines in the U.S.), then says “…the vast number of immunizations that you’re requiring at such a young age really is taking a toll on the immune system. I think that’s just logic.”
Dr. Offit replies that the critical issue is the number of immunological components in the 14 vaccines. Today there are 160 such components. And we know a lot about the human immune system. Each of us has about 100 trillion bacteria on our body. And each bacterium has between 2,000 and 6,000 immunological components. If our immune systems were really that fragile, human life would have been wiped out millennia ago.
Leslie replies, “I can’t accept what you’re saying. It just sounds like pap to me, it sounds like panacea. A two year old cannot accept this kind of chemical onslaught.” In other words, actual scientific data and facts — information — are irrelevant. Ira Flatow tells Leslie that it doesn’t look like anything Dr. Offit says will change her mind. She replies, “Well, I’m not hearing anything that sounds credible to me as an educated adult.”
Educated, perhaps, but completely unable or unwilling to appreciate science, the scientific method, or logic (despite her statement to the contrary).
It’s not just an information problem. It’s an information processing problem. Until we can figure out a way to get these folks to think, the country will remain in a lot of trouble.
The Justice Department supports the US Postal Service monopoly. That’s my conclusion after reading an editorial in today’s Wall Street Journal. Apparently the Feds are going after FedEx and UPS for — get this — shipping prescription drugs that have been purchased illegally. This is astounding even from this Justice Department featuring Eric Holder, the worst Attorney General since John Mitchell. Somehow, UPS and FedEx are supposed to (a) figure out which packages contain prescription drugs, then (b) determine which were purchased illegally. At best, this is another shakedown by Justice.
At worst, Mr. Holder and his pals are supporting the U.S. Postal Service’s quasi-monopoly. Or perhaps you didn’t notice that USPS was missing from the list of entities being persecuted. In case you don’t believe USPS ships drugs, I happen to have a rather persuasive example. I am a member of the Kaiser-Permanente health plan. I have the option of having my prescription refills delivered to me. The carrier is USPS.
Yet, somehow, Jon Corzine is still free and looking for his next financial fraud scheme. I have almost lost my ability to be surprised by anything Mr. Holder and his partners in crime dream up.
Some of you may not know about the USPS monopoly. Despite their claims of not being part of the U.S. government, USPS still has one significant monopoly power. Under U.S. law only USPS is allowed to put anything into your mailbox. Or mine. Or anyone else’s.