U.S. Registries – Linking buyers and sellers across North America

Category: Economy

It’s hard to be a member of the middle class if you don’t have a job.

THE GOVERNMENT’S WAR ON JOBS

Bill Dunkelberg, Chief Economist

National Federation of Independent Business

There is one law that the Supreme Court and Congress cannot fundamentally alter and that is the law of demand: the higher the price of something, the less of it will be taken. Sometimes immediately, sometimes over a longer period as markets and firms adjust. The “price” of something is more than just the “tag price”, it also relates to the difficulty of acquiring it and all related costs. In the case of labor, it’s more than the wage, it’s all the associated search costs, paperwork, employment taxes, training costs and the mandated benefits that determine the cost of an employee.

There is a second important principle: firms cannot pay workers more than the value they bring to the firm (and stay in business). Every time the cost of labor is increased, whether by market forces, or increases in the minimum wage, or mandated family or sick leave, or more labor taxes or paperwork, the hurdle an employee must get over in order to have a job rises. The most damaging impact of a higher minimum wage on our economy is not the increased labor costs, but all the job opportunities that are eliminated forever for young and unskilled workers who want to enter the labor force and become productive workers.

Yet liberals can’t be more proud of all the measures they support, federal, state and local, that raise the cost of entry into employment, including supporting unionization, which is the power to use monopoly power to tax ordinary consumers by raising labor costs, imposing costly work rules, and adding red tape. Yes, auto workers lived very well (and retired well) in the good old days when $1500 in the price of a car went just to fund their medical insurance in addition to the excessive wages paid, all included in the price of the car. So customers paid a heavy tax so the union workers could live well. Competition ended that, GM failed and lives today only with a $10 billion dollar subsidy from taxpayers and continued profit tax breaks engineered by the Obama administration.

Competition has cut much of this “tax” on the customer, and unions now cover only about 7% of the private workforce. Their new “sweet spot” is in the public sector where “profit” is not measured and managers are not accountable for the bottom line. GM failed but your local city or state government is not likely to (although a few have managed even that). Here, 35% of the workers are unionized and often guaranteed jobs (tenure, civil service etc.) and their tactics are the same, inflict pain on the customers until the public sector mangers cave under pressure from constituents (no garbage picked up, schools not in session, buses don’t run etc.). Taxpayers take the hit here as well.

The Liberal’s push for a higher minimum wage is also a “tax” on customers. There is no new income in a market when the minimum wage is raised. Every dollar a minimum wage worker receives comes out of the pockets of customers and owners as prices rise to pass on the costs. Few poor people are helped, most officially poor people don’t work and would find it even harder to get a job at a higher minimum wage. Most of the earnings gains from a higher minimum wage go to families with above median incomes, not the poor. Meantime, job opportunities are destroyed and more and more unskilled and young are denied opportunities to get their first job (and on the job training) and become productive members of the workforce. Only people who don’t “think it through” believe that government wage setting is a good idea. A recent report from Professor Mark Perry at the University of Michigan illustrates the impact of a recently implemented $15 minimum wage in Seattle. You can bet that most of the decline in employment was concentrated among the young and unskilled. And those job positions are lost forever (as long as the minimum wage is at $15 or higher). Now Seattle’s city council is deliberating the setting of work schedules for private sector employees.

war_on_jobs

It is hard to be a member of the “middle class” if you don’t have a job. So, how are all of these “liberal” or “sounds really good”, “fair” policies working? Today, the percentage of the adult population (age 16 and over) with a job is 58%, down from 64% in 2000 (the record high) and 63% in 2007. The percent of workers working part-time that want a full time job is 20%. The black unemployment rate is 11%, 33% for 16-19 year olds. These people aren’t helped by a higher minimum wage, they find it even harder to get a job as it rises. The percent of the population receiving welfare payments is over 25%. Food stamp recipients are at record high levels. The poverty rate is the highest since the early 1990s. Having a job is a much better alternative, for the person and for the good of the country. President Obama wrote recently “Access to a job in the summer and beyond can make all the difference to a young person-..”

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The Net Worth Bubble, Losing Air.

Bill Dunkelberg, Chief Economist

National Federation of Independent Business

 

 

American consumers have about $14 trillion in debt and a net worth of over $80 trillion according to the Federal Reserve. Net worth is the sum of the values of all assets, real and financial, that consumers own, less their debt, including mortgage debt, leases, credit cards and the like. The wealth we hold is a way of storing purchasing power. You can sell your shares of Apple and buy “stuff”, goods and services. Ultimately, for most consumers, that’s what our wealth is used for, to acquire “stuff”. Some of our assets provide services directly such as our houses and cars. The real services received from these assets would seem to be unchanged over time even though their market prices vary.

Consumer Net Worth vs GDP

Financial assets do provide an income that can be used to buy stuff (although interest income was dramatically reduced by Fed policy, dividends held up reasonably well). And part of the goal of Quantitative Easing was to induce people to buy more stuff (real goods and services) as their asset values were inflated by Fed policy. On first blush, not much of this seemed to occur. That said, the total value of our net worth represents a potential claim on stuff, the real output of our economy.

The broadest measure of “stuff” is the Gross Domestic Product, the total value of final goods and services produced in a given period of time. Constructing the ratio of Net Worth to GDP illustrates the fluctuation of claims on output per dollar of output produced. Not surprisingly, this was a fairly steady series for 25 years (maybe longer) from 1970 to the mid-1990s as gains in nominal wealth were matched with gains in nominal output, averaging about $3.50 in claims on output for every $1 of GDP. The advent of the dot.com era (and Y2K) drove the ratio up to $4.40 and then the housing bubble up to $4.80. Real housing services received in that period likely did not rise and fall with house prices. The end of the housing bubble drove the ratio back down to $3.70, a full dollar, but still 20 cents above the 25 year average from 1970 to 1995.

Each peak was followed by a recession, the last one the worst since the early 1980s. And now the ratio has once again reached $4.70. “History” suggests that the ratio will collapse again toward the $3.5 level. This can be accomplished by a massive increase in real GDP (unlikely) or a massive decline in the value of assets (more likely). The economy is not likely to fall into a recession in the next year or two, but growth will be historically modest.

What can impact the market value of assets? The return of “normal” interest rates, weaker profit growth, a serious global slowdown, each could trigger the “adjustment” in net worth. The adjustment might be accelerated because of widespread short covering and record high margin credit and other leverage. Logically this seems unavoidable, unless you believe that we are truly wealthier now, even with an economy that is delivering a rather poor performance (historically weak output and sales growth) in real terms. It would seem to not be “whether” we will adjust but ‘when’ and ‘how’ that will challenge the money managers and prognosticators. Every bubble is different, this one will be about stock prices as well as bond prices, missing in earlier bubbles which occurred during the steady decline in interest rates that started in the early 1980s. This time, rates will likely go up, not down.

 

Since writing this piece last year, central bankers have developed a new tool, NIRP. At 0% or negative rates, there is mathematically no limit to how high bond and equity prices can go. Real earnings can fall while asset prices rise as people put their money into any asset rather than hold cash. Asset prices will rise, yields will fall. Cash will be a “hot potato” that we can’t get rid of. Should the Fed become so disconnected from reality and common sense that it moves to “negative interest rates”, equity markets can rise, at least for a while. Ultimately, the value of “shares” in USA INC will depend on the economy’s real performance.

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