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    More On Unemployment

    Oct 11 • Labor, Macroeconomic Measurement • 375 Views

    These are great graphs! In just a minute or 2, through a series from The Washington Post, you can understand our employment problems.

    Our starting point is potential output during the past decade. We see how much we could have produced if our land, labor, and capital had been optimally used. Then by comparing our potential to our actual output, the next three graphs illustrate when we reached our potential and when we were below it. During 2009, with the recession over, we see actual output rise. The problem though, is that the actual output line is still lower than our potential. The result? We have an “output gap”.

    Eliminating the output gap with enough jobs is tough because increasingly efficient producers need fewer workers. In addition, our population keeps growing. So, the line representing actual output needs to ascend steeply toward potential output for enough workers to have jobs. As you can see in the last 2 graphs, 3% annual growth is not enough. What do we need?  You might want to look at graphs 8 and 9.

    The Economic Lesson

    There are four kinds of unemployment. 1) Cyclical unemployment that is caused by a dip in the business cycle. 2) Structural unemployment that results from fundamental changes in production such as new technology. 3) Seasonal unemployment that reflects the impact of holidays and the time of the year. 4) Frictional unemployment that will be here always because people are constantly leaving jobs for a variety of personal and professional reasons.

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    Innovative Thoughts

    Oct 10 • Businesses, Government, Innovation, Labor, Macroeconomic Measurement • 525 Views

    Saying we need “More (Steve) Jobs, Jobs, Jobs” journalist Tom Friedman reminded us that economic “stimulation” is more important than economic stimulus. Using the creative, successful, and competitive co-founder and current CEO of Apple as his example, Friedman says innovation has always been the source of U.S. success.

    This took me to a recent NPR Planet Money podcast on dying and thriving manufacturers. Pointing out that the U.S.A. remains the world’s leading manufacturing nation, they focus on 2 businesses. A button making business that had once supplied Ralph Lauren with thousands of buttons now is barely functioning because they cannot compete against Chinese factories that have cheap labor and up-to-date technology. By contrast, a firm that creates and constantly updates tiny metal parts for electronic devices is flourishing. Its founder says that its source of growth is constant innovation.

    Knowing where we need to go, how can we get there? Economist Mike Mandel tells us that recent reports indicate that only 9% of all firms do product or process innovation. You might want to look at the details he presents to see who does what.

    The Economic Lesson

    A very simple model that displays economic growth and resource utilization is a production possibilities frontier. To visualize it, you just need to imagine a line that is bowed out to the right on your graph. The bowed out line is important because it represents the best we can do. It illustrates the most that existing land, labor, and capital can produce.

    If we want our incomes to keep growing and our standard of living to rise, then we want the “bowed out line” to shift to the right. It will shift only if existing land, or labor or capital (defined as tools, equipment, buildings, and inventory) changes. Typically, through technological innovation, new capital has been the reason the curve has shifted to the right.

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    Cyclical or Structural?

    Oct 9 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Government, Macroeconomic Measurement, Money and Monetary Policy • 451 Views

    Economists still cannot agree. With the new unemployment rate, at 9.6%, the same as the old unemployment rate, one question remains the same. Is it a jobs mismatch, contractionary lay-offs, or a third economic ailment? The diagnosis you choose will determine the policy you support.

    On the structural side are those who say that the high unemployment rate is the result of too many unemployed workers who cannot fit the jobs that are available. As expressed by the President of the Federal Reserve Bank of Minneapolis,  the s ources of the mismatch are probably a combination of geography, demography, and skills. The policy implication: the Federal Reserve cannot do very much. While this gentleman suggests more unemployment insurance, others have a more laissez-faire inclination.

    Cyclical advocates say that high unemployment is the result of inadequate demand from consumers, businesses, and government. With sluggish economic growth and tepid business confidence, we have moved from the trough of this business cycle to an anemic expansion. As expressed by the former Chair of the Council of Economic Advisers, Christine Romer:

    In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one.  It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis.  Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.

    The policy implication? More stimulus and “QE2″ (quantitative easing).

    Yet another group of economists rejects the structural diagnosis and then moves onward to other problems such as a “balance sheet” recession. You might want to go here to see what other economists have suggested in an online Economist debate.

    The Economic Lesson

    Structural unemployment takes us to buggy whips and typewriters. When the former was replaced by the Model T and the latter became obsolete because of computers, workers with traditional skills lost their jobs while those who could make the new goods and services were in greater demand. What happened? The structure of the economy changed as old industries died.

    Cyclical unemployment is about the business cycle. Like death and taxes, we will always have a business cycle. 1) First, production grows. 2) Then it hits a peak. 3) Reversing, it stagnates and declines. 4) It reaches a trough. A lagging economic phenomenom, cyclical unemployment is most evident when the economy is at its lowest and also as it begins its expansion.

    Then, a new cycle begins, it reaches a new and higher peak, and you know what happens next.


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    Soda Wars

    Oct 8 • Demand, Supply, and Markets, Economic Debates, Regulation • 434 Views

    In “the soda wars,” who is fighting whom? Past news articles refer to state legislative attempts to tax sugary soft drinks. Now, a NY Times article focuses on how New York City is trying to bar use of food stamps for sugary soft drinks. The Department of Agriculture, as the agency that oversee NYC’s food stamp program, will make the decision.

    On one side is the city saying it is fighting obesity. Their ammunition? “…nearly 40% of public-school children in kindergarten thorugh 8th grade were overweight or obese,…and…obestity rates were substantially higher in poor neighborhoods.” With the ban, poorer familieis “…would have as much, if not more, to spend on nutritious food.” 

    Disagreeing with the ban, a spokeman for the oppostion cites concern about stimatizing people on food stamps. Yes, he says, we do want to diminish sugary drink purchases but let’s use education. An industry spokewoman said, “This is just another attempt by government to tell New Yorkers what they should eat and drink.”

    The Economic Lesson

    Wearing economic lenses, we are seeing a classic opportunity cost battle. The (short term) benefit of enjoying soft drinks is experienced by the purchaser and soft drink manufacturers. The cost, though is borne by the tax payer twice: 1) once when the drink is purchased with public funding 2) and then again when obesity related illnesses are paid for by publically funded health care.

    I expect opportunity cost battles to multiply as society pays for additional benefits. If we pay for more, do we have the right to control behavior more also?

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    Presidents’ Net Worth

    Oct 7 • Economic History • 419 Views

    Who was wealthier George Washington or John F. Kennedy? You’ll find the answer in a fascinating Atlantic article that describes, from Washington through Obama, presidential affluence.

    George Washington was very rich. Including his land, savings, inheritance, slaves, and other assets, Washington’s net worth, in today’s dollars, would have been a whopping $525 million! Yes, he did marry the wealthiest widow in Virginia. But perhaps more importantly, Washington’s papers indicate his interest in running his estate.

    Moving through the article’s slide show and descriptions, trends emerge. Until the middle of the 19th century, presidents had considerable land wealth. Then, net worth plunges as attorneys and other salaried professionals became president. At the end of the century, with Grover Cleveland, we again start seeing some very wealthy men. During the 20th century, the Roosevelts, the Bushes, and JFK had inherited wealth while Warren Harding, Calvin Coolidge, and Harry Truman were not rich.

    The Economic Lesson

    We can divide our economic history into 5 major eras: 1) An agricultural era during which a transport network started to develop (1st half of 19th century). 2) An era dominated by capital goods formation and railroad expansion (second half of 19th century). 3) A consumer goods series of decades that was characterized by the onset of the automobile (first third of 20th century). 4) A depression era when government became more economically active (1930s). 5) An era when production of services surpasses manufacturing (1950s-now).

    Each president’s wealth reflects the economic era in which he lived.


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