Here is graph from a presentation at the University of Waikato Teachers Day. It shows the milk volume, the profit, and the risk involved. Notice the minimum risk and maximum profit points as well as a social optimum
The US economy has had the highest sustained level of unemployment since the Great Depression of the 1930′s. One reason for this has been the significant increase in income inequality as there is a redistribution of income from low income families to high income families. When you consider the proportion of income that is spent by both groups you will find that the lower income groups consume a much greater percentage of the their income than their higher income counterparts. Therefore we take more consumption out of the economy with slower growth and ultimately a loss of jobs = higher unemployment. Here is a clip from Paul Solman of PBS.
Very good video from Ray Dalio in which he believes that the three main forces that drive most economic activity are:
1) trend line productivity growth,
2) the long-term debt cycle and
3) the short-term debt cycle.
What follows is an explanation of all three of these forces and how, by overlaying the archetypical short-term debt cycle on top of the archetypical long-term debt cycle and overlaying them both on top of the productivity trend line, one can derive a good template for tracking most economic/market movements. While these three forces apply to all countries’ economies, in this study we will look at the U.S. economy over the last 100 years or so as an example to convey the Template.
Another video by Paul Solman in which he discusses how the NYSE record high doesn’t reflect the fundamentals of the US economy. With interest rates at virtually 0% the US Federal Reserve is trying to lower unemployment by stimulating the economy. But, by doing so there has been a tendency for it to overstimulating the stock market in the process. And also lending to stock investors, whose margin debt to buy shares on credit has been hitting record highs. Last week the Dow ended above 16000, another record for the headline index of 30 major companies.
The last record was set in 2007, a few months before the Dow’s previous high watermark.But for all the talk of the Fed’s role there’s an alternative way to understand a record Dow and higher profits: a shift of power from workers to owners. The stock market would actually be much higher if the unemployment was much lower. I think the economy is still really fundamentally weak, and that slack that’s in the economy right now, with all the unemployed people, all the unemployed businesses, would actually bring up the stock market even further.
I was directed to this article on the New York Times website by A2 student Annie Huang. In October this year, a truck dumped 8 million coins (see photo) in front of the Swiss Parliament along with 125,000 signatures in support of a minimum monthly wage. The coins represented the citizens of Switzerland, and the petition was enough to trigger a referendum, voting on whether Swiss citizens should receive a monthly minimum income of $2,800, no questions asked. Each Swiss person would recieve this money from the government no matter what age they are, if employed or unemployed.
Although this seems rather radical there are some interesting points made as to why it has been proposed. The proposal is the work of German Enno Schmidt who is a leader of the basic-income movement. Here are some of the reasons:
* Basic income would provide dignity and security to those underemployed and unemployed
* Empower the labour force to work they want to, rather than just getting by
* Basic income through the tax code would be fairer than band aid programmes such as benefits, housing allowances, child benefits etc.
* The one basic income would replace and reduce welfare bureaucracy that is apparent with numerous welfare schemes
* Reduce poverty and increases social mobility
Research has shown that where the basic income has been implemented not only did poverty disappear but secondary school completion rates increases, hospitalisation went down and the community values started to change.
However there are some strong arguments against:
* The cost is too great
* It creates a disincentive to work
* The basic income might be enough to live on but at a very low standard
With the record earnings in the corporate sector but still no increase in the living standards of many, guaranteed incomes have resurfaced. Millions of workers have had no real increase in earnings since the late 1980’s. Below is an extract from the article:
The advocacy group Low Pay Is Not OK posted a phone call, recorded by a 10-year McDonald’s veteran, Nancy Salgado, when she contacted the company’s “McResource” help line. The operator told Salgado that she could qualify for food stamps and home heating assistance, while also suggesting some area food banks — impressively, she knew to recommend these services without even asking about Salgado’s wage ($8.25 an hour), though she was aware Salgado worked full time. The company earned $5.5 billion in net profits last year, and appears to take for granted that many of its employees will be on the dole. New York Times – 12th November 2013
Here is a chart from WSJ Graphics which shows the level of interest rates in the US from 1980 to today. With the stagflation of the 1970′s Paul Volcker was faced with some very tough decisions. Below is an extract from an interview with him on the PBS Commanding Heights documentary.
It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon.
If you had told me in August of 1979 that interest rates, the prime rate would get to 21.5 percent, I probably would have crawled into a hole. I would have crawled into a hole and cried, I suppose. But then we lived through it.
Below is a graphic from the WSJ which outlines inflation and unemployment under the last 3 Fed Chairmen – Paul Volcker, Alan Greenspan and Ben Bernanke. From the stagflation that was slain by Volker to the irrational exuberance of the Greenspan years and finally the financial contraction under Ben Bernanke. In the 1970′s Volcker tightened the money supply, the economy slowed and contracted – unemployment reached 10 percent. By August 1979 the prime interest rate got to 21.5% but by 1982 the inflation problem had been extinguished. However this was after 3 years of real hardship for the American people. Today we see that inflation isn’t the problem that it used to be and that stimulating growth and job creation is required.
Thanks to colleague David Parr for this graphic from the Washington Post. Unemployment measures those that are actively seeking work. There are 4 ways you can be taken off the unemployment register:
1. Get a job
2. Reached retirement age,
3. Become unmotivated or discouraged
4. Work illegally (cash jobs – hidden economy)
The yellow line on the left shows the official unemployment rate since 2008. It’s fallen from over 10 percent to under 8 percent. But the red line on the right shows the actual employment rate which has not really changed at all.
Notice from the figures that the reduction in unemployment hasn’t seen an increase in employment. That means a lot of the people who’ve left the labour force haven’t acquired a new job. They’ve just left the labour force altogether.
Some of that’s natural. The population is aging, and the labour force was expected to shrink. But it wasn’t expected to shrink this much. The economy is a lot worse than a glance at the unemployment rate suggests.
The OECDs annual employment report makes for sombre reading especially for those European countries. The Economist reports that policymakers in Europe, where projections remain especially poor, need to focus on creating demand. There is good discussion on structural and cyclical unemployment and especially the problem of youth unemployment. Basically the OECD have stated that there needs to be more focus on demand but with austerity measures in place where is it going to come from? Good introduction to unemployment.
The level of unemployment in Spain has reached worringly high levels with over 25% of the labour force out of work. More of a concern is the 57% of the labour force under 25 without a job. However with these levels, especially amongst the youth, one would think that social unrest, crime rates etc would be widespread in the country. There is a belief that the hidden economy (working in cash jobs and also claiming benefit) hides the real figure and, like in Ireland, the labour force is contracting as those without job prospects stay on in education or emigrate.
However in Spain the education system doesn’t do any favours for those students that fail exams when they are 16 – if you fail you are out the school system. This is all very well if there are jobs/trades available for those without qualifications. In 1984 the late Margaret Thatcher said “Young people ought not to be idle. It is very bad for them”. Those that start their careers on the dole are more likely to have lower wages and more spells of joblessness later in life, because they lose out on the chance to acquire skills and self confidence later in their formative years. It is estimated that there are over 310m young people (16-25) that are looking for work. One of the main issues to be addressed is the mismatch between education and the labour market or commonly referred to as structural unemployment.
To reduce the level of unemployment in Spain the economy’s net job growth needs GDP of 1% or more but the Spanish government doesn’t forsee that until 2016.
“The long run is a misleading guide to current affairs. In the long run we are all dead.”
Should investors focus on the short run or long run? The majority are looking at short run gains rather than a long term focus as they are most likely driven by instant financial rewards after the GFC.
Investors are also looking to see if the significant monetary expansion over the last 5 years will lead to inflationary pressures. Niels Jensen of Credit Writedowns has been writing on this for awhile and has come up with a couple of reasons why we shouldn’t be worried about it. Firstly many investors don’t seem to have grasped the difference between the monetary base and the money supply.
The monetary base is the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves.
The money supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts.
See above for some figures from Neils Jensen
As he points out it is the money supply, not the monetary base, which influences inflation. The chart below shows that there is no growth in bank lending despite the QE measures of printing money.
“As so aptly demonstrated in a recent IMF paper, the interaction between inflation and the economic cycle is very different today when compared to the 1975-1994 period. Whereas inflation back then was pro-cyclical, it is largely non-cyclical today with inflation well anchored around 2% regardless of the underlying economic conditions – see chart below. The obvious implication of this is that inflation should behave relatively well even as (if) economic fundamentals improve.” Source: Credit Writedowns
This year saw an all German final in the European Champions League with Bayern Munich defeating Borussia Dortmund 2-1 at Wembly Stadium in London. In order to get to the final both teams beat Spanish counterparts – Real Madrid and Barcelona. What is fitting is that in economic terms German is the powerhouse of the European economy whilst in contrast Spain has suffered greatly from the euro crisis and austerity measures that have been imposed on it. If you look at post-war Germany you can see some correlation between the success of the national side and state of the economy.
The Economist looked at this and made the point that German has opened up its borders to not just traditional labour but also football players. Of the two squads on show at the Champions League Final at Wembley last month, 17 were from outside Germany.
Most visibly, Germany opened up. Just as immigrants flock to German jobs (more than 1m net arrivals in 2012), so players join German clubs. Between them Bayern and Dortmund have four Brazilians, three Poles, a Peruvian-Italian, a Serb, a Croat, a Swiss of Kosovar extraction, an Austrian of Filipino/Nigerian stock, a Ukrainian and two Australians—and so on. Of the German players, several have dual citizenship or a “migration background”. If the choice is between a German Europe or a European Germany, as the novelist Thomas Mann once put it, football points to the second.
From the Wall Street Journal Graphics page. Unemployment in the EU hits record highs – joblessness in the 17-nation currency area rose to 12.2 percent in April. Reuters stated that the greatest menace to the unity of the euro zone is now social breakdown from the crisis, rather than market-driven factors. What is of significant concern is that 5.6m young are without employment although it is getting desperate for Spain and Greece.
Despite a improvement in unemployment figures in the US – 8.1% – 7.5% for the year to April 2013 – there still remains nearly two million Americans 55 and older who are still out of work. Paul Solman of PBS explores why older workers face joblessness and considerable financial strain.
The BNZ publish a report entitled “NZ at a Glance” which summarises the current state of the NZ economy. Here are some of the main points:
GDP – Construction is the main driver of growth over the next couple of years – mainly residential. Net exports is likely to take a hit as import penetration starts to build with as the economy recovers. GDP is forecast to increase to 3.6% in 2014 from 2.9% in 2013.
Unemployment – the current rate is 6.2% and the labour market is tightening with the increase in economic activity. Forecast to fall to 5.2% by March 2015. Tighter labour market will mean higher wage growth but also because of higher inflationary expectations as the economy recovers.
Inflation - quite subdued and the annual rate has been 1% or less over the last four quarters. A strong NZD, weakening commodity prices and low inflation globally are conspiring to offset domestic-demand driven price increases. Low inflation also becomes self-fulfilling to the extent that it moderates inflation expectations and price-setting behaviour elsewhere.
Current Account - The current account deficit appears to be stabilising in a 4.0% to 5.0% of GDP range. This is thanks largely to a resurgence in the commodity prices of the goods that New Zealand exports. This is a welcome development to the extent that it may appease nervous rating agencies for a year or so.
The New Zealand economic expansion is gaining in momentum. The rebuild of Christchurch is now building up a head of steam and this is supporting increasingly widespread confidence. Very low interest rates and a booming housing market are playing their part too. Eventually this will necessitate a response from the central bank but while annual inflation remains below 1.0% (and set to stay there for a while) it suggests that any such response might be some time in coming. Meanwhile, the NZD remains supported by money printing elsewhere and the relative strength of the economy here.
In the NYT it was stated that Moody’s are predicting that a tighter fiscal policy – cuts in government spending and increased taxation – will slow economic growth for 2013 by about 1.2 percentage points and prevent the unemployment rate from falling to 6.1 percent by the end of the year. Where is the effect of QE on these figures?
Some alarming figures have been banded about with regard to America’s infrastructure. It is estimated that over 700,000 bridges are rated as structurally deficient. In 2009 Americans lost approximately $78 billion to traffic delays – inefficient use of time and petrol costs. Also crashes which to a large extent have been caused by road conditions, cost a further $230 billion.
According to the American Society of Civil Engineers the US needs to spend $2.2 trillion bring their infrastructure up to standard. The Congressional Budget Office estimated in 2011 that for every dollar the federal government spent on infrastructure the multiplier effect was up to 2.5. Other indicators state that every $1 billion spent on infrastructure creates 18,000 jobs, almost 30% more than if the same amount were used to cut personal income taxes. – The Economist
Positive Externalities from infrastructure.
Investment in infrastructure has a lot of positive externalities – faster traveling time for consumers and companies, spending less time on maintenance. Research has shown that the completion of a road led to an increase in economic activity between 3 and 8 times bigger than it initial outlay with eight years after its completion. But what must be considered is that now is the best time to invest in infrastructure as it is very cheap – much cheaper than it will be when the economy is going through a boom period.
Here is a very good video graphic from The Economist. It looks at youth unemployment rates in the main economies of Europe and discusses the reasons why some countries have had much higher rates. Notice German’s low rate which was falling during the GFC which was mainly due to labour reforms which allowed small businesses to fire employees more easily and liberalised work for part-time and temporary work.
If you look at the labour market in Spain you would think that it resembles the German economy 10 years ago when Gerhard Schroder was its leader. Schroder was responsible for labour reforms that ignited the German economy into one of the strongest in Europe.
Spain is relaxing labour laws and cutting public spending and there are some positive signs here in that labour unit costs are falling as result of greater productivity. However German’s vocational education sector was a significant factor in its improved performance as the education and training system is more job orientated. Furthermore, with austerity measures in place and more to follow – pressure from the EU to introduce yet another sales-tax rise – Spain will find it hard to generate any sort of growth. But if it does grow will it generate any reduction in unemployment? Because of labour reforms some economists now believe that only 1.5% growth is required to bring about net job creation rather than 2.5% as previous.
Recently the minimum wage in New Zealand increased from $13.50 to $13.75 per hour. What are the arguments for an increase in this and what affect does it have?
An argument for the minimum wage is the fact that sometimes in labour markets there isn’t enough competition between employers and a monopsony situation occurs – see graph below. Here the minimum wage would protect the employee. However, is raising the minimum wage based more on reducing inequality as people are still struggling with the purchasing power of their incomes. In the US President Obama spoke in his State of the Union address about increasing the minimum wage from US$7.25 to US$9 – seems to be well targeted with regard to its impact. But ultimately how many people are affected by the increase in the minimum wage?
With the increase in minimum wage there is the belief that employers will lay-off workers. Evidence suggests the following:
1. Employment doesn’t fall much as the increase in wages lowers labour turnover, which raises productivity and the demand for labour.
2. The increase in costs for the employer will be passed onto the consumer in higher prices for goods and services
There is also the argument that wage increases will boost aggregate demand and therefore growth and employment. But in the USA this is estimated to increase consumer purchases by approximately US$15bn and when you think that the US economy is worth US$15 trillion is quite small in the scheme of things.
Economist Christina Romer stated in The New York Times that a more generous earned-income tax credit would provide more support for the working poor and would be more pro business at the same time.
Monopsony Labour Market
A monopsony occurs in the labour market when there is a single or dominant buyer of labour. The buyer therefore is able to determine the price at which is paid for services. Unlike other examples we have looked at, in this situation we are now dealing with an imperfect rather than a perfectly competitive market. The monopsonist will hire workers where:
Marginal Cost of labour (MCL) = Marginal Revenue product of labour (MRPL)
In order to entice workers to supply this amount of labour, the firm need pay only the wage Wq. (Remember that ACL is the supply of labour). You can see, therefore, that a profit-maximising monopsonist will use less labour, and pay a lower wage, than a firm operating under perfect competition.
In this situation the power of the employer in the labour market is of overriding importance and the employer can set a low wage because of this buying power.