Unemployment

Last Friday, the Labor Department said that there were 85,000 jobs lost in December, but that the unemployment rate was unaffected at 10%.  Scratching your head?  How can this be?

It would seem to be easy to calculate the unemployment rate.  Just take the total number of people who don't have jobs but are able and willing to work, and divide that by the total number of people who are willing and able to work.  Like I said, it seems simple.  But not to our government.  You see, they have multiple rates, the one they announced Friday is the lowest.  It is the number of people who are actively seeking work.  This number does not include those that have given up and live off the largess of government or some underground activity or those who are underemployed (think NASA type flipping hamburgers part time).

10% unemployment in most economic theory is bothersome, but not crisis.  However, if you add up the total unemployment, then the rate is closer to 22%, according to the New York Post.   I did some research and at the peak of the Great Depression the unemployment rate hovered around 25%.  Is there any wonder why, no matter what Washington is saying, We the People are feeling stress?  Couple that unemployment rate with the price of gas and you do have a crisis.  Washington can try to placate with made up numbers and rosy rhetoric, but until the people feel better, this economy will remain in the doldrums.

What can we do?  As individuals we need to continue to be productive if we have jobs.  We need to continue to spend, but not to a point of insanity.  If you need a new car, buy it.  If you need an appliance, don't try to make the old one last.  Go out to dinner with your significant other, take in a movie.  And stay positive.

By pulling back too radically on spending we exaggerate the problem.  It really is a spiral, you are in control.  If we as a group stop spending, then those who make the products slow production, increasing unemployment, causing employed to cut back on their spending, until an immense crisis is at hand.

Irving Fisher proposed 9 factors that made the Great Depression what it was.

1. Debt liquidation and distress selling
2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business, precipitating bankruptcies
5. A fall in profits
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence
8. Hoarding of money
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

The housing market sure shows, or at least showed distress selling.  The loans were written off, contracting the supply of money.  Our houses are worth less than they were at our peak, and businesses are struggling.  We are not totally seeing a fall in profits, but the year is young.  There is a general lack of confidence in the economy, although there doesn't seem to be evidence that people are hoarding money to a high degree.  Interest rates are extremely low.

Spending is up, but it is driven mostly by commodities, oil and food.  It is imperative to try to control the cost increases of both to end the spiral.  By spending our cash on those items to the exclusion of others causes imbalance and economic turmoil.

Government is not the answer, it is the problem.  By blocking new oil leases, it keeps supply stagnant and prices higher than they need be.  Higher oil prices affects the costs to produce food and get it to the store, as well as encouraging things like ethanol, which takes food stuffs that we could eat and puts it in the tank as fuel, and it is not as efficient as oil based fuel.

There is good news!  The business cycle has consistently spun.  Recessions and depressions help to improve productivity, cull the parts of our economy that are inefficient and leads to a boom cycle after.  The goal is to survive the bad times.  Since 1980 our economy has been very productive on the whole so look forward to the comming expansion!  And as the Clinton Administration said:  It's the economy, stupid.

What's this about gas prices?

Wow, or is woe, gas prices are going up.  Why?  Is it the fact we are running out of oil?  How is supply and demand at work?  Or is it those crazy speculators?

Speculation has been around since the very beginning of time.  People will try to hoard things that they believe will be in short supply.  Whether it was wild rice of the first hunter gatherers or oil today.  We just complicate the process with our financial systems.  Supply and demand are at work as well.  And oil production seems to be sustainable for the foreseeable future.

However, when speculators look at the market, they see OPEC controlling the supply of oil.  They assume there will be a shortage.  They also see the unrest in the middle east, and they see supply issues.  These are major things that lead them to believe that oil will be in shortage, therefore they are more willing to bid up the price of oil.  But has any of these things actually happened?  No.  Iran is saber rattling, Eygpt, Iran, Afganistan, Syria, and Libya seem to be in turmoil, some of which is our own fault.  Since the Mid East is a major supply of oil in the world, this volativity puts pressure on the oil supply, even though no shortage exists today.  So what can we do about it?  Attack Iran?  Leave Iraq and Afganistan?  Buy off the Libyans and Syrians?  Let Israel do the dirty work?  Or, how about, none of the above.  Since the supply is not choked off at present, we have time to set a strategy to combat it, that hopefully will not include the loss of human life.  It requires us to think outside of the box.  And an important thing to reiterate is that -- it hasn't happened yet.

Why is that so important?  It is important because our President and other political leaders say there isn't anything we can do to affect the near term oil supply.  So it isn't their problem, we need more electric cars and other green energy solutions so in the future, we will be secure.  And I agree to a point.  There is one thing our government can do to affect oil supplies, and they can do it today.  In a very few weeks we would see prices of oil decline, and gas becoming more affordable.  And from a political standpoint would probably cause President Obama to be re-elected.  But it doesn't fit the President's agenda, so it is unlikely he will do it.

What is the one thing you ask?  Announce to the world that the United States is opening up oil leases across the country, off shore, and inland.  However, this is what the political response is:  It will not have an immediate affect, those leases will not produce for maybe 10 years or more. 

As I said in an earlier post, economics is a social science.  Imagine for a moment you own a business, let's say a gas station, on a corner somewhere in town.  You find out that a major chain has started the process to build and open a competeing station across the street from you.  What would you do?  I guess one answer might be to increase your prices, then close when they open.  Or maybe, you might consider slightly lowering your prices, to minimize the affect on your business when they do open.  Maybe you remodel your store, or reevaluate your selection of goods that you carry.  The goal of the second is to try to stay in business to keep your income; and be able to live in the long term.  Countries are no different.  If that announcement was made, what would OPEC do?  They could, as the first example, cut production and drive up prices, which when the new oil becomes available will drive prices down through increased supply, and with the strained relationships, cause OPEC oil to be less desirable.  And it would cause American Oil Companies to expedite the production. 

Or, and there is history to support this, they will increase production to a point that it doesn't make sense to open new supplies.  I lived in Illinois in the 1980's, I saw oil pumps cranking away, until world supply increased to a point that those wells were losing money.  The owners shut them down rather than lose money.  The wildcard here is OPEC.  They set production goals for their members, which in good economic theory affects supply and demand.  The immediate impact of increased OPEC production, and speculators seeing an increase in supply, will bring prices down. 

One final thing, we do need to follow through on producing more oil domestically for the long term.  Oil companies need to be encouraged to continue exploration in North America, rather that take the easy route of just letting a ship dock and off load oil.  How we do that is a subject for another post.

Why Economics is a Social Science

In the previous post, I stated that economics is a social science, no mater how badly economists want it to be a physical science, it is not.  What do I mean by this?

Economics is the measure of an economy.  But what is the economy?  Simply put, the economy is a group of people bound together socially.  Maybe you are a truck driver, you get paid to drive a truck.  The money you earn you take to the economy to find things you are not.  The truck driver might spend money at a grocery store, or a barber, or even an electronics store, finding the things he cannot make like food, TVs etc.  The money he leaves there then is spent by those parts of the economy for things they are not.  Like to pay a truck driver to deliver food from the farmer to the grocery store.  In its simple form, you are the economy.  It is what you do with your money that determines economic growth, or recession or even depression. 

Think for a moment, how do you determine what to spend, where and how much?  Of course you need a place of shelter (mortgage or rent), you need water (water company bill), food (grocery store or clubs) and the ability to communicate are essentials for human life to thrive.  Do you not apportion your money to cover these very basic things first?  What is left over then is either saved or spent in a discretionary way.  "Hey Honey, can I buy a new car?"  It is mostly what each of us does with that left over segment that is what we need to discuss here.

For instance, your best friend is laid off.  Your neighbor losses his house to foreclosure, and your parents need to go to a nursing home.  Think of the frame of mind you would be in... You would probably not even consider a new car under those circumstances, its just too risky.  But what about less expensive things like a new TV or even a new bed.  Depending on your ability to accept risk, you may or may not do any of those, or some of them.

Now, add to that what every other person in the world is doing, based on individual circumstances.  When a majority of people are worried about providing shelter, food and water, the economy goes into recession.  Why?  Because they stop spending, companies lower production because they are not selling as much, which means more lay offs or under utilized employees, which can cause the spiral to deepen.  The economy does not grow.

Now let's assume that your best friend just found a new job, your neighbor sells his house at a 30% profit after just one year, and your parents are aging well, and have enough money to care for themselves until death.  Easier to spend that discretionary money, isn't it?  You feel better that the basics are covered, then it is time for the extras.  TV manufacturers hire employees to make more TVs, grocery stores carry more convenience types of foods, and fancy bottled water sellers are able to sell better versions of what you have coming out of the tap.  The economy grows.

So what I see is that the psychological mindset of the people making up the economy is the most important factor in whether the economy booms or busts.  Which is exactly why FDR was able to encourage people saying "we have nothing to fear, but fear itself" or Ronald Reagan "I see America as a shining city on a hill..." And interestingly, those two are political extremes of each other.  Both understood econ101.

Just a beginning!

It is a political year, 2012.  In November we have Federal and State elections.  It is a year in turmoil, especially economically.  Some economists are aloof, they just know that the great unwashed know little about economics, it is their job to enlighten them.  I take the other side, the American public are some of the most economically savvy people in the world.  Our whole system ensures that.

Some people assume the economists are right, and don't even try to figure the economy out.  There are others who are pretty knowledable about economic things, but let the alphabet like GNP, and GDP etc. get in their way.  These are the audience we seek here.  One thing you will never see here is complicated equations and meaningless terms.  Economics is a social science, no matter how badly economists want it to be a physical science, it is not.

At times this blog will get political, because I do not know a way to separate the two.  I do come at economics from an Adam Smith perspective, and I firmly believe, unlike the Keynsians, that even our government, perhaps the largest in the world, does not have enough money to stimulate our economy in any major way.  They can only cause issues.  I also believe it is government's job to set the rules for economic activity, to keep the thieves at bay.  However, these should be rules like with any other game, specific and not open to interpretation, and perhaps most importantly, unchanging.

We will endeavour to search the news each day for economic stories, post a link to that story, and then try to explain in a way that most will understand the economic theory involved.

Thank you for joining us, let the fun begin!