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Jobs, Recovery, and the Barrista
From The Daily Capitalist
A private jobs survey came out Wednesday morning from ADP which said the private economy lost another 23,000 in March. This was the smallest loss of jobs since February, 2008. Jobs in construction (-43,000) and goods manufacturing (-51,000) were hard hit. Gains came from the service sector (+28,000). ADP's survey has a base of 22 million workers.
This contrasts with the Wall Street Journal's survey of economists forecast of a 50,000 job gain. Bloomberg's survey expects 184,000 jobs, including government jobs, with a big boost coming from temporary Census hiring. The Bureau of Labor Statistics report comes out Friday. Stay tuned.
This made me think about jobs--what they are and how they can be increased.
I read an excellent op-ed piece on Real Clear Markets about the failure of the American Recovery and Reinvestment Act, the $787 billion orgy of Keynesian stimulus. It was written by econ professors, George Bittlingmayer (Kansas), Arthur Havenner (UC Davis), and Thomas Hazlett (GMU--econ and law). Their point is that the bill did nothing to stimulate employment, as advertised, and the new "Jobs Bill" is an admission of their failure.
Counter to the predictions put forward a year ago by the Administration, when it claimed that "more than 90 percent of the jobs created are likely to be in the private sector," U.S. companies employed 3.9 million fewer workers in January 2010 than they did one year earlier. Public employment bucked the trend, staying constant even as governments contended with sharply reduced tax revenues. While the jobs held by those 22 million public workers helped support many families, the "stimulus" failed to trigger private sector employment growth. ...
This implies a price tag, at the median estimate, of about $800,000 per job. These forecast job gains are not permanent, but temporary. The Administration's January 2009 forecast was that the A.R.R.A. was needed to reduce the path of unemployment for five years, when the unemployment rate - if we did nothing - would decline to the level projected with the "stimulus." Using this five-year time horizon projects annual costs of approximately $160,000 per job.
Nice work if you can get it.
One would think that the advocates of Keynesian stimulus would admit failure, but like most fundamentalists, they are more interested in doctrine than results. We now see that they are panicking because their policies aren't working. Paul Krugman recently recommended that we erect a tariff wall against Chinese goods in order to force them to devalue to yuan and make U.S. exports more competitive in the world market. In effect, he is asking us to declare the economic equivalent of WW III. The devastation to the world's economies would be catastrophic. Wow. But that's another economic fallacy.
The bills to stimulate the economy are all based on a fundamental economic error and we, our children, and generations of grandchildren will have to pay for it.
Keynesians have a talent for giving a name to things that are often the opposite of what they mean. "Job" is a good example. To Keynes and his followers a job was something that you paid someone else to do. Simplistic and correct, until you think about it. It's more complicated than that. Keynesian stimulus actually suppresses economic activity and thus employment.
Let's say I open a coffee bar. At first I am the only barrista but my lattes are fabulous and word spreads. I figure if I hire another barrista, I can increase sales by 80%! I've been saving money from my profits as a cushion against potential losses so I have the money to pay the new guy until the profits kick in. And, lo, it happens. I pay her $12.50 an hour and still I can add another 25% to the bottom line after costs. She uses her wages to buy a new car because now she can afford the payments. Let's forget about payroll deductions, taxes, and all that for now to keep things simple.
That is a job. I made a profit. People wanted my product and willingly parted with their money to get it. As long as things go along nicely and I keep on top of the business, the business and her job will continue.
Here's what Keynesians think is a job.
Let's say there is a recession, as in today. It seems that people are reluctant to pay $3.75 for my wonderful lattes and business drops off, sharply. In order to stay in business I fire the new barrista and go back to being a one person shop. I have contributed to unemployment because you coffee drinkers have cut back your morning lattes.
I hear about a new jobs bill. The bill says the government will pay me $7,000 to hire a new worker. If I pay my barrista $26,000, my actual cost will be only $19,000. I take the plunge. What the heck, I'm doing good for society by hiring someone. It turns out my sales are just enough to cover my costs for this person since people really aren't buying more.
That's good right? No.
First of all, the barrista is not productive. Only because the taxpayers are giving me more money does it work for me. But that doesn't make her effort economically productive. It's a losing proposition and really, just a waste of capital. Not my capital, but someone else's. It's the same to me if I just worked alone.
Which brings up my second point. Where did the money come from? This isn't supposed to be an obvious question, but we all know the money comes from taxpayers. Governments never make money, as I was doing before the recession hit. They just spend money. Your money.
No one asks you what you were going to do with your tax money I wasted on the barrista. Perhaps you were saving up to buy some equipment you saw for a sweet deal which would make you more productive. We'll never know, but the unseen consequence of this is that your capital was wasted and the potential real economic growth from your dream of expanding will never be realized. Nor will any new jobs which you would have created.
No net economic gain.
But what about the barrista? She was unemployed before isn't it good that she has a job? Won't this stimulate consumer spending because now she has more money to spend? No.
She was on unemployment, sharing an apartment with her sister, and just getting by. The car was repossessed. The unemployment funds came from state unemployment insurance. Then she got federal assistance when that ran out. Again, tax money supported her, so with a job she might be better off with the job, but she's spending someone else's money, a form of welfare.
But now she has moved out of her sister's place and has a new apartment on her own. She can't buy a new car because her credit is bad. She's spending money right? That has to be good? But is there any net gain in economic activity? No. Since she's not productive, she's just living off of stimulus money which was someone else's money, a form of welfare. Welfare is what is called a "transfer payment" from the government (giving someone tax dollars).
No net economic gain.
And, it turns out that after 6 months the stimulus money ran out and I had to let her go again.
That's what Professor Krugman believes is a job. It's what is called faith-based economics.
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i say we declare a moratorium on use of the phrase "taxpayers' money" until the US deficit at least gets below 5% of gdp.
the truth is, the "me" generation of american taxpayers aren't paying for diddly. they're just consistently voting for borrow and spend populists, who dominate both major parties, and not worrying themselves about how it might be repaid. the AAA rating is untouchable, right?
the AAA rating is untouchable, right?
Depends highly on the willingness to use political means to ensure it. That's already been proven by the 2008-current bailouts.
We are in the midst of a great coffee bubble.
Props to my Austrian homies...
The other problem with subsidy systems is that the free market will find a way to take advantage of it, and it will always benefit auxiliaries that nobody had any clue would happen. It happens all the time. While these programs are intended to produce a certain outcome for a certain population, they are created by morons who have no foresight whatsoever. They can't see past the next election, and don't understand that their current job is to protect the US and its citizens, not destroy them.
Businesses that are already on the rocks aren't going to spend $19k (+bennies, training, unemployment insurance, SS+Medicare match, etc) for a $7k bribe. Just not going to happen. That leaves the healthy companies, and they will follow the valley road, and decrease their costs as much as they can. Another entitlement plan that solves no problems, makes existing ones worse, and creates new ones.
As a business owner, what's to stop me from doing one or more of the following:
1. Laying off an existing worker, then hiring him back at the same wage, thus pocketing the difference?
2. Laying off a low-skill existing worker, and replacing him with someone else at the same wage?
3. Laying off a high-skill worker, and replacing him with a fresh college or votech grad at half his wage? (Think of the downstream ramifications of laying off a $60k/yr engineer who owns a home, financed to the hilt and pays income taxes. It would cut the govt's income tax in half, and spit out another foreclosure on the market.)
4. Laying off any worker, and replacing him with a highly-trained person who in a bad economy would die for any job at a fraction of the going rate?
5. Laying off any worker and not replacing him at all, because my taxes have increased to pay for someone else who is taking advantage of the entitlement?
The result of any of these policies would be a net gain for the business, and a net loss for taxpayers. Especially 3 and 4, with 5 being the most gain for the business if measured by the loss of hassle required to comply with any government programs at all. No employee, no unemployment insurance, SS match medicare, mandated health insurance, etc.
All of those are why you're part of the problem and not part of the solution. Doubly so if you've got a captive market for work. While you might have a noble goal, the route is not.
Constrain the pool such that you can't tell what formal education they've had or prevents any attempt to get around immigration law restrictions on non-US work.
There are plenty of ways to make your flight from hiring US folk Icarian in nature.
If any of those plentiful ways include more government interference, then yes, the flight would certainly be Icarian, and your kind tendencies would cause far more pain than you ever intended. That's the closing page of every entitlement storybook. There is something worse than the entrepreneurial class playing silly games like this to get around regulation - or even profit from it. And that is to not be in business at all, and providing no jobs.
Interestingly, the $7k in question is intended to be a carrot, but it's not a magic carrot. That money either comes from a finite pool of tax resources (in many cases that are yet to be realized) or printed money or borrowed money. If the first, it's immoral to tax my profit in order to subsidize a competitor who can't make it on his own merits. If the second, it devalues the very dollar I am paying the barrista. If the third, it spends money it doesn't have for something that has a negative return, with interest. It's all theft.
There is something worse than the entrepreneurial class playing silly games like this to get around regulation - or even profit it. And that is to not be in business at all, and providing no jobs.
I wish there was a nice answer, but there really isn't one either way(interference or not). The ~20% that is unable to find work are going to do something(legal or not). Without making it deliberate "make-work", it would be far better to maximize voluntary employment and minimize crime(and not by the corrections system).
If you want a more level taxation rate, then fine. Curtail a lot of the overkill environmental regulations, fine. If you want to streamline the process(while minimizing immigration law fraud) by making it easier to start businesses, fine.
If you're dealing w/ people whom use the(complete) lack of political freedom and a very debased currency(vs the dollar), you don't turn your nation into a perpetual employers' market. They should be subject to the upward forces in the US as well as the downward ones(and not simply allowed an offshore circumvention, unavailable to most US/developed world citizens).
If you want to go offshore, do it when you have a real problem(<2% U3, 2% U6 w/o using permatemps to inflate the count), not when you have "full employment"(2003-2007 numbers). While it may be far below pre-recession levels of "full employment", it makes sure that there is an actual problem.
With all that said, the $7k credit isn't a good situation at all. It invites too much creativity to all the wrong ends.
Until you create your own wealth, excess cash over what you need for your own expenses, there is no wealth created.
How many people now living, have ever begun a business that employed 1 employee, 2, 4,8,16, 2,000 people? OR for that matter how many dead have ever done that?
Beginning an enterprise that requires the brains and backs of others is one holy hell of a tough job to do successfully and for long periods of time. And so tiny a few are any good at it, have the luck that's required to get it done, that it's a wonder we got this far taking in each other's laundry thru offering our services to each other. The difference in the prices of those services is an unconscionable discrepancy, wherein a CEO now charges 300 times what it's lowest paid worker gets. In some case I'm certain its a 10 million times more. That disparity is what needs addressed.
How is another story altogether.
Worse yet, we now have to pay interest on the transfer payments!
Government malinvestment, through its many channels, many of them "hidden" costs, hidden in the sense that politicians have no incentive to open their eyes, have gutted the tax payers of America.
When you look at the magnitude of the abuse and stupidity, it is clear that no capitalistic economy could survive. From a standpoint of investment, the Government cannot own private markets (real estate) and corporations and hope to acheive efficiencies which promote growth. They can't even address the GSEs continuing losses effectively.
In March we able to sell $333B in debt, thats good, I dare say amazing. But by my calculation for FY2010 we will have to sell an average $183B per month. You can see that this is unsustainable for any length of time. Also, I have not figured in deficiencies in SS pay-as-you-go, and I have not amortized any of the FED, GSE, or TARP losses. In addition I have not factored in any relative net loss in ARRA over FY2009. If we make it to FY2011 without more QE I will be very impressed. But really, without massive cost cutting the search for debt buyers will be the number one priority of the FED and Administration.
Mark Beck
Oh come on. It's like JMK said. You hire one bunch of guys to bury something in the ground. You hire the next bunch to dig it back out. When you're done, you get X2 the stimulus!
That's about what the banks did(and still appear to do) with loans.
That's actually what banks do with treasuries. They borrow at the Fed rate. Buy T-Bills to give the Fed cash to lend and pocket the spread between the Fed rate and the T-bills. Then they borrow more funds at the Fed rate....
Paul Krugman recently recommended that we erect a tariff wall against Chinese goods in order to force them to raise the value of the yuan and make U.S. exports more competitive in the world market. In effect, he is asking us to declare the economic equivalent of WW III.
The problem is that Krugman actually could be right. Not something he's been able to be but supporting such a regime(totalitarian China) is not helping the US and its citizens whom seek work.
As for the devastation, it would cause China's current regime to collapse(and possibly any other targeted countries). The US on the other hand, would take a bit of pain but not enough to collapse the country. They're hanging by threads, guns and kidneys of dead critics. We're not dependent on a ton of company towns, nor do we need to kill our critics.
I think the 70% of the population that shop almost exclusively at Walmart would take more than a bit of pain if those items all doubled in price overnight. No trade war is good. It justs hurts some players more than others.
Wal-Mart would just do what it did when Sam Walton was alive in the US. They'd switch their suppliers to as many US/EU/etc. products as they could.
It'd hurt their "high-end" products(which usually are middle of the road), but doubling wouldn't be as painful as civil war.
jobs and such
March Unemployment Rose to 9.8% Net of Census Hiring
- Official Reporting: BLS U-3 Held at 9.7%, U-6 Rose to 16.9%,
SGS Rose to 21.7%
- March Employment Gain of 162,000 Was 114,000 Net of Temporary Census Hiring
- Economic-Deterioration Signal Intensifies
shadow statistics
“First of all, the barrista is not productive.”
Of course she is productive. The $19,000(minus the $7000 subsidy) salary the barrista
garners is from true market activity-a net economic gain. She will pay taxes on her
salary and spend her income into the general economy.
The coffee shop business owner might not make a profit on the cost of the barrista
salary even with the tax credit but that is the risk of business.
If the employer's revenue does not increase with the addition of a new employee by an order of magnitude large enough to at least offset the cost of paying him/her then no new wealth has been created. If, without the subsidy, the employer would be incurring a loss from paying the new hire then it is entirely possible wealth has actually been destroyed, because a) the productivity in the barrista industry has not been improved, and b) capital has been reallocated from one sector of the economy (through taxation) where it might have been productive and lead to capital accumulation, to another one where it isn't (through the subsidy). Sure, the employee benefits because she's being payed for labour she otherwise may have been unable to exchange for a wage but this does nothing for the economy (and "fixing" the economy is the goal, is it not?) because that money would inevitably have been spent at some point, probably productively. This, I believe, is little more than government enforced capital consumption. The economy shrinks when you consume what would otherwise be used to produce.
It is at this point that Keynesians run smack into the knowledge problem. A central planner simply cannot allocate capital as efficiently as private, competing entrepreneurs attempting to predict the future conditions of demand with varying success. The achilles heel of government intervention is that, by its very nature, a bureaucracy must "paint in broad strokes" whereas individual competing firms are capable of allocating capital in much smaller increments. Put bluntly: Entrepreneurs with private profits and private losses can cock up more often with smaller, more isolated consequences, allowing those left standing to pick up the pieces and basically learn from the mistakes of others. "What's that? Bob's heavy equipment business failed in Nowhere, Saskatchewan because the market appears to be saturated? Guess I'd better look somewhere else to start my next branch but I'll snap up some of the stock he's liquidating first!" Contrast this with the Government's "invsetment" in GM. Maybe another company unhobbled by the UAW would have been able to acquire General Motors' production facilities and put them to competitive, productive use. Instead the same-old inefficient model has been perserved.
(Returning briefly to the function of entrepreneurs and their success/failure: I have not been personally involved in the world of business for any remotely significant amount of time but I learned VERY quickly that who you know is imperative to success if for no other reason than simply the exchange of information.)
In a nutshell the problem is this: Government bureaucrats cannot apportion capital to where it will be put to the most efficient use because they cannot deal with firms on an individual basis to determine where said capital would be best used. Bureaucracy does NOT efficiently scale up to where such investigations would be possible. Even if it could it would be impossible to accurately apportion capital with any kind of consistency because humans cannot predict the future state of demand. Cash for clunkers briefly improved the bottom lines of American auto retailers, but the net effect was to send the majority of the money to the Japanese economy instead of stimulating American business...D'oh!
The fact that there is no net economic gain means that the activity is not profitable, thus no new wealth is created. At best one could say the barrista's activity was neutral, but there is no economic justification for her work without profit. All that is happening is that the taxpayers are subsidizing her activity which means the $7,000 taken from them won't ever end up being applied to something that would be productive (i.e., profit making).
I disagree with the fact that the gov't does not make money. They make a ton of money gunning the SPY's and/or selling Citi stock.
Not to mention the Federal Reserve makes a few billion annually that gets posted back to the Treasury. Small change in the grand scheme of things, but "real" money nonetheless.
cyan
government ..fed .make money like a parasite draws blood off its host
where is the voluntary ... a hidden gun is used lol
The economic equivalent of WW III has already started and they are winning and the results are catastrophic. They have kept their people in poverty and the resultant low wages are used to destroy our middle class. Are we expected to wait until their wages rise to developed world levels in order to fix this? More likely we will meet in the middle with a permanent decline in US living standards thanks to the inept, corrupt government of the world including ours.
That's also what Econophile wants. They don't care about the decline if it was "supposed to happen" as a result.
Thanks & well done, Econophile.
Life's too simple for the academics. They need to obfuscate to keep their phony-baloney jobs going. Then the politicians glom onto the "stimulus" concept to make us think they're 'doing something' and to extend their power. Economic life gets more complicated (read: expensive) by the year, because we must add another 2K pages to the tax code, 2K pages to the laws of the land and another 2k bureaucrats to 'manage things'. Meanwhile, as you indicate, our children and grandchildren will pay for this 'stimulus' until the end of their days. We're selling them into debt slavery to our own government. We truly live in an Orwellian society.
11 0n a scale of 1 to 10
You could, in an ideal capitalist society, advertise for a barrista at an annual salary of$18,500. Whatever that works out to on an hourly basis.
That said, however, I'm not even sure your coffee business is really adding anything to the net national wealth. You're no mining, fishing or farming. You are merely adding demand, though hopefully spurring some coffee growers elsewhere to step up production.
The point is, if a rather large portion of an economy's activity consists of little more than "stirring the pot" ~ creating demand but little or no direct wealth ~ then as a collective society we are barely better off, if at all...
You could buy Credit Default Insurance (Swaps is total Bullshit since there is no swap of anything, talk about mislabelled fraud) on coffee futures.
Then you'd be adding employment to the FED. Never mind.
coffee shop ..but better off... net .. coffee beans bought ,,, paper cups , rent paid , all on the premise of ones own capital,, Risk.
providing service that requires no gun at head ,,
division of labor at work ,, that is good,
mr kredit ,, what do you do, and you are free to add to national wealth in any way you please ,
start any company that pays wages..
well lol
Nothing wrong with it at all...it's called freedom as you imply. I don't mine, mill or chop down trees either. People voluntarily pay me for my services too.
But you know the old story about everyone in an economy doing one anothers' laundry. Maybe not in ONE country...but even on a worldwide basis, wealth has to be actually PRODUCED somewhere, not just sold to the next guy endlessly...
its called division of labor a person does what he does ,, sans government tit ,
well glad we all do not do the same laundry lol
Learn to write in complete sentences if you want people to take you seriously. I'm putting you on my browser's blacklist so I don't have to see your moronic comments anymore. Buh bye.
a employed merkin no doubt lol
reducto the absurd
so go ahead ,, when you chat with folks make sure the sentence structure is complete, take your red pencil put it back in the plastic case in your shirt pocket ,, with all the other pencils of intolerence .
Nice piece Econophile.
DavidC
Thank you for a lucid example of how compassion that is based on spending other people's money rarely accomplishes anything. If the do-gooders had to spend their own money, the world would be a safer and saner place.