"Recalculation" in the Economy---Yes, YOU are being Recalculated as we speak! A must read

     The more I read about this concept of "recalculation" the more I am intrigued and believe it needs to be more understood by students.  In the past, creative destruction pulled everyone along for the ride and opportunities, seemingly, fell into peoples laps relatively easily.  As old industries faded away, people were able to move into new and better employment situations with little friction. Look at the years between 1980 and 2000, for instance.  So much changed so quickly, but employment and opportunity rose dramatically. Could we say, by and large, we had a "good calculation" or resources to their most productive uses in the 80's/90's (technology driven advancements, etc) and the 2000' s were marked by a "bad calculation" of resources (housing, financial instruments,etc)?   Something has changed and there appears to be a disconnect between  how we currently allocate our resources domestically and how we work or train/prepare for that work.
    The following 16 points go a long way in understanding the underlying structural issues we face in terms of employment as it relates to the output (production) of goods and services.  These points are not the "be all to end all" in the discussion (politics will inevitably jump in), but it is a terrific starting point.  Well worth reading and pondering...Do you disagree with any of the points??

The Recalculation Story: A Summary--(Arnold Kling)

1. Try not to think of macroeconomics in terms of equations or in terms of aggregate demand. Try to learn to think in a new language, rather than translate from the Recalculation language to something you are used to.

2. "Economic activity consists of sustainable patterns of specialization and trade." That is the mantra of the Recalculation Story.
3. Note how difficult it is to squeeze patterns of specialization and trade into a model of a single representative agent. Robert Solow has more good points.
4. If you cook for yourself and I cook for myself, that is not economic activity. If we eat at each other's restaurants, that is economic activity. This is true in the national income accounts, and it is justifiable. It is better to have millions of people working for you to produce your food, computers, health care, and so on than to produce them for yourself.
5. Part of the challenge of creating sustainable patterns of specialization and trade can be described as a matching problem. Think of two decks of cards, one with a list of workers with specialized skills and one with a list of occupations that utilize specialize skills. If you draw two cards at random, the chances are that they will not match. The skills of the worker will not match the skills required in the occupation. In that case, the marginal product of the worker in that occupation is very low, and the worker is unemployed.
6. The economy's calculation problem is to sort the two decks in ways that match workers to occupations in which they have value. This problem becomes more complicated with each increment of technological progress. The number of occupations has increased, because even as some occupations become obsolete, even more occupations emerge as useful. Also, the amount of human capital needed for many occupations has increased.
7. The patterns of specialization and trade are interdependent. In some instances, there is negative feedback. A new pattern that involves automobile production has negative impact on horseshoe makers. In other instances, there is positive feedback. A new pattern that involves automobile production has a positive impact on gasoline refiners.
8. Economic profits are what indicate a sustainable pattern of specialization and trade. Ultimately, the way that we know that we have a good set of matches of workers and occupations is that employers are not losing money.
9. The sustainability of patterns of specialization and trade is always changing. New opportunities emerge, and some older patterns become obsolete.
10. A danger in the economy is that an unsustainable pattern will go unrecognized for a long time. In the recessions of the U.S. between the end of World War II and the 1980's, excess inventories were accumulated. In the most recent episode, excesses in housing construction and mortgage finance went unrecognized for a long time.
11. If the excesses are merely short-term inventory problems, the old patterns of specialization and trade can be restored once the inventories are worked off.
12. However, if the old patterns of specialization and trade are not sustainable, the economy faces the Recalculation Problem. New patterns of specialization and trade need to be created. While the economy is creating new patterns even in good times, when it faces a Recalculation Problem it cannot create new patterns rapidly enough to prevent widespread unemployment.
13. Government can create temporary jobs for the unemployed. However, that is not the same thing as creating sustainable patterns of specialization and trade. For example, if the government subsidizes a firm that builds solar panels and those solar panels are not efficient, then this does not really represent a sustainable pattern of specialization and trade.
14. The more that patterns of specialization and trade involve government direction of resources, the greater the risk that those patterns are not sustainable.
15. It is possible that lower real wages will help to solve the Recalculation problem. However, generally speaking, when you pick a card from the worker deck and a card from the occupation deck, the match is either a good one or it isn't.
16. The production process has become more roundabout over the years. Fewer workers are engaged in hands-on production of output. Instead, they are engaged in building what Garett Jones calls organizational capital, as indicated by functions such as marketing communications, management reporting systems, or corporate training. This means that the relationship between output and employment has become looser. It means that patterns of specialization and trade reflect not just what goods and services are produced but how they are produced.

With all the infusion of money into the economy, why do we not have Inflation? Hello! It's due to Velocity of Money! Did you not know that??? Nice chart enclosed.

Below is an excellent explanation of the velocity of money and its impact on economic recovery AND why we are not experiencing inflation with the increase (real or perceived) in the nations money supply.  Velocity of money is simply how many times the money supply turns over on itself to purchase GDP.  If GDP for a given year is $14 Trillion and there are only $7 Trillion in circulation, how can that be? The $7 Trillion turns  over on itself twice to buy $14 Trillion dollars worth of "stuff".  Some dollars turnover more than others (some sit in the seat cushions of your couch) and others circulate many times over.  I will do another blog entry to further explain this in the context of an equation called the Equation of Exchange...Fun! Fun!

Bartlett: Hoarding Cash Could Stifle Growth and Halt the Recovery

""The Wall Street Journal reported somewhat breathlessly on June 10 that nonfinancial businesses in the U.S. are sitting on $1.84 trillion in liquid assets, or 12.6 percent of the gross domestic product (GDP). The implication is that this money could immediately be mobilized to invest and create jobs. This isn’t quite so, but excessive cash holdings by households, businesses and banks are symptomatic of a fundamental problem plaguing the economy: the low level of monetary velocity.
The $1.84 trillion figure is a bit misleading because businesses always have a lot of liquid assets. At the end of 2007, before the financial crisis hit, they were sitting on $1.53 trillion in liquid assets, which represented 11.1 percent of all their financial assets. At present, liquid assets represent 12.9 percent of financial assets, roughly comparable to the 12.5 percent share in 2005.
It’s difficult to say what would be a normal percentage for liquid assets, but it’s doubtful that businesses are sitting on much more than $150 billion or so of precautionary liquid assets . If they were to spend these funds on hiring or investment or even dividend payments to shareholders, it would help the economic situation, but not by all that much.
However, to the extent that businesses and households are hoarding cash it reduces the rate of turnover of money in the economy—the number of times dollars are spent in the aggregate—which economists call velocity. In the simplest terms, velocity is the ratio of the money supply to GDP in nominal (money) terms.
For many years, economists treated velocity as if it was a constant like pi (π), the ratio of the diameter of a wheel to its circumference. Throughout the 1960s and 1980s, velocity was fairly stable at around 1.6/1.7. But in the 1990s, it began to rise due to financial innovations, such as debit cards, that allowed people and businesses to use their cash more efficiently. Throughout the 1990s, the velocity ratio was more than two, meaning that if you multiplied the money supply by two, that would approximately equal GDP.
In the 2000s, velocity fell to the 1.8/1.9 range. On the eve of the financial crisis it was about 1.93, as shown in the table. But in mid-2007, it began to fall, hitting a low of 1.68 in the middle of last year, a level not seen since the 1980s

A decline in velocity has the same economic effect as a decline in the money supply, which creates deflation—falling prices. This is what happened during the Great Depression. At that time the money supply fell because there was no deposit insurance, so when banks failed, their deposits literally disappeared. (Most of the money supply is in the form of checking accounts or demand deposits that exist only in an accounting sense.) Between 1929 and 1933, the money supply shrank by 30 percent. Since the price level is a function of the quantity of money times the goods and services available for sale, this caused the Consumer Price Index to fall by about 25 percent.""

Which State has 5 counties in the Top 10 in terms of job growth in the last 10 years? Answer within...

According to CNN Money, these are the Top 10 Counties in the country that, on a percentage basis, have experience the largest job growth...Look where 5 of the Top 10 counties are located.  I wonder why that is? Click HERE to see more of the list and descriptions. (HT: Carpe Diem)

1. Lincoln County, SD
2. Williamson County, TX
3. Hays County, TX
4. Douglas County, CO
5. Fort Bend County, TX
6 Webb County, TX
7. Collin County, TX
8. Broomfield County, CO
9. Hamilton County, IN
10. Cache County, UT

Does an increase in the Minimum Wage hurt teen employment? Textbook says it does, but maybe Grandpa has a different opinion.

In today's WSJ there is an editorial relating the recent increases in the minimum wage to an increase in unemployment among the teenage population.  Every introductory economics textbook tells us this relationship exists, but there is some controversy (at the margins) about how much of an effect it actually has.  As with many things economics lately, there is another variable(s) to consider.  Look at the chart below....

Previous Blog Entry

Statistically, there are more 65+ people in the job market at the lower ends of the pay scale then teenagers (a relatively new development, demographically speaking.  So, perhaps it is not as cut and dry to say that the increase in the minimum wage has reduced teen employment.  Perhaps "the olds" are being employed at a higher rate than teenagers.  I don't know the answer, I just pose the question that the WSJ does not address  I suppose one would have to look at the hiring rate of the 65+ group and see if there is a connection.  Might be a good research paper for someone...

Letting the Bush Tax Cuts Expire--Primer on Marginal Tax Rates...It is FUN!...Really, it is!!

     Congress is in the midst of deciding to extend or let expire the "Bush Tax Cuts" of 2001-03 (In the original law, there was a "natural" expiration date of 2011).   These tax cuts were initiated as part of a fiscal stimulus plan to get the economy out of a recession that further deteriorated as a result of the events of 9/11.  The tax cuts were on Marginal Tax Rates applied to individual  incomes. 
     Marginal is a fancy word economists use to mean "each additional". In the US we have what is termed a progressive tax structure, which means the more you earn beyond certain levels of income, a higher tax rate is levied on each of those additional dollars.  Currently we have 6 levels of income that when each level is exceeded, the tax rate applied on each additional dollar is higher than the tax rate on the previous level of income (confusing, I know...example to follow).
    First, look at the graph below.  The current marginal tax rates are in the first column. The benchmark level of income that is subjected to each marginal tax rate is in the third column. The fourth column are the previous (pre-2001) marginal tax rates and the ones that we will return to if the tax cuts are allowed to expire. These columns are the ones we want to examine.

  Important definition:  In the third column you can assume these numbers represent "Taxable Income".  Taxable income is the income left over AFTER you take any tax deductions and/or tax credits you may be entitled to. Also, the FIRST $5,350 of income you earn is exempt from taxation.  In other words, you likely earned more than this amount, but not all of it is subjected to Federal taxation. 
     Look at the first line in our graph. Right now, if your TAXABLE INCOME, is between $1.00 and $16,750 you pay 10% of that income in Federal Income Taxes.  Assume you take all your deductions and credits you are entitled to take and you are left with a taxable income of exactly $16,750.  Currently, when you do your tax return you would owe 10% of that, or $1,675.  If the tax cuts expire, you would pay 15%, or $2,512.50.  One caveat here: Congress has the discretion (important word!) to keep any of the current tax rates or change any one of them.  It is NOT likely they would make lower income people pay this much more, percentage-wise, but for illustration purposes I will assume they do.
    Lets assume instead of $16,750 your taxable income was $17,750.  Under the current tax rates you would pay 10% of the first $16,750 or $1,675 PLUS 15% of the $1,000 over $16,750, which is $150.  Per our definition, each additional dollar over $16,50 is taxed at a higher tax rate (15%).  So, now your total tax would be $1,675 + $150 = $1,825.  Using the numbers from the previous paragraph, you can easily calculate what the total tax bill would be on $17,750 if the tax cuts were allowed to expire. Note: the 15% marginal tax rate is the only one that stays the same.  I forget the main idea behind this, but I have to assume that this level of income represented middle class America back then.
   Another example: You are now a high paying executive and are doing your taxes. After deductions/credits you find you have a taxable income of $250,000 (which means you ACTUALLY earned $300,000+). Nice going!!! Lets calculate your Federal income tax:

Looking at the above table under CURRENT TAX RATES
The first $16,750 of earnings times 10% =                                        $1,675.00
The amt. between $16,750 and $68,000 = $51,250 times 15%=         $7,687.50
The amt. between $68,001 and $137,300 = 69,299 times 28% =      $19,403.72
The amt. between $137,301 and $209,250 = $71,949 times 31%=   $22,304.19
The amt. between $209,251 and $250,000 = $40,749 time 33%=     $13,447.17
Phew!!!
Federal income tax owed on a taxable income of $250,000  =  $64,517.58

While you are in the 33% tax bracket ($250,000 is in between $209,251 and $373,650 with a marginal tax rate of 33%) your EFFECTIVE TAX RATE is $64,517.58 divided by $250,000 multiplied by 100 = 25.8%.  In other words, you are actually paying 25.8% of your taxable income in federal taxes, not 33%. And in terms of your gross income, say $300,000, you are effectively paying ($64,517.58 divided by $300,000 mulitplied by 100) 21.5% of your income in Federal taxes.   This is a technical issue, but important to know if you want to be literate on the issue...
    Now, YOUR homework is to calculate what the amount of tax in dollars AND the effective tax rate is on $250,000 IF the Bush Tax Cuts are allowed to expire. How do the two compare?  We will use this for class discussion on Fiscal Policy, tax policy and  Automatic Stabilizers...

I have solved the unemployment problem---Shovel ready projects! Err, I mean get your shovel ready for a project...See video!

Two ways to lay concrete.  Congress seem to think the construction industry TODAY will create jobs as illustrated in the first video but in reality it is more like the 2nd illustration (photo).  The job creation process COULD BE accelerated if, in any stimulus bill, they banned the use of capital equipment used in construction. That would work, right? ..I am being facetious (or am I?) but is seems like there is too much of a tendency to apply the job creation policies of the Depression to what is happening today.  We USED to work like the first video, now we work like the picture.  Things have changed...Why can't the thinking on "stimulus" change too???  Just askin'...(Watch the video and the photo at the same time---it speaks volume to "progress")

Here are two more to watch simultaneously...Look what happens when you substitute Capital for Labor!

Nice Graphic--Environmental Impact of a Pair of 501 Jeans---

"Levi's studied the life cycle of a pair of stonewashed 501 jeans as part of its research into sustainable apparel..." WSJ: How Green is my Sneaker?"

Navy shooting down drones with a Laser---I hope NOT mounted on a Shark Head...See Video!

This is a REAL news story (Link HERE)...The first video shows the Navy shooting down a drone aircraft with a "Lazzer"...The second video shows how this has already been done in the movies, except on a shark.... :)

Why Economists (or econ teachers) are never invited to play boardgames...

Source: Economists do it with Models

The productivity of labor vs capital---Could you do ANY of these jobs for more than 10 minutes?? Look and see...

HT: (Cafe Hayek) Here are 3 very instructive videos that illustrate the productivity of labor relative to the productivity of physical capital.  While you watch think about the physical capital we in the developed world use to do these tasks that are performed by people in many/most parts of the developing world.  You certainly can employ alot of labor by not using machinery, but is it conducive to economic growth and the general welfare of a society??..These are VERY short (no more than 30 seconds each) and are REALLY amazing. The first one with the buckets ESPECIALLY!! The coordination to accomplish the job is something to behold. Could YOU do ANY of these????  Judge for yourself...

This is more like we do here---mostly capital, less labor---quite the difference, ehh???

HT: Carpe Diem

Personal Opinion enclosed---Republicans need to support extending Long-Term Unemployment Benefits NOW!

     Should the Republicans stop blocking the passage of a bill that will further extend unemployment benefits to the long term unemployed?  In all introductory economics textbooks, students learn is that if unemployment benefits are increased then people, especially, but not exclusively, at the lower-end of the pay scale, will respond to this incentive by taking more time to find another job. If you look at the differences in unemployment compensation offered by many European countries (which are relatively generous) compared to the US and Japan, you will see that the European countries experience persistently higher levels of unemployment.  Unemployment compensation is not the only cause of this, but it is certainly a contributing factor.  While the unemployment compensation, in general, does not 100% replace the working pay, it is enough to allow people to extend their search for a more "ideal" job. 
    Having said that, it is obvious we live in interesting times right now.  It appears that the bromide "a job is a job is a job" is no longer apropos (if it ever really was) and applying learned/current labor skills in lateral industries is increasingly difficult.   There is a continuing shake-out on the Aggregate Supply-side of the economy, as certain industries contract and the re-deployment of those resources (human, physical/financial capital, production capacity,etc) takes place.  Some of those resources are fluid and can go to other uses rather easily, and some are high static and not "fungible" and take more time, if ever, to find a new productive use. 
    Labor/skill specialization and advancements in production technology have converged to squeeze lot of people out of the pool of workers needed for current jobs.  This form of unemployment is called "structural unemployment", meaning a worker is no longer needed because his/her skill has been rendered obsolete by the adoption of technology. We can extend this definition to the advancement in processes that lead to efficiencies that allow for fewer workers to do a particular task. For example, the auto worker who operates a rivet gun is replaced by a robotic arm. The worker cannot move to another plant because the technology will be adopted industry-wide. Or a workplace design or innovation streamlines production.  He or she in either line of work is outta luck. 
    One could say, "Ah Ha! He/she can go to the businesses that makes the robotic arms and get a job!".  But does he/she have the necessary skills to make that transition? Where do they get training to do this and feed their families at the same time? What is the time lag between losing a job, training, and finding a comparable pay job? Hmmm...have to put yourself in their position.  The longer one stays unemployed the difficulty in finding gainful employment multiplies exponentially.
   If the economy is booming and jobs are plentiful, then a case can be made for REDUCING unemployment benefits because people can reasonably find a job and limited, if any, social damage would be inflicted on the least amount of people. However, when employment prospects are limited because: (1) the economy is simply not creating jobs  fast enough , if at all (2) there is a re-deployment of resources which is a slow process, (3) workers are structurally unemployed due to technological advances in production, then, I believe, the unemployment benefits have to be extended.  Having said THAT, there has to be a commitment by public policymakers and industry to facilitate training and/or re-training of workers AND a commitment from the unemployed to do so as well.   The social cost, which appears to be unseen to Republicans, of not doing so is too high.  Too much idle human resource creates lots of potential ancilliary social problems Not addressing it promotes uncertainity for those who still have a job and may feel "but for the grace of god there go I". That trepidation is not condusive to inspiring confidence, which, in addition to new jobs, is vital to economic recovery.
   My only question is, "What SERIOUS proposals are on the table to help the long term unemployed that complement the extension of unemployment benefits?"...Not a rhetorical question....
    So, Republicans, vote for this (sorry, it is on the Demand-side)! Democrats---work on this resource re-calculation problem (sorry, it is on the Supply-side).  Get out of your comfort zone and help my country, please and thank you!!

Teenagers are being crowded out of the job market by "old" people...Has this happened to you?? See enclosed graphs for proof!

WOW! Old people POWER! Or not...this is a trend that signifies three important demographic changes and their effects on the "youngs" in our economy...(1) Older workers are hanging onto jobs longer to make up for recent losses in retirement funds, (2) Recently retired workers are re-entering the job market because of recent losses in retirement funds or they simply cannot afford to retire, and (3) the coming baby boomer crunch that just numerically is going to swamp the number of young people just in terms of demographics...  For the first since the 50's, older workers outnumber teen workers in competition for the same jobs....read em' and weep, young people... 

Source for Graphs HERE

How a company can make more profits AND donate half their sales to charity...Great example of incentives!

This kind of research into consumer behavior and how people respond to incentives is interesting to me..The researcher, Ayelet Gneezy, conducted a study to see how a business could  maximize profits AND be a socially conscious company.  I would not have predicted this outcome but can see the possibilities.  I think you will  find the conclusions surprising too....(HT: Marginal Revolution).

""At a theme park, Gneezy conducted a massive study of over 113,000 people who had to choose whether to buy a photo of themselves on a roller coaster. They were given one of four pricing plans. Under the basic one, when they were asked to pay a flat fee of $12.95 for the photo, only 0.5% of them did so.
When they could pay what they wanted, sales skyrocketed and 8.4% took a photo, almost 17 times more than before. But on average, the tight-fisted customers paid a measly $0.92 for the photo, which barely covered the cost of printing and actively selling one. That’s not the best business model – the company proves itself to be generous, it’s products sell like (free) hot-cakes, but its profit margins take a big hit. You could argue that Radiohead experienced the same thing – their album was a hit but customers paid relatively little for it.  When Gneezy told customers that half of the $12.95 price tag would go to charity, only 0.57% riders bought a photo – a pathetic increase over the standard price plan. This is akin to the practices of “corporate social responsibility” that many companies practice, where they try to demonstrate a sense of social consciousness. But financially, this approach had minimal benefits. It led to more sales, but once you take away the amount given to charity, the sound of hollow coffers came ringing out. You see the same thing on eBay. If people say that 10% of their earnings go to charity, their items only sell for around 2% more.
But when customers could pay what they wanted in the knowledge that half of that would go to charity, sales and profits went through the roof. Around 4.5% of the customers asked for a photo (up 9 times from the standard price plan), and on average, each one paid $5.33 for the privilege. Even after taking away the charitable donations, that still left Gneezy with a decent profit.""

See the whole article here and see how RadioHead could have improved their profits AND helped their pet causes...

Financial Reform Bill doubles as a Lawyer/Lobbyist Full Employment Act--Let the Rent-Seeking Begin!

If you actually read some of the text of these bills (I have) you will notice the unbelievalbe increase in "lawyer-speak" over time and mind-numbing meaningless stock phrases.  You find yourself thinking, "didn't I just read that same thing a couple of pages (paragraphs) ago?"  This really is, as Professor Perry points out,  a full employment Act for lawyers and lobbyists.  They will be happy to interpret the meaning of these 2,300 pages for the respective Federal bureaurcracy.  English teachers will tell you less is more.  I guess law school professors tell students they get paid by the page....Law professors win!

From Carpe Diem: 2,319 Page Dodd-Frank Bill aka The “Lawyers’ and Consultants’ Full Employment Act of 2010"

Britian ranks first in end of life care for elderly---They have come a long way since the Middle Ages---Just ask Monty Python!

Quality of death:  A ranking of care for the dying by country
The Chart to the left shows a countries ranking by how it provides for end of life care to the elderly...Britain ranks first follwed closely by Australia.  I suppose they have come a long way from where they used to be...