Saturday, July 31, 2010

Unemployment map: The geography of a recession

Urgent review needed.

Having been unplugged for a few weeks, it is time to respond to some questions and comments. First up: Is this a true picture of Unemployment or an Internet slam/scam on the recent failures of Obama and others? I would be interested in hearing your thoughts.


Take a look at this map. It shows how the unemployment rate has changed over the past several months. When you get to the map, click the arrow in the middle and watch how things changed. Incredible what "The Great Recession" has done. The old saying, "A picture is worth a thousand words" is never more true than looking at this map. Viewing it only takes a few seconds. The darker the color, the higher the unemployment. 2009 has been BRUTAL. Unemployment Rates by County--January, 2007, approximately one year before the start of the recession -- to the most recent unemployment data available today (May, 2010).

It is an accurate picture of one of the unemployment rates, and worth viewing. However, there are numerous ways to measure unemployment. The particular one used for the mapping is not particularly meaningful. That said, the one selected doesn't matter too much for a broad brush overview of the geographic spread of the recession.

The unemployment rate used does introduce some "bias" in the time dimension. There is a slight bias toward greater absolute change and a lag in timing when this particular unemployment rate is used.

To understand the issues consider those who “want to work but have given up looking.” Giving up on job seeking should take time, thus the built-in lag. Add in the subjective nature of discouragement and things get interesting. Does the unemployment rate as measured by job seeker influence it? If so, it becomes self-referential in that the rate of unemployment becomes a function of itself. Self-referential variables can become unstable. They can just exaggerate their own cycles. Now consider what it measures. Are you discouraged today? Does it measure something other than consumer confidence? Who wouldn’t work if the prefect job were offered? Most retirees, kids, home makers, etc. would enter the labor force if offered a job doing nothing and getting well paid for it.

People who are employed part time but would like to work full time are included. I’ve always wondered about people working full time but who would like to work part time. Job sharing is a recent phenomenon. Including part time workers raises a question about what is being measured. The Hedged Economist worked part time throughout college and grad school. If offered a full time job at post grad rates, would I have taken the job? If so, where would that put me? I wasn’t unemployed; I was a student. I had a job and thus was employed (part time).

My suggestion is ignore the unemployment rate and focus on the change in employment if you want to measure how an economy is doing. Notice the term was employment; not jobs. It is the failure to realize that employment and jobs aren't synonymous that is the Achilles heal of this recovery.

Saturday, July 10, 2010

The discussion Congress should be having: PART 3, Punishing the innocent.

What happened to my nest egg, my pension, my IRA?

As is noted in Urgent Speed: Why Ten Million Dollar IPOs Matter: to quote: “…with the proliferation of derivatives the seed stage asset class is one of the few uncorrelated asset classes.”

This is an issue discussed in some detail is The Hedged Economist: Angels, entrepreneurs, and diversification: PART 2 , as well as Part 3 and 4. and the Epilogue to Angels, entrepreneurs, and diversification. Unfortunately, people haven’t connected the dots. If one can’t diversify, the options are to accept volatility in investment prices. And, yes, that includes pensions, IRAs, and nest eggs with no intention of directly participating in early stage investments. One could trace the linkage through markets, fund investments, capital flows into later stage investments, etc., but the generalization is simply that reduced diversification makes the entire economy more volatile without increasing growth.

Ultimately it inhibits job growth. The reason it inhibits growth should be a question that answers itself. Seems every commentator has discovered small business creates the majority of new jobs. But, they fail to point out the inconsistency between small business job creation, and the culture of dependency and the psychology of victimization in the US. Besides, there are very few opportunities for our “leadership” to claim success for a healthy small business sector.

Spreading the wealth is a poor substitute for creating the wealth, but it is a lot easier; sort of the lazy man’s solution. Problem is it doesn’t create jobs. It creates more dependencies.

Nice thing about jobs is that a good number next month will cause many people to ignore how dismal a failure the last year has been. But, unless the last six months get revised away, anemic is still the operative word.

Our “leadership” doesn’t like to point out that the US has a major bias against investment. They seem to fear that someone could loose money, or even worse, someone might make some money. But, they found a solution. Tilt the economy toward consumption.

If lack of consumption is the problem, one has to explain cars that are larger than families; excess housing inventory; families with more TVs, phones, etc. than family members; toys that are replaced almost weekly; consumption that routinely exceeds output (thus a trade deficit); why one can borrow to buy a house at record low interest rates but can’t get a loan to start or expand a small business; zero percent down and no payment for X; and so on.

We currently have a debate going on about fiscal policy. It is all noise unless someone introduces the question of how to address the issue of subsidies for consumption and hostility to small business -- especially toward startups.

Wednesday, July 7, 2010

The discussion Congress should be having: PART 2, Whose ox did we gore?

Where are the start ups?

US NEWS AND WORLD REPORT made an interesting comment in a piece on financial regulatory financial reform (“4 Things Financial Reform Won’t Do For You - Rick Newman (” ). The relevant section is quoted below. It lists one of the things the legislation won’t do as:

“Come up with creative financing. While clamping down on risky lending, banks and their government overseers have also denied credit to many who legitimately need it. Scarce credit is especially hard on small-business owners, who often use bank loans or credit cards to pay suppliers or stay current on rent. The stranglehold on small business is one reason hiring is weak and the whole economy is fragile, because small business accounts for an outsized portion of new jobs. The government thought it would solve this problem by bailing out the banks, which in turn would inject more money into the economy, but it hasn't worked out that way so far. So, many people who desperately need credit have had to tap friends or family, mortgage assets, hastily improve their creditworthiness and find unconventional sources of money.”

This may sound a bit familiar to anyone who read “The Hedged Economist: Angels, entrepreneurs, and diversification: PART 1.” It pointed out the importance of family, friends, mortgages, and credit. But, it also argued that other sources of capital are essential. My contention is that by making the environment hostile to start ups and self employment, the entire economic food chain is given stomach cramps. Nothing makes the environment more hostile than choking off credit.

But, it is worth noting that the problem isn’t just financial reform. This blog pointed out back in March in “The Hedged Economist: Regulatory capital and who’s got the money?” that for bank stability and ultimately economic stability “Increased capital is ultimately the solution. But, timing changes is probably more important than the level. What we know about reserves is that people lower them in good times and raise them in bad times. We also know this aggravates the cycle. Well, surprise, surprise, governments are people; they do the same thing. Unfortunately, the government has a long history of changing capital requirements in the wrong direction over the business cycle. It’s the fallacy of composition writ large. Individual banks are safer with higher reserves, but if every bank raises more capital, oops, no credit even for productive endeavors.” So, regulatory reform is just aggravating a bad situation.

So, while the IPO market has problems of its own, one should never underestimate the importance of the general economy. “General economy” is a nice way to say “how people get by.” Make getting by dependent on government and sooner or later government runs out of rabbits in its hat. Further, governments, and for that matter, the media have problems with amorphous, self-contradictory, disorganized (maybe self-organizing) bunches of people. If amorphous, self-contradictory, disorganized or self-organizing doesn’t sound like how people get by, go out and talk to you neighbors, friends, relatives, and be sure to include some strangers.