Monday, March 12, 2012

...congrats to the candidates

By kay.e.strong

Time to congratulate the candidates for their great American myth-busting powers!

"Don’t just go to one that has the highest price. Go to one that has a little lower price where you can get a good education. And, hopefully, you’ll find that. And don’t expect the government to forgive the debt that you take on."—Mitt Romney 

What we heard: Public assistance is for Wall-Streeters, not Main Streeters!

“President Obama once said he wants everybody in America to go to college. What a snob!”—Santorum. 

What we heard: College is for snobs!  Who else can afford it?

The Great Meltdown of 2008-2009 has been really hard on our cultural psyche.  Many of the myths, those little mantras that smooth over life’s truth, have been gutted like smelt prepared for a hot frying pan. You remember the one about no man is above the law?  Well, no man that doesn’t don a three piece suit, black leather shoes and carry his custom attaché case to a financial institution near you.  Or how about this one: work hard, follow the rule and you’ll get ahead.  I’ll bet every homeowner who lost his/her home to foreclosure right after their unemployment ran out is beating themselves over the head wondering where they went wrong.  With the American home dream lying in the morgue, no reason not to kill the ticket to the middle class myth, too.  Perhaps, the candidates have even done us a favor. 

The middle class has been a shrinking phenomenon for decades.  According to the President’s Council of Economic Advisors chief, the dispersion of national income to the top 0.1 percent is now on par with the Roaring Twenties.  According to the Congressional Budget Office the top 1% enjoyed a whooping 278 percent increase their real after-tax income in the period 1979 to 2007 before the Great Meltdown—the middle twenty percent of households--60%.  The size of the middle class has been steadily shrinking.  Krueger reports: “We have gone from having just over 50 percent of households with incomes within 50 percent of the median in 1970 to 44 percent in 2000, and 42.2 percent last year.” (http://blogs.reuters.com/great-debate/2012/01/13/a-shrinking-middle-class-means-a-shrinking-economy/)  

Institutional changes, those little tweaks in the rules of the game—are cited as the main culprits for spiking income inequality: declining union membership, fall in the real value of minimum wage, and tax code changes since 2000s that compound the widening gap in pre-tax earnings.  But the one not mentioned is the shift in financial burden from societal to private in the cost of the ticket to the middle class.  A shift that innately implies that post-secondary education, in whatever formulation, is a pure private (individual) good like a Pay Day candy bar.

Yet, nothing could be further from the truth. Sustained long-term economic growth is propagated through growth in human capital: the skills embodied in workers through experience, education and on-the-job training.  Humans are complementary inputs to every aspects of economic production from R & D and management to production on the floor.  Humans dream up new technologies.  Humans are the source of funding for private business investment. Learning-by-doing enables humans to push the edge of productivity gains. Humans set “the formal and informal rules that constrain human economic behavior.” (Douglass North, Nobel Prize winning economist, 1993)  In short, growing an economy to improve our collective well-being is impossible without social investment in people—at least until the technological Singularity kicks in.

The U.S. Department of Education (2009) reported that 90 percent of bachelor’s degree recipients owe upwards to $40,000 of student loan debt. Those were graduates finishing at the end of the Great Meltdown.  Since post-secondary schooling is not a public mandate, states short on revenue have taken the liberty to balance their unbalanced checkbooks on the backs of students. Compounding the problem for degree holders is job crunch.  The labor force participation rate for all bachelor’s degree and higher job holders, according to the latest jobs report, is 76 percent. So, a degree in hand with no job in sight—education is proving to be a ticket to the underclass.

Least we believe that all hope is lost, here’s what the other candidate said: “This is about the nation’s welfare. It’s about making choices that benefit not just the people who’ve done fantastically well over the last few decades, but that benefits the middle class, and those fighting to get to the middle class, and the economy as a whole.”

What we heard: Education is an increasing sums game.  It benefits everyone!

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

Sunday, March 4, 2012

...the predator-prey model

By kay.e.strong


On 16 February the Congressional Budget Office (CBO) released its report Understanding and Responding to Persistently High Unemployment.

The CBO cites the current period as the longest stretch of high unemployment since the Great Depression with the unemployment in excess of eight (8) percent since February 2009 and their projection is for it to remain above 8 percent until 2014.  Be reminded that the National Bureau of Economic Research (NBER), the official dater of turning points in the economy, declared June 2009 as the trough of the last business cycle. [http://www.nber.org/cycles/cyclesmain.html]  Now three years into the expansionary phase of current business cycle, the Bureau of Labor Statistics reported in the January 2012 an unemployment rate of 8.3 percent (or, 12.7 million individuals).  And this number excludes a persistent 2.8 million individuals identified as marginally attached (willing-able-looked for a job but stopped looking in a 4-week interval) to the labor market.

In the short term the CBO report attributes the persistence of high unemployment to slack demand for goods and services.  Not surprisingly, unemployment and demand are a coupled system. Unemployment rises when business inventory exceeds desired levels due to insufficient demand. The loss of income associated with unemployment widens the gap between business inventory and insufficient demand. In many ways, the dynamics of unemployment-demand replicate the dynamics of competition in biological systems.  With little effort we can juxtapose the unemployment-demand story in to the classic predator-prey model—where businesses are likened to predators and demand, the prey.

In this story the prey (demand) has unlimited food supply.  The size of the predator population (businesses) depends on the size of the prey population (demand).  Rate of change in a population (businesses or demand) is proportional to its size.  The external environment does not shift in favor one species (businesses or demand) and adaptation is sufficiently slow.  

Over time predators (businesses) thrive in an environment with plenty of prey (demand).  Growth in the predator population is, ultimately, checked when its growth outstrips food supply, the prey.  Thereafter, the predator population (businesses) goes into decline. As one might expect a predator-prey system is inherently self-annihilating without some outside intervention. Intervention in the biological system, say, the reintroduction of prey, allows for a rebound—but a rebound out-of-synch with predators.

O.K, besides being a nice story, what conclusion(s) might one draw from this exercise?

The most obvious: introduction of more predators into the environment is conclusively NOT the solution!

Yet, time again, most political prescriptions for our economic predator-prey problem focus exclusively on the predator (businesses) and, only begrudgingly, on the prey (demand). 

In January the Bureau of Labor Statistics reported that “[t]he number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 5.5 million down slightly from January 2011 (6.2 million) and accounted for 42.9 percent of the unemployed.” This number, however, excludes 2.8 million individuals identified as marginally attached to the labor market. January-to-January numbers showed a reduction in the overall participation rate of the civilian non-institutional population from 64.2% (2011) to 63.7% (2012).  Between December and January the labor market absorbed 4.5 million workers, while shedding 7.3 million.

Despite the evidence, OpenCongress reports a new deal in the works concerning the prey:

  • Assume the lack of food on the table-roof over head is insufficient motivation for the unemployed to search for jobs that don’t exist! Prescription: shrink the maximum length of unemployment benefits to 63 week.
  • Assume drugs are the primary cause of unemployment. Prescription: beneficiaries subject to drug testing.
  • Assume budgetary funding is likely tied to cuts in other parts of the social safety net. Prescription: mandatory “reemployment assessment” and training for long-term unemployed.
  • Assume sufficient numbers of unemployed have long since been “deleveraged” of homes, therefore, highly mobile. Prescription: mandate “national job search requirements.”
Seriously, how does killing off the prey (demand) not hasten the demise of the predator (businesses)!  

Alternatively, the CBO ran an analysis of tax-spending policies designed to “reintroduce prey,” allowing for a rebound over the next two years.  CBO concluded that the largest increases in employment per dollar of budgetary cost would be produced by two measures:
  • Reducing the marginal cost to businesses of adding employees and
  • Targeting people most likely to spend the additional income (generally, people with lower income).
Long term (structural) unemployment is a bit trickier to address.  CBO advocates policies designed to eliminate the mismatches between employers' needs and workers' skills through training programs. The mismatch between job locations and potential workers will require a stronger housing market or relocation-style transition programs. Likewise, employers will require “re-education” to mitigate the social sigma associated with hiring the unemployed. Poaching employees in no way lessens our national unemployment problem.

Nature has been engaged in the predator-prey dance for eons.  Let’s swallow our pride and follow her lead on this one!

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.