Unemployment Really 20%?

The current unemployment figure is a little over 9%. This ignores the “discouraged workers” (folks, like me, who don’t bother to sign up for the government dole) and it ignores those folks who’s unemployment benefits have run out. Why go to the unemployment line if you will not get a cheque?

So we hear statements like “Unemployment among youth is 25%” and “Discouraged Workers add 5%” or 10% or… and the real unemployment level is closer to 20%.

But I think there is another “term” here, being ignored.

Percent of Whom?

I’ve heard it a couple of places, most recently on a business news program (CNBC or Bloomberg I think), that the total of government at all levels in the USA is about 50% of the national product.

Now that, of itself, is a key number. When government percent of GDP goes over 50%, most countries enter an economic collapse. It starts with a stagnation and then accelerates from there, more or less in proportion to the percentage. The reason is pretty simple. Government is a parasite on the rest of the economy and at that level, the host has little blood left. It’s a poor parasite that kills it’s host, but governments do.

So this got me thinking. Who is employed by government? Places like this site:

http://www.data360.org/dsg.aspx?Data_Set_Group_Id=1367

have the government employment rate at about 14%. But I think that seriously under reports the truth. A worker at Newport News shipyard building nuclear submarines is technically employed outside government, but really, who else is going to buy that nuclear submarine? For all practical purposes, they are a part of the Government Machine. They produce nothing of ‘wealth’ for the rest of the economy and they could be gone tomorrow and national productivity would not notice. Similarly, the James Hansen like “researchers” of the world who get paid to play computer video games with weather and call it research do nothing to increase net national wealth nor productivity. They consume a lot of government dollars, but will not improve our economy (some would assert they damage it) nor will they be “let go” in an economic downturn.

So in my opinion, a much larger part of the ‘work force’ is employed BY government even if they are not employed IN government…

How much? Well, as a first approximation, we can use the percent of GDP as a guide. While there are wage disparities (with government folks now getting more slop at the trough per hour… it was less than private sector when I was a kid…) they are not gigantic. While there is plenty of room to improve that estimate, it’s a decent ‘working number’. So lets assume for now that it’s roughly 1/2 the population, directly proportional to GDP percent. And that 1/2 is NOT subject to layoffs to any degree like that in the truly private sector.

The Rest Of Us

The implication of this is that the unemployment rate among ‘the rest of us’ is really closer to 20% even before counting “discouraged workers” and those with no unemployment cheque to collect. It might even be pushing 30% if those are added in. So we have a bifurcated world.

On one side, the Government Lackey in one form or another seeing “no problem”, yet dependent on the other side.

On the other side, the Private Sector. With effectively 1/4 to 1/3 of them unemployed and with the company managers and owners painfully aware that The Government wants just as much money from the remaining 2/3 as they did in the past from the fully productive whole. The mantra from DC (and local levels) is, after all, “Tax beatings will continue until morale improves.”

The truly Private Sector must support itself, the direct Government employees, AND the indirect Government Dependent employees. The wealth creation has to come from them and flow to the consumption goods that all those other folks consume. (And yes, a nuclear submarine is a consumption good. War material is among the most fleeting of ‘investments’ and most prone to destruction.) Right now, the Truly Private Sector is being asked to carry that same full sized burden with a much smaller base. And it is showing “failure to thrive”.

Stimulus, Redistribution, and Pork

So we had a “stimulus bill” and now we’ve got another $26 Billion hand out of “pork” to the state governments to hand over to union employees in the public sector as more “stimulus”. And all this is doing is to move more of the money around on the public consumption side of the ledger. (Don’t get me wrong. The spouse is a teacher who is taking mandatory ‘furlough days’ every so often as The State of California is bankrupt. So we will benefit from this pork. Yes, I’m biting the hand that gives me pork… It’s not like I’m talking-up something for my own benefit.)

But from where does this money come?

I had a business at one point that had several employees. I closed it some time ago as the paperwork and pain started to exceed the gain. That was a source of net wealth creation ( I did a lot of site build outs for I.T. systems) and created a net increase in physical capital to create more wealth.

Now, not only is that wealth creation gone, but my family has joined the ‘wealth consuming’ side of the ledger. Someone ELSE has to create the wealth that will be ‘redistributed’ via that “stimulus” to me. And I’m a “discouraged worker” rather than a host…

So where does the money come from?

It isn’t coming from the truly private sector. They are not growing. The “Sovereign Risk” is just too high to add employees. Added ‘social benefit’ costs are up 10% to 25% and a giant tax hike is coming in December. Nope, not a time to add more employees nor invest in new capital stock. (Capital gains taxes skyrocket in December too. Now is the time to be cashing out those capital gains and relocating them to other countries with better tax treatment.)

The money is coming from debt.

But not from our cumulative credit cards. Those are already full.

And not from our Home Equity. That was made “toast” by our government owned home mortgage system. (Government made Fanny and Freddy. Government set the rules for them, for the banks, and for the mortgage market. Government sets the interest rates and makes all the other rules and laws about real estate. Government OWNS the mess it made.) No, the day’s of doing “Re-Fi and Buy!” are a fading memory.

There are 2 sources of debt still being used. The Chinese Credit Card and “Bugger the Currency”. China has loaned the U.S. Government close to a $Trillion. They are nervous and IMHO are likely to be taking subtile actions to reduce the risk in their portfolio. Certainly not buying another $Trillion of 30 year bonds.

So that leaves “bugger the currency”.

The Fed announced an intent to let their real estate loan portfolio ‘run off’ and as the money comes in, to buy treasury bonds. About $Trillion. So we know that US Treasuries will have a large “bid” for several years. Probably TIPS are your best bet. (Treasury Inflation Protected Securities). But we also know that this is ‘monetizing the debt” and will lead to inflation. Maybe not right now (we are at 1%) but as the monetizing happens.

Inflation is a tax on all holders of money denominated assets. So that 2nd mortgage you took back when you sold your home that might buy 1000 loaves of bread today will only buy 500 in a couple of decades. Half of the value was taxed away via inflation. That is, IMHO, where The Fed and The Government are headed to get the money they are spending right now.

Yes, it is possible to “fix this”. But it will take a while and it will take the will to act. Historically, folks have not done that until ‘too late’. We’ll see.

But for now, it seems pretty clear to me that the actual unemployment in the productive half of the economy is way higher than the official figures; and that if you do not allow for that and see what it means, no amount of “stimulus” or “redistribution” can ever hope to fix it. It can only Bugger the Dollar. And make everything else that much worse.

Or looked at another way: “What the stimulus giveth to the Government Lackey the Sovereign Risk taketh away from the productive economy”. Repeat until collapsed in a fit of Dollar Buggery.

About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , . Bookmark the permalink.

39 Responses to Unemployment Really 20%?

  1. j ferguson says:

    E.M.
    Again, you are on to something. I suspect that the number of unemployed who would otherwise be productive is even higher than 20% There is the problem that for many of them, their productive pursuits may have left the country – although some could return.

    There is also the problem of productively accommodating the heretofore unproductive who’ve been riffed out of their positions and now face the prospect of having to do something economically useful and for less pay.

    Having worked both sides of the street, I can quickly agree that that having a too-secure position doesn’t promote greater productivity.

    I’ll spare you the stories from my 14 months at a federal agency that were all I could handle before returning to the world of profit and loss. Generally people who haven’t worked for a government agency don’t believe them.

  2. David A says:

    I have a difficult time understanding when the inflation comes in. How will the velocity of money accelerate when there is so much debt and misallocation of resources as you mention. I can see inflation in things we need, oil, energy, etc, due to, again, goverment decisions. But other then potential problems with food supply I am having trouble seeing an increase in spending in this debt deflation trap.

    Of course if Uncle Ben wants to actually drop thousands of dollars from his helicopter on my property, I may then do my part to increase the velocity of money.

  3. Gnomish says:

    Parity with CDN very soon, eh?

  4. Robin Melville says:

    I can see where you’re coming from, but don’t all those teachers, firefighters and climate researchers buy cars, insurance and toaster ovens?

    When they’re laid off (as they must be since the US deficit is unsustainable and has been increasingly so post-Clinton) they have to find jobs making cars and toaster ovens, and selling insurance. But who to? Where does the stimulus come from? The great depression of the 1930’s was surely created and sustained by “balanced budget” economics and only dissipated when the war economy cranked up in the early ’40s. The US economy was steaming in 1944 — driven by tax dollars and war bonds.

    Real wealth comes from manufacture, as you say, and perhaps intellectual rights — not sure. An Apache helicopter is manufactured and embodies considerable intellectual creativity. Why is this different to an iPad?

    Just wondering….

  5. PhilJourdan says:

    Very good. I am an economist by education, and the level of economic education in this nation is pathetic! But whether through OJT or education, you do have a good grasp of it. Thank you for a good article on why government is not the answer to a recession. It is the problem.

  6. boballab says:

    The Great Depression was not sustained by balance Budget economics, you are forgetting who was President: FDR who tried to spend us to prosperity.

    New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending and the institution of financial reforms. The Securities Act of 1933 comprehensively regulated the securities industry. This was followed by the Securities Exchange Act of 1934 which created the Securities and Exchange Commission. Though amended, key provisions of both Acts are still in force. Federal insurance of bank deposits was provided by the FDIC, and the Glass-Steagall Act. The institution of the National Recovery Administration (NRA) remains a controversial act to this day. The NRA made a number of sweeping changes to the American economy until it was deemed unconstitutional by the Supreme Court of the United States in 1935.

    http://en.wikipedia.org/wiki/Great_Depression#United_States

    Stimulate through Spending? Where have I heard that before? Financial reform? Haven’t we had this recently too?

    In fact, the stock market turned upward in early 1930, returning to early 1929 levels by April. This was still almost 30% below the peak of September 1929.[11] Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. On the other hand, consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent.

    http://en.wikipedia.org/wiki/Great_Depression
    http://en.wikipedia.org/wiki/File:1929_wall_street_crash_graph.svg

    Now doesn’t that sound familiar? Something that EM might appreciate is what Nobel Laureate Edward Presscot came up with in conjuction with Timothy Kehoe:

    Recent work from a neoclassical perspective focuses on the decline in productivity that caused the initial decline in output and a prolonged recovery due to policies that affected the labor market. This work, collected by Kehoe and Prescott,[27] decomposes the economic decline into a decline in the labor force, capital stock, and the productivity with which these inputs are used. This study suggests that theories of the Great Depression have to explain an initial severe decline but rapid recovery in productivity, relatively little change in the capital stock, and a prolonged depression in the labor force. This analysis rejects theories that focus on the role of savings and posit a decline in the capital stock.

    http://en.wikipedia.org/wiki/Great_Depression#New_classical_approach

    The book it is based on: http://www.greatdepressionsbook.com/

    The worldwide Great Depression of the 1930s was a watershed for both economic thought and economic policymaking. It led to the belief that market economies are inherently unstable and to the revolutionary work of John Maynard Keynes. Its impact on popular economic wisdom is still apparent today.

    This book, which uses a common framework to study sixteen depressions, from the interwar period in Europe and America as well as from more recent times in Japan and Latin America, challenges the Keynesian theory of depressions. It develops and uses a methodology for studying depressions that relies on growth accounting and the general equilibrium growth model.

    Each chapter of the book is accompanied by a data file that contains all of the data used in the analysis. This Web page also provides links to computer programs for applying the methodology.

    Data and programs that ought to interest EM :)

    Now lets look at history and see if this is in the works for today:

    By 1936, the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high at 11%, although this was considerably lower than the 25% unemployment rate seen in 1933. In the spring of 1937, American industrial production exceeded that of 1929 and remained level until June 1937. In June 1937, the Roosevelt administration cut spending and increased taxation in an attempt to balance the federal budget.[76] The American economy then took a sharp downturn, lasting for 13 months through most of 1938. Industrial production fell almost 30 per cent within a few months and production of durable goods fell even faster. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938.[77] Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels.[78] Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. As unemployment rose, consumers’ expenditures declined, leading to further cutbacks in production.

    http://en.wikipedia.org/wiki/Great_Depression#United_States

    Except for the cutting spending part looks like the current administration is following the FDR playbook (and they say that the Republicans have no new ideas).

    The crisis had many political consequences, among which was the abandonment of classic economic liberal approaches, which Roosevelt replaced in the U.S. with Keynesian policies. These policies magnified the role of the federal government in the national economy. Between 1933 and 1939, federal expenditure tripled, and Roosevelt’s critics charged that he was turning America into a socialist state.[80] The Great Depression was a main factor in the implementation of social democracy and planned economies in European countries after World War II.

    http://en.wikipedia.org/wiki/Great_Depression#Political_consequences

    And history repeats itself…..

  7. Soronel Haetir says:

    Wouldn’t inflation actually help the person who took out the home equity loan (while hurting the bank)? The load would be payed back with dollars that are worth less than those turned over to the borrower. This assumes, of course, that the borrower is in a position to get any money when the time to repay comes along.

  8. TGSG says:

    Soronel Haetir
    Wouldn’t inflation actually help the person who took out the home equity loan (while hurting the bank)?

    Maybe the only person it did help, as a LOT of .gov $#*! is pegged to the CPI and that is a disaster in the making.

  9. boballab says:

    @Soronel

    In that micro aspect especially with a fixed rate mortage, Yes. But I expect that your theoretical homeowner would have more pressing concerns at the time: Paying for a loaf of bread

    For example, the value of German mortgages in 1913 measured in U.S. dollars was about $10 billion; in late 1923 these mortgages were worth only one U.S. penny.

    Measured by the price of food, prices were 135 times higher at the end of the period than they were at the beginning. Measured by how many marks it took to buy a dollar, prices were 222 times higher. Yet even this horrid inflation was mild compared to what happened from July to November of 1923, when prices increased by somewhere between a million and a billion times their previous level.

    http://ingrimayne.com/econ/EconomicCatastrophe/HyperInflation.html

    That is what happens when you try to print your way out of debt.

    Germany’s inflation peaked in 1923 when it became so severe that a wheelbarrow full of money would not buy a newspaper, and people spent money as quickly as they could in order to preserve as much value as possible. Goods were bartered because it became easier than actually using money. At the worst point one trillion marks were equivalent to one dollar.1

    Hyperinflation is nearly always caused by governments spending far beyond their ability to tax, coupled with an inevitable loss of confidence in the currency. The reparation payments imposed on Germany as punishment for losing World War II coupled with the necessity for maintaining governmental services proved too much for the Weimar (German) government. Money was borrowed to the limit, and when lack of confidence in the government would not allow it to borrow, it simply printed the money to pay its bills.2

    http://www.indepthinfo.com/economics/hyperinflation.htm

  10. GregO says:

    Chiefio,

    Thanks for doing an unemployment post, I was hoping you would.

    Check this out:
    http://www.bls.gov/news.release/empsit.t15.htm

    This is Table A-15 Alternative measures of labor underutilization from the Bureau of Labor Statistics. It shows the official unemployment rate which is designated U-3 and that is the rate that is reported (generally) in MSM and I believe the target of your post.

    Note however, that U-6 shows total unemployment and is has a seasonally adjusted July 2010 rate of 16.5%; and that figure is most likely low. IMHO U6 is a better indicator of the actual state of the economy and at 16.5% is frighteningly high.

  11. Sinan Unur says:

    @Robin Melville: You are missing a key point: The dollars the federal government gives the teachers to spend on their toothpaste must come out of someone else’s pocket. So, $1 increase in their spending must be offset by $1 less someone else has to spend.

    Or, the government prints funny money, and now everyone has less.

    The situation would be different if the money going into teachers’ pockets came from customers paying tuition for their children’s education. In that case, those parents would have voluntarily decided that that money was best spent paying for the school + teachers.

    @E.M. Excellent post. Thanks for mentioning Prescott. The problem with Bernanke et al. is that they typify the kind of person who’s scared of math so does not even bother to understand the underlying reasoning. It’s sad really. It is as if the rational expectations revolution never happened.

    While the situation is sad, it is predicted by economic theory. Politicos gain nothing from economic theories that explain the destructive role of government intervention and the deadweight loss associated with it. So, the economists they listen to (and pay) are the ones who support their ambitions.

    And, how much is a government job worth?
    http://blog.qtau.com/2010/03/what-is-government-job-worth.html

    I have already experienced where the U.S. going. It is not pretty.

    Sinan

  12. Ken McMurtrie says:

    Over simplistic, but I like the theory that any money spent within the country, and that remains in the country, is useful and doesn’t have to be inflationary.
    It must, however, circulate, keep people in jobs, create jobs, and ideally add asset value. (an employee can be an asset as long as he/she contributes to the welfare of the state).
    For example, the creation of roads and bridges, public transport, food production, water resources, national manufacturing and technical services etc., even using printed money, is legitimate providing the facility user contributes to the repayment of the printed money. No interest charge is needed.
    High levels of unemployment must be dealt with on a first priority basis, almost at any cost.
    There is no way a country can survive unless there is a surplus of useful and asset related income earners to finance the overhead of the non-productive earners/welfare/pension costs.
    Which brings me back to the belief that as little as possible money must flow out of the country. Any national deficit must be, at worst, balanced by export income. Otherwise spending money overseas is like throwing it in the rubbish bin.

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  14. E.M.Smith says:

    @J Ferguson: I’ve worked at some government agencies as well. Yeah, the contrast is stark. My general approach to things comes from growing up as a kid in a family restaurant. There was no such things as “not my job” and everything has to be done NOW and as the customer likes it. At the end of the day you counted out the till, set aside the costs, and if there was money left over, you could buy something. Good, if strict, training… Government jobs are more like being the whining brat with a clueless parent and finding excuses not to do your homework, while pestering for a better allowance.

    @Robing Melville: Yes, they buy toasters and cars. But they don’t create them… So the guy making them must either be happy to give them away, or be able to make so many more per hour that those going to such consumption do not dramatically hurt profit. (That is, if the government taxes away 20% of his toasters, he still has enough profit left to live on when he ‘counts out the till’ at the end of the day). It doesn’t really matter if the tax is “in kind” or is a money tax. The effect is the same. At some point, I count out the till and set aside the costs, then have nothing left. That is the point where I quit.

    So we can hide all this behind a lot of smoke and mirrors, but what it comes down to is that the government (of all levels) is presently about 1/2 the total GDP. So each day the other 1/2 makes a pile of toasters, cars, dinners out, shoes, … and in walk all the government and government related workers who pick up 1/2 the product and walk out without paying. (Yeah, in reality they pay, but that pay was taken out of your left pocket to be handed back to your right pocket… Taxed away, then ‘spent’ back. Net the same as just not paying.) At the end of the day, the productive 1/2 ‘count out the till’ and if they have economies of scale great enough and efficiencies great enough they can pay their costs and have some left over. (If margins are over 50%). If not, someone gets fired or the business closes. Not all businesses have margins over 50%…

    The problem with Apache Helicopters as economic stimulus is that it’s functionally the same as digging a hole on odd days and filling it in on even days. You put a lot of money in to mining materials and making the object that then does NOT provide for the needs of the populace and does not increase the net national wealth. The money to make it came from taking 1/2 the productivity of the other side of the economy and diverting it. It’s the impact on that other half that’s the worst part; but the increased prices for materials and the withdrawn labor also have impacts. And at the end of the day it is not like a tractor that will now let the farmer make even MORE food, nor is is like the machine tools that would let a worker make MORE cars. It’s just a really complex hole in the air waiting to be shot down. Yes, you can assign a net ‘benefit’ to it via deciding that “protection” is worth something. That ‘worth’ is not the same as ‘improved productivity’. And unlike things like gold (a ‘sterile asset’) the helicopter is a ‘wasting asset’.

    In the end, that may be what it comes down to. Businesses are made by having more ‘productive assets’ that grow wealth than the wealth they consume. In very hard times, folks will run to ‘sterile assets’ just to assure they get their wealth back some day. But government has far more ‘wasting assets’ and very very little ‘productive assets’. It’s not about “guns OR butter” (Apache helicopters or dinner out) it’s about “Machine shops vs Farms” OR “guns vs butter”. The government thinks in terms of consuming guns or consuming butter (DOD budget or food stamps budget) while business is all about machine shops or farms. Productive assets.

    And those productive assets are only kept running if there is a profit AFTER TAXES to be made. With 50% of the economy ‘tax dependent’ that becomes a much harder thing to do.

    So it’s not so much the ‘intellectual capital’ in the product, nor even the ‘value’ of the product. It is just the question of “consumption good” vs “production investment”. The Apache is, in the end, just a consumption good. And digging holes to fill them is consumption as well. (It consumes shovels while producing nothing). There is nothing to prevent a government from doing productive investment (Stalin did a lot of it, for example, in steel mills and mines) but they generally don’t, and when they do, don’t do it nearly as well as private parties. And they never account for it as well…

    @PhilJourdan
    BTW, I’ve a degree in Econ from the University of California.

    @Boballab: There is a school of thought that the thing which broke the great depression was the forced investment in productive capacity for W.W.II. Companies were simply told: We’re going to buy a million guns, tool up for it. It wasn’t the consumption of tanks, guns, and uniforms that mattered, it was the investment in plant and equipment (and purchases of rations and…)

    Others hold that it was simply the ending of the uncertainty of the FDR policies. (Something I can see happening again today. Business is simply sitting on their cash waiting to see what the rules will be next week…)

    Interesting to note that we’d had similar ‘financial collapses’ in prior decades that all had resolved much more quickly. The difference was the “New Deal” stifled the recovery of 1930 (ish).

    @Soronel Haertir: The issuer of the mortgage gets screwed and the person paying the mortgage wins. Now the bank may or may not win. They are “special” in that they can issue the loan, but not keep it, and lock in their profit at the time of issuance. So they borrow from the Fed at 2% and issue a mortgage at 4%, spread of 2%. Now they sell off that mortgage to someone else and walk away with the profit on the sale… If they hold the mortgage, both their cost basis (borrow from the Fed) and the loan inflate to lower worth, so they still have a profit between the spread. (Though the worth of the profit is dropping a little). And nobody cares that the Fed gets screwed on that deal as they can just print more money…

    But yes, private mortgage holders lose big time during inflation. As do folks holding private bonds. Just as the holders of SIVS got creamed in this turn of the screws. (Packaged mortgage products).

    @Greg O: Thanks, I’ll check it out.

  15. E.M.Smith says:

    @Ken McMurtrie:

    Simplistic? Yes. Can’t put a text book in a posting. But simplistic things are good thought tools for seeing where truth may be found.

    The notion that any money spent is good; fails on a simple example. If the government wanted full employment they could simply issue a mandate that on odd days everyone take a teaspoon and go dig a hole. On even days they fill it in. Then send everyone a cheque.

    Full employment. A great “jobs bill”. But at the end of the year all you will have done is consumed a lot of teaspoons, messed up a lot of landscaping, and consumed a lot of liniment and band-aids.

    Money is best spent on jobs that result in more spoons at the end of the year, not less, and better landscaping, not moth eaten. Money ought to be productive, not consumptive.

    It isn’t a question of “are police a net benefit”, they are. It’s a question of “are they productivity improvers”? That is more questionable. In an ideal world, they would not be needed at all. In a violent and crime ridden world, they let capital be accumulated and investments pay off by preventing their theft and destruction. To the extent our “moral compass” works, they are not needed and not productive. (And to the extent they just sit by the ‘perpetual construction zone sign ATM at the edge of town’ and act as a cash generator for small town speed traps they are simply net consumption tax… But lacking moral perfection, we need some police. Just not as much as we have. ( I don’t need protection from some guy stoned on grass eating too many twinkies. And I certainly don’t need it at $250,000 per year which is what some police are hauling down these days in California. Give me a ‘rent a cop’ for that at $50,000 please…)

    BTW “at any cost” is almost always a bad metric… Full employment is a nice goal to have, but never achieved. More important is productive employment…

    Per balance of trade: There is one exception to your scenario. If you send buckets of money overseas, then inflate away the value, you can “win”. That’s the game we are playing. Several $Trillion (and a run rate of about $Trillion a year new debt issuance…) are outstanding. When we inflate it away, the folks who issued that debt win and the holders of it lose. The USA has about a $200 Trillion unfunded obligations cost to the baby boomers who retire in the next decade (already started). No way possible to pay that off in real terms. No way to simply tell the boomers “you are screwed” – they have the most votes. The only viable answer is to pay them the dollars promised, but have them be functionally worthless. i.e. inflation. That’s the “demographic bomb’. But until then we are going for One Last Push of Treasuries to the rest of the world. Crank that Ponzi one more turn…

    Education is a bit more problematic too. An engineering education does increase productivity of that person. A sociology degree not so much… A lot of education just comes down to ‘info-tainment’ and another large chunk is ‘indoctrination’. In a capital driven system it would be much more focused on ‘trade school’ and much less on PC.

    So yes, I’ve glossed over those ‘fine points’ (and more) as they distract from the central understanding:

    Government under invests in productive capacity and is dominated by consumption spending. At some point, the “government cut” is unsustainable by the portion of the economy that does invest in productive capacity. And once you’ve eaten your seed corn it’s hard to increase the harvest.

    That does not mean that ALL government spending is evil. Just that there is a limit or optimum level and that limit point is about 50% and the optimum point is about 25% (as ‘simplistic’ estimates). So we must have a military, but does it really need to be policeman to the world?” For “free”? And we need roads (and charging tolls every mile is not a very efficient system) so having folks agree to have some roads ‘common goods’ is a good thing. But do we really need a system of social engineers out there working on our ‘self esteem’? And does it really make sense to haul all the money to DC so a small part can be sent back to the states to pave roads on “shovel ready” projects? Is it really ‘productive’ to give folks like Hansen multi-million dollar video arcades? Build bridges to nowhere? Fund airports named for Senators with no traffic but them? Fund freeways past properties Senators have purchased just prior to their leaving the senate? Provide free lunches to every school kid in the country? (While complaining about ‘childhood obesity’… )

    The world is full of things that sound like a good idea, and we simply can not afford them. Then government does a lot of them badly, and does a lot of things that are not a good idea too. So it’s a “necessary evil”, but needs to be kept from killing the productive host on which it feeds.

  16. Jason Calley says:

    E. M. Smith, your comment at Aug 12, 3:49am is brilliant and should be required reading for anyone desiring a simple explanation of why Lord Keynes should always be depicted with horns and a pitchfork.

    As a quick addition to your comments, let me point out one more important way that coercive governmental taxation and regulation interferes with the creation of wealth.

    Efficient creation of wealth requires increasing specialization of creative functions. If I build a car from scratch, the labor and cost is ginormous. If I make a million electrical fuses, and you make a million screws, and some one else makes a million pistons, etc., etc., then we can, by pooling our specialized creative functions, make a million cars at a reasonable cost in time and money. Each breakdown of the manufacturing process into more focused and specialized functions (tempered by the free market sucess of these specializations) allows the creation of excess wealth. One drawback of such specialization is that we are now faced with a problem of coordinating production and transportation of goods. The market, working through individuals interested in their own needs solves this problem rather well. Walking down the aisle of your local supermarket will prove this. There is another problem though; governments seek (because they are interested in THEIR own needs) to regulate and tax the productive specialists who drive this system. And remember that in this system of specialists, there are a LOT of individual hands making the parts of each final product. Every set of hands gets taxed and every specialized function gets regulated. Even if the individual bite is small, each final consumer product created (because of the many hands which contributed to its creation) will have a total tax and regulatory load on it that in the end will either force prices upward to the sky, or will drive the small businesses into closing their doors.

    Fiat money destroys the stable pricing functions of the market. Fiat taxes and regulations destroy the division of labor.

  17. Jason Calley says:

    E. M. Smith, concerning your comments on balance of trade, two observations.

    Many people are puzzled why the huge numbers of illegal aliens are currently allowed to stay in the US. Most assume it is because “it gives the Democrats a new set of voters!” or “it gives the Republicans cheap labor!” One reason not often mentioned is that it delays a bit of the inflation we would otherwise expericence. Many of the illegal aliens here in the US wire money home to their families outside the US. Since most countries (either openly or on the black market) allow US currency to circulate and be used, each dollar which is transfered out of the US, and remains out of the US, becomes a slight deflationary influence to counteract the inflation that would have taken place here. Each dollar sent to Mexico (that remains in Mexico) exports a little of our inflation. Each dollar transfered out of the US allows the powers that be to spend one more dollar in its place without creating more inflation to upset We The People.

    Likewise, goods bought from (for example) China, but which are bought on credit, allow the US to experience “prosperity” without the inflation which we would see if the money were just printed up. By giving us goods but still keeping our debt to themselves, the Chinese, like the Mexicans, are importing to themselves some of our inflation. In the case of China, the growth of productivity in that nation is such that they could be reasonably expected to see deflation as goods are produced more efficiently, year over year. They can absorb some of the US’s inflation by foregoing some of the benefit of their accumulation of productive capital.

    This may sound a bit like economic warfare, especially when you consider the vast number of US businesses which have closed due to competition with imports coming in to compete with them.

    Remember the Opium Wars? Remember how Great Britian hooked the population of China on opium so that the Brits could continue to import Chinese goods without depleting the British monetary base? Remember how China was destroyed in the process?

    The Chinese are quick learners, and the US landfills have ample evidence of the new opium war.

  18. kenmcmurtrie says:

    Hi EM.
    Appreciate your comments.
    What I have tried to simplify, you have put through the ringer. Yet, much of what you say is correct. Any ideal can be criticised with exceptions etc.
    However, the thing is, as you said, there already exists an unbalance of income earners to income “receivers”. There also exists a HIGH level of unemployment, again, as you highlighted, a lot of them draining the economy. Others living in abject poverty, or living by their wits, and some becoming criminals.
    Little is being done to create work for the unemployed. More and more people are actually losing jobs and becoming non earners. More and more mortgagees are defaulting. More and more businesses are becoming bankrupt.
    The only response by the WH and government is to support the financial and war industries.
    The only response to local cash flow problems is to sack workers/people, and turn off a few lights.
    No matter how correct you are on economic theory, I suggest that you are being too theoretical and, as far as I can see, not coming up with any sort of sound practical solution to the serious downwards spiralling economic chaos that undeniably exists in the US.
    How can cuts to health, education, fire departments, police departments, or even lesser important workers, possibly be anything other than socially devestating? Then, because of a reversal from taxpayer to tax drain created by the unemployment, is not that also economically negative? (Yes, I realise that a government employee might drain say $100,000 and repay say only $30,000 in tax, so there is a saving of $70,000. BUT all that he nets is usually put back into the general and local community/economy). That is the difference.
    On the overseas expenditure – the benefit you cite only occurs IF there is devaluation. Do you consider that to be a desirable situation?
    Of couse, I offer full agreement with you regarding expenditure overseas on “police duties”??
    With my usual sincere respect, Ken.
    PS. Of course, whatever you, I, or any blogger says, we are not going to change the world. But we can have fun trying to be more intelligent than the government, or is that not necessarily difficult nor something worth boasting about? :-)
    (username change coincident with registration with wordpress).

  19. kenmcmurtrie says:

    Please note: I have changed my username from Ken McMurtrie as a result of registering with wordpress.
    Presume this is the reason for my last post awaiting moderation.
    Ken

  20. kenmcmurtrie says:

    @Jason,
    Your thoughts are impressive, and have helped answer my queries on overseas deficit.
    Regards, Ken.

  21. PhilJourdan says:

    E.M.Smith – your article indicates an education well spent! And I take it you are a monetarist (I know, duh!)?

    In professional life I have found that the most important person in business is not the one that knows the most, but the one that can explain it to the average person the best. I know not if how much you know, but your ability to explain it to the layman is excellent.

  22. Ken McMurtrie says:

    Hi EM.
    Am I “persona non grata” after all the great discussions we have had?
    This week I registered with wordpress and changed my username to “kenmcmurtrie”.
    My last comments to your blog were under the new name and didn’t get past moderation.
    Just wondering what is the true situation?
    Best Regards,
    Ken.

    REPLY: { There is only one of me, so “new” commenters get held for review. Once approved, they can go ahead rapidly with future postings. Yesterday was a run to Mission Carmel, so things sat for the day. Nothing more. Your “ID” change had WordPress put you back in the “Who is this guy” queue is all. -E.M.Smith ]

  23. Ken McMurtrie says:

    EM., I would really appreciate an explanation, perhaps by email.
    Regards, Ken.

  24. Ken McMurtrie says:

    Thanks EM. All the best!
    Ken

  25. E.M.Smith says:

    @Jason Calley: Yes. And don’t forget our ‘reserve currency status’. A few $Billion (or is it $Trillion now?) sitting in national banks and treasuries around the world as IMF mandated and approved “reserves” is very helpful to us too…

    @kenmcmurtrie: Well, you have to figure out what the right problem is before you can come up with a ‘fix’ that will work. And with the kind of complexity in the economy, we can’t have a toy one on the shelf to try things out, so we have to look at the problems a bit more ‘theoretically’. (Though when possible, existence proofs from history are very helpful…)

    So I’d love to have a better answer than “Stop doing the things that break the economy” but is all I’ve got right now. Don’t go over 50% total tax take for the nation. Don’t under-invest and over consume. Don’t treat business like an endless piggy bank to raid at will, it isn’t. Don’t be ‘free cop’ to the world. etc. Maybe as I ponder it some more I can come up with something better. (My first instinct is just to say: Drop taxes to the point where it is attractive to keep businesses here again. And fix the balance of trade with China. Via a tariff if they won’t let the currencies re-align. But there are probably better ways. I’ve already offered the ‘flexible landing tariff for oil’ to fix that balance of trade and foreign oil dependence.)

    Per cuts being “socially devastating”. They need not be. A local city recently shut their police department. They were paying something like $200,000 / year / cop. They just contracted for the service from a nearby (city or county, I forget which) that had a lower cost per cop. Works great. So you can get rid of all the “pork projects” and all the “sweetheart contracts” and still get the necessary services. Heck, I’d be a cop for a lot less than $200,000 / year. But when I was picking a career cops made the same as teachers at about $14,000 a year. Similarly, we have the city of Bell California with a city manager who was pulling down $800,000 / year. Hit the news, and they decided they could skip their paycheck this year… (talk about embarrassed…) One proposal was just to put city pay rates on a common web site so voters could see (and vote more often…)

    Yeah, the folks guzzling at the slop trough will be ‘devastated’ but nobody else need be bothered… Perhaps it’s as simple as letting the people vote directly on the pay of their employees. I know I’d give congress a pay cut ‘right quick’.

    Per inflation: I’m not recommending it, just observing a pattern of facts that points toward an intent to devalue as a way out of the problem. It’s just as possible that the folks doing these things are just too clueless to recognize the impact. I could easily see them thinking they will just sell bonds to pay for stuff and not knowing the impact.

    Note you have an ‘explanation’ in-line up-thread. Just processing mechanics. Exacerbated by a day ‘on the road’.

    @PhilJourdan: Thanks! I try to explain it to myself mostly, and that makes it clearer to others. I’m probably more monetarist than anything else; but I have my eclectic moments. I think Keynes had some bits right, but may have had some missing things that cause problems. Then again, that just be simply because I was trained with Samuelson as the text in the Keynes traditions. Mostly I just try to look at what actually happens and be accurately descriptive. I do have an affection for the Chicago School, though…

  26. boballab says:

    EM

    It just wasn’t cops they contracted out (I believe it was from the LA County Sheriffs Department), they contracted out all municipal services and personel. Most of the clerical staff they got from Bell CA.

    You remember Bell: the city with the Manager that got 800K base pay and after bennies got a total 1.5 mil per year and a Police chief that made 400K per (thats more the police commisioner of NYC). The pensions ain’t bad either but Jerry Brown is trying to find a way to convict them now.

  27. E.M.Smith says:

    The city I was talking about was up in No.Cal. On the Peninsula somewhere. Probably several doing it… Up here did not involve Bell or L.A.

    I think Bell is going to be in the news for quite a while…

  28. boballab says:

    EM you might want to gaze on this then if you haven’t seen it:

    Maywood may divorce Bell and cancel outsourcing contract

    Maywood, whose political marriage to the city of Bell made national headlines, is considering a quickie divorce.

    In late June, Maywood fired most of its workers and turned over day-to-day operations to Bell. But the scandal over eye-popping salaries in Bell has become a “distraction,” and Maywood’s city leaders say they may look for someone else to run their affairs.

    “We’re caught in a situation where we need to move forward,” said Maywood Councilman Felipe Aguirre. “We don’t want to be distracted by things that are not germane to our city.”

    Also, Aguirre said, he didn’t want Maywood to “become a laughingstock of a city,” a term used to describe Bell by one of its own embarrassed council members.

    The Maywood City Council is also expected to vote at its meeting Monday night to replace Angela Spaccia, an interim city manager borrowed from Bell. Spaccia, was being paid $376,288 a year as an assistant Bell city manager, much more than most city managers. When her benefits package was included, Spaccia’s salary more than doubled to $845,960. (Spaccia has left her Bell post.)

    http://latimesblogs.latimes.com/lanow/2010/08/maywood-may-divorce-bell-and-cancel-outsourcing-contract.html

    And here is the first story on this:

    Maywood to hire others to run the city

    The L.A. County community, facing a $450,000 budget deficit, plans to lay off its employees, disband its Police Department and contract its operations to the Sheriff’s Department and the neighboring city of Bell. Experts say it is the only city in the state to take such drastic action.

    http://articles.latimes.com/2010/jun/23/local/la-me-0623-maywood-20100623

  29. E.M.Smith says:

    Don’t believe everything you read… San Carlos is doing it too:

    http://fixpacifica.blogspot.com/2010/06/san-carlos-disbands-its-police-force.html

    The city of San Carlos has voted to dissolve its police force and to begin the steps to outsource the job of law enforcement to the San Mateo County sheriff’s office as a cost-cutting measure.

    The City Council voted 4-1 on Monday night to disband its 85-year-old Police Department to help save nearly two-thirds of next year’s $3.5 million deficit. The council directed city staff to begin negotiating with the sheriff’s office, said Mayor Randy Royce, who voted to scrap the city’s 32-member force.

    Royce noted that the sheriff’s office, which has 462 deputies, has agreed to offer full-time jobs to all San Carlos officers. Redwood City police, which had also offered to take over police services, could not make such a guarantee.

    I make that about $73,000 per head for the local police. I’ve seen some departments with up to $250,000 per head (with overtime) so it looks to me like there is plenty of room to reduce costs.

    (Please note: I am NOT anti-cop. I was a “law enforcement eagle scout” and I am very much pro-cop. I have police friends and don’t have a ‘problem’ inviting cops to any party I might have. OK? I’m from the “Teachers and Cops” social circle of ‘upper lower class’ folks and have Irish Cop relatives. I’m just stating an economic fact. Got it? My mothers maiden name was “Sumner” as in “Summon er” the big guy who drug your ass in front of the crown if you failed to report for a ‘summons’. So we’ve been ‘pro-cop’ for many generations. But a 1/4 million a year? Common… )

    So it looks to me like the unions are running head long into the economies of scale issue.

  30. Gnomish says:

    I’d love to tell a story here… it would be trollfully epic, too.
    But some of that high pay was turned over to me to stfu.
    I’d like to tell another one, also about the Tiburon Chief of Police… but that would ID me.
    Hi EM. There is no escaping the corruption that feeds on plunder. The end is implied by the means.

  31. j ferguson says:

    E.M.
    There seems to be plenty of money to throw around in political subdivisions where the employees are organized.

    Daughter recently discovered that her old suburban Chicago high school phys ed teacher was making $140k – not head of department or any executive role.

    One of the revelations of cruising (in a boat) is encountering folks in bigger newer boats who retired early with astonishing pensions from public service jobs.

    A most amazing group is firemen from a northeastern city whose pigmentation didn’t evolve with the times. They were retired en-mass with stellar (STELLAR) pensions so that there wouldn’t be any carping and the force could better reflect its constituency. Some of them were 50.

    I worked with a fellow who was on the board of Hillary’s old high school. He handled the negotiations with the teachers’ union (ah, er, professional association).

    At negotiation time, they would show up with their list. One year he suggested that pay scales could be negotiated at the same time and that the direction could be down if some of their other demands were to be met. After all, it was the value of the “package” that was being negotiated.

    If they wanted to call it a compensation “package” then each component of the “package should be variable.”

    This got him on the cover of their state “professional” magazine as the biggest single obstacle to the advancement of education in Illinois.

  32. E.M.Smith says:

    So it will go until it breaks.

    One of the aspects of bankruptcy (and why, IMHO, the left are so dedicated to avoiding it – avoidance of bankruptcy is one of the definitional components of “market socialism”) is that pensions get shed to a Federal Pension Guarantee (Corporation?) that can trim them back. Basically, fat pensions get squashed and poor ones get paid close to full funding.

    If cities and states start to do the bankruptcy thing (as they ought) then a lot of those excessive retirement packages would be reduced…

    That a public with a broken Social Security system is being asked to work ever longer (presently talk is about 70) while the ‘public servants’ are retiring to yachts at 50 is not only a sin, it is an unsustainable evil.

  33. j ferguson says:

    E.M.
    It’s really amazing out here. Except for folks who owned their own businesses and not all that many of them, the best off at the upper middle range of cruising is the retired public employee cohort.

    In 1960 when I was trying to figure out what to do with my life, making lots of money wasn’t on the list. Nonetheless, I rejected vocations which I was sure would have limited opportunity at the upper end.

    My observations may have been accurate for 1960 but I could never have imagined encountering retired university professors, usually from state systems with pensions exceeding $100k and tied to cost-of-living. I should say that there probably isn’t anything basically wrong with this number for that career but few in the private sector have wound up with anything like this.

    There are the auto-industry retirees, a lot of them worked their butts off for the requisite years and are now on the loose on their Harleys at relatively tender ages – we see them in the keys. Pensions, the gift that just keeps giving.

    Our wherewithal is the result of saving like crazy the last 20 years of our careers and not spending a whole lot now.

    Maybe you could share some observations on the Calpers burden with us some time.

    It’s amazing to me that the people who seem to support social leveling don’t see this a bit tilted.

  34. E.M.Smith says:

    I probably ought not to say too much about Calpers as my spouse is in it as is her mother…

    It’s a generally well run retirement fund that has a LOT of political and economic clout. It has been known to walk into businesses where it owns a lot of stock and say, roughly: “Do what we say or be ruined in the market”. And they generally get their way. “Activist shareholders”…

    When I was in school, one of the teachers in the MBA program was making all of $25,000 / year. Looks like it’s gone up a bit since then…

    The good news is that Calpers means that the folks dependent on those retirement monies are pre-paid and NOT needing a handout year by year from current taxes. That makes those folks much less of a burden than, oh, Social Secuirty, were there are no actual investments behind it. Just I.O.U.s to the tax collection authority.

    As I decided to “retire in the middle” I couldn’t fit in any of the traditional models. So I worked like crazy, built up ‘enough’ bundle, then took a few years off. I’ve now outlived the age at which my Dad died by a couple of years, so it’s probably time to go back to work. But in this crappy market, not much demand for a ’50 something’ who has been out of work for a few years.

    Maybe I’ll write a book 8-)

    Yeah, strange model. Start working at 7 years old (in the family restaurant), work while going to school, work like a dog until about 52, then suddenly stop. Do what you want for 1/2 a decade. Then decide what you want to be when you grow up.

    If my wife could deal with the motion of a boat (she can’t) I’d be doing the liveaboard cruiser so fast it would make your head spin. Even with depressed prices, there’s enough equity in the house to do it easy. But instead, I’m looking for a bit of cheap dirt with a cottage and a dock, with a day sailer size boat for me. But that’s 2 more years after all the kids are out and settled.

    Until then, I’m playing climate scientist and trading. Maybe I’ll write 2 books… one on each topic.

    Or maybe I’ll just find out what’s for lunch and watch my garden grow…

  35. j ferguson says:

    E.M.
    I could be happy anywhere. I mentioned once a small cabin on the plains in the Dakotas where we could sit on the porch and look out into the distance over the endless prairies. NO SALE.

    i also suspect the the number of people, me, possibly you, that could be happy putzing around in a day-sailer all day is also limited.

    I took a 7 year sabbatical from architecture to invent, run, and run out a technical computing resale company (the Sun VAR period). Going back to work for other people was very hard. It took me a long time to realize that many of them didn’t have a clue as to their cluelessness, or clewlessness as we say here at sea.

    As I worked my way toward 60, I lost all my obsequiousness and actually got to be pretty blunt when I heard something I didn’t like. And, to my amazement, I got away with it.

    I subsequently found out that people assumed that anyone who was as abrasive under provocation as I came to be must have good tight connections at the top of the company. No-one who knew I didn’t ever said anything.

    Having the stash to retire NOW is a big help. Financial independence really clarifies the mind.

    I doubt if I’m any longer employable. I let my architectural licenses (even in California) all expire – swords into plowshares, I suppose.

    I don’t want to do it again, ever.

    In the computer/computing industry which I savored for the 7 years, it looked like 6 months absence could mean you had to start over. Would this apply to you or can you live off the verities you picked up in your first exposure?

    I found if you had read and understood Clauswitz you could likely run anything, but if there was a lot of activity going on under you that you weren’t sharp on, it could get away from you.

    I hope this doesn’t prove as hard for you to do as I think it would be for me?

    good luck……

  36. P.G. Sharrow says:

    This morning it occured to me the the ChiefIO would be the perfect person to create a special book. Right up his alley. Detective in a mind puzzle, language reconstruction, and requires computer skills. garanteed best seller too. Oh yes, and it needs to be done soon. Any interest? pg

  37. E.M.Smith says:

    @J Ferguson:

    One of the joys of Unix / Linux / Mach is that the core of it is fairly constant. The downside is everything else moves on very fast. For example, the present Object Oriented fad. So I can still use C just fine, but most development now happens on C++ or C Sharp or … I’ve managed C++ projects, though, even though I can’t write it. Configuring routers changed some, but I can still do it. Cisco IOS is not that hard. And the basics of network design are the same. Project Management (that I’ve done most) is pretty much human interaction skills and MS Project. Only ‘hard bit’ is more folks are going to integrated software based ‘meetings’ and a lot of interpersonal skills are useless then. (My “people reader” doesn’t work as well on a thumbnail on a 12 inch laptop…)

    Though the biggest hurdle is most likely just getting back in the “suck it up and suck up” culture. Hard to do. Then again, I always had some difficulty with the idea of it.

    @P.G. Sharrow: Sounds interesting. If you want to send more description in private the email is pub4all followed by at AOL dot com for most purposes.

    I suspect I’m going to end up being self employed in some way, simply because it’s hard to find a technical gig as a 50 something. Silly, but true.

  38. Gnomish says:

    more catholic than the pirate party, more focussed than the tea party – these guys have a REAL PARTEH!

    http://www.maybelogic.com/gunsanddopeparty/

    BTW- for those oldsters with failing vision, audiobooks are win and awesome!

    as clever as The HitchHiker’s Guide
    http://isohunt.com/download/112839317/Douglas+Adams+Hitchhiker's+Guide.torrent

    it’s as fun as Principia Dischordia!
    http://www.ebook3000.com/The-Illuminatus–Trilogy–audiobook-_52107.html

    still, gotta love those pirates, eh?
    http://www.heroturko.org/ebooks/266475-the-politically-incorrect-guide-to-global-warming-audiobook.html

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