.comment-link {margin-left:.6em;}
Visit Freedom's Zone Donate To Project Valour

Friday, April 05, 2013

Oh, Geeze, Maybe This Time It's NOT Different

See, for years now I've had this future fudge factor sitting in all my calculations having to do with boomer retirements. As these people retire, they exit jobs. And many of their jobs aren't really going to be replaced, but the influx of the retirement maintains or increases net cash flow into consumer hands.

Now that we get into the years where these retirements start really accelerating, this effect should be kicking in quite strongly. And what I had was basically the presumption that while net job growth would be poor, and because of labor slack wages would tend to decline in real terms, the aggregate consumer spending would be more stable. 

That allowed me to postulate an economy that's much less weak at lower GDP growth rates. Not stable over the long term, but over the near term, stable when it never has been before under these conditions.

But now I'm staring at the March employment report in dazed bewilderment, because this is a truly BAD report. As you work through it the badness just keeps growing. 

The best of it is in the Establishment report, but at 88K nonfarm jobs that isn't much of a best. And then I look at the details, and I become uneasy. Wholesale trade and retail trade both racked up significant negatives. Transportation and warehousing is negative. Temporary help services are a big plus, which at least keeps one from drinking bleach. But this looks like knock-on effects from a weak economy, i.e., the type of thing I was theorizing really couldn't happen due to the influx of retirement benefits. 

The Household report is significantly worse. It claims that we lost 206K jobs in March. One hopes not, but that is such a large number that it's difficult to explain away. The emp-pop ratio is stuck at 58.5. That's where it was last year. The participation ratio is at a new low of 63.3. Last March it was 63.8. The not-in-labor force group grew by 663K this month, which is very statistically significant. 

Now I know a lot of this is retirements, and a wave of retirements can briefly produce a gap in jobs as jobs are filled after departure. But still - we are seeing improvements in unemployment rates, but that's inevitable given these huge exits. 

On the Household side, the YoY job gains keep weakening. We are under 1.3 million now. This is what the time series looks like:


My dear friend Mr. Rail started January very badly, then was chugging along gaining. All of a sudden he has dropped out on me. I begin to feel the cold winds of destiny circling from my back to my front as a trudge along.

Bank deposits are very slow, and credit cards show that consumers are not gaining ground. In short, we are very close to recession levels for both GDI and YoY employment:

We got to about these low levels of YoY employment in the mid 1990s due to tax increases, but not that GDI stayed above the magic 5. It's very hard to stay up when GDI is stubbornly low and your YoY employment numbers are sagging this badly.

Of course I could pull a Krugman and claim that the only reason we are still up is because of the M_O_M fudge factor, but I don't believe that. I have noticed a certain substitution of passion for rigor in Krugman's work, and I think it makes him a bad prediction economist.

If I am substantially wrong, then later this year we pretty much crunch into the wall in a really solid and determined manner. Autos are topped out, very clearly. I suspect sales won't decline too much, but they aren't going to keep pushing us along. The housing market is far weaker than now appears. I've been reading FHA reports going "Oh, golly!"


M_O_M, two questions:

YTD intermodal rail seems to be pretty good. Is the weekly number just noise? Lumber looks good too, but if your interpretation of housing is correct then that doesn't mean much.

Retirements mean that GDI inclusive of transfer payments should remain more stable than you'd otherwise expect--which seems to be supported by the GDI dataset. But does your fudge factor include the effects of the change to a fixed-income mindset, coupled with a healthy dose of fear for the future?

Neil - well, retirement incomes for the later cohort will on average be considerably lower than for the earlier wave.

The government retirees go out earlier and have far better medical and pension benefits. Many of those will keep spending.

The private sector retirees are mostly going to have lower incomes and a very different spending pattern in retirement. They will be very significantly worse off than the last big group.

But still, as retirees exit jobs young'uns will come in, set up households etc. So even if their real earnings are restrained, on net it should be a plus.

The real problem will come when we hit the "must cut" line in a few years. We're getting close to 75% of GDP. From there it is not long to 85%. At that point I think some people will start getting scared.

This is a remarkably flat economy at best.

Regarding rail, Jan was awful (autos were negative YoY). Intermodal wasn't that hot either. Then everything slowly improved, only to start diving in the last half of March. I suspect that Easter and China New Year timing has something to do with the intermodal sequence. On the other hand, even writing that makes me think that maybe I should hit myself in the head with a hammer and reconsider, based on this jobs report and the remarkable negative numbers shown also in Canada and Mexico.

Two more weeks will tell the tale on that.
Damn, the "real" economy is finally starting to show through. Gravity can only be defied for so long.

How long before Ben & Co. panic and go all Abe on us?

I feel sorry for all those not-so-poor suckers bidding up houses right now... NOT.


IMHO Cyprus is 2013's version of Bear Stearns. Now we start looking for this year's Lehman. Should be an interesting year.
Why so down?

It's not like there are 40.9 Million Missing Jobs.

Oh wait. Never mind.
Mark, you can always be counted on to send a few people leaping out of tall buildings.

But that graph does sum it up. Nor is it just us - Treasury yields fell hard yesterday.

It's all those retail jobs that really gave me the yimyams.

Also, the impact of the FICA increase and the other tax increases, as well as the sequester, has not yet peaked.

I'm thinking a lot of people saw that report and went through the same thinking process as I did.

"Mark, you can always be counted on to send a few people leaping out of tall buildings."

Superman? Stock brokers? Disaffected college students? It's all good, lol. Sigh.

I watched the employment release live on CNBC. Steve Liesman was the most optimistic at 200k+.. He argued that the sequester's impact shouldn't show up until next month.

He also argued that Thursday's bad claims data shouldn't impact yet either, since the employment survey was before it.

April's looking to be quite the month.

Oh, and get this. Larry Summers argued today that the data should not cause us to panic. It's been a few years since I've heard the panic word used in public. It reminds me of a favorite quote which I shall paraphrase.

If one must panic, at least panic first!

Then there's the quote from the disaster movie 2012.

When they tell you not to panic... that's when you run!
Money velocity leads to employment. The quickest
way to increase velocity is to put money into the
hands that spend it. Reduce taxes on the bottom half
and the economy will pick up, don't and it dies on the vine.


If V lead to employment, Weimar would have been a golden age.

Spork, I think we all have to grow up and face facts. We have been doing your program for 30 years. We've reached the point at which we can't do it any more.

This is a table of historical federal tax rates (income + payroll + corporate + excise) since 1979.
Read it and weep.

Note that the average federal tax rate for the lowest fifth was lowered from 7.5 to 1% over 30 years. For the second lowest quintile, it was lowered from 14.8% to 6.8%. For the middle quintile, it was lowered from 18.9% to 11.1%.

It's pretty obvious that to ever balance the budget again, we are going to have to cut federal spending on the middle through the top quintiles, and start raising taxes at least on the middle to upper quintiles. The average federal income tax rate on the middle quintile in 2009 was 1.3% versus 7.4% in 1979. Almost all of the federal taxes they paid were from payroll taxes at 8.4%, which had been at 8.5% in 1979.

Despite the common cant, in fact the US has adopted a uniquely progressive tax system. In the US, three-fifths of the population pays very little in federal taxes.

In most Western countries, lower and middle income countries pay much more in federal taxes, mostly in the form of VAT (sales tax).

There is no way to balance the budget without increasing taxes on the middle income households. Instead of raising taxes on the higher income households, I would cut a lot of the subsidies.

Err - lower and middle income GROUPS, not countries. You get my drift.
This comment has been removed by the author.
M_O_M, at this point I'm not sure raising taxes will result in any greater revenue. Despite varying federal tax rates, historically revenue's always fell within a certain range of GDP. It's only below the range now not because of lower revenue so much as government spending comprising such an absurdly high percentage of GDP (rendering it practically useless as a measure).

I would argue that overall economic activity (and thus tax revenue) could be raised substantially by a better tax code. It's so arbitrary and distorted that it's a major impediment to growth.

Besides, federal taxes comprise only a portion of the total tax burden these days; state/local taxes are already high and rising.
Let's just accept the fact that the quality of life for China/India will trend better, and ours will trend worse. There's no fix in the US that's acceptable to the voting public.
Let's just accept the fact that the quality of life for China/India will trend better, and ours will trend worse. There's no fix in the US that's acceptable to the voting public.
Total taxes for the bottom classes have gone up, not down.
The person working for minimum wage now pays more in total taxes now than they did in previous periods. I'm not
arguing for across the board tax cuts but for a less regressive tax code.

Spork, are you including the effects of EITC and other programs? Much of the bottom quintiles pay no effective federal tax at all.
Spork, that's not true at all because of various programs.

Total taxes for the bottom earners have gone down.

Of course, for many of these people real ncomes have gone down as well. That's the other part of the equation.

But your assertion is flatly untrue and the link I gave you shows you why. Most of these people pay negative income tax. The refundable tax credits didn't exist in the 1970s, and even the rise in payroll taxes hasn't offset them.
CF - Our living standards are going to go down, but given the trends in China, theirs won't survive the decline. We're now their largest export market. Indonesia, Thailand and Malaysia have room left. China's due to hit the wall.

We have been living in a bubble, and it must end. But the Chinese and Indians are also living in a bubble.

There's no fix in the US because we won't even admit the truth. We can't even discuss our problems!

After a really grim review of the data, my first conclusion on this jobs report is that it reflects some of the changes in the tax code for the wealthy.

Seriously, we are on a self-destructive path and doubling down all the time.
TJ - I suspect that some of the recent changes will produce negative revenue.

We have lost the collective ability to honestly examine the long term effects of what we are doing.

By the time you jack up long term capital gains rates for wealthy people in some areas above 30%, you've just taken an axe to growth rates.

23.8% federal combined with states with high tax rates counting capital gains as ordinary income puts CA, for example, at more than a third.

Jack a little inflation in there, and those who build wealth will lose it.

We ran this experiment before. We discovered that we increased tax revenue by LOWERING the long term capital gains rate. And now we're doing the opposite.

Greater stupidity I cannot imagine.

Of course, coupling that with a Fed that is pursing inflationary policies just throws another wobble in there.

That's why I say that this is not stable.
The group Citizens for Tax Justice , comes up with
different total taxation figures MoM. Why not focus on
total taxes paid per household net worth ? The taxes
paid by the working class looks very regressive .
If I wasn't on my phone I'd provide the link.

Because tax dollars per net worth is a stupid and evil metric to use.

Are you seriously saying that the guy who owns a $250K coffee cart and makes $50K/yr from it should pay more in taxes than the young Harvard banker who makes $120K and spends it all? Talk about penalizing initiative.

What you' talking about doing would punish the thrifty and reward the privileged.

Interesting chart (but note the caveats):

Not income related, but check out the charts in this one...

No, what I'm am saying the extremely wealthy pay very
little of their net worth in taxes while the poor often
pay more than their net worth. This is total taxation,
not just income tax. When the assets of the six Walton heirs exceed the total net worth of the bottom 30 percent
of Americans it does matter. We are on our way to creating a permanent over class who will ensure that their position
is not threatened by sharing productivity with labor or
distribution to society through taxation.

We've had a permanent overclass like you describe since at least the mid-19th century. Every attempt to confiscate their wealth only entrenches their power by preventing the entry of new participants, like the Waltons. Conversely, loosening the tax rules causes turnover of the elites. Before the 80's, who would have thought that Bentonville, Arkansas could be the nexus of a new American power center?

Capital flows like water, and you cannot pin down the truly wealthy and powerful with wealth taxes--try it, and you either increase their power or destroy the elites utterly and create a totalitarian state and supine society. The only way to successfully prevent stagnation of the elites is to encourage new wealth.

Oh yes, the loosening of tax rules which enable the
wealthy to keep their wealth ? Walmart, whose policies
take money out of Main Street American by offering
low cost Chinese goods at the while eliminating many
small businesses ? The same Walmart who keeps
employees part time ? This county broke up the
railroads and other robber barons because of it
felt the concentration of wealth and power were
dangerous to democracy and the economy. Now
we want to encourage more wealth concentration ?
That's crazy.


Because breaking up the trusts worked so well? That got us the Big 3, Pan Am, IBM, AT&T. The decades following that "success" were utterly oligopolistic. The country only succeeded because the rest of the world had immolated itself over the previous 30 years. Once Europe and Japan (and eventually China) got their act together, we got our butts kicked and have only stayed in the game by inventing new industries faster than Washington D.C. can regulate them.

I'm not going to defend Walmart per se, but they mostly responded to tax and regulatory policies designed to discourage domestic fixed investment. The data shows over and over that fixed investment (i.e., capital concentration) increases wages. Why would you want to discourage that?


I can say that more succinctly:

You're focusing on money, thinking it leads to power. But if you give the elites power, they don't need money.

Modern Monetary Theory is now all the rage...

Bloomberg Editorial...

“Central Banks Must Master Their Fear of Inflation”


QE till the end of time...

"“Columbia Professor Michael Woodford, the world's most closely followed monetary theorist, says it is time to come clean and state openly that bond purchases are forever, and the sooner people understand this the better.
"All this talk of exit strategies is deeply negative," he told a London Business School seminar on the merits of Helicopter money, or "overt monetary financing".
He said the Bank of Japan made the mistake of reversing all its money creation from 2001 to 2006 once it thought the economy was safely out of the woods. But Japan crashed back into deeper deflation as soon the Lehman crisis hit.
"If we are going to scare the horses, let's scare them properly. Let's go further and eliminate government debt on the bloated balance sheet of central banks," he said. This could done with a flick of the fingers. The debt would vanish.
Lord Turner, head of the now defunct Financial Services Authority, made the point more delicately. "We must tell people that if necessary, QE will turn out to be permanent."

AEP is correct that there is no exit; the issue is that QE cannot be permanent. You can only build a house of cards so high before it inevitably collapses.
Sporkfed, you really ought to go read up on what Pareto had to say about circulation of the elites. There will always be elites. A lot of our current problems can be traced to a lack of circulation in ours - for example, look how many generations some political operatives in both parties go back. Many have roots a century ago. Not surprisingly, people who haven't had an original thought in 3 generations aren't going to be capable of solving current problems.
No, what I'm am saying the extremely wealthy pay very
little of their net worth in taxes while the poor often
pay more than their net worth. This is total taxation,
not just income tax.

As Neil pointed out, this has ALWAYS been the case; not only is it nothing new, it isn't even worth mentioning because it makes no difference whatsoever.

So what has changed over the last 30 years? The is so simple it is almost frightening how many people ignore it: the lower 3 quintiles are paying a higher percentage of their net worth in INTEREST PAYMENTS and REGULATORY burden. Also it is worth mentioning that CPI (the basket of goods) mostly reflects the spending of the top 2 quintiles while the bottom 3 quintiles spend a higher percentage of their income and net worth on food, shelter, and energy.

The biggest rip-off for the bottom 3 quintiles was "Cash For Clunkers". Whatever increased maintenance costs a clunker burdens on its owner, it doesn't come close to the increased insurance and interest costs of a new vehicle.

With friends like Sporkfed, the lower classes don 't need any enemies.

Why do you believe retirements would maintain or increase cash into consumers hands? Isn't it more likely that as people retire they conserve their capital, effectively reducing consumer spending?

Back in the 90's, there was a chart floating around at the insurance company I worked at that charted the S&P to the number of 49 year olds in the US economy. The lines matched easily well.

The number of 49 year olds started to crash in 2009. One year later than what actually happened.

Things that make you go hmmmm, eh?
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?