I am fascinated by closed economies. One of these is Venezuela, where the main driver of the economy has been oil. However, Venezuela's economy is ravaged by hyper-inflation, chronic shortages of basic goods, stifling currency controls, and plummeting global oil prices. A recent Fortune article "4 Steps To Fix Venezuela's Economy" outlines the economic problems the country faces, and proposes four steps to stabilize the economy. It's an interesting article, and worth a read.
In a prior blog post called "Unemployment, Employment and the Participation Rate," I explored several different metrics used to evaluate the health of the economy. One of those is the participation rate, which measures the percentage of the labor force (those aged 16 and older) that are working or actively seeking work. This metric has been declining over time, which could signal weakness in the economy.
Yesterday's post on Seeking Alpha "Declining Participation Rate a Function of a Weak Labor Market" discusses this a but more and points out that some economists attribute the decline to an increase in the retirement of baby boomers. The article compares our economy to that of the United Kingdom, which also has baby boomers, and concludes that the decline in the participation rate is not due to an increase in the retirement of baby boomers. It's an interesting article and worth a read.
Link to my prior post on Unemployment, Employment and the Participation Rate:
Link to Seeking Alpha article: http://seekingalpha.com/article/2715165-declining-participation-rate-a-function-of-a-weak-labor-market?ifp=1
The unemployment rate recently dropped to 7.6 percent, which on its face sounds good. However, the economy only added 88,000 jobs in March, well below expectations. Given this dichotomy, I wanted to add a few of my own thoughts on unemployment rates, employment and the participation rate.
Official Unemployment Rate (U-3). In my opinion, focusing on the official employment rate as issued by the Bureau of Labor Services (BLS) provides an incomplete (and potentially misleading) picture of the unemployment situation. This headline rate is known as the U-3 unemployment rate, and focuses on people out of work that have actively sought work in the past four weeks. According to the BLS: "Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work." It ignores people that have stopped looking for work or people that are working part-time but who want to work full-time. The chart to the right shows the U-3 unemployment rate from 2007 to present, with the peak of 10% unemployment during the recent recession (data from the BLS website).
U-6 Unemployment Rate. The U-6 unemployment rate is based on the U-3 unemployment rate and adds people who are "marginally attached workers" and part-time workers who want to work full-time but cannot due to economic reasons. This broader measure of unemployment captures underemployed workers, but still excludes people who have given up on looking for work and so are not considered to be part of the workforce. This could be people who have retired or have simply given up looking for work because they couldn't find a job. This U-6 measure of unemployment was 13.8% in March 2013, down from a peak of 17.1% in October 2009. This data is not easy to find on the BLS website, but here's the link: http://www.bls.gov/webapps/legacy/cpsatab15.htm
Employment. The BLS also publishes employment data, with the non-farm payroll employment data being the most commonly used. For example, the recent headlines that the economy added 88,000 jobs refers to non-farm payrolls (here's a link to the recent BLS announcement: http://www.bls.gov/news.release/empsit.nr0.htm). According to preliminary numbers from the BLS, non-farm payroll employment reached 135,195,000 in March 2013, up from a low of 129,320,000 in February 2010. Many economists estimate that it takes a monthly increase in employment of at least 150,000 for the workforce to keep up with population growth.
Labor Force Participation Rate. The labor force participation rate measures the percentage of the labor force that is working or actively looking for work. The labor force in the US is defined by the BLS as people aged 16 and over. According to the BLS, the Labor Force Participation rate fell to 63.3% in March 2013, down from a high of 67.3 in early 2000. The Labor Force Participation Rate has trended down since 2000, but the pace of decline picked up in the latest recession. There's a good article on the blog Calculated Risk discussing the Labor Force Participation Rate - here's the link: http://www.calculatedriskblog.com/2013/04/labor-force-participation-rate-update.html?. Here's a good discussion on Seeking Alpha on how declining labor force participation could actually be good for workers: http://seekingalpha.com/article/1330171-could-there-be-a-silver-lining-to-declining-labor-force-participation?
Payroll to Population (P2P) Rate. Another measure of employment (or unemployment) is the Gallop US Payroll to Population Rate (P2P). This metric "is an estimate of the percentage of the U.S. adult population aged 18 and oder who are employed full time by an employer for at least 30 hours per week. P2P is not seasonally adjusted." (Source: http://www.gallup.com/poll/161624/payroll-population-rate-stagnant-march.aspx.) According to Gallup, the P2P was 43.4% in March 2013, unchanged from 43.3% in February 2013. Another similar measure is the employment-to-population ratio (aka employment-population ratio).
When I'm trying to understand unemployment, these are the measures that I use. So for example, the way I read the current release is that the drop in the official unemployment rate is misleading. The economy only added 88,000 non-farm jobs when 150,000 new jobs are needed just to keep up with population growth. So the pace of hiring has slowed down. Also, the decline in the participation rate tells us that more people are leaving the work-force, whether by retirement or going back to school (a popular route for younger workers) or other reasons. So in all, despite an improving official unemployment rate, the economy has taken a step back.
Thoughts? Please send me a note.
We all know of California's state and local pension crisis (if not, see these posts). However, there's also an unfunded $62 billion liability for retiree healthcare benefits for California state employees, according to a recent press release issued by the California State Controller's Office. Because it is unfunded, this means that the State of California pays for these benefits on a "pay as you go" basis. According to the State Controller, California needs $4.7 billion in fiscal 2011-12 to pay for these unfunded retiree healthcare benefits, when only $1.7 billion was provided for in the state budget.
The State Controller argues that the state should shift to "pre-funding" these healthcare costs, and that by doing so, significant cost savings could be achieved. However, recognizing the difficult budget environment, the Controller suggests that even partial funding of these costs would significantly reduce the state's liability.
Here's a recent story on NBC Bay Area on the topic:
Here's a link to the press release by the State Controller's Office: http://sco.ca.gov/eo_pressrel_11680.html
Did you know that outstanding student loan balances in the US total $870 billion, more than outstanding US credit card balances ($693 billion) or US auto loan balances ($730 billion)? Further, the outstanding student loan balance is growing, while other consumer credit is declining or remaining flat. This is according to the post "Grading Student Loans" on the Federal Reserve Bank of NY's Liberty Street Economics web page. The concern is that the amount of student loan debt is causing a drag on the economy.
According to the Forbes article "The Next Crisis to Avoid is in Student Loans," the concern is the high amount of student loan debt combined with a weak job market adds pressure to the economy. Specifically, this could be impacting first-time home buyers, as borrowers in their 30's have the highest average student loan debt balance at $28,500.
There's much more to the issue that is contained in the articles.
Here's the link to the "Grading Student Loans" post:
Here's the link to the article "The Next Crisis to Avoid is in Student Loans" from Forbes: http://finance.fortune.cnn.com/2012/03/06/student-loan-crisis/
Several California cities are broke, near broke, or on their way to being broke. There's an interesting (and likely controversial) op-ed piece that recently appeared on Bloomberg.com that discusses the financial mess that Stockton is in, the new 90 day mediation period required before a municipality can declare Chapter 9 bankruptcy, the genesis of the problem, and how San Diego has proposed to fix their financial mess.
Here's a link to the op-ed piece:
Here are links to my prior posts on California's pension crisis: http://www.allenlatta.com/1/post/2011/11/reforming-the-california-public-pension-system.html
The NY Times has posted an article "Big Data's Grass-Roots Revolution" which discusses how the incredible volumes of data that is being generated can be analyzed by regular folks like you and me. There's also a video by Google's Chief Economist, Val Varian, from the Strata 2012 conference on how one can use Google data for economic forecasting. The beginning of Mr. Varian's speech discusses the correlation of searching for vodka and searching for hangovers.
Here's the link to the NYTimes.com story: http://bits.blogs.nytimes.com/2012/03/02/big-datas-grassroots-revolution/
Link to Hal Varian's talk "Using Google Data for Short-Term Economic Forecasting" at Strata 2012: http://www.youtube.com/watch?feature=player_embedded&v=-I8acYHQ0v0
Uber is a San Francisco-based, venture capital-backed start-up company that enables people to locate a nearby private car service through an application designed for mobile devices. Uber is backed by venture capital firms that include Benchmark Capital, First Round Capital and Menlo Ventures.
Uber has been the focus of several articles today about the service on New Year's Eve, when the company implemented a form of dynamic pricing (called "Surge Pricing" by the company), by adding surcharges to the fares at around midnight and after. Here are a couple links to stories:
All Things Digital: http://allthingsd.com/20120101/uber-ceo-responds-to-new-years-eve-complaints-considers-dynamic-pricing-for-weekends/
Here's a link to Uber's blog explaining the Surge Pricing: http://blog.uber.com/2011/12/31/nye-surge-pricing-explained/
My NYE Uber Experience
This was my first experience with Uber. We had signed up for the service previously and downloaded the app, but had never used it before. I like to test the services of venture-backed companies, and it seemed that NYE would be a perfect time to test Uber.
8:45 pm. I used the Uber service on New Year's Eve at a little before 9:00 pm in San Francisco. Using my iPhone App, I identified my location and requested a car. Surge Pricing wasn't in effect at that time. The car arrived literally within a minute and was a late-model town car with a very professional and amicable driver. He drove us to our destination, and as payment is all done through the Uber website (a credit card is stored at the website), no money changed hands, and the tip is included in the price of the fare. Our trip was short and our fare was the minimum $15 fare. All in all, I was very pleased with this experience.
11:00 pm. I tried using the Uber car service at a bit after 11:00 pm and the Uber App on my iPhone notified me that Surge Pricing was in effect and that the surcharge was a 5x charge on the price of the fare. As the minimum fare in San Francisco is $15, this meant that the minimum charge for a short ride would be $75. We found a taxi quickly and our fare was about $10 with tip.
After 2:00 am. The party was winding down, and Surge Pricing was still in effect. For a short ride home, $75 seemed excessive, and so we caught a ride with a friend.
Conclusion. When I used the service, Uber worked well. In addition, dynamic pricing worked (from an economics perspective) with me. At 8:45 pm, $15 for a short trip was a go. At 11:00 pm and 2:00 am, $75 for a short trip seemed excessive, and we found suitable and readily available alternatives. I don't have a problem with dynamic pricing, and given how pleased I was with the Uber service at 8:45 pm, I will certainly use them again. However, I will be mindful of the potential of dynamic pricing and will make sure to have other options lined up (taxi company apps, perhaps?).
The title of the Forbes article sums it up nicely: "New Study: With Giant Pension Debts, California is Screwed." The Stanford Institute for Economic Policy Research (SIEPR) has issued a report entitled "Pension Math: How California's Retirement Spending is Squeezing The State Budget" which looks at the UNFUNDED pension liabilities for three California pension systems (CalPERS, CalSTRS, and UCRP) and finds that the combined unfunded liability for these pensions systems is an astonishing $290.6 billion, using a discount rate of 6.2% (which discount rate is aggressive in my opinion). Using a risk-free discount rate, this unfunded liability is a staggering $497.9 billion. In my view the truth is somewhere in between, but it doesn’t really matter much. California has a huge pension problem, and it must be dealt with immediately.
Link to Forbes article:
Link to SIEPR:
Link to the SIEPR report:
Link to California Common Sense Transparency Portal analysis of CA pension funding status:
California Governor Jerry Brown is confronted with an estimated budget shortfall of up to $13 billion, and limited tools to eliminate that shortfall. His solution: prepare a balanced budget that includes the impact of proposed tax increases, and if the tax increases aren't passed automatic spending cuts will occur. As one can imagine, the proposal has met with considerable mixed response. The LA Times essentially agrees that more revenues are needed and calls for lawmakers to "come to the table with an open mind and a willingness to compromise." An opinion column in the Orange County Register argues that Governor Brown's proposal to increase the sales tax and to raise income tax rates on the top earners in California are not the solution, but are a continuation of California's "failed management of existing resources and poor understanding of the dynamics of state revenue." In my view, this is a very complex problem that is compounded by a complex legal framework that no longer works in California.
Here's a link to a Bloomberg article on the issue: http://www.bloomberg.com/news/2011-12-08/brown-to-seek-more-automatic-budget-cuts-if-california-tax-increase-fails.html
Here's the link to the LA Times piece: http://www.latimes.com/news/opinion/opinionla/la-ed-brown-20111209,0,4157624.story
Here's a link to the Orange County Register piece: http://www.ocregister.com/opinion/state-330661-income-tax.html
Eliot Spitzer, when he was Attorney General of New York, negotiated a universal settlement with Wall Street banks that, among other things, prohibited equity research analysts from participating in underwriting activities. The San Francisco Chronicle has an interview with Mr. Spitzer on the impacts of financial regulation. The story can be found here: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/11/19/BUUA1M0II9.DTL
An opinion column by Dean Garfield and Dendy Young that appeared on today's US News website provides their insights on what would help keep innovation in the US strong and robust, helping to improve the US economy. Here's the link: http://www.usnews.com/opinion/articles/2011/11/11/encouraging-venture-capitalism-key-to-economic-growth. Mr. Garfield is the president and CEO of the Information Technology Industry Council. Mr. Young is the managing partner of McLean Capital, a private equity firm, and the former CEO of GTSI Corp.
In this piece, Mssrs. Garfield and Young list three items they feel will help the US maintain its innovation advangate:
I generally agree with the points made in this piece, but would add the following two items:
Governor Jerry Brown recently proposed a 12-point pension reform plan for all California public employees. Here's a link to the proposal: http://gov.ca.gov/docs/Twelve_Point_Pension_Reform_10.27.11.pdf. The Los Angeles Times has a good editorial on the Governor's proposal, which can found here: http://www.latimes.com/news/opinion/opinionla/la-ed-pensions-20111028,0,394461.story. This is a difficult issue that must be dealt with to ensure the future economic soundness of the State.
The US economy's growth will probably be "frustratingly slow", according to Fed Chairman Ben Bernanke, Fox News reports. The Fed now estimates that the US economy will grow from 1.6% to 1.7% for 2011 and 2.5% to 2.9% in 2012, which estimates are roughly a point below the Fed's estimates in June. Unemployment is expected by the Fed to be between 8.5% and 8.7% in 2012, down from the current rate of 9.1%. Here's a link to the Fox story: http://www.foxnews.com/politics/2011/11/02/bernanke-pace-economic-growth-to-be-frustratingly-slow/.
According to The Wall Street Journal, Bernanke also signaled that the Fed is ready to do more to help the economy, such as through the purchase of additional mortgage-backed securities to aid the weak housing market. Here's the link to the WSJ.com story (behind subscription firewall): http://online.wsj.com/article/SB10001424052970203804204577013900433130614.html?mod=WSJ_hp_LEFTWhatsNewsCollection
To me, this is all mixed news. Given the turbulence in Europe with the Greek sovereign crisis, Asia's slowing economy, and the lingering weakness in the US economy, it wouldn't take much to derail the slight US recovery. I'm hopeful that Europe is able to contain the Greek crisis, that Italy can address its economic issues, and that the US economy continues to grow. These would be nice holiday presents to us all.
Interesting article on growth economics, innovation and entrepreneurship by Tom Kane that appeared recently in the American. Here's the link: http://american.com/archive/2011/october/macro-vs-growth. In the article, Mr. Kane discusses the differences between macroeconomics, which is the focus of our politicians in Washington DC, and growth economics, which deals more with long-term trends in output per capita. Growth economics deals with entrepreneurship and innovation - important topics for the US economy.
Interesting article on the erosion of the American Dream from Nin-Hai Tseng of Fortune Term Sheet. Here's the link:
In an Op-Ed piece that appeared yesterday on WSJ.com, Steve Malanga outlines how California is driving away jobs. Interesting read and it adds to the discussion of articles from Michael Lewis and the Economist which are discussed in an earlier blog post. Here's the link: online.wsj.com/article/SB10001424052970204422404576594890367486316.html?KEYWORDS=california
The November 2011 edition of Vanity Fair magazine contains a Michael Lewis article entitled "California and Bust." Here's a link: http://www.vanityfair.com/business/features/2011/11/michael-lewis-201111. In this article, Mr. Lewis describes the dismal financial condition of California, both at the state and local level. To me, it highlights the difficulties we face as a state, and how difficult it will be to change the situation. The article also introduces me to a term that I'm going to try to incorporate into my vocabulary: lizard-brained.
In my view, the Michael Lewis article echoes the article "California reelin'" which appeared in the Economist in March 2011. Here's a link: http://www.economist.com/node/18359882. The Economist article examines some specific causes of the problems that now exist in California and is an interesting read.
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