Cash Flow

Posted by PITHOCRATES - March 24th, 2014

Economics 101

New Complex and Confusing Regulatory Policies require Additional Accounting and Legal Fees to Comply

There have been demonstrations  to raise the minimum wage.  President Obama even called for Congress to raise the federal minimum wage to $10.10 an hour.  He also wants employers to pay salaried people overtime.  There have been demands for paid family leave (paying people for not working).  Unions want to organize businesses.  To get employers to pay union wages.  Provide union health care packages.  And union pensions.  Obamacare has made costly health insurance mandatory for all employees working 30 hours or more a week.

Environmental regulations have increased energy costs for businesses.  Sexual harassment training, safety training, on-the-job training (even people leaving college have to be trained before they are useful to many employers), etc., raise costs for businesses.  New financial reporting requirements require additional accounting fees to sort through.  New complex and confusing regulatory policies require additional legal fees to sort through them and comply.

With each payroll an employer has to pay state unemployment tax.  Federal unemployment tax.  Social Security tax (half of it withheld from each employee’s paycheck and half out of their pocket).  Medicare tax.  And workers’ compensation insurance.  Then there’s health insurance.  Vehicle insurance.  Sales tax.  Use tax.  Real property tax.  Personal property tax.  Licenses.  Fees.  Dues.  Office supplies.  Utilities.  Postage.  High speed Internet.  Tech support to thwart Internet attacks.  Coffee.  Snow removal.  Landscaping.  Etc.  And, of course, the labor, material, equipment and direct expenses used to produce sales.

The Problem with Guaranteed Work Hours is that there is no such thing as Guaranteed Sales

The worst economic recovery since that following the Great Depression has created a dearth of full-time jobs.  In large part due to Obamacare.  As some employers struggling in the worst economic recovery since that following the Great Depression can’t afford to offer their full-time employees health insurance.  So they’re not hiring full-time employees.  And are pushing full-time employees to part-time.  Because they can’t afford to add anymore overhead costs.  Which is hurting a lot of people who are having their own problems trying to make ends meet in the worst economic recovery since that following the Great Depression.  Especially part-time workers.

Now there is a new push by those on the left to make employers give a 21-day notice for work schedules for part time and ‘on call’ workers.  And to guarantee them at least 20 hours a week.  Things that are just impossible to do in many small retail businesses.  As anyone who has ever worked in a small retail business can attest to.  You can schedule people to week 3 weeks in advance but what do you do when they don’t show up for work?  Which happens.  A lot.  Especially when the weather is nice.  Or on a Saturday or Sunday morning.  As some people party so much on Friday and Saturday night that they are just too hung over to go to work.  Normally you call someone else to take their shift.  Then reschedule the rest of the week.  So you don’t give too many hours to the person who filled in.  In part to keep them under 30 hours to avoid the Obamacare penalty.  But also because the other workers will get mad if that person gets more hours than they did.

The problem with guaranteed work hours is that there is no such thing as guaranteed sales.  If you schedule 5 workers 3 weeks in advance and a blizzard paralyzes the city you may not have 5 workers worth of sales.  Because people are staying home.  And if no one is coming through your doors you’re not going to want to pay 5 people to stand around and do nothing.  For with no sales where is the money going to come from to pay these workers?  Either out of the business owner’s personal bank account.  Or they will have to borrow money.  It is easy to say we should guarantee workers a minimum number of work hours.  But should a business owner have to lose money so they can?  For contrary to popular belief, business owners are not all billionaires with money to burn.  Instead, they are people losing sleep over something called cash flow.

Cash Flow is everything to a Small Business Owner because it takes Cash to pay all of their Bills

To understand cash flow imagine a large bucket full of holes.  You pour water in it and it leaks right out.  That water leaking out is expenses.  The cost of doing business (see all of those costs above).  A business owner has to keep that bucket from running out of water.  And there is only one way to do it.  By pouring new water into the bucket to replace the water leaking out.  That new water is sales revenue.  What customers pay them for their products and/or services.  For a business to remain in business they must keep water in that bucket.  For if it runs out of water they can’t pay all of their expenses.  They’ll become insolvent.  And may have no choice but to file bankruptcy.  At which point they’ll have to get a job working for someone else.

Cash flow is everything to a small business owner.  Because it takes cash to pay all of their bills.  Payroll, insurance, taxes, etc.  None of which they can NOT pay.  For if they do NOT pay these bills their employees will quit.  Their insurers will cancel their policies.  And the taxman will pay them a visit.  Which will be very, very unpleasant.  So small business owners have to make sure that at least the same amount of water is going into the bucket that is draining out of the bucket to pay their bills.  And they have to make sure more water is entering the bucket than is draining out of the bucket to pay themselves.  And to grow their business.

This is why business owners don’t want to hire full-time people now.  Because full-time people require a lot of cash (wages/salary, payroll taxes, insurances, training, etc.).  They’re nervous.  For they don’t know what next will come out of the Obama administration that will require additional cash.  For every time they want to make life better for the workers (a higher minimum wage, overtime for salaried employees, guaranteed hours, etc.) it takes more cash.  Which comes from sales.  And if sales are down future cash flow into the business will also be down.  Leaving less available for all of those holes in the bucket.  So they guard their cash closely.  And are very wary of incurring any new cash obligations.  Lest they run out of cash.  And have to file bankruptcy.  Which is why they lose sleep over cash flow.  Especially now during the worst economic recovery since that following the Great Depression.


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Minimum Wage, Obamacare and Unintended Consequences

Posted by PITHOCRATES - February 3rd, 2014

Economics 101

The Affordable Care Act greatly increased the Cost of Unskilled and Inexperienced Workers

The Affordable Care Act has changed the employment landscape.  In particular it changed a lot of people from full-time employees to part-time employees.  Especially at entry-level jobs.  Or minimum wage jobs.  Jobs that may be physically demanding but require minimum skill or experience.  Making them ideal for unskilled and inexperienced teenagers entering the workforce.

Not everyone, though, is a teenager in these minimum wage, entry-level jobs.  Some adults find themselves in them, too.  Older adults.  Single parents.  Widows.  Widowers.  People whose circumstances have changed.  And who don’t have the skills or experience for other employment.  So they find themselves struggling to get by on their entry-level, minimum wage job.

Then the Affordable Care Act (i.e., Obamacare) made their struggle more difficult.  For it required employers to offer health insurance to anyone working 30 hours or more per week.  Greatly increasing the cost of unskilled and inexperienced teenagers.  And their other entry-level, minimum wage workers.  So they did the only logical thing.  They cut their hours below 30 hours per week.  Shrinking the paychecks of both teenager.  And those who are struggling to live on their minimum wage paychecks.

The Unintended Consequences of Obamacare changed Full-Time Workers to Part-Time

We call it unintended consequences.  When a government program to solve one problem creates another problem.  In an attempt to give people with insufficient income to buy health insurance Obamacare forced their employers to provide health insurance for them.  This caused employers to cut hours for these employees.  To keep the cost of their entry-level, minimum wage workers from rising.  Thus reducing their insufficient income even further.

The rollout of Obamacare did not go well.  In the effort to give people affordable health insurance a lot of people actually lost the health insurance they liked and wanted to keep.  Another unintended consequence.  (Unless the Democrats designed the Affordable Care Act to destroy the private health insurance industry as many believe then things are going exactly as planned as people may soon start demanding that the government step in and provide national health care).  Causing a bit of a problem for the political party that gave us Obamacare.  The Democrats.  In the upcoming midterm elections.

It’s one thing causing people with individual insurance policies to lose their health insurance that may or may not have voted for you.  But to further impoverish the impoverished working those entry-level, minimum wage jobs was another.  For thanks to endless class warfare the Democrats put the impoverished into the Democrat camp.  So they needed to do something to replace the income they lost when Obamacare changed them from full-time to part-time employees.  And chose further class warfare.  By forcing those ‘rich’ employers to pay their entry-level, minimum wage workers a ‘living wage’.  By increasing the federal minimum wage.

Obama wants to Raise the Minimum Wage to replace Earnings lost when Obamacare made Full-Time Workers Part-Time

In the State of the Union address President Obama said he wanted to raise the federal minimum wage to $10.10.  But why $10.10?  The current federal minimum wage is $7.25.  And if you earned that working 40 hours each week for 50 weeks (assuming you take 2 weeks off over the year for personal reasons, holidays and vacations) that comes to $14,500 per year.  Raising the minimum wage to $10.10 brings those annual earnings to $20,200.  Or $5,700 more at the higher wage rate.  It’s a lot of money.  But probably not enough for someone to quit a second job.  For if someone is working 20 hours a week at a second job that would come to an additional $7,250 a year.  If they work 30 hours a week in a second job that would come to an additional $10,875 a year.  And some people have to work 70 hours or more a week to approach a ‘living wage’ when they don’t have the skills or experience for a job that pays more than an entry-level, minimum wage job.  So raising the minimum wage to $10.10 an hour probably won’t solve everyone’s financial woes.  But it will do something else.

If people who were working 40 hours a week went to working only 29 hours a week after Obamacare they would lose 11 hours of pay.  At the current minimum wage that comes to $79.75 less in their paycheck each week.  A significant amount for someone struggling to make it on something less than a ‘living wage’.  But look at what happens when we raise the minimum wage to $10.10 for those 29 hours.  If we multiply the additional $2.85 per hour to those 29 hours that comes to an additional $82.65 a week.  Which is a little more than the $79.75 they lost when Obamacare cut their hours.  So it would appear that the new push to raise the minimum wage to $10.10 is to put the money the Obama administration took out of these workers’ paychecks back into their paychecks before the fall midterm elections.  So they still won’t be angry and vote Republican because of what the Democrats and their Affordable Care Act did to their paychecks.

They want to sound compassionate to those with insufficient income by wanting to raise the minimum wage to replace what they took away from them with Obamacare.  To give these people a ‘living wage’.  For the current minimum wage is actually worth about 20% less than it was during the Reagan administration.  When it was $3.35.  Wait a minute, you say.  How can $7.25 be worth less than $3.35?  Because of the Democrats’ embrace of Keynesian economics.  The government wants to print money to spend.  To provide economic activity when the private sector is not.  And when President Nixon decoupled the dollar from gold in 1971 they ramped up those printing presses.  And have been depreciating the dollar ever since.  Because they made the dollar worth less and less over the years the purchasing power of the federal minimum wage fell.  Even when people were earning more dollars.  And raising the minimum wage won’t address this problem.  Only voting the Keynesians out of office will.


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The BLS Employment Situation Summary for December 2013

Posted by PITHOCRATES - January 13th, 2014

Economics 101

The Labor Force Participation Rate has Fallen Steadily since President Obama became President

Ever since the recovery summer of 2010 the Obama administration has told us the recession was over.  And his policies were creating one heck of an economic recovery.  Backed up by all those glowing monthly jobs reports. Like the December 2013 jobs report (see Employment Situation Summary posted 1/10/2014 on the Bureau of Labor Statistics).

The unemployment rate declined from 7.0 percent to 6.7 percent in December, while total nonfarm payroll employment edged up (+74,000), the U.S. Bureau of Labor Statistics reported today.

The unemployment rate is down.  And new jobs were created.  Again.  Jobs report after jobs report it’s the same thing.  The administration touts the falling unemployment rate and new job creation as confirmation that their economic policies are working.  Even though it’s been 5 years.  And the economy is still in the toilet.  Despite that falling unemployment rate.  For there is a reason why the unemployment rate is falling.  And it has nothing to do with an economic activity.

The civilian labor force participation rate declined by 0.2 percentage point to 62.8 percent in December… The labor force participation rate declined by 0.8 percentage point over the year…

In fact, the labor force participation rate has fallen steadily since President Obama became president.  This is not good.  In fact, it’s very bad.  Because it means that under President Obama’s economic policies more people have left the labor force than entered or remained in it.  Meaning that his economic policies have caused a net loss of jobs throughout his presidency.

The U-6 Unemployment Rate is Closer to the Bitter Sentiment of Job Seekers in the Current Economic Climate

In January of 2009 when President Obama began his presidency there were 80,507,000 people not in the labor force.  At the end of December 2013 that number grew to 91,808,000.  Subtracting one from the other and you get 11,301,000 people that have left the labor force since President Obama entered office.  Because his policies destroyed 11,301,000 jobs.  And because these people couldn’t find new jobs they just gave up looking.  Which is why the unemployment rate keeps falling.

So you can talk of new jobs created.  And a falling unemployment rate.  But those numbers don’t reflect the 11,301,000 jobs President Obama destroyed with his policies.  Which comes to 260,200 jobs lost per year.  Or 188,350 each month.  Which is a lot more than the 74,000 new jobs.  In fact, if you look at the change in the number of people not in the labor force from November to December of 2013 you’ll see that 525,000 people left the labor force.  So the December jobs lost is about 2.8 times the average jobs lost during the Obama presidency.  And giving a ratio of about 7 jobs lost for every new job created in December.  Making December a horrible month for jobs.  Much worse than the 6.7% unemployment rate would have us believe.

The funny thing about the official unemployment rate is that the Bureau of Labor Statistics (BLS) doesn’t count people who quit looking for a job.  Or who are working part-time because they can’t find a full-time job.  If we want an alternative measure of labor underutilization (that counts more people who can’t find a full-time job) we should look at the U-6 unemployment rate.  We can find this number in the same BLS jobs report (in Table A-15).  Which was 13.1% for December 2013.  An unemployment rate much closer to the bitter sentiment of job seekers in the current economic climate.

We will have to Wait through many more Bad Jobs Reports before we can Enjoy a Healthy Economy Again

The Employment Situation Summary confirms the horrible economy.  Though misleading with these falling unemployment rates the real economic picture is still in these reports.  All you have to do is look for them.  And understand what they mean.  For example:

In December, job gains occurred in retail trade and wholesale trade…

Employment in retail trade rose by 55,000 in December. Within the industry, job gains occurred in food and beverage stores (+12,000), clothing and accessories stores (+12,000), general merchandise stores (+8,000), and motor vehicle and parts dealers (+7,000)…

In December, wholesale trade added 15,000 jobs. Most of the job growth occurred in electronic markets and agents and brokers (+9,000).

Note that of the 74,000 new jobs 70,000 (94.6%) of them were in retail and wholesale trade.  Which is not surprising when you consider what’s in December.  Christmas.  (While near-zero interest rates sold cars to people who would otherwise not buy them.)  The final sprint of retailers for the year.  And when many of them go firmly into the black.  But while the Christmas surge on employment was underway other sectors did not fare as well.

Within the [professional and business services] industry, temporary help services added 40,000 jobs in December, while employment in accounting and bookkeeping services declined by 25,000.

Businesses add temporary workers when they have a surge in sales they believe won’t last.  And don’t want to have more permanent workers on their payroll when that surge in sales ends.  For it is easier to let temps go than full-time workers.  And less costly.  Accounting and bookkeeping services aren’t the most glamorous of services.  When the economy is growing businesses have more accounting and bookkeeping work.  But when the economy is contracting businesses have less accounting and bookkeeping work.  So a decline here could indicate an economic contraction.

The December 2013 jobs report is bleak.  Just as the oncoming winter looks in December.  Knowing we’ll have to wait through a long and cold winter before we can enjoy the warmth of summer again.  Just as we know we will have to wait through many more bad jobs reports before we can enjoy a healthy economy again.  Thanks to the horrific economic policies of the Obama administration that have failed to work these past 5 years.


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Obamacare is Raising Health Care Costs and Causing People to Lose their Health Insurance

Posted by PITHOCRATES - April 13th, 2013

Week in Review

Members of Congress think they’re smarter than the average business owner.  But they’re not.  In fact, when it comes to running a business most Congress people don’t have a clue.  Yet they continuously pass new legislation.  Discounting any concerns business owners may have.  With a certain measure of disdain.  For business owners are, after all, the enemy.  Because they object to paying higher taxes.  And they object to higher regulatory costs.  Just so they can keep their earnings.  And that’s just being greedy.

When the Democrats rammed Obamacare through Congress on a straight party vote the business community said this legislation was going to hurt them.  But Congress didn’t care.  Their basic attitude was ‘screw them’.  They’re just greedy.  But they weren’t being greedy.  They were just worried how they were going to stay in business under Obamacare (see Some Small Businesses Opt for the Health-Care Penalty by EMILY MALTBY and SARAH E. NEEDLEMAN posted 4/8/2013 on The Wall Street Journal).

Mr. Levi currently spends about $140,000 a year on insurance premiums to cover 25 managerial staff at his business, Consolidated Management, which runs cafeterias at schools, offices and jails.

Under the new law, he will have to offer insurance to all of his 102 full-time employees starting in January. Assuming all of them take the coverage, Mr. Levi says the cost of premiums could exceed $500,000.

“I’ve never made a profit in any year of the company that has surpassed that amount,” says Mr. Levi, 62 years old. “I don’t make enough money.”

He says it makes more sense to drop insurance entirely and pay a penalty of about $144,000…

Mr. Levi…is worried that failing to offer insurance could entice employees to seek employment at competing businesses that do offer benefits.

“If we don’t offer coverage, will it be harder to hire people?” he asks. “That’s the unknown.”

Meeting the new health care mandate will turn an operating profit into an operating loss.  Now as much as the Democrats may hate the very idea of profits a business just can’t remain in business if it doesn’t make a profit.  So his choices are go out of business or cut health care.  But if he cuts health care he may lose employees.  And have trouble hiring new employees.  For even though the majority of his employees were happy to work without health insurance those positions that had it may be very hard to fill without it.  Which may leave the only option available is the going out of business option.  Putting 102 people out of a full-time job.  And he’s not alone.

Mr. Epstein, 52, employs about 250 workers and currently provides health insurance to his 20 office personnel. If he were to start covering the 100 or so nurses and nursing assistants that work full time, his annual health-insurance costs would jump to roughly $600,000 from the current $100,000, he says.

Even if he takes the penalty option, he estimates he would have to pay about $240,000—a cost he doesn’t think his business could absorb. To compensate, he plans to cut the number of hours his nurses and nursing assistants work so they will be considered part-time under the law. He says he will hire more part-timers to ensure patients receive the same level of care.

Few business can just absorb another $500,000 in costs.  Even absorbing an additional $140,000 is not that easy.  Unless you have a monopoly and can just increase your prices.  But few have the privilege of just increasing their prices to absorb additional costs.  Most have to figure out how to cut costs elsewhere.  Such as dropping insurance coverage.  Forcing full-time workers to part-time.  Or deducting more out of their paychecks for the higher insurance cost.

To avoid the employer mandate, some small firms are considering other strategies, such as increasing employees’ share of the premiums, so they don’t have to shoulder the entire cost of offering benefits. Others say they will stay under the 50 full-time employee threshold or deliberately turn full-time workers into part-timers.

This is the reality of Obamacare.  And when it hits our businesses with higher regulatory costs it is ultimately the employees of the business that pay.  If you have ever wondered why the current economic recovery is one of the worst in history this a big reason why.  Obamacare.  It has frozen hiring.  And even pushed full-time workers to part-time.  All in the name of trying to pay the costs of Obamacare.  Which, according to the geniuses in Congress, was going to make everything better.  Giving everyone high-quality health care.  While cutting health care costs.  So far it appears to be doing the exact opposite.  And they’re still rolling it out.  So the worst is, no doubt, yet to come.


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Labor Force Participation Rate

Posted by PITHOCRATES - March 11th, 2013

Economics 101

The Official U-3 Unemployment Rate doesn’t count Everyone who can’t find a Full-Time Job

The unemployment rate fell in February 2012.  Yet more people are out of the workforce than they were in January.  Odd.  For the two seem to contradict each other.  For how can the workforce shrink when the unemployment rate falls.  Easy.  It just depends on who you count.  The federal government has a few ways to count unemployed people.  Specifically, they have six ways.

U-1  Persons unemployed 15 weeks or longer, as a percent of the civilian labor force.

U-2  Job losers and persons who completed temporary jobs, as a percent of the civilian labor force.

U-3  Total unemployed, as a percent of the civilian labor force (official unemployment rate).

U-4  Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers.

U-5  Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

U-6  Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.

As you can see they count more people at each of the six levels.  And the official U-3 unemployment rate doesn’t count a lot of people.  By the time you add in discouraged workers, the marginally attached and those working part-time because they can’t find a full-time job the unemployment rate increases.  With the U-6 number giving a truer picture of the employment picture.  Which currently stands at 14.3%.  And is a long way from the official 7.7%.  So even though the news reports are celebrating that the economy is improving because the unemployment rate fell from 7.9% to 7.7%, the U-6 unemployment rate stands at 14.3%.  Down from 14.4% in January 2012.  Which is pretty bad.  And little to celebrate about.

The U-6 Unemployment Rate counts all of the People who can’t find a Full-Time Job

To better understand these numbers we need to understand exactly who the people are that they are counting.  Who are the people that could be working.  Who are the people working.  And who are the people not working.  Which is all defined at Civilian Noninstitutional Population and Associated Rate and Ratio Measures for Model-Based Areas.  And summarized here:

The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.

Employment consists of all persons who, during the reference week (the calendar week including the twelfth day of the month), (a) did any work at all (at least 1 hour) as paid employees, worked in their own business or profession or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family, or (b) were not working but had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs.

Unemployment consists of all persons who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment some time during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

The civilian labor force consists of all persons classified as employed or unemployed as described above.

The labor force participation rate represents the proportion of the civilian noninstitutional population that is in the labor force.

The unemployment rate is the number of unemployed as a percent of the civilian labor force.

The civilian labor force, then, equals the total of employed and unemployed people.  But note who they count as unemployed.  Only people who were looking for work during a 4-week period.  And those on a layoff subject to recall.  (Who didn’t have to look for work during that 4-week period.)  Which excludes everyone who gave up looking for work not subject to recall who can’t find a job.  People who are living on their savings, their credit cards, their spouse’s income, their retirement nest egg or even moving back in with their parents.  Or are working a part-time job or two because they can’t find a full-time job.  The U-6 rate counts all of these people.  Which is why it’s almost twice the official unemployment rate.  And why it’s a much better indicator of the employment picture.

The most Accurate Read of the Employment Picture is the Labor Force Participation Rate

So you now can see how the official unemployment rate can fall even though fewer people are working.  They calculate the unemployment rate by dividing unemployment by the civilian labor force.  And the smaller unemployment is the smaller the unemployment rate is.  Which it is when you don’t count all of the people who can’t find a job.  Which brings us to the labor force participation rate.  Which they calculate by dividing the civilian labor force (the employed plus the unemployed) by the civilian noninstitutional population (the total of the civilian population that could be working).  Which, like the U-6 unemployment rate, provides a truer picture of the employment picture.

The U-3 and U-6 unemployment rates improved in February.  Showing an improving employment picture.  While the labor force participation rate fell from 63.6% to 63.5%.  Which means those not in the labor force increased.  Going from 89,008,000 to 89,304,000.  An increase of 296,000 people who disappeared from the labor force.  Which is greater than the 227,000 new jobs created.  So even though the unemployment rate fell there was a net loss in jobs.  Which means the economy got worse.  Not better.

Mark Twain said facts don’t lie but liars figure.  And this is what he meant.  The employment picture is not improving.  But the government reports the 227,000 new jobs and the falling unemployment rate as signs of an improving economy.  But the most accurate read of the employment picture, the labor force participation rate, shows the economy is getting worse.  As everyone who is struggling in the private sector already knows.  So someone is lying.  And it isn’t the facts.  It is those who want to hide the damage the government’s policies are doing to the economy.  So they can keep trying the same failed policies of the past.  Keynesian economic policies.  Favoring more government intervention into the private economy.  While dragging out the worst economic recovery since the Great Depression.  Another period of failed Keynesian economic policies.  For Keynesian policies are anti-business policies.  But pro-government growth policies.  Which is why liars figure.  And the labor force participation rate falls.


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The Unemployment Rate Falls but the Economy is Still Horrible

Posted by PITHOCRATES - December 8th, 2012

Week in Review

The Labor Department released the official unemployment rate (U-3) for November.  It fell from 7.9% to 7.7%.  Hurrah.  Sadly, the U-6 unemployment rate remains north of 14%.  Which is a better reflection of the economic climate as it shows basically everyone who can’t find a full-time job.  That’s about an 8 point gap between U-6 and U-3.  When George W. Bush was president this gap was only about 4 points.  Which means the economy is far worse than the official unemployment rate tells us it is.   In fact, if you plot these numbers along with the labor force participation rate (the percentage of people who can work that are actually working) the employment picture gets even worse (see Alternative measures of labor underutilization and Labor Force Participation Rate on the Bureau of Labor Statistics).

The only reason why the unemployment rate has been falling is that people are disappearing from the labor force.  Since President Obama took office the labor force participation rate has fallen from about 66% down to 63.5%.  A decline of 2.5 points.  Or a fall of some 3.79%.  Which is more than President Obama has been able to lower the unemployment rate.  Worse, the labor force participation rate has fallen at a greater rate than the unemployment rate.  Which explains why there are fewer people working today than when President Obama took office.

Why the horrible numbers?  Is it because of George W. Bush?  No.  People aren’t working because this is one of the worse business climates in U.S. history.  Higher regulations.  And higher taxes on the horizon.  And, of course, Obamacare.  The great job killer.  Businesses have basically frozen all hiring in the face of the impending Obamacare new taxes, fees and penalties.  And started reducing their full-time workforce.  Cutting hours of their workers to push them into part-time status.  As they cannot pass these costs on to their customers without losing their customers.  For people just aren’t going to pay $9.50 for a Big Mac.  If they do they will be spending less at McDonald’s overall.  And everywhere else.  Because they simply won’t be able to afford as much as they used to.

You will hear economists saying how much better things are getting.  But they’re not.  And won’t be for a long, long time.  At least not under this president.  Or his Keynesian policies.  For President Obama is a Keynesian.  But there is a problem with Keynesian stimulus spending.  It doesn’t work.  As proven by his $800 billion stimulus bill that failed to create any jobs.  At least, based on the historical data from the Bureau of Labor Statistics.


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The Official Unemployment Rate falls to 7.8% but the U6 Unemployment Rate Holds Steady at 14.7%

Posted by PITHOCRATES - October 6th, 2012

Week in Review

The jobs report is out.  And the Left is trumpeting the great fall in the unemployment rate from 8.1% in August to 7.8% in September (see Table A-15. Alternative measures of labor underutilization posted 10/5/2012 on Bureau of Labor Statistics).  This is the official U3 unemployment rate.  That only counts people looking for full-time employment.  It doesn’t include those working part-time because they can’t find full-time work.  And it doesn’t include the people who just gave up looking for full-time work because there just isn’t any out there.  Which throws a little cold water on this 7.8% number.  For it doesn’t reflect a gain in new jobs.  It just reflects that they are counting fewer unemployed people.

A more accurate picture of the current employment climate is the U6 unemployment rate.  This number counts everyone who can’t find a full-time job for whatever reason.  Some have given up their search.  Some have retired early.  Some are living off of government benefits.  Some are working part-time jobs.  Some are working a couple of part-time jobs to make ends meet.  Interestingly, although the U3 rate fell 3 points the U6 rate held steady at 14.7%.  Which is puzzling.  For everyone included in the U3 rate is included in the U6 rate.  So if U3 fell U6 should have fallen, too.  For U3 and U6 generally rise and fall with each other.  As they have done in the past.  Such as in the years from 2006 to 2012 (pulled from the same Bureau of Labor Statistics website).

During the 2006 mid-term elections the Democrats were saying the economy was just terrible.  They hammered the economic numbers saying it was one of the worst economies ever.  Of course, the numbers say otherwise.  Whether you’re looking at the U3 rate or the U6 rate.  The economic numbers were very strong right until that sustained Keynesian monetary expansion forcing interest rates below market values and the government pressure on mortgage lenders to lend to people who could not afford a conventional mortgage blew up in their faces.  Beginning with President Clinton’s Policy Statement on Discrimination in Lending.  Which is why these lenders turned to the subprime mortgage.  Approving so many people for mortgages that housing prices soared.  Creating a huge housing bubble just waiting to be pricked by a rise in interest rates.  Which had to come.  As expansionary monetary policy eventually creates inflation.  And the only way to stop that is by raising interest rates.  Which was the time bomb ticking buried deep within those adjustable rate subprime mortgages.

Facilitated by the federal government and their GSEs Fannie Mae and Freddie Mac (who guaranteed and bought these toxic mortgages from the lenders they were pressuring to approve more toxic loans), subprime lending expanded.  As the GSEs sold these toxic mortgages to unsuspecting investors.  Which all blew up in the final months of 2008.  Creating the subprime mortgage crisis.  And the Great Recession.  The U3 rate rose as high as 10% in the fallout from this bad Keynesian expansionary monetary policy.  While the U6 rate soared as high as 17%.  Great Depression unemployment levels.  And neither has fallen much since these highs.  As the current numbers are closer to their highs than their previous lows.

Worse, the spread between U3 and U6 is far greater under President Obama then it was under George W. Bush.  Which tells us how poorly the U3 rate describes the current employment picture.  The greater the spread the more meaningless U3 is.  As it is simply not counting all the unemployed people in the economy.  The Left trumpets the 3 point fall in September but that only brings the U3 rate down to what the U6 rate was under Bush.  And the Left was calling the even lower U3 numbers under Bush some of the worst job numbers of all time.  So by their own standards President Obama is a far greater disaster to the economy than George W. Bush was.  For if it was horrible under Bush anything worse than Bush’s numbers must be more horrible.

When they passed the stimulus bill they promised they would have 5% unemployment by 2012.  Even the president said he would be a one-term president if this didn’t happen.  Despite all of their spending these numbers haven’t fallen much.  Despite their Summer Recovery pronouncements of 2010.  Their economic policies have all failed.  And there is a simple explanation for that.  Their policies were Keynesian policies.  And Keynesian policies have never worked.  Nor will they ever work.


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