Unemployment

Posted by PITHOCRATES - October 1st, 2012

Economics 101

When Prices Rise Businesses Increase Output and when Prices Fall they Decrease Output

No one likes losing their job.  Even if you hate your job.  In fact, that’s why so many people stay in jobs they don’t like.  Because it’s easier than finding a new job that provides decent pay and benefits.  Sure, there are some aggressive go-getters out there who advance themselves up the earnings ladder by making career moves.  But most people prefer a steady paycheck that meets their needs.  At least, meets their needs with only a modicum of complaining.

But resigned to our places of employment as we may be change happens.  And we lose our jobs.  For a variety of reasons.  Mostly through the ebb and flow of the free market economy.  The normal business cycle.  The boom-bust cycles of the economy.  On the boom side prices rise as people are buying a lot of things.  High prices translate into business profits.  So businesses increase output to sell at those high prices.  And other businesses enter the market.  Adding jobs to the economy.  Retailers increase their orders at their wholesale suppliers.  Who increase their factory orders.  And the factories increase their orders with their suppliers.  Adding a lot of jobs to the economy.  And lowering the unemployment rate.

But eventually too many businesses flood the market with their goods and services.  Supplying more than the people can buy.  So stuff sits on shelves longer.  Retailers reduce their orders at their wholesale suppliers.  So inventories grow at the wholesalers.  So they cut their factory orders.  Leaving the factories with excess production.  So they cut back and reduce their orders with their suppliers.  As everyone cuts back on their business operations they lay off workers.  Removing jobs from the economy.  And increasing the unemployment rate.

When Capitalism destroys some Back-Breaking and Unpleasant Jobs it creates New and Better Jobs

The business cycle is normal.  And necessary.  By using prices in the market place it constantly adjusts supply to demand.  Making sure we efficiently use capital (raw materials, factories, equipment, etc.).  And human resources (labor, research, engineering, etc.).  When we under-utilize capital and human resources prices tend to rise (demand increases).  Encouraging an increase in supply.  The boom time.  When we over-utilize capital and human resources prices tend to fall (demand falls).  Encouraging a decrease in supply.  The bust time.  Or recession.  The business cycle maintains the optimum amount of economic activity automatically.  If we let this process operate automatically.  Yes, there will be recessions.  But they will typically be short in duration.  The less prices rise during the boom the shorter the duration.  The higher prices rise during a boom the longer the duration.  But one thing for certain is that prices have to fall to correct to actual demand.  And that only happens with a recession.

There are other contributors to unemployment besides the normal business cycle.  Like structural unemployment.  Such as when technology changes and makes old jobs obsolete.  A lot of ditch diggers lost their jobs when we developed mechanized excavating equipment.  People in the whale oil business lost their jobs when John D. Rockefeller brought kerosene to the market.  The Pony Express riders lost their jobs with the advent of the telegraph.  The telephone put telegraph operators out of work.  Cell phones put people in the phone booth industry out of a job.  And destroyed a lot of jobs in the pager industry.  The personal computer put a lot of secretaries and typists out of work.  The DVD destroyed jobs in the VCR industry (and those little video cassette rewinding machines).  When they found asbestos caused lung cancer it destroyed the asbestos industry.  The Internet is putting the printed newspapers out of business.  Digital cameras destroyed jobs in the instant camera business (e.g., Polaroid).  And email and texting is causing the U.S. Postal Service to go bankrupt.

There are always unemployed people.  Thanks to the normal business cycle.  Structural unemployment.  Even to changes in consumer preferences that puts some businesses out of business.  (Wearing legwarmers was a fashion trend that sold well in the Eighties but disappeared by the Nineties.)  So there are always people losing their jobs.  But that’s normal.  And necessary.  For all of those new technologies and new consumer preferences create new industries.  And new jobs.  Jobs they staff from the unemployed.  So while free market capitalism destroys some jobs it creates new ones.  Jobs that are often better than the ones destroyed.  Such as back-breaking and unpleasant manual labor jobs replaced by less back-breaking and less unpleasant jobs.  Such as the ditch diggers being replace by a machine and an operator.  And all those workers who build, transport, fuel and maintain those machines.

Some of our Worst Recessions have happened since the Keynesians set out to make Recessions a thing of the Past

Then there’s a worse kind of unemployment.  The kind government causes.  In part with their policies that are not business-friendly.  That increase the cost of business.  Which reduces the number of jobs they can create.  Such as increasing taxes and tariffs.  And mandatory employee costs.  Such as Social Security, Medicare, unemployment taxes, health insurance, etc.  As well as corporate income taxes.  Regulatory compliance costs.  And a minimum wage.  Which discourages hiring unskilled workers.  As well as increases pay levels for those earning above the minimum wage.  Who expect a much higher pay than minimum wage because of their education and/or experience.

So these policies depress the job market.  Because they increase the cost of business.  Then they compound their anti-business policies with bad monetary policy.  Keynesian economists don’t like capitalism.  Or the private sector.  Because of the business cycle.  Keynesians say they can get rid of the business cycle.  By doing what the private sector won’t do.  Hire people during times of recession.  Keynesians encourage the government to run deficits during recessions so they can spend money.  Creating government jobs.  And by creating government projects (e.g., building roads and bridges) for the private sector.  Creating jobs that the private sector won’t.  They even push interest rates below where the market would have them.  By expanding the money supply.  To encourage business to borrow money to expand their businesses for a consumer demand that isn’t there.  And they encourage consumers to buy big ticket items like houses and cars.  To further go into debt to stimulate economic activity.

The problem with these Keynesian policies is that they interfere with the automatic price mechanism to match supply to demand.  So when prices tell suppliers to reduce output these policies encourage them to increase output.  So while they may actually stimulate some economic activity it is not real economic activity.  Not driven by real demand.  Prices will continue to rise as if the boom is continuing.  The inflation created by that expansion of the money supply will even increase prices further still.  Which means when the correction happens those prices have a lot farther to fall.  Making the recession longer.  And more painful.  So the Keynesians not only failed to remove the bust-side of the business cycle.  They made the bust-side last longer than it normally would have had there been no government intervention.  Which is why some of our worst recessions have happened since the Keynesians set out to make recessions a thing of the past.

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U.S. Education no longer Leads the World in Science, Technology, Engineering and Mathematics (STEM)

Posted by PITHOCRATES - July 22nd, 2012

Week in Review

There’s bad news.  And news that’s not as good as the bad news.  There’s structural unemployment.  And we’re dumbing down our educational system (see For the U.S. Economy the News Is Bad and Worse by Mortimer B. Zuckerman posted 7/18/2012 on U.S. News and World Report).

Given that the median period of unemployment is now in the range of five months, vast numbers who want to work are just not counted. If we include, as we should, people who have applied for a job in the last 12 months, and those employed part time who want full-time work, the real unemployment number is closer to 15 percent. And we’ve made virtually no progress in reducing this number. We need 150,000 jobs every month just to take into account the people entering the labor force. Today we are looking at monthly job creation estimates of only 75,000 over the last three months.

We do track this true unemployment number.  We just don’t report it.  The official number we report is the U-3 unemployment rate.  The one that includes everyone who can’t find a full time job is the U-6 unemployment rate.  And it does stand around 15%.  So why does the U.S. continue to suffer through the worst recession since the Great Depression?  Because of structural unemployment.  Meaning people lost their jobs because the economy no longer needs their jobs.  Think of print newspapers going out of business because of digital news available online.  The world changes.  And we replace the old technology with new technology.  Meaning there are jobs for who drives this technological change.  And no jobs for those who cling on to the technological past.  So you want to be the people driving this new technology.  Which requires the best education.

Here now is the worse news: America is adding to the length of unemployment lines in the future by falling behind today in skill areas where global competition has become so intense. Too few of our younger people are benefiting from what is called STEM education. STEM stands for science, technology, engineering, and mathematics, the human capital at the core of any productive economy…

A stunning illustration of how far America has started to lag in training its youth is that we are only one of three countries in the 34-member Organization for Economic Cooperation and Development where the youngsters are not better qualified than their fathers and mothers. Men and women ages 55 to 64 have the same or better education than the 25-to-34 generation. The younger workers in most other OECD countries are much better educated than those nearing retirement…

In a 2010 report by the academies, an advisory group on science and technology, the United States ranked 27th among 29 wealthy countries in the proportion of college students with degrees in science and engineering. In a larger study conducted by the OECD in 2009, American 15-year-olds were 31st in math and 23rd in science. Yet another study found American 12th graders near the bottom of students from 20 nations, and this doesn’t even focus on the achievement gap between low-income and minority students and their peers…

Astonishingly, according to recent studies, about 30 percent of high school math students and 60 percent of those in the physical sciences are taught by instructors who either did not major in the subject or are not certified to teach it.

Sadly, the U.S. no longer has the best education.  Sure, students today can recite every bad thing America has done as a nation.   Tell you the inherent evils of capitalism.  And they can tell you everything you want to know about global warming.  But they’re not smarter than their parents.  Which is why our kids today won’t have a better life than their parents.  Because our educational system is dumbing them down.  Making them prime candidates for structural unemployment.  For the sad truth our college graduates are learning today is that having a college degree isn’t all that is necessary for a good job.  You need a degree in something useful.  And the liberal arts and social sciences just aren’t going to give you the science, technology, engineering and mathematics you need to compete in the global economy.

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