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The Manufacturing Sector Is Alive And Well

Posted by Tom Lindmark on May 2nd, 2013

An interesting article on manufacturing from the Cato Institute which posits that there is no manufacturing renaissance simply because the meme of a manufacturing decline is a myth. Consider their chart.

Here’s their summary of the manufacturing sector;

Contrary to countless tales of its demise, U.S. manufacturing has always been strong relative to its own past and relative to other countries’ manufacturing sectors. With the exception of a handful of post-WWII recession years, U.S. manufacturing has achieved new records, year after year, with respect to output, value-added, revenues, return on investment, exports, imports, profits (usually), and numerous other metrics appropriate for evaluating the performance of the sector. The notion of U.S. manufacturing decline is simply one of the most pervasive economic myths of our time, sold to you by those who might benefit from manufacturing-friendly industrial policies with the abiding assistance of a media that sometimes struggles to distill fact from K Street speak.

Manufacturing’s share of GDP has certainly declined but as they point out that’s a function of the growth of the service sector, and while it is true that employment in the sector is significantly below it’s peak but again that isn’t a result of a shrinking industry, rather it reflects substantial productivity gains.

No doubt the smattering of “onshoring” we’re seeing as well as the emergence of the US as a major energy producer with the follow-on industries which will feed off of fossil fuels hold the promise of an expansion of the manufacturing sector and more blue collar jobs. They just don’t represent a resurgence, the sector has been doing fine for a long time. All of which it worth remembering the next time you hear calls from either labor or capital for import protection, government investment and other forms of transfer payments. Chances are it’s about rent seeking not reviving a sector that needs no help.

Posted in economy

Tags: Manufacturing, Manufacturing Renaissance

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Budget Battles

Posted by Tom Lindmark on April 10th, 2013

The President released his budget today and the usual suspects are lining up to either hail or damn it. Predictably political affiliation pretty much determines reaction though the President is getting perhaps a bit more blowback from his left flank than he might have expected. Here are two analyses which I suspect will more or less encompass the substance of the thousands of blog posts, columns and op-eds which are sure to follow.

On the Left we have Derek Thompson at the Atlantic. His take can pretty much be summed up by his opening comments.

If the Paul Ryan budget, in nine words, was:

“Save the rich; Forget the poor; Spare the old “

President Obama’s budget, in nine words, is:

“Tax the rich; Spare the poor; Remember the young”

The contours of the president’s plan will be familiar to budget nerds, because he’s been cooking up different styles of the same dish for months now. And there are two sticking points, which will also be familiar to budget nerds, because they’re the same old sticking points: Taxes and entitlements. Obama’s plan raises taxes on the richest households by $600 billion — not by raising rates, but instead reducing the deductions these families can take. Second, his plan adopts a new measure for inflation, which would slowly cut Social Security benefits, and it proposes additional cuts to Medicare.

Most Republicans hate the first part. Most Democrats hate the second part. Will this new budget compel both sides to reconsider? Honestly, who knows.

On the right we have Veronique de Rugy at the National Review.

The FY2014 budget figure is astonishing: $3.77 trillion.

This is the only number that really matters and should be taken seriously, considering the amount of rosy assumptions and wishful thinking built in the out-year numbers. And in FY2014 the president went all out. I assumed his spending proposal would be higher than the FY 2013 number and the Republican budgets (both Ryan and Paul), but I didn’t think he would spend more than the Senate Democrat plan. Here is a recap of other headline budget figures for 2014:

Senator Rand Paul: $3.2 trillion.

Chairman Paul Ryan: $3.53 trillion.

Chairman Patty Murray: $3.71 trillion.

President Obama: $3.77 trillion.

So much for his budget being conciliatory or trying to find a middle ground. President Obama’s budget would spend $160 billion more in FY 2014 than the Congressional Budget Office’s baseline. That’s a lot of extra spending.

If it happens, it will put an end to the relatively flat spending levels (even decreasing levels) that we have had in the last few year (which you can see in this chart).

There you have it. Republicans are heartless bastards only looking out for their friends or Democrats are irresponsible spendthrifts capable of only bidding up the national debt. We won’t get into the possible kernels of truth which might lay in either position, rather note that this is both politics and a negotiation. Put those two together and you have as complex a puzzle as any you can conjure in which principle is very much a secondary consideration. That President Obama chose to bid on the high side is no more surprising that the Republicans approach the process with low bids. Each wants to establish the starting point hoping to see the outcome as close as possible to their position.

Of course, there may be no reconciliation. Given the gulf that separates the two sides compromise is not a given outcome. There is no guarantee that Congress can produce any bill that would go to the White House for signature and no certainty that once there it would be signed. Each side may calculate that the political gains of no decision outweigh the gains or losses they would sustain in agreement. After all, they have become quite adept at managing albeit from manufactured crisis to manufactured crisis without a budget.

Whatever the outcome, I suggest that you follow de Rugy’s advice and focus only on the current year budget. The rest is all budgetary gamesmanship subject to revision at the whim of whichever party happens to have the upper hand. And, enjoy the show.

Posted in economy, government

Tags: budget, obama budget

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Relax, It’s Just One Month

Posted by Tom Lindmark on April 5th, 2013

By now you’ve not only digested the BLS jobs data this morning but been subjected to any number of analyses of the numbers. If you still have some unfilled void for further soothsaying then here is a roundup of the musings of a selection of economists presented by the WSJ. Personally, I found that this one puts the whole thing in its proper perspective.

We suggest looking at longer-term averages to assess the state of the economy and labor markets. In that regard, the three-month average rate of payroll growth is now 168,000, about in line with the 175,000 monthly average increase in 2011 and 183,000 average in 2012, and consistent with our forecast for an average increase of 169,000 payrolls in 2013. Our view is that the February employment report overstated strength in the labor market, and the March report likely overstates any weakness. The trend in payrolls is consistent with our expectation that employment growth will slow somewhat in coming months as the large, and increasing, fiscal drag is absorbed, and it should reinforce the willingness of the Fed to keep its asset purchase program in place. –Michael Gapen, Barclays Capital

Actually Edward Lazear has an opinion piece in the Journal which does an even better job of showing just how unreliable the data tends to be. Unfortunately, I can’t find an ungated version of his piece so here is the nub of what he has to say.

Each month, the Bureau of Labor Statistics reports employment and the change in employment since the previous month. There are subsequent revisions, one and two months after the first announcement, until the number becomes final, sometimes up to two years later. The error in any given month tends to be very large, which means that its reliability is low.

For instance, the average number of jobs created per month during the 1996-2012 period was 78,000. But in the typical month, the initial estimate missed the final number by 73,000 in one direction or the other. This means that the average error in the initial report is almost as large as average job creation itself.

The quarterly numbers are somewhat better, but not by much. The picture improves somewhat for annual job growth, with the typical error being about half as large as the average job change itself.

You get the picture, I hope. This particular data set and in fact most short-term economic measures are best taken with a shaker not a grain or two of salt. So ignore articles like this, don’t sell your portfolio and go to gold and do enjoy the weekend.

Posted in economy, employment

Tags: March Jobs Report

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Labor Torpedoes Immigration Reform

Posted by Tom Lindmark on March 22nd, 2013

Can you have immigration reform without a viable worker visa program?

I think that most would answer no. Without a scheme that provides guest workers sufficient to meet the needs of employers as well as manages the flow of people who want to fill those needs we really just set ourselves up for the next debate about how to handle the wave of humans who have entered the country illegally. Unfortunately, devising such a system seems to be one of the stickier parts of getting something done and according to BuzzFeed this morning, organized labor is doing its best to gut any meaningful guest worker program.

According to multiple sources, several parts of the worker visa plan laid out by labor, which is led by the AFL-CIO, are proving to be particularly contentious.

Among the problematic union proposals: a 10,000 annual cap on low wage work visas; barring work visas for any trade covered by Davis Bacon, a federal wage law that would encompass most of the construction industry; and creating an unemployment based trigger for work visas that would come into effect only when employment drops below a specific level, which sources said has been proposed at several levels including eight and five percent.

A cap of 10,000 workers is on its face ludicrous. It’s also darkly humorous that labor would attempt to back door a federal minimum wage for the entire construction industry on the back of something as noble as this immigration reform effort could be. Needless to say, these proposals are political poison for the Republicans. Immigration reform is never going to be achieved unless both sides give up something. Labor seems unwilling to get on board with that sentiment.

In the end we may accomplish some sort of legalization for those currently in the country illegally. That would be a positive and humane outcome. Just don’t call it immigration reform.

Posted in illegal immigration

Tags: Immigration Reform, Organized Labor

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Can We Grow Out Of Our Debt Problem?

Posted by Tom Lindmark on March 22nd, 2013

John Cochrane plays around with some of the CBO projections and comes up with this graph which represents the long-term outlook based on their numbers.

Sort of OK for the next say seven or eight years and then things get really ugly. Cochrane properly asks, “So what can adjust?”, as the scenario represented by the graph isn’t sustainable. Well, the answer is that you can’t adjust revenues up or spending down enough to bring the numbers into any sort of range that will tempt investors to continue to finance the country and that leaves only one out according to Cochrane – Growth.

Here is what he sees happening if growth exceeds the CBO’s assumption (2% in the out years) by 1% and 2%.

Whew, saved! At least we are so long as we chug along at around 4%. If we don’t and growth falls 1% or 2% below forecast then things go to hell in a handbasket really quickly. You can flip over to Cochrane’s post to see what that scenario looks like, just make sure the kids are out of the room first.

So full speed ahead on the growth agenda. Er, what growth agenda. As Megan McArdle pointed out some time ago, it’s all well and good to say that all we need is growth but there are some pretty good reasons why it’s hard to get.

1. Every year that we delay returning to trend growth (hopefully by way of a few years worth of above-trend growth), makes future finances considerably worse. We are currently in the demographic equivalent of our peak earnings years: most of the baby boomers are still at the height of their earning powers, and most of them are still in the workforce. Ideally, we’d be growing fast now, to cushion against the inevitable slowdown. But we’re not. So this “one time factor” has lasting impacts.

2. The Bush tax cuts are no longer a “one-time factor”: most of them were made permanent, as both Democrats and Republicans wanted. That is going to add a permanent $300 billion, and growing, to our annual deficit. No one has proposed any way to pay for this.

3. There’s always a risk of another “one time factor”. No one saw this one coming. If we have another, the debt we’re accumulating now will leave us in a worse position to pay for it. Of course, we could have a happy growth surprise too–but it’s not unreasonable to say that we should prepare for emergencies, not unexpected growth. Presumably, if it materializes, we’ll have little trouble spending it.

4. High levels of debt (and the taxes needed to pay for it) have a negative effect on growth. By the end of this year, the federal debt held by the public will probably be something like 78% of GDP. That may not be high enough to exert a serious drag on growth, but it’s getting pretty close.

5. Just an aside, because I know what you’re thinking: infrastructure! But at this point, infrastructure isn’t going to turbocharge growth, because we already have a lot of infrastructure. In Vietnam, putting in a paved road and a modern port facility can easily pay for itself in higher growth, because right now, it’s very hard for goods to move or factories to be built. But the United States already has paved roads and modern port facilities. Infrastructure investments here are often repairs or replacements, not radical capacity improvements. That’s not to say that we shouldn’t do them. But this spending is in the category of “keeping ourselves from getting poorer”, not “making ourselves richer”; we shouldn’t expect it to raise the trend growth rate. Even things that could actually improve productivity, like some of the smart grid innovations, are not going to deliver an extra 1% of trend growth every year. That doesn’t mean that we shouldn’t spend money on needed infrastructure. But we should not act as if this is a substitute for sensible budgeting. It isn’t–any more than buying a house was a good substitute for saving in 2005.

So more growth would be nice and certainly heal a few wounds but you can’t conjure it. Assuming that we only get some help from higher GDP how then do we adjust. Cochrane thinks that since federal revenues have never exceeded 20% under any tax scheme that we are destined to forever raise no more than that. Likewise he sees no prospect of bringing spending back to its historical range. I think that both spending and revenues will adjust. Just because the government has never succeeded in claiming 20% of the economy doesn’t mean that they can’t tomorrow. Yeah, it’s probably true that you can’t do it through the income tax but that just means you find another vehicle. The VAT is sitting out there waiting to fill the hole. As for spending, it won’t go to the levels Cochrane’s graphs project. Entitlements are the drivers of ever expanding spending and they will be reined in. Means testing for Medicare and Social Security will come along, likewise age thresholds for qualification will be raised. Obamacare will likely morph into a single payer system providing the ability to gut the profits accruing to the health care industry bringing spending in the sector closer to the level enjoyed by other developed countries.

None of this is desirable and to the extent it comes to pass is going to lead to a more brutal and probably less free America. Growth alone isn’t going to be enough to get us back to a sustainable position. We may raise taxes and limit spending significantly in response to markets or we may do so proactively in order to fend off the market response but do them we will for there will be no other choice.

Posted in economy

Tags: economy, spending, taxes

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Japan Is Toast

Posted by Tom Lindmark on March 10th, 2013

If you want to spend a pretty productive hour then watch this presentation by Kyle Bass at the University of Chicago. He discusses his thinking on the inevitable collapse of Japan. Given that he’s investing in that outcome rather than simply opining renders his thoughts at the very least worthy of serious consideration. Stick around for an interesting Q&A after his presentation. His comments about the financial sector’s pricing of risk is worth the entire hour.

Posted in Uncategorized

Tags: Japan, Kyle Bass

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Sequestration And Rounding Errors

Posted by Tom Lindmark on February 28th, 2013

So far I’ve demurred adding to the hype over sequestration. Rest assured that this post will not add to the bloviating but on the Eve of Armageddon I would like to inject a bit of reality into the fury that appears to be swarming through the blogosphere and greater media, though to the credit of the citizenry it appears to be reacting to the onset of spending a bit less money with admirable unconcern.

Specifically, the proposed cuts of $87 billion represent a rounding error. If you accept this bit of rationale then you probably accept the argument that since it’s a blip, all of the hand wringing over lost jobs, the countryside being overrun by felons and GDP cratering have no basis in reality. Now, I recognize that it’s easy to make such a claim but let me throw in one piece of evidence which I think makes a fairly good case for taking all of this with many grains of salt. It comes from the Government Accounting Office.

WASHINGTON (January 17, 2013) – The U.S. Government Accountability Office (GAO) cannot render an opinion on the 2012 consolidated financial statements of the federal government because of widespread material internal control weaknesses, significant uncertainties, and other limitations.

As was the case in 2011, the main obstacles to a GAO opinion on the accrual- based consolidated financial statements were:

• Serious financial management problems at the Department of Defense (DOD) that made its financial statements unauditable.

• The federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies.

• The federal government’s ineffective process for preparing the consolidated financial statements.

In other words, these clowns have absolutely no clue as to what they own, what they owe or how much money comes and goes. They just spend it. And we’re supposed to worry about maybe cutting their receipts by 2.5%? Trust me their biggest worry is not going to be whether to fund a needed program, it’s going to be how to keep enough money off the books so they can fund their next conference in Cabo.

Posted in Uncategorized

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