Mitchell's Musings

  • 27 Apr 2015 8:39 AM | Daniel J.B. Mitchell (Administrator)

    American’s tend to believe that all problems have solutions – if only folks would just get together and work things out. Thus, they are annoyed when ideological differences cause gridlock in Congress. Americans tend to think simplistically about the Middle East. Why can’t the people there just sit down and settle their conflicts? But there is one problem which seems to escape the notion that all-problems-have-solutions and that is exchange rates. There are calls from time to time for someone to do something about exchange rate manipulation but the calls include no real solutions for the U.S. Someone should do something – but what? [1]


    As we have pointed out many times in prior musings, the U.S. has become the world’s champion debtor as the result of continuous net export deficits. The effect of such deficits falls disproportionately on U.S. manufacturing which was once the provider of those good jobs that politicians, policy wonks, and just about everyone else pine for when such topics as income inequality are raised. So if you want to do something for manufacturing, before you start proposing such remedies as more community college, you would want to focus on the trade side.


    First, let’s put the issue of manufacturing in perspective. Manufacturing as a proportion of total economic activity has been in decline since the end of World War II. Although we keep changing the measurement of that sector via changes in industrial classification systems, manufacturing in relative terms compared to overall GDP is about one third of what it was at that time. [2]
    - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    Manufacturing as Percent of GDP
    1950 31% 1960 29% 1970 25%
    1980 23% 1990 18% 2000 15%
    2010 11% 2014 11%
    - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    Given its rate of shrinkage, it is unlikely that any “remedy” – trade deals, community colleges – would restore manufacturing to its 1950s’ importance. On the other hand, since the sector is only 11% of total economic activity, even a modest trade-related boost could have a notable impact on the manufacturing sector.


    Exchange rates can change the relative costs of production between countries. The Federal Reserve has an index of the U.S. dollar exchange rate compared to a large array of other countries’ currencies, all adjusted for inflation. Attempts by the U.S. to retain a fixed exchange rate system relative to other currencies ended in the early 1970s. Since that time, the dollar has been subjected to substantial swings in value. It’s hard to look at the chart below and interpret these swings as having some “fundamental” causes. How much can “fundamentals” change in the course of a few years? In fact, the history suggests both speculative volatility (a characteristic of other financial markets) and opportunities for countries to set their exchange rates at arbitrary levels (including arbitrarily low levels).


    Although countries are not supposed to “manipulate” their exchange rates, it is hard to define that concept in practical terms. Given the kind of volatility exhibited in exchange markets, surely countries have the right to intervene in currency markets to try to smooth out the swings. And if they hold their exchange rates at levels that generate net export surpluses (so that official reserves accumulate), who is to say what the appropriate reserve levels should be? In short, unlike negotiations over tariffs and other trade barriers, no one has come up with a workable way of regulating exchange rate manipulation.




    However, because exchange rate manipulation cannot be regulated easily through international negotiations and trade treaties, that doesn’t mean there are no solutions. It just means that the solution won’t be found in trade treaties and negotiations. We have noted in prior musings that a solution was suggested many years ago and was ignored at that time and after. Below we will (again) repeat it for the record. But let’s first go back to U.S. manufacturing and the net export deficit.


    The chart below shows the U.S. net export surplus or deficit from the end of World War II through 2014. Immediately after the War, the U.S. had large surpluses reflecting both foreign aid to war-damaged countries and attempts by various countries to hold their currency values relative to the dollar at unsustainably high levels. But by the 1950s and until the end of fixed exchange rates in the early 1970s, the U.S. ran modest trade surpluses – typically in the range of 0-1% of GDP. [3] But once the fixed exchange regime ended, the U.S. ran chronic deficits. These deficits fluctuated in amount but at times ran over 5% of GDP. At present, they seem to have stabilized at around 3% of GDP.




    Suppose the dollar were now to be maintained at an exchange rate consistent with a zero deficit. While that wouldn’t begin to pay back the U.S. debt to the world, it would stop adding to the debt. Trade treaties, for reasons already explained, are unlikely to produce such a result. Negotiations with particular countries – China and Japan would be prime candidates – would also be unlikely to produce changes in behavior and would lead to charges of China-bashing or Japan-bashing. The U.S. shrinks from such charges officially because it wants cooperation from these countries in other matters of foreign policy. Politicians don’t necessarily shrink from such bashing – indeed they may be attracted to it around election time – but, as noted, their bashing doesn’t come with solutions.


    If the exchange rate were reset so that net exports were zero (“balanced” trade), perhaps half of the increased activity (more U.S. exports; more U.S.-made import substitutes) would be in manufacturing. At present, that would be about 1.5% of GDP (half of 3%). With manufacturing at about a tenth of total activity, the employment gains in that sector would be about 15%. No trade treaty or negotiation is likely to produce such an effect. Similarly, long term remedies such as more technical training in community college seem unlikely to produce that impact.


    But wait! What could bring about such an exchange rate effect and do it without singling out any particular country for bashing. As we have noted many times, back in 1987 (when Japan was seen as THE trade villain), financier Warren Buffett wrote an op ed in the Washington Post outlining a specific plan.4 It was basically a cap-and-trade plan for trade similar to the plans more commonly applied to air pollutants. Under the Buffet plan, U.S. exporters would receive a $1 voucher for each $1 of their exports of goods and services. The voucher would be a license to import $1 of goods and services. The voucher could be exercised directly by the exporter or sold in an open market to some importer. By definition under the system, value of exports = value of imports. The market cost of the voucher plus the prevailing exchange rate would be the equivalent of the exchange consistent with net exports = zero.


    The Buffett cap-and-trade exchange rate plan singles out no country or countries. There is no bashing. There is no negotiating with any particular country about its exchange rate relative to the U.S. dollar. It is not protectionist. It simply achieves the result of the exchange rate consistent with net exports = zero. Under the Buffett plan, U.S. debt to the world stops rising. [5]


    Would there be administrative problems? Any system has costs. There would need to be verification of export value in issuing vouchers and verification of import value when they were exercised. We do have customs inspectors in place but there would need to be more of them to implement the system. Perhaps one might oppose the Buffett plan on the basis of administrative cost but to do so, one would have first to recognize and evaluation the possibility of the plan.


    How can those commentators who lament exchange rate manipulation without even mentioning the Buffett plan be interpreted? Do they just want to pose a problem without offering any solution? Are they unaware of a plan that would provide a solution to the problem they pose even though the plan was published in a prominent daily newspaper and written by a well-known financier? You can chose between those two answers. I can’t think of any others.


    [1] For three examples, see

    http://www.latimes.com/opinion/op-ed/la-oe-0408-baker-currency-20150408-story.html
    http://www.cepr.net/index.php/blogs/beat-the-press/the-end-of-china-bashing-toward-a-serious-discussion-of-the-trade-deficit
    http://www.iie.com/publications/pb/pb12-19.pdf


    [2] The chart uses the SIC code for 1972 through 1980, the SIC code for 1987 for 1990 and 2000 and the NAICS 2002 for 2010 and 2014. The two SICs showed no appreciable difference in 1987. NAICS measurement showed a slightly smaller manufacturing sector in 2000 compared with SIC.


    [3] The ongoing “balance of payments problem” of the U.S. before the end of fixed exchange rates had to do with the financial side of the accounts. Low interest rates in the U.S. (maintained for domestic reasons) encouraged borrowing in the U.S. by foreigners and U.S. direct investment abroad. In effect, that accumulation of claims on the world by the U.S. was financed by increased dollar reserves held by foreign central banks under the fixed exchange rate system that had been established by the 1944 Bretton Woods agreement.


    [4]https://drive.google.com/file/d/0BzVLYPK7QI_4NmYyOGQzYzQtMWU1MC00MDEwLWI0ZGUtMzYxYmM2OTY5NjMz/view?usp=sharing. Warren E. Buffett, “How to Solve Our Trade Mess Without Ruining Our Economy,” May 3, 1987, page B1.


    [5] The voucher entitlement could be set so that the U.S. ran a surplus and began paying off its debt. For example, each $1 of exports could produce an entitlement equal to, say, 90 cents worth of imports.

  • 20 Apr 2015 8:24 AM | Daniel J.B. Mitchell (Administrator)

    The Age Discrimination in Employment Act, as amended, generally prohibits mandatory retirement ages except in a few occupations such as airline pilots. Yet at one time, such practices were commonplace with the mandatory age often set at 65 or 70. For tenured university faculty, mandatory retirement was permitted later than for other occupations, but it, too, was ended in 1993. New York Senator Daniel Patrick Moynihan – who had come out of the university setting with a PhD - expressed concerns about ending mandatory retirement in academia:


    I must note, however, that I am troubled by the application of this change to the unique situation of tenured faculty members at colleges and universities. In order for these institutions to remain effective centers of teaching and scholarship, they must have a balance of old and new faculty. Hence, universities must ensure that older faculty members retire at an appropriate age, not simply to "make room" for younger faculty, but to maintain a contemporary, innovative and creative atmosphere where students can obtain the fullest education. . .[1]


    However, despite Moynihan’s concerns, Congressional policy was to delay the end of mandatory retirement for tenured faculty while a study was being prepared but then – based on the study – ended authority for universities to impose it.


    Starting in the 1970s, the labor economics literature began looking at practices such as mandatory retirement ages under the rubric of the “new economics of personnel.” Mandatory retirement was seen as a component of “implicit contracting” in the labor market. The rationale was that career employees – seen as having long-term relationships with employers – worked for less than their value early in their careers in exchange for an overpayment later. The early period was seen as a form of posting a bond for good performance, given imperfect information at the time of hiring and as an incentive against “shirking.” Mandatory retirement was seen as a way of terminating the overpayment period.


    Similarly, defined-benefit pensions were depicted as having a similar function (by making it advantageous to retire after a given age). Under a defined-benefit pension plan, the monthly annuity is typically a function of age, length of service, and the level of recent (pre-retirement) earnings. The expected value of the future stream of pension payments begins to fall beyond a certain age since each year of continued work means one year less of pension receipt. Eventually, someone who continued working would be effectively working for nothing due to the continued pension loss which has to be subtracted from the pay expected from continuing to work.


    All of this history and economics literature came to mind recently when I participated as a panelist on a program at UCLA developed for faculty who were thinking of retiring but who were uncertain as to whether to do so. You can hear my presentation at the program at https://archive.org/details/MitchellRetirementWorkshop41015Edited. One thing to note about UCLA (as part of the entire University of California system) is that it has a defined-benefit pension. In that respect, it is unlike most universities that have defined-contribution plans (such as TIAA-CREF) which provide no particular incentive to retire. My impression – based on anecdotal evidence – is that, as a result, there has been less of an issue regarding tenured faculty retirement decisions at UCLA than has developed at many other universities.


    Nonetheless, some elderly faculty do have a problem in making the retirement decision, even at UCLA. One factor is that the defined-benefit incentive to retire – while self-evident to economists – is not necessarily fully appreciated by others. (Having understandable incentives is always an issue in designing personnel systems and retirement programs are no exception.) Thus, some faculty may think that the point of “working of nothing” arrives only when the pension is equal to the rate of final pay, which at UCLA occurs only after 40 years of credited service.[2] Or they may think that the optimum decision is to wait until you are working for nothing.


    It was clear from the program at which I spoke that there is a subset of folks who have a problem in letting go of their long-time activities despite economic incentives to do so. What about folks in sectors outside academia? We do know that labor-force participation rates for those 65 years and over have been increasing since the late 1990s, as the charts below show. Participation rates fell from the end of World War II until they leveled out in the 1980s (particularly for men). Clearly, there were various underlying factors in this pattern, notably the availability of Social Security, private pensions, and improved elder health.[3]
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    Now it’s easy to say that the experience of university faculty is vastly different from those of other employees in other sectors and occupations. Other employees may not be committed to their careers to the same extent as faculty and they rarely have anything like tenure. They may have work histories in physically demanding occupations that produce health issues which make job continuance difficult beyond a given age. Nonetheless, for whatever reasons, the overall participation rates for those 65 and over throughout the labor market have been rising as a long-term trend.


    Note, too, that the stories that were especially in vogue about stock market losses in 401k plans due to the Great Recession don’t fit the timing of the trend. Such stories tied continuation of working to depleted retirement accounts. The rise in participation for older women seems to start in the late 1980s. For older men, it seems to occur in early the 2000s, halting – not beginning - in the Great Recession.


    When we move to a still older age bracket – 75 years and over – the same pattern emerges, as the charts below illustrate. The male participation rate heads up after the late 1990s; the female rate goes up from the late 1980s.4 Using the older age cutoff likely filters out individuals with physically difficult job histories. But it can be assumed that most remaining workforce participants still are not tenured faculty.

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    In short, the faculty reluctance-to-retire phenomenon may be part of a larger set of forces that are not unique to academia. Economic incentive devices such as defined-benefit pensions may mitigate the phenomenon for many individuals.[5] But they don’t entirely eliminate it. Thus, universities may need to consider other types of programs - such as phased retirement - to encourage turnover.


    [1] http://www.nap.edu/openbook.php?record_id=1795&page=9


    [2] The system multiplies an age factor of 2.5 times years of service and then multiplies that product by what for most faculty is final base pay for the last three years. (The age factor rises with age but peaks at 2.5.) For many faculty, it might be noted, the base rate of pay on which the pension is calculated excludes pay beyond the official salary rate. Such extra pay may be a considerable fraction of total pay – especially in medicine. Pay received during the summer months for teaching, research, or other reasons is also excluded from the pension to avoid “spiking.” So, in such cases, i.e., cases in which non-base pay is significant, the idea that you are working for nothing only if your pension equals your pay means that such a condition is perceived never to arrive.


    [3] Data for the charts are from the U.S. Bureau of Labor Statistics website. The charts were created on the website.


    [4] Data from U.S. Bureau of Labor Statistics for ages 75 and over are not available before 1987.


    [5] Universities with defined-contribution pension systems sometimes create ad hoc incentives – essentially retirement bonuses – from time to time. But such practices can have perverse effects; faculty may delay retirement waiting for the next special deal to come around.

  • 13 Apr 2015 8:47 AM | Daniel J.B. Mitchell (Administrator)
    My UCLA office is located in a building constructed in the 1960s that contains four elevators. At least one elevator seems always to be out of service. Although the building now houses the School of Public Affairs, when I first came to UCLA in 1968, it was the home of the business school (where I had my office, too). Even then, the elevators never seemed to behave properly.


    Elevator misbehavior gave rise to a kind of mythology. Some in the building believed that if you jumped up and down in an elevator that seemed not to want to go, it would start to move. Others believed that some sequence of button pushing would do the trick. I would sometimes suggest to annoyed riders that if the authorities would only feed the donkey pulling the rope better, service would improve. But that suggestion was always taken as a joke. Actually, it was as good a story as any of the others. There is a human need, apparently, to have explanations for events and situations, even if there aren’t any explanations.


    I was reminded of that phenomenon in reading a news account interpreting the April 7 release by the U.S. Bureau of Labor Statistics JOLTS (Job Openings and Labor Turnover Survey) data through February:[1]


    A new Labor Department report Tuesday showed that job openings surged 3.4 percent to 5.1 million in February — a 14-year high. That’s a clear sign that companies are willing to boost their staffs… To be sure, there were some negative signs in Tuesday’s report. Total hiring slipped 1.6 percent in February to 4.9 million, the second straight decline. At the same time, layoffs fell sharply. The declines in hiring and layoffs suggest that employers were cautious in the face of a faltering economy but weren’t spooked enough to cut jobs...[2]


    When you look at the actual media release, it’s just a couple of charts, data tables, and text describing the data. There is nothing in the release itself about caution or being insufficiently spooked. In any case, if employers were being cautious, perhaps they would hire at a lower rate. But why would they also reduce separations? Wouldn’t they want to let workers leave their employment voluntarily who wanted to leave if there were reasons for caution about a slowing economy? That is, might they not cut back on efforts at worker retention out of caution? And might they not want to step up their involuntary layoffs?


    Perhaps, more pointedly, we are talking about a one-month change in the various rates being tracked and discussed. And the data we are talking about are seasonally-adjusted. So there could be any number of explanations for the one-month changes. Perhaps the seasonal factor – which is based on the past history of seasonality – was wrong for the particular weather that occurred in January-February 2015? Maybe the especially bad weather this winter led to delayed decision making on both separations and hiring. Or maybe the underlying (unadjusted) data were simply affected by some statistical noise since we are talking about figures from a sample survey. The release footnotes the latest data as “preliminary” so they might well be revised. In short, maybe there is no story here to tell at all.


    Let’s put in perspective the data that the news account describes. The job openings rate (job vacancies rate) during January-to-February went from 3.3% to 3.4%.[3] I am not sure that move (if it was more than noise) qualifies as a “surge.” The “slippage” in hiring was in fact so miniscule that it left the hiring rate unchanged at 3.5%.[4] For separations, the supposed slippage was a drop from 3.4% to 3.3%.[5]



    If you are looking for a “story” on the job openings rate, you need to focus on long-term trends and not one-month blips. The chart below tells you that story, but it isn’t one that you didn’t already know. Labor markets are generally recovering since the bottom of the Great Recession in 2009. Maybe that isn’t news at all. But as they say, no news is good news. Would you rather have a reverse story of no recovery?


    --
    Job Openings Rate, seasonally adjusted, 2005-2015


    [1] http://www.bls.gov/news.release/archives/jolts_04072015.htm
    [2] http://www.nytimes.com/2015/04/08/business/report-shows-job-openings-are-up-but-hiring-slows.html

    [3] The job openings rate is computed by dividing the number of job openings by the sum of employment and job openings and multiplying that quotient by 100. (Description taken directly from release.)
    [4] The hires rate is computed by dividing the number of hires by employment and multiplying that quotient by 100.
    [5] The separations rate is computed by dividing the number of separations by employment and multiplying that quotient by 100.

    Source: U.S. Bureau of Labor Statistics.

  • 06 Apr 2015 1:17 PM | Daniel J.B. Mitchell (Administrator)

    Statistics are in principle “neutral.” They are just facts. In theory, it’s up to the user of the statistics to interpret the numbers. But nice as that theory is, it is not quite true. How you display statistics or which statistics you choose to display can influence users’ perceptions. To take an example, consider the monthly “Employment Situation” release of the U.S. Bureau of Labor Statistics shown below. There is much information in the body of the release. But someone has determined for you that the two most important pieces of data you want to see first are the official unemployment rate and its trend and the monthly change in non-farm payroll employment over the past two years. In effect, those two items are the cover story to the rest of the information. They are often the headline stories in the news media.


    As noted, it’s not that those two items are the only pieces of information contained within the release. But they are prominently displayed. For example, someone might alternatively have chosen average weekly hours or the median duration of unemployment to display, data that are also part of the release. There are alternative unemployment rates in the release based on definitions differently from those used for the official rate. But you have to know about these other data series and look for them.


    How you display data has long been known to be important. When I taught a course in labor markets and we arrived at the unit on productivity, I would note that in a broad context, productivity can refer to management and effective decision making. Your decision making is in part a function of the facts at hand. In that context, I would bring up the name of Florence Nightingale who at least some students would identify as “the first nurse.” Less known about her is her use of statistics and her presentation of statistics to persuade the powers-that-be in Britain on appropriate treatment of wounded and ill Crimean War soldiers. Nightingale developed a circular bar chart form of display to make her points.[1] Indeed, she said that “To understand God's thoughts we must study statistics, for these are the measure of his purpose.”[2] She didn’t add that the choice of which statistics to study is a human choice.


    The display of data may not necessarily tell you about God’s thoughts, but they do tell you something about the thoughts of whoever arranged the display. Which brings me to the Mitchell’s Musings of March 23, 2015.[3] In a footnote in that musing, I noted that the St. Louis Fed’s database system “Fred” indicated that a statistical series on the holdings of U.S. Treasury securities holdings of foreign official monetary institutions (central banks and similar institutions) had been discontinued.[4] This series, which has been produced by the Bureau of Economic Analysis (BEA) in the Dept. of Commerce, may seem obscure to you. But it previously could be found on Table 1 of the quarterly “balance of payments” releases of the BEA. Putting it on Table 1 – and therefore among the first information you see - was a decision someone had made that the information was important. I agree with whoever that was that the series was important, and still is, but let me delay getting into why.


    When you go to that release now, the series has indeed vanished from Table 1 as can be seen on the latest posting.[5] A year earlier, the same release had the series.[6] So I emailed BEA to find out why the change was made. The response I got back was essentially in two parts. Basically, there was an effort by BEA to simplify the release and put it in a format similar to that said to be used by other countries. Second, it was noted that because users might want to see the information that had previously been displayed, you could go on the web and find it on another table (a table not included in, or mentioned in the latest release). So the data are available (FRED was wrong), but surely not displayed in a way that Florence Nightingale would have used if she thought there was importance in the series. (You go to http://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=6&isuri=1&6210=1&6200=74 and then click on “Addendum Table 9.1”)


    OK. Who cares? Why is the series important? To answer that question, you have to know something about the international monetary system. From the end of World War II and until the early 1970s, the U.S. and other major currencies used a fixed exchange rate system. All countries defined the price of their currencies relative to the U.S. dollar. To make the market price the same as the official price, central banks committed themselves to buy and sell their currencies in unlimited amounts at that dollar exchange rate. The system suffered a major shock in 1971 and essentially fell apart in 1973. Thereafter, with some exceptions, the U.S. took a relatively passive position with regard to the dollar. However, other countries in varying degrees bought and sold their currencies to achieve a target exchange rate with the dollar, or at least to stay within an exchange rate range around the dollar.


    When we look at the change in U.S. dollar holdings of foreign central banks and official monetary institutions, particularly U.S. Treasury securities, we can determine whether they were acquiring more dollars (a “capital inflow” aimed essentially at preventing their currencies from rising in value relative to the dollar) or doing the opposite (a “capital outflow”). The series on the change in foreign official dollar holdings (flow data) is paralleled by a series showing the absolute amount of the holdings at the end of each quarter (stock data). As in the case of the flow data, BEA no longer includes this information on its basic table and leaves it to the user to find it in a supplementary table.[7]


    The question of exchange rates and what other countries are doing to control the movement of their exchange rates relative to the dollar is crucial to the debate over the unprecedented growth of U.S. liabilities to the world, the imbalance of trade (imports far in excess of exports), and the shrinkage of American manufacturing due to that imbalance. A decision to reduce the prominence of a data series that relates to that debate (whether deliberate or not) is equivalent to a decision that the debate over those issues isn’t of much importance. Florence Nightingale would have understood the significance of the change in data presentation. Whether the decision maker at BEA understood is unknown.


    [1] http://www.uh.edu/engines/epi1712.htm
    [2] http://www.goodreads.com/quotes/330822-to-understand-god-s-thoughts-we-must-study-statistics-for-these
    [3] http://employmentpolicy.org/page-1775968/3264258#sthash.WIap5LMs.dpbs
    [4] http://research.stlouisfed.org/fred2/series/BOPIOGT
    [5] http://www.bea.gov/newsreleases/international/transactions/2015/pdf/trans414.pdf
    [6] http://www.bea.gov/newsreleases/international/transactions/2014/pdf/trans413.pdf. Go to line 58 and the more comprehensive line 56 of Table 1.
    [7] You go to http://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=5&isuri=1&6210=5 and then click on Table 3.1.

  • 30 Mar 2015 11:50 AM | Daniel J.B. Mitchell (Administrator)

    The Public Policy Institute of California (PPIC) regularly publishes state opinion poll data on political, economic, and social issues. Among the questions included as part of the survey is an open-ended inquiry in which respondents are asked about what they think is the most important issue facing the state:


    “Thinking about the state as a whole, what do you think is the most important issue facing people in California today?”


    Respondents don’t choose from a menu of issues. Rather their responses are coded into various categories by the interviewer. (So far, the inelegant use of participles by pollsters has not been among the coded top issues reported to be facing the state!) The table below summarizes the responses of the March 2015 poll and the trend in responses going back to 2007.
    - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    California Unemployment Rate and Percentage of Adults in PPIC Poll Listing Jobs/Economy or Some Other Issue as the First or Second Most Important Issue Facing the State
    - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -


       Unemployment [a]  Jobs/Economy
     
    Second Most Important Issue [b]
    March
    2007
     5.4%  13%  immigration/illegal immigration 19%
    March 2008  7.3%  35%  education/schools  12%
    March 2009
     11.2%  58%  state budget/deficit/taxes  13%
    March 2010  12.2%  57%  education/schools  12%
    March 2011
     11.7%  53%  state budget/deficit/taxes  14%
    Feb
    2012
    10.4%  52%  education/schools  8%
    March 2013
     8.9%  45%  education/schools  11%
    March 2014
     7.5%  32%  Water/drought  15%
    March 2015
     {6.9% [c]}
     24%  Water/drought  23%

    - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    [a] Annual unemployment rate except 2015.
    [b] In 2007, jobs/economy was the second most cited issue; immigration/illegal immigration was first.
    [c] February 2015, preliminary, seasonally adjusted.
    - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    As might be expected, the Great Recession and its aftermath had a major effect on the responses given by those surveyed to the poll. The rise in unemployment during the Great Recession and its high level during the subsequent recovery made jobs/economy the number one response for most of the period. Before the Great Recession took hold, however, another issue – immigration – was the lead concern and the percentage citing jobs/economy was low (number 2). In the latest survey, jobs/economy is essentially tied for first with the drought California is experiencing.1 The level of concern over jobs/economy shown on the table has been roughly cut in half from the peak. Various water districts are currently imposing limits on water use and raising the price of water. Scary headlines about the drought have appeared. So it’s not surprising that as jobs/economy has faded in perceived importance, the water/drought issue has risen in relative prominence.


    As noted, jobs/economy was in second place just prior to the Great Recession and before the unemployment rate shot up. At that time, drought was not an issue. However, the immigration issue had simmered somewhat during the gubernatorial election year of 2006 which may account for its showing in the early 2007 poll. Within California in the most recent survey, there is regional variation. Jobs/economy receives the most attention in the higher unemployment areas of the state. Thus, it is seen as more important in the Inland Empire, an area generally east of Los Angeles which was a center of flaky mortgages, foreclosures, and has featured the municipal bankruptcy of San Bernardino. In contrast, jobs/economy is a low concern in the San Francisco area which is now in the midst of a tech boom. An exception to the unemployment effect is the Central Valley which has high unemployment but also an agricultural base and therefore has heavy water dependence. Water and jobs/economy are tied together in that region.


    Percentage of California Adults in March 2015 PPIC Poll Listing Jobs/Economy or Water/Drought as the First or Second Most Important Issue Facing the State
      - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

      Jobs/economy
    Water/drought
     All Adults  24%  23%
     Central Valley  17%  32%
     San Francisco Bay Area  15%  32%
     Los Angeles, Long Beach, Anaheim  29%  13%
     Orange, San Diego  27%  22%
     Inland Empire  35%  15%

    - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
    Despite the recovery, California, as has the rest of the U.S., shows signs of labor-market distress that go beyond the basic unemployment rate. For example, the labor force participation rate has fallen in the state, as it has in the country as a whole. The drop in participation seems particularly marked among younger age groups. The current overall participation rate for the state (62.4%) is below the level at the pre-Great Recession peak of the last business cycle (65.7%) and below the level at the trough date of the Great Recession (65.3%). But while the news media have carried stories about such job market difficulties,2 there has not been much political traction to them.

    California at the statewide level is a “blue” state and its (Democratic) political establishment tends to focus on jobs created since the Great Recession and the decline in the unemployment rate. Issues such as poverty and labor force participation are more likely to be raised on the right side of the political spectrum, but mainly to decry perceived state overregulation and high taxes to which such ills are attributed. As the PPIC survey suggests, however, the problems of the labor market – whatever their cause - are receding from public view. The political significance of jobs/economy is becoming progressively limited.


    PPIC data refer only to California, of course, but it is likely that similar attitudinal and political developments have occurred throughout the U.S. as the general unemployment rate has fallen. The unemployment rate may not capture all of the aspects of the labor market on which economists focus. However, at least at the state and local level, and absent another economic downturn, both the unemployment rate’s decline and its current reduced level suggest that other issues are likely to dominate future political contests. Unemployment may not capture all that is occurring in the labor market, but it seems to capture the level of public attention to that market.


    [1] Among “likely voters,” the statistical tie was reversed with the drought as the lead issue. For the most recent poll, see http://www.ppic.org/content/pubs/survey/S_315MBS.pdf. The question about the most important issue is asked several times during the year. I picked the earlier March surveys, or a date close to March if that month was not available, to match the most recent survey month.

    [2] http://www.latimes.com/business/la-fi-shrinking-workforce-20141204-story.html.

  • 23 Mar 2015 9:49 AM | Daniel J.B. Mitchell (Administrator)

    Below is an excerpt from the transcript of a recent (March 18, 2015) National Public Radio (NPR)
    broadcast:

    DON GONYEA, HOST: Call it one of those conflicts that happen among friends - in this case, Democrats and labor unions. The sore spot is trade and the Obama administration's push for authority to negotiate a big, new trade deal covering the Pacific region. Unions want to stop it. At a speech in Washington today, AFL-CIO President Richard  Trumka said history shows such deals have hurt the little guy…


    GONYEA: Trumka and labor are clearly already looking ahead to next year's elections including the presidential race. Joining us to talk about all of this is longtime labor journalist Steven Greenhouse. Steve, hello…


    GREENHOUSE: …The Obama administration, like the Clinton administration, think trade deals are great. They help bring in cheaper foreign goods that help American consumers. They create investment opportunities for American companies. And they say, look, labor, manufacturing jobs are going to go overseas anyway because labor costs are cheaper in Mexico or China, and it's not trade deals that are doing it. You know, labor unions say no, these trade agreements really accelerate this, and we don't like it, and we want to slow it and maybe stop it…


    Source: http://www.npr.org/2015/03/18/393870615/trade-policy-vote-could-affect-organizedlabors-role-in-2016-election


    Perhaps you heard the broadcast. The bulk of the interview consists of the political angle, i.e., a threat by organized labor to withhold campaign funding for Democrats who support the trade agreement. Neither the host nor the guest commented on the premise attributed to both the Clinton and Obama administrations that “manufacturing jobs are going to go overseas anyway because labor costs are cheaper in Mexico or China, and it's not trade deals that are doing it.” So let’s unpack the premise.


    There are really three elements in the premise: 1) manufacturing jobs are going overseas, 2) the job loss in manufacturing isn’t due to trade deals, and 3) the job loss is due to lower labor costs abroad.


    We have noted in previous musings that manufacturing jobs have been in long-term decline, although – after a dive in manufacturing employment resulting from the Great Recession – there is some cyclical recovery. So let’s just say that point #1 is not controversial. That conclusion leaves points #2 and #3.

    You probably have noted that there are many Japanese and German cars on the road. Neither country features cheap factory labor. So you should at least be somewhat suspicious about #3. On the other hand, we haven’t really had any big trade deals involving Japan and Germany for a long time so you might have a sense that #2 is plausible. But if it isn’t trade deals or #3 that is causing #1, then there must be some other causal elements at work. Let’s note some statistical facts about U.S. foreign trade in manufactures. Although there are various industrial classifications used for defining trade in “manufacturing,” here are some numbers to keep in mind.


    • In 2014, using the SITC statistical division, about three fourths of U.S. goods exports were manufactures. In that same year, about 80% of U.S. goods imports were manufactures.[1]
    • In 2014, about three fourths of exports of goods and services consisted of just goods. In that same year, over 80% of U.S. goods and services imports were just goods.[2]


    Those two facts suggest that if there were increases in U.S. exports of goods and services, surely U.S. manufacturing exports would have to rise. If everything stayed proportional, a billion dollars of increased exports would entail something like half a billion dollars’ worth of manufacturing exports. ($1 billion x .75 x.75 = $563 million.) Similarly, a billion dollar decline in U.S. imports of goods and services would entail about $600 million decline in manufacturing imports. ($1 billion x .8 x .75 = $600 million.)


    Using these approximate ratios, what would happen if the U.S. net export balance on goods and services, instead of having been around -$500 billion in 2014 had been zero (so that U.S. indebtedness to the world would stop increasing)? One way to close the gap between exports and imports would be to raise exports by about 15% and cut imports by about 10%. Exports and imports of goods and services in that case would have been about $2.5 trillion each. Again, just assuming simple proportionality would imply that there would be a net increase in U.S. domestic manufacturing (more production for manufacturing exporting and more production to make up for the drop in foreign manufacturing imports) of something around $300 billion. Bumping up net foreign demand for U.S. manufactures by that amount would raise economic activity in the manufacturing sector by around 15%.
    You can play with these assumptions any way you like. Obviously, simple proportionality is only one possible assumption. But no matter what you can reasonably assume, manufacturing can’t simply “go away” if the net export balance is ever to improve, at least from negative to zero. The only way to stop American indebtedness to the world from increasing is to achieve at least a zero net export balance. The only way to start paying down U.S. net indebtedness to the world is to run a net export surplus – which would require an even bigger step up in U.S. manufacturing.


    When you put the idea of manufacturing “going away” in that perspective, you have to have a plausible scenario under which the U.S. manufacturing sector disappears because the U.S. simply borrows the money from the rest of the world need to finance its absorption of manufactured goods. U.S. debt to the world grows forever and never has to be repaid under that scenario. Alternatively, if you think the borrowing at some point must at least halt, if not reverse, while at the same time manufacturing “goes away,” you have to believe that the U.S. pays for its absorption from abroad of manufactures and other goods and services by exporting something other than manufactures. What might those other exports be? Movie royalties? Tourist services? Fees from patent licensing? Rice? Coal? What?


    Although the numbers bounce around due to exchange rate variation and the market valuations of particular assets and liabilities, the U.S. net international position (assets minus liabilities) stood at around -$2 trillion in the years leading up to the Great Recession. The most recent estimate (for the third quarter of 2014) is over -$6 trillion.[3] That’s a big jump for a period of about a decade.


    Now let’s go back to the unquestioned premise contained in the NPR broadcast with which we started this musing. Is it some trade agreement that is behind the net export deficit and growing U.S. international debt? Trade agreements typically lower barriers to trade (tariffs, quotas, other regulatory limits on trade) in both directions. If they increase imports, they should also increase exports, other things equal. But is there an influence - outside of trade agreements - that tends to increase one and decrease the other?


    Think about the exchange rate. An increase in the value of the dollar relative to other currencies discourages exports and encourages imports. Put another way, if the U.S. dollar’s value relative to other currencies is “too high,” there will tend to be a net export deficit. To sustain such a deficit, someone has to accept more and more net borrowing by the U.S. Foreign central banks – for reasons internal to their national polities - can always stand by to absorb excess U.S. net debt if the private sector won’t do it. [4]


    We have discussed what might be done about the dollar exchange rate in previous musings. But the bottom line for this musing is that you can’t talk about manufacturing “going away” (and about the possible role of trade agreements in its assumed demise) without at least discussing the exchange rate issue. Once you start looking at the exchange rate issue, it will become clear that whatever other objections you have to particular features of trade agreements, such agreements are not the basic element that is – as the NPR broadcast put it - “hurting the little guy.”


    [1] https://www.census.gov/foreign-trade/Press-Release/2014pr/12/exh15.xls. SITC = Standard International Trade Classification.


    [2] https://www.census.gov/foreign-trade/Press-Release/2014pr/12/ft900.pdf.


    [3] http://www.bea.gov/international/bp_web/tb_download_type_modern.cfm?list=2&RowID=144 and

    http://www.bea.gov/newsreleases/international/intinv/2014/pdf/intinv314.pdf.


    [4] At one time, the U.S. Bureau of Economic Analysis in its balance of payments and international position tables readily made available “foreign official assets in the U.S.” which allowed tracking of the accumulation of dollar holdings by foreign central banks. It showed a burst in such activity starting with the Great Recession. That series has been discontinued, a decision that should bother someone. See http://research.stlouisfed.org/fred2/series/BOPIOGT.

  • 16 Mar 2015 3:38 PM | Daniel J.B. Mitchell (Administrator)

    In past musings, we have discussed the decline of unionization – and therefore the frequency of union-management negotiations – and a consequent drop in public understanding of what a negotiation entails. In a repeat negotiation process, there are rituals which experienced parties to the negotiation understand, some of which are symbolic. But at the end of the day, skilled negotiators (are supposed to) keep their eye on eventual goals and outcomes. If symbolic actions and statements get in the way, we have evolved techniques of mediation to reframe issues so that some eventual deal can be reached.


    I was recruited to the UCLA faculty as a graduate student at MIT by UCLA Professor Frederic Myers who was visiting MIT at the time. Myers had been a union negotiator just after World War II and he related a story to me. In that era, there was much labor strife as wartime controls were lifted. There were “rounds” of bargaining in various industries in which certain targets – expressed in cents per hour – developed. At one point, there was a round in which a pay raise of 18½ cents per hour became a union target. Union leaders were expected by their members to achieve 18½ cents, regardless of whether that number was appropriate for their unit. In short, 18½ cents became a symbol. The target therefore also became a figure that management wanted to resist, a kind of anti-symbol symbol.


    After a stalemate in negotiations was reached by Myers and his management counterpart, they met informally in a bar. Myers proposed that the two of them find a settlement for which he could credibly claim to have won 18½ cents for his union members and his counterpart could credibly claim that the settlement was actually less. With that understanding, a deal was reached. It was “win-win,” before anyone had even heard of that phrase.


    The lesson is that it’s fine to have symbols as long as they don’t stand in the way of achieving some feasible objective. If symbols stand in the way of achieving such an objective, negotiators need to find some way around them. Nowadays, when union-management negotiations are rare in the private sector, you generally hear nothing about them in the news media at all. When they do make the news, the accounts take a naïve view that what is said publicly by the parties is what they expect to achieve. Put another way, symbolic speech is taken literally in the news media.


    Outside the labor-management context, I have the impression that symbols are taking over at the expense of actual deal making. Either the parties to political disputes have no objective other than promoting their symbols or they don’t understand the process of finding an approach so that symbols don’t get in the way of goals. In my home state of California, for example, there is at present a drought and so there is a renewed attention being paid to water infrastructure. However, dams have now become symbols in California. Democrats are against them, ostensibly for environmental reasons, even if they are euphemistically called “water storage facilities.” Republicans are for them because, well, Democrats are against them.


    Presumably, however, there is a trade-off on a case-by-case basis between the environmental impact of any particular “water storage facility” and reliable water delivery and cost. After much haggling, the legislature put a water bond on the ballot last November which seemingly earmarked certain funds for water storage. That was a good sign; some way was found around the symbol. The bad news is that any decision on what actually happens to the bond funds – now approved by the voters – is likely to restart the symbolic battle.


    You see the same symbolic takeover in Congress over the proposed Keystone oil pipeline. Republicans are in favor of the project. Democrats are opposed. Presumably, however, the pipeline could (should) be evaluated with regard to its environmental costs vs. economic benefits. No one seems especially inclined to do so. The situation repeats with regard to almost every major issue at the federal level.


    One interpretation, a plausible one in my view, is that the legislative or Congressional goal is just re-election and that the partisan public has, over time, become more interested in symbols than results. Yet polls results suggest that there is a substantial nonpartisan center with aversion to gridlock, state or federal. Congress’ favorability ratings, in particular, are low as a result of a sense that it is unable to deal with the nation’s business.


    There is no doubt that the partisan public likes symbolic behavior. However, there is a growing nonpartisan public that isn’t symbol minded. When I examine California’s voter registration data, I find that there is a long-term decline in the proportion of the electorate registered as either Democrats or Republicans. The only growth in registration is what is termed “decline to state,” i.e., voters registered with no party as their choice, a proportion approaching a fourth. Neither of the major political parties has a simple majority of registered voters although Democrats with 43% have a plurality. (Republicans have 28%, third parties have 5%, and the rest are “decline to state.”)


    California voters through a ballot proposition a few years ago abandoned partisan primaries and substituted a “top-2” nonpartisan system in which all candidates run in one election regardless of party affiliation. In short, even if folks no longer have frequent labor-management negotiations as potential models for how to reach feasible outcomes when there are conflicts, there is a trend in sentiment – not yet dominant, of course – against the current clash of symbols.

  • 09 Mar 2015 10:42 AM | Daniel J.B. Mitchell (Administrator)

    There was much excitement when the latest employment release came out from the U.S. Bureau of Labor Statistics last week. The February month-to-month change, seasonally adjusted, in payroll employment was officially 295,000, considered “good.” In past musings, I have cautioned about the vagaries of one-month, seasonally-adjusted data that are preliminary and subject to revision and re-revision. But those folks who were excited about the employment gain pointed to a series of months with gains above 200,000. And the stock market took a dive on the news, purportedly because good news is bad news if you are worried about the Fed eventually raising interest rates as the economy picks up.


    There is no doubt, however, that apart from monthly noise in the data, U.S. employment has been expanding steadily, if not rapidly, for the past five years, as the chart below illustrates.


    Private Sector Payroll Employment



    However, there are sectoral differences in the post-Great Recession experience. In particular, manufacturing employment (see chart on the next page), while showing gains over the past five years, is nowhere near its prior cyclical peak. While total private employment surpassed its previous peak in 2014, manufacturing employment is still depressed. As we have noted in prior musings, if you want to do something for manufacturing, offering training at community colleges or providing subsidies to this or that “greentech” company won’t do it. Photo ops at high-tech factories won’t do it. You have to look at the international side of the problem of long-term job erosion in manufacturing. And, having looked there, you have to address the issue of the chronic American trade deficit.


    Manufacturing Payroll Employment


    The world has grown used to the U.S. playing Keynes when job expansion abroad is needed. In the past year or so, both Japan and the Euro-zone have experienced economic slumps of varying degrees and have allowed (encouraged?) their currency exchange rates to depreciate relative to the U.S. dollar. While such foreign currency depreciation adversely affects the competitiveness of a variety of U.S. industries, the impact is particularly felt in the manufacturing sector. Import-competing sectors of manufacturing are put under additional pressure. And exports become more difficult to sell abroad. The former “good jobs” in manufacturing that aren’t there anymore are not gone because of some mysterious force of nature. Some may have gone due to technological advance. But others are gone because no one in either political party wants to address the real deficit that matters to manufacturing – the trade deficit.


    As the chart above shows, just to get back to the prior peak in manufacturing would require growth of roughly two million jobs. Both political parties claim an interest in job creation, particularly in manufacturing. But neither has a program for addressing the dollar exchange rate. And in less than a year, the dollar has appreciated on a trade-weighted basis by almost 10%, as can be seen on the chart on the next page from the St. Louis Fed database. Much of that change is Euro and Yen related.


    Have you heard any Congressional debate about that dollar appreciation? Are there statements from the White House? When you do hear discussion of the “deficit” from either source, it is always the federal budget deficit and not the trade deficit that is the target. Why is that? Why is there a taboo when it comes to discussing exchange rates? A 10% jump in gasoline prices creates headlines, but not a 10% dollar appreciation (about the magnitude on the chart below). Why is the U.S. the one country elected to play Keynes (i.e., to provide stimulus to other economies) when foreign economies need help? It’s time to change the rules of the international game.



  • 02 Mar 2015 9:29 AM | Daniel J.B. Mitchell (Administrator)

    A short musing this week, one based on a personal experience. But first a proviso. Yes, I do know the distinction between a macro view of the labor market and a micro view. I used to utilize the following example in a labor econ class with regard to that distinction and the use of programs which are supposed to aid the unemployed. If there are 100 job seekers and 90 jobs, at the end of the day, ten will be unemployed. That’s what happens in “Round 1.” Imagine I now propose a job coaching program whereby I apply some “treatment” to the unlucky ten to help them find a job. The evaluation of the program will be based on whether in fact the program gets them a job.


    In my hypothetical job coaching program, I teach the ten to comb their hair and to dress right for job interviews, to look the interviewer in the eye, and to prepare a spiffy résumé. Now we run the experiment again for Round 2. Let’s supposed that as before there are 100 job seekers (including my ten) and 90 jobs. And let’s suppose that prospective employers are very impressed with my well combed job seekers so that all ten get jobs. My program is a smashing success. But at the end of the day in Round 2, ten folks end up unemployed. It’s just that they are a different ten. From a macro perspective I have done nothing other than reshuffling the queue of job seekers. But from a micro perspective, my program has met its objectives (and the ten who went through it are now enthusiastic supporters).


    I hope this example will be convincing that I know the difference between macro and micro. The macro problem was the shortage of ten job openings compared to the number of job seekers. I can only fix the underlying macro problem by doing something on the demand side to create those extra jobs. A supply side fix won’t help in this simple example.


    There is a proviso, however. Suppose we complicate the example a bit by assuming there are some additional job openings beyond the original 90. To make the example simple, assume there are employers with another ten openings, but who won’t hire folks who are unkempt, inappropriately dressed, who don’t look interviewers in the eye, and who have slapdash résumés. Those employers take such traits as signals that job seekers who have them will, if hired, turn out to be poor performing employees. They would rather have vacant positions instead of poor performers. My ten job seekers, before the treatment, can be said to be structurally unemployed because of their traits.


    No matter how much opportunity the labor market provides, they end up unemployed. But if I run the ten through my treatment program, they do get jobs and we have resolved the problem whether you choose to view it as macro or micro.


    What brought these matters to mind was my participation in hiring a candidate for a job vacancy. I won’t describe the vacancy except to say that it involved a job requiring a college education. The job’s duties were described in the official posting. And one could easily go to the website of the organization in which the job was to be located to find out more detail about the organization itself and the likely desirable characteristics of someone who would be considered for the position.


    About 30 applications were received. At this stage, the process involves separating applications into those who should be rejected without further scrutiny and those who should receive a serious look. Of the applications received, about two thirds fell into my reject pile. Why? Their cover letters – an opportunity to explain in brief terms why the applicants’ backgrounds made them a good fit for the position – were generic “hire-me-I’m-good” letters that were not geared to the actual position or the actual organization at issue. There was no highlighting in the letters of background or experience that seemed specifically relevant for the job opening. There was no sign of the applicants even having visited the organization’s website to see what its function was. Would you hire someone for a responsible position if that person showed no ability to highlight their own qualifications?


    Because the job posting made it clear that a college education was required, the applicants were not uneducated. They did not have backgrounds where one would expect to find folks who needed to be told to do the equivalent of combing their hair or dressing right for an interview. Of course, you could say that given the modern ability to apply for the job electronically, it didn’t take much effort to submit an application. Still, what’s the point of submitting an application which has a zero chance of success, even if it is easy to do?


    My experience is admittedly a very small sampling of the job market. Nonetheless, it suggests (to me, at least) that there is a need out there for some very basic job coaching, apparently even at the college level. Yes, I know that such coaching – “make your cover letter relevant for the job you are seeking” - wouldn’t have solved the macro labor market problems that arose in the aftermath of the Great Recession. That’s why I started this musing with the macro vs. micro material. But my limited experience does suggest that there is a structural problem in the labor market for some folks which goes beyond the usual target groups.

  • 23 Feb 2015 9:20 AM | Daniel J.B. Mitchell (Administrator)

    You probably have been reading about the West Coast longshore labor dispute that went on for months. News reports, as this musing is being written, indicated that a tentative settlement had been reached. Basically, the old contract between the Pacific Maritime Association (PMA - the employer group) and the International Longshore and Warehouse Union (ILWU) had expired last May and the union was working without a contract while negotiations continued. The PMA charged that the union was engaged in a work slowdown (as opposed to a full-fledged strike) as a bargaining tactic. But the union claimed that a variety of technical causes had led to delays in loading and unloading ships, apart from labor relations. It denied promoting a slowdown. The alleged causes, according to the union, were related to such issues as coordination with trucks servicing the ports, sorting of containers, and larger ships. The PMA, while not terming its actions a lockout, closed the ports on successive weekends, ostensibly to catch up with a backlog of containers needing to be processed.


    The PMA seemed to want presidential intervention of some type. It was not clear, however, that such intervention would necessarily favor the employer position. In 2002, after a lockout occurred at the ports, President George W. Bush invoked an 80-day cooling off period under the 1947 Taft-Hartley Act. Perhaps the PMA was seeking a repeat of that action by President Obama. But the attitude of the Obama administration toward unions is surely different than the Bush administration’s attitude. In any event, a complete lockout or strike might have triggered a Taft-Hartley intervention by the president, but weekend work pauses were unlikely to do so.


    It could be, however, that PMA planned on ramping up its partial lockouts, hoping that the union would eventually call a complete strike in response and that the strike would then trigger Taft-Hartley intervention. However, there was no strike and the intervention by the president was more limited. President Obama sent out his Secretary of Labor, Thomas Perez, to intervene in the negotiations. There were calls by shippers and other commercial interests for someone to do something because of the impact of the problem at the ports in moving cargo in a timely fashion. Undoubtedly, however, the Federal Mediation and Conciliation Service (FMCS) – the agency which is supposed to provide assistance to parties in reaching settlements in labor disputes – was already involved. FMCS, it might be noted, is not part of the Department of Labor and does not report to the secretary of labor.


    Full disclaimer: I have no inside information on what was actually going on within the union, within the PMA, at the negotiations, or in the minds of those folks in the Obama administration who made decisions on this matter. What interests me in this episode, however, is that it seemed like an event from a past era during which unions were common in major industries and were seen as important economic players. The fact that possible use of a 1947 statute was at issue makes that point. So let’s do a little background history.


    Unions began to expand rapidly during the Great Depression of the 1930s. Major strikes occurred and produced ad hoc forms of presidential intervention under the Roosevelt administration. Eventually, in 1935, the Wagner Act (National Labor Relations Act - NLRA) was enacted. The new law formalized a process of regulation of labor relations by establishing a National Labor Relations Board (NLRB) to deal with union-management relations in most of the private sector. (Railroads - and later airlines - are covered by a separate Railway Labor Act; agriculture and public sector workers were not covered by the NLRA.)


    The expansion of unionization continued during World War II, a period of wage-price controls and bans on strikes to protect uninterrupted military production. But after World War II, as controls were lifted, a strike wave broke out. Conflicts that had been suppressed during the War broke out. At the same time, Congress had shifted to Republican control. Disruptive strikes became a matter of public concern. From the congressional viewpoint, the problem was that the NLRA was too pro-labor and needed to be amended to produce a “balance” between unions and management. The result was the Taft-Hartley Act which was partly an amendment to the Wagner Act, partly a response to the postwar strike wave, and partly a means of dealing with other issues such as political contributions by unions and firms.


    Senator Robert Taft, the key personality in shaping the legislation, was a major figure in Republican politics and a possible presidential contender. He was conservative, but mainly in the libertarian sense. Thus, Taft-Hartley is itself a balancing act (no pun intended!) involving checking the power of unions while not giving the federal government authority to determine wages and working conditions. There is no compulsory arbitration, for example, built into the law. Ultimately, Taft-Hartley was vetoed by President Truman and then passed over his veto.


    The Taft-Hartley provisions that were at issue in the current port labor dispute provide for limited presidential intervention in labor disputes that rise to the level of creating a “national emergency.” Essentially, the president appoints a fact-finding Board of Inquiry to determine what is at issue in the dispute but not to make any recommendations. If the president believes that a national emergency is being created by a work stoppage, an eighty-day injunction (cooling off period) can be sought from a court. If the court agrees that there is a national emergency, any strike or lockout is forbidden during the 80 days. As noted, there is no provision for the president or anyone else to engage in binding arbitration and to determine what the terms of the settlement should be. But there is a provision for management’s last offer to be put to workers for an up-or-down vote conducted by the NLRB during the period between day 60 and day 75. If workers accept those terms (thus going over the heads of their union leaders in doing so), the terms presumably become the new settlement. (The statute is a bit vague on that point.) If there is no settlement, both sides are as free to engage in a strike or lockout as they were before at the end of the 80-day period. The president would have to seek additional legislation from Congress for any further authority.


    There are two implicit assumptions in the Taft-Hartley process. One is that the impasse that caused the work stoppage was a function of the parties not having enough time to negotiate a settlement. Thus, if the parties are given another 80 days, perhaps they will reach an agreement on their own. But the fact that settlements are often reached at the midnight hour, i.e., just before the old contract expires, may create an illusion of a tendency to run out of time in labor disputes. In fact, however, it is in the nature of the bargaining process that bluffing stops when the deadline is at hand. Last minute settlements are to be expected. Moreover, if the parties think that the federal government is likely to step in and add another 80 days to their contract, they will take the true deadline to be at the end of the injunction, not the original ending date of the contract.


    The other Taft-Hartley assumption – inherent in the vote procedure – is that union officials are leading their members astray and that the members, if given a chance, are more amenable to going along with the employer than their (radical, militant) leaders. Again, the assumption is questionable. Nonetheless, the Taft-Hartley Act – which reflects conditions and political attitudes of the late 1940s – is still the law of the land and the only formal method of presidential intervention in labor disputes covered by the NLRA.


    At one time, when unions were major factors in key industries, Taft-Hartley injunctions were repeatedly invoked in a variety of sectors. The issue of whether these cases were truly national emergencies was not much discussed and courts gave the president what he wanted. By the 1970s, however, Taft-Hartley injunctions were mainly at issue in longshoring. When President Carter sought an injunction in a coal mining dispute, a court did not go along with granting his request on the grounds that there was no true national emergency. But because of the impact on international trade and the ripple effects therefrom, courts remained less likely to be dubious in longshore situations. Thus, as noted above, President Bush obtained an injunction in a West Coast longshore dispute as recently as 2002.


    Still, thirteen years have gone by since 2002. Whether a court would view a complete work stoppage in longshore as a national emergency in 2015, is unclear. Courts haven’t had much practice in handling now rare Taft-Hartley injunctions. The notion that longshoring is inherently a sector in which any major stoppage is a national emergency is no longer routine.


    If we go back in time to the era of Taft-Hartley’s enactment and the next decade or so, presidential intervention in labor disputes was much more common than it is today. In earlier musings, I have used White House recordings from the Kennedy, Johnson, and Nixon administrations to illustrate the tendency of presidents to involve themselves and their labor secretaries in work stoppages. Such disputes tended to be visible but not necessarily even close to national emergencies. A newspaper strike over the displacement effects of automation – computerized printing – during the early 1960s in New York City was a prime example. Automation was a general public concern in that period. And, in addition, the Kennedy-Johnson administrations had promoted voluntary wage-price guidelines for anti-inflation reasons and were anxious that visible union settlements not exceed the guidelines. Later, the Nixon administration imposed mandatory wage-price controls and, again, it was anxious to see that the rules were being followed.


    In short, presidents and their advisors back in the day were more familiar with labor relations and more accustomed to involving themselves in labor disputes than is now the case. They were aware that there is a political danger inherent in such involvement. What happens if there is presidential intervention and no settlement is reached?


    The current secretary of labor is reported to have pushed the parties to the longshore dispute to settle or be called to the White House for negotiations. Note that there is no law, certainly not Taft-Hartley, which could require the parties to a labor dispute to move to the White House. And there is no certainty that if they did so move, there would be a settlement as a result. In the mid-1960s, President Johnson tried such a strategy in an airline dispute and ultimately failed to achieve a settlement that complied with his wage guideposts. That high-profile failure is generally seen as the de facto end of the Kennedy-Johnson wage-price guideposts program and a presidential defeat.


    What’s the lesson to be learned? The ILWU and the PMA have been engaging in labor negotiations for decades. They are old pros. One suspects there is much less experience in labor relations among the political advisors to the president. In this case, at least in public perception, the president sent out the secretary of labor and a settlement was reached. That result was a PR plus for the president. Did anyone in the White House see the potential dangers to the president that could have arisen from an unsuccessful intervention? What if the parties had not reached a settlement? It’s an interesting question to which we will not know the answer.

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