Mitchell's Musings

  • 02 Dec 2016 1:26 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 12-4-16: Everything Mattered (Somewhat)


    Daniel J.B. Mitchell


    Given the poor performance of political polls in the recent presidential election, one is reluctant to cite poll data to analyze what voters were trying to say. But here goes. The Kaiser Family Foundation did a post-election poll asking voters what motivated them in their choice of candidate. The results suggest that those analysts who are theorizing and explaining really don’t have a good answer, particularly if they are trying to find some single cause. It isn’t just a case of Midwestern manufacturing workers disgruntled about international trade. That issue was clearly present, of course, and back in the day those on the left would have seized on it as the “real” issue (since economics was supposed to be the underlying cause of all things).


    Nor is it just loss of “white privilege” due to changing demographics, although that factor is there, too, for at least some voters. But blaming the outcome on racism – which seems to be the trend among some in academia – isn’t THE story, either. The problem is that there is no “THE” story.

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    Voters, according to the Kaiser poll, were upset about “the direction the country is headed,” – see the chart above - but no one factor in that nebulous concept seemed to dominate what it meant. Separating out the results by those who voted for Hillary Clinton vs. those who voted for Donald Trump doesn’t reveal some mysterious key to the election’s outcome, as the chart below shows.

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    Separation of the results shows that Hillary voters were more concerned about the personality of Donald Trump than about the direction the country was seen to be headed. Trump voters were more concerned about the direction than about the personality of Hillary Clinton. (The fact that 31% said the main reason they voted for Hillary Clinton was that she wasn’t Trump suggests she wasn’t a strong candidate in her own right.) Note that “immigration” might be seen as a racism proxy. But few Trump or Clinton voters saw it as the major factor in their choices.


    The fact that the election was close and revolved around margins of relatively few votes in a limited number of “swing” states suggests that a search for a grand cause is misplaced. Right now, the Democrats are doing what the Republicans were supposed to do after the projected Clinton win, i.e., falling into factions and finger pointing. But in a close election, a marginally better candidate on the Democratic side could have reversed the actual result.


    Finally, the focus on those in the workforce with less than a college degree needs some elaboration. The standard tale seems to be that THE story was that the jobs for those less than a college degree are drying up due to technology. So it might be worth looking at a new survey released by the U.S. Bureau of Labor Statistics which characterizes jobs by minimum educational requirements. (The survey excludes jobs in the federal government and self-employment.) 

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    Over 30% of jobs require less than a high school diploma, as can be seen on the chart above.[1] Another 45% require a high school diploma. So that’s about 3 out of 4 jobs. Another 4% require an associate’s (community college) degree. So we are now up to about 4 out of 5 jobs that don’t require a college degree. Of course, there are some folks in those jobs with more education than is required. And there are other forms of training that may be required apart from formal education. But still, we have not run out of less-than-college jobs. There is more to be said on that issue, of course, but – again – the search for THE cause of the 2016 election result is likely to be fruitless. Everything mattered somewhat. And almost anything that might have occurred, but didn’t, to favor Clinton might have reversed the outcome.

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    [1] http://www.bls.gov/news.release/pdf/ors.pdf. The numbers underlying the chart can be found at http://www.bls.gov/ors/#data and searching for educational requirements.

  • 25 Nov 2016 1:27 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 11-28-16: What Could Possibly Go Wrong?


    Daniel J.B. Mitchell


    There has been much commentary and controversy about various picks of the incoming Trump administration for top cabinet and other positions. No, I’m not going to offer more comments on those. Nor am I going to rehearse the numerous after-the-fact explanations and criticisms related to the election, polling (mis-)predictions, news media coverage, etc.


    There are some things an incoming administration – whatever its ideological leanings – can change quickly and others which take time. Things like Supreme Court appointments take time to go through the Senate approval process. Supreme Court appointments, even when justices are finally seated, take time to have an effect; it takes a while before cases come to them that can alter past judicial directions.


    But there is one area in which there can be important impacts quickly and that is at the Federal Reserve. Once approved (there is a Senate vetting process), appointees can quickly change monetary policy (or decide not to change it). Fiscal policy, in contrast, requires legislative approval which generally is an involved process. Thus, in the 2008 financial crisis and its aftermath, the Fed became the prime mover. Congress meanwhile debated whether fiscal stimulus should be applied through tax cuts or through spending (or how much of each) and which taxes or spending projects should be considered. When it came to spending, moreover, it turned out – as it generally does – that the “shovel-ready” projects put forward really weren’t shovel ready but could only gradually (too late?) came into force.


    The Fed, as the nation’s central bank, has long been a target of conspiracy theories both of the left and the right. It is, after all, a “bank,” right? Actually, although central banks such as the Bank of England emerged gradually out of commercial banks, in their modern guise, “bank” is a misleading term for central banks.[1] They can’t be appraised on a commercial basis, i.e., are they at risk of bankruptcy? Modern central banks create money. Repeat, modern central banks create money. (See the chart below showing the Fed’s response to the 2008 crisis.) So – absent some artificial legal constraint – they can’t be at risk. The cries to “audit the Fed,” therefore, are at best ambiguous. Audit it for what?




    People have trouble wrapping their heads around the idea that the Fed creates money out of nothing. Isn’t money based on something “real”? (No.) Are you saying it’s just a social convention? (Yes.) But don’t people work hard to get it, sometimes cheat or steal or even murder to get it? (Yes.) So how can it not be “real”? (Sorry, but is an “inch” real? It, like the “dollar” is a social convention.)

    Put bluntly, there are a lot of wacko ideas about the Fed and putting someone with wacko ideas in positions of authority at the Fed could have very bad consequences. Right now, there are two vacant positions at the Fed and more to come in a year or so including the Fed chair. The wrong folks could do a lot of damage in relatively short order.[2]


    It’s true that there are other presidential decisions – particularly in the foreign policy/military area – that could do a lot of damage quickly. But if you are making a list of things that could possibly go wrong, think about putting appointments to the Fed up towards the top.

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    [1] Note that the central banks in countries which adopted the euro are no longer central banks in any meaningful sense of that word. They are at best legacy monetary institutions.

    [2] http://www.bloomberg.com/politics/articles/2016-11-22/trump-looks-to-put-stamp-on-fed-in-first-months-of-presidency.  


  • 18 Nov 2016 5:15 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 11-21-16: One Out of Five - What Might Have Been


    Daniel J.B. Mitchell


    In early January 2013, shortly before President Obama was about to take the Oath of Office for his second term, I spoke at a LERA meeting in which the panelists gave their advice to the new president. Of course, he wasn’t there to hear the wisdom of the session. So the fact that I presented five

    recommendations and only one of them actually was implemented shouldn’t be a disappointment. However, it is of interest to ponder what might have happened if the various recommendations that were not followed instead had been.


    By the way, dear reader, the LERA presentation of advice from 2013 – along with all of the informative and engaging PowerPoint slides – is available for viewing and listening on the web! Just click and on:

    https://archive.org/details/MusingOnAdviceForTheNewAdministrationFiveSuggestions

    and use the player on that link. It will take about 21 minutes to hear and see the full presentation.


    The first piece of advice presented was tactical and was based on collective bargaining, an institution with which LERA members are naturally familiar. I pointed out that collective bargaining is a repeat game and therefore any single negotiation will influence subsequent negotiations. In particular, if you get rolled in one negotiation (if you were too soft), you will have a hard time convincing your opposite number in the future that you will hang tough. You will have to invest in teaching the other side that there is a new you.


    At the time – in my view – President Obama had been rolled in his dealings with Congress on government budgets (and shutdowns), debt ceilings, etc. Changing that stance would be difficult because of that past history, but it was worth an investment, I suggested. You can decide if that investment was made. My sense is that it wasn’t and that the deficiency showed up in other areas, too. Remember the line in the sand on chemical weapons use in Syria that was ignored when it was crossed? Remember Putin coming to the rescue by producing a face-saving deal with the Syrian government? Enough said.


    Recommendation number 2 was to avoid over-reliance on opinion polling. Given the political polling meltdown in the recent presidential election, my observation about the fallibility of polling doesn’t seem – in hindsight – to be at all off base. Perhaps less reliance on pollsters and more information from the field would have suggested that the Hillary Clinton candidacy was a more tenuous proposition than the White House evidently thought. Had that information arrived, actions might have been undertaken that could have produced a different election result. Clinton’s loss is also Obama’s, since his legacy “Obamacare” program is likely to be dismembered.


    Recommendation number 3 was to re-examine the entire federal economic data-gathering apparatus. My sense was that too many resources were going into theoretical manipulation of key indicators such as real GDP and the Consumer Price Index (CPI). No such re-examination occurred, however. Perhaps if it had occurred, better indicators might have been developed that would have highlighted the economic distress that had something to do with the Trump vote. For example, if the product quality improvement adjustments being built into the CPI and, thus, into “real” wages are excessive – maybe displaced workers don’t enjoy improvements in computers quite as much as someone thinks – perhaps the rustbelt’s labor market problems might have been better understood.


    The fourth recommendation – the only one that clearly was followed (not due to my LERA presentation, of course!) - dealt with the Federal Reserve. To avoid being an issue in the 2012 election, Fed Chair Ben Bernanke announced that he did not want to be reappointed when his term expired. My recommendation was to find a pragmatist in the Bernanke mold and avoid appointing a monetarist. (Monetarists were convinced that the Fed’s responses to the earlier Great Recession were about to cause a roaring inflation – something that was implausible in 2012-2013 and never occurred during Obama’s second term.) The President subsequently appointed Janet Yellen, a pragmatist in the Bernanke mold.


    Finally, the fifth observation dealt with the slow recovery from the Great Recession. I noted that while it is true empirically that recoveries from financial crises have tended to be slow and prolonged, that fact had built into it how economic policies responded to such crises in the past. Put another way, the past did not have to be prologue.


    However, the idea that the slow recovery was just the way the natural law of the universe worked seemed to become the general opinion in Washington. Given Congressional gridlock, conventional fiscal stimulus was not on the table. My suggestion was, therefore, that dealing with the U.S. international trade imbalance would - as a byproduct - produce far more stimulus than the official stimulus program provided. And I provided a mechanism for bringing the trade balance to zero. I don’t have to tell you that nothing of the sort happened.


    In view of the last election’s result, it is worth looking into the trade issue with political hindsight. When you look at the sectors of the economy that tend to employ blue collar workers – mining, construction, manufacturing, transportation, and utilities – you can see on the chart below that employment in these sectors has declined over a long period as a fraction of the total workforce.[1] It is also true that within these sectors, the decline occurred largely in the two sectors most exposed to international trade (mining and manufacturing).

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    As I have pointed out in prior musings, given the level of the trade imbalance and the now relatively small job base provided by the blue collar trade sector, a return to balanced trade would not produce a return to anything like the roughly one third of the workforce seen on the chart in the early 1970s. If that is someone’s standard of when America was great, we are not going back there. Maybe you might get employment in the blue collar sectors up to 20% (from the current 17%).


    Such an increase in jobs isn’t nothing. But Trump supporters thinking that more could occur from renegotiated “great” trade deals are likely to be disappointed. Still, the chart also makes it obvious why trade is associated with rustbelt problems in the minds of those who now have less opportunity than they had in the past. The correlation is there, even if a one-to-one causation is not.

    On the other hand, the fact is that even though dealing with the trade issue would not restore some Golden Age of blue collar employment, nothing of significance was being done to address trade directly. In particular, nothing of significance was being done about currency issues and the related Japanese and later Chinese mercantilism.


    The 2016 election was close and the loser in fact got more popular votes than the winner. But might the results have been enough different if the trade issue in particular had been targeted as suggested? It would have provided more stimulus than the official stimulus program did and produced a faster recovery. And it would have responded to concerns about trade in “swing” states that in fact went unaddressed.


    For all sad words of tongue and pen, the saddest are these, 'It might have been.’”

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    [1] Data are for the month of October of each year, seasonally adjusted. 


  • 12 Nov 2016 11:02 AM | Daniel Mitchell (Administrator)

    Note: Somehow, this item from Oct. 10, 2016 was either not posted or unposted. Here it is, out of sequence:


    Mitchell’s Musings 10-10-16: Makes Sense to Me


    Daniel J.B. Mitchell


    I came across an article in the Los Angeles Times business section recently with the print-version headline “Trade is seen as harmful.”[1] The article noted that a Pew Research Center poll found that “eight out of ten adults regarded outsourcing of jobs overseas and the growth of imports of foreign-made goods as harmful to U.S. workers. By comparison only half of the people surveyed saw automation as hurtful – even though many economists believe that new technologies and the mechanization of work have led to as many job losses as imbalanced trade.” The article went on to relate the trade concerns to the current presidential election campaign.


    Above are the actual poll results from the underlying Pew study.[2] Although the LA Times article seems to imply that respondents have misdiagnosed the relative importance of trade vs. automation, there may be an explanation. Unfortunately, Pew does not provide the precise wording of the questions asked. So exactly how respondents interpreted words such as “outsourcing” and “automation” is not clear. Were they given definitions? The hurt vs. help contrast also raises some questions. Do the words mean destroy jobs vs. create jobs? Or do the terms suggest making jobs more difficult to do vs. assisting workers to do their jobs? Or do the terms suggest some kind of good jobs vs. bad jobs distinction?[3] The LA Times article implicitly assumes the destruction/creation interpretation.


    Despite the ambiguities, let’s limit the interpretation to destruction vs. creation when thinking about the trade issue and how survey respondents reacted. Other things equal, the large trade imbalance (deficit) that has characterized the U.S. for decades has to be a source of net destruction. There are caveats, of course. Important among them is the fact that workers whose jobs are lost may end up in the non-trade sector (such as retail).[4] That is, imbalanced trade may shift the mix of jobs towards the non-trade sector without changing the total number of jobs.


    What about automation as a concern? Note that the LA Times article seems to use automation and technology interchangeably. If that is also how respondents reacted, at least some of them may have been thinking about the way technology provides an assist to workers in doing jobs. Thanks to computer technology, for example, it is easier to access information needed on the job than it used to be. Medical records are now available readily without going through paper files. There are many such examples.


    Finally, what about immigration? Respondents are roughly split on whether immigration hurts or helps American workers. The LA Times article notes that ten years ago, the result was much more anti-immigrant than it is now. Although the pace of illegal immigration is hard to measure precisely, another report from Pew suggests that during the past decade, net illegal immigration has halted.[5] That is, the absolute of number of illegal immigrants residing within the U.S. has stayed about constant, as shown on the chart below. Presumably, the Great Recession and its aftermath had an impact in discouraging a net inflow; up until the Great Recession occurred, the number had been rising. That shift to a net of zero may explain the attitudinal change.[6]


    In short, the Pew survey results do not seem to be counter-intuitive. They seem to go with the election narrative. Reflected in the outcome, you have the followers of Bernie Sanders who think trade is a problem but not immigration vs. the followers of Donald Trump who think both are a problem.  You have automation-technology seen as good and bad, perhaps because the question is posed ambiguously. It makes sense to me.

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    [1] The online version of the article had a different headline focused on immigration, not trade: “Americans are feeling better about immigrants' economic effect — but Republicans aren't, survey shows.” See http://www.latimes.com/business/la-fi-pew-study-jobs-20161006-snap-story.html.  

    [2] The full report is at http://assets.pewresearch.org/wp-content/uploads/sites/3/2016/10/ST_2016.10.06_Future-of-Work_FINAL4.pdf. A summary is at http://www.pewsocialtrends.org/2016/10/06/the-state-of-american-jobs/.  

    [3] The fact that decline of unions is seen as more hurtful than helpful in the survey suggests that respondents may have been thinking – at least in part – about job characteristics such as pay and benefits.

    [4] Exports and imports may differ in their labor-using characteristics. At least in theory, however, U.S. imports should be more labor-intensive than exports which would intensify the net destruction effect. That is, even with balanced trade, there might be net displacement.

    [5] http://www.pewresearch.org/fact-tank/2016/09/20/5-facts-about-illegal-immigration-in-the-u-s/. Even when the stock of illegal immigrants is constant, there may be gross flows into and out of the U.S. But the inflows and outflows must be balanced, i.e., a net of zero, for the total stock to stay the same.

    [6] Immigration has had a U-shape in terms of skill with a concentration of unskilled immigrants and a lesser concentration of highly-skilled immigrants. Since this pattern is not a replica of the existing U.S. workforce, there may be both competition among substitutes (e.g., low-skilled natives vs. low-skilled immigrants) as well as complements, e.g., natives for whom demand for their labor is enhanced by the presence of immigrants. For example, native supervisors in southern poultry packing plants may benefit from the influx of low-skilled production workers. It seems unlikely, however, that this nuanced view of the impact of immigration across different groups within the workforce is driving the survey results.

  • 11 Nov 2016 12:57 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 11-14-16: Do We Really Have All Our Marbles?


    Daniel J.B. Mitchell


    When I was in high school a long time ago, a teacher wanted to demonstrate the laws of probability and the concept of sampling. So he filled a large jar with marbles of four colors. Since he had filled the jar himself, he knew the proportions of each color which he told the class. He then chose various students to come up and – without looking in the jar – randomly pick out a couple of marbles. The idea was to show that as the sample increased in size, it would come to reflect the actual proportions in the jar.


    Now this demonstration took place in Stuyvesant High School in New York City, a special school – you had to take an SAT-type test to get in - which at the time was male-only. And the teacher was a patsy. So the nerdy teenage boys in the class managed to sabotage the demonstration. I won’t go into more details on what happened, but let’s suppose that the demonstration had proceeded as the teacher had planned. Indeed, as the sample size grew larger, the proportions in the sample would have come to resemble the actual proportions in the entire jar.


    I thought of the marbles-in-the-jar story given the polling fiasco that occurred in the presidential election last week. Basically, pollsters (the polling industry) had a Dewey-Beats-Truman event in 2016, whatever rationalizations and defenses they offer.  And there will be rationalizations offered in the weeks to come. Examples: Clinton won the popular vote so really those who projected a Clinton win were “right.” Voters changed their minds at the last minute. Etc., etc. You can just hear the self-justifying stories now.


    But there is a problem. Pollsters usually qualify their results by including a “margin of error.” Journalists take this margin to mean that there is zero probability of an error outside that range. But presumably “margin of error” actually has some relationship (what relationship exactly?) to the statistical concept of a confidence interval linked to sample size. A confidence interval, however it is defined, does not mean that there is zero probability of a result outside its boundaries.


    That issue is a comparatively minor part of the larger story. So let’s go back to the marble story. There is no such thing as a “likely marble.” If you took the marble out of the jar, its status is clear; it was previously a marble in the jar.  But there is the concept of a “likely voter.” When you poll people, you have to decide what filters to apply in order to count people who will actually vote. Whatever you do about that issue, you may be wrong. The fact that you may be wrong potentially adds to the actual “margin of error,” but not to the reported one; you can’t treat your sample as if it were marbles in a jar.


    Marbles in a jar don’t change their colors. No matter how you ask the question about what proportions are in the jar, the marbles and their colors are unaltered. But we know from years of research that the way a question is framed when people – not marbles – are surveyed, can influence the answer you obtain. So pollsters (hopefully) try to take account of that issue. But the way in which you take account potentially increases the “margin of error.” You might be wrong.


    The same is true with regard to response bias. You don’t have to worry about marbles refusing to come out of the jar. But no one has to answer the phone. No one who does answer the phone has to volunteer to be questioned. And there may be systemic links between responding to a pollster and political inclinations. Like the problem of question framing, you can add methodological steps to try and account for response bias. But you might be wrong and thus potentially add to your “margin of error.”


    One way to try to deal with the issue of a wide margin of error in any particular poll is to average a group of polls. If you took several separate samples out of the marble jar, in effect you would have produced a larger sample and a smaller confidence interval as a result. But pollsters asking about voting behavior using different filters and different questions are not the same as repeat samples of marbles from the jar. Pollsters may influence each other. If you see your poll is an outlier, you may modify your methodology to make it more like the consensus. So the unintended biases in one poll may induce biases in another.


    Anyway, exactly how do you average different polls? Do you weight different polls differently? What weights? Even using a simple (unweighted) average is a de facto decision about weights. The bottom line here is that polling is not the same as pulling marbles from a jar; “margins of error” calculated as if it were the same are generally going to be too small.


    What about using non-poll models based on economic variables? Note that the sample size of relevant elections is small; we have presidential elections only once every four years. And economic models that correctly predict the popular vote can be wrong about the Electoral College outcome, as in Bush vs. Gore in 2000 or Trump vs. Clinton in 2016. (If your economic model of the popular vote predicted Trump, you were wrong, even though you were right.)


    Generally, economic models tend to be estimated after some methodological massaging has occurred to find the best “fit” to past election data. Confidence in results has to go down as you keep revising your methodology to improve “fit.” Ultimately, a crooked enough line can fit any constellation of points but may not be good at predicting the next point in the series. Even if you buy the notion that “it’s the economy, stupid,” that view doesn’t tell you how to measure “the economy.” Real GDP? Unemployment? Trends vs. absolute values? There is nothing in the general idea that “the economy” is key to voter behavior that tells you exactly what the economy is.


    If you are really an economic determinist, of course, you face a paradox. Why should the party which the model predicts will lose put up a candidate at all? Why go through the expense of a campaign? Presumably, the answer is that there is some probability (“margin of error”) that the model’s forecast is wrong. So there must be possible things the disadvantaged campaign can do to reverse the predicted result. And if there are such things, surely some of them are non-economic. Maybe the observation – promoted by Democrats - that Dewey looked like the man on a wedding cake had some effect!


    Bottom line: When Dewey didn’t beat Truman in 1948, folks remembered that lesson for a while. But people also forget over time. And it is always possible to assert that nowadays we have new sophisticated high-tech methodology that didn’t exist back in the 1940s. (“This time it’s different” is not an idea confined to financial bubbles.) In fact, new technology does not always guarantee better results. Think about people switching from landlines to cellphones, for example, and what that may do to sampling. Do we even know?


    Be skeptical.

  • 04 Nov 2016 10:32 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 11-7-16: Disunion


    Daniel J.B. Mitchell


    Much has been said about the base of support for the Trump candidacy, usually depicted as disaffected white males with less than a college degree. We have noted in past musings that there are plenty of Trump supporters who don’t fit the stereotype. The latest Field Poll data for California – a decidedly “blue” state – show among “likely voters” that 28% of those with a college degree are Trump supporters as are 22% among those with postgraduate work (more than a college degree). Twenty-four percent of Latinos are supporting Trump, despite the notion that he alienated that group with anti-immigrant rhetoric. Among those 18-39 years old, he has 17% support, despite the idea that the young are inherently liberal. So the Trump story is not exclusively one of support among the stereotyped base by any means.[1] The base alone would not produce the kind of polling numbers Trump has been receiving.


    Nonetheless, it is worth looking at the stereotyped group. And particularly for LERA readers, it is worth asking whether the decline in unionization has something to do with the fact that this group is looking for someone to give it political representation. In a sense, you can view the declining-union idea as a “bowling alone” story.[2] Unions once served the group as a form of representation – not only at the workplace, but more generally in the American polity. Now, after a long period of union decline within the group’s primary employment sectors, unions represent only a small fraction of the group.


    Neither political party, it can be argued, has been energetic in finding actual economic remedies for the group. But Democrats have largely continued to do so indirectly via their historical connection to unions, unions that have less and less contact within the group. Republicans have made direct appeals – not with economic remedies, but with “social” issues. So what has occurred is the Obama “guns and God” story combined with bowling alone.[3] It’s true that in the contemporary era, folks can represent themselves and interact via internet social networks. But individual self-expression is not effective group representation.


    Unions never represented a majority of the U.S. workforce or even close to it. But in, say, the 1950s, something like a third of nonfarm workers were union members.[4] The representation rate was uneven, more in some regions and industries than others. But if you were a blue collar, white male, there was a good chance you were a union member.


    We don’t have detailed demographics from the 1950s “golden age” of unionization. But the U.S. Bureau of Labor Statistics (BLS) did do a study, based on Current Population survey data, for 1970 (so a decade or more into the decline).[5] Nowadays, the stereotypical union worker is in the public sector, even though there are still more private than public union members.[6] (In 2015, there were 7.2 million public sector union members vs. 7.6 million private members.)


    In 1970, 1.1 million union members were in “public administration” out of a total of 17.2 million members in total.[7] (Note that the absolute number of union members was larger in 1970 than today despite substantial growth since 1970 in the workforce.) Moreover, in 1970 (with private unionization rates already in decline but public rates increasing), the average union membership rate in each of the two sectors was about the same. Nowadays, the overall unionization membership rate in the public sector is 35.2% versus a mere 6.7% in the private sector.


    Male Union Members as Percent of Male Wage and Salary Workers: 1970

                      Total            White         “Negro & Other”

    ------------------------------------------------------------------

    All               27.8%            27.6%              29.0%

    Agriculture        2.7              2.9                2.2

    Mining            38.9             38.7                  *

    Construction      41.3             42.2               33.7

    Manufacturing     38.4             37.8               43.7

    Transportation

     & Public

     Utilities        49.4             50.1               43.6

    Wholesale &

     Retail           12.9             12.8               13.9

    Services &

     Finance          11.7             11.2               15.6

    Public

     Administration   27.8             27.0               33.4

    ------------------------------------------------------------------

    White Collar      12.5             12.0               20.7

    Blue Collar       42.1             42.8               36.7

    Service           20.1             20.2               19.9

    ------------------------------------------------------------------

    *Base too small for an estimate.


    The table above summarizes the BLS estimates of unionization membership rates for males in 1970. To anyone familiar with contemporary data on unionization, the figures on the table are jarringly different from what prevails today. We can debate the long-term causes of union decline. And you don’t have to be a romantic about the role of unions in society and the economy, as some in academia are. But the simple fact is that over time, a sizable group in the U.S. population that was once represented in society has lost a major channel of voice, both in the workplace and in the broader sphere of economic policy. A vacuum was created and politics abhors a vacuum. So someone moved to fill the void and now there are consequences.

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    [1] http://www.field.com/fieldpollonline/subscribers/Rls2554.pdf

    [2] “Bowling alone” refers to the Robert Putnam idea that social and community institutions (including unions) have been in decline.

    [3] https://www.washingtonpost.com/news/the-fix/wp/2015/12/21/obama-dusts-off-his-cling-to-guns-or-religion-idea-for-donald-trump/

    [4] Gerald Mayer, “Union Membership Trends in the United States,” Congressional Research Service, 2004. Available at http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1176&context=key_workplace.

    [5] U.S. Bureau of Labor Statistics, “Selected Earnings and Demographic Characteristics of Union Members, 1970,” U.S. GPO, 1972.

    [6] http://www.bls.gov/news.release/union2.t03.htm

    [7] Public administration does not cover the entire public sector. Some government-run employment sources (transit enterprises, etc.) are lumped in with other private workers. 

  • 29 Oct 2016 2:14 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 10-31-16: Sitting Out the Election


    Daniel J.B. Mitchell


    The Federal Reserve, on and off during the 2016 presidential election campaign, has been accused of following a policy aimed at helping Hillary Clinton by keeping the economy artificially afloat. So what has been the recent history of Fed policy, particularly during the election cycle? It’s actually not all that hard to interpret the available data.




    The chart above shows the “adjusted monetary base,” essentially the credit injected by the Fed into the broader economy.[1] What we observe is a remarkable break from the past trend in the midst of the Great Recession and then various surges and pauses thereafter. Particularly in a period in which short-term interest rates were stuck near nominal zero, it makes more sense to judge monetary policy by what happened to the base than by changes in interest rates.


    There are – as can be readily seen – distinct periods of monetary policy depicted on the chart. It is, of course, interesting to analyze the details of who said what at meetings of the Open Market Committee, and what outside observers were citing as important developments at those times. But the chart provides us with an after-the-fact general overview that cuts through the noise. Below is a listing of what we can see, combined with labor market conditions as measured by unemployment:

    • Sept. 2008 – Jan. 2009: Surge. Unemployment rate rises from 6.1% to 7.8%, seasonally adjusted. This period contains the 2008 election and a general collapse of the financial sector which was rescued through various “bailout” policies.
    • Jan. 2009 – Aug. 2009: Pause: Unemployment rate rises from 7.8% to 9.6%. New president takes office. The Fed seems to want to see what the impact of its previous surge would be. But the economy continues to weaken. The surge prevented financial collapse but did not avert a severe downturn.
    • Aug. 2009 – Mar. 2010: Surge: Unemployment rate rises from 9.6% to 9.9%. The Fed – having observed the slide and the general poor economic outlook - tries more stimulus.
    • Mar. 2010 – Jan. 2011: Pause: Unemployment stabilizes (drop from 9.9% to 9.1%), but the labor market remains very soft. The previous surge delivered less than might have been hoped for.
    • Jan. 2011 – July 2011: Surge: Unemployment continues at its high level (9.1% to 9.0%).
    • July 2011 – Dec. 2013: Pause for a year and a half to see impact of prior surge: Unemployment drops from 9.0% to 6.7% as Fed essentially sits out the 2012 presidential election.
    • Dec. 2013 – Sept. 2014: Surge. The Fed concludes that – since inflation remains low – that the unemployment rate could be pushed down further. Unemployment drops from 6.7% to 6.0%.
    • Sept. 2014 – present: Pause. Unemployment drops from 6.0% to 5.0%. Fed implements a token slight rise in interest rates. Beyond that step, it essentially sits out the election. Inflation remains low.

    It is hard to look at this Fed policy history from 30,000 feet and conclude there is some active manipulation of monetary policy around election time. In the 2008 case, with the financial sector and the economy collapsing, of course the Fed became active. But it essentially sat out the 2012 election and has repeated that behavior in 2016.

    ---

    [1] The adjustments referred to in the adjusted monetary base involve changes in reserve requirements. None occurred during the period shown on the chart. The monetary base is currency in circulation plus deposits at the Fed by banks. 

  • 21 Oct 2016 11:47 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 10-24-16: Who Will Re-Invent Buffett’s Wheel First?


    Daniel J.B. Mitchell


    As numerous past musings have noted, back in the 1980s – when the U.S. trade deficit became particularly marked - financier Warren Buffett in a Washington Post op ed proposed a system to force balanced trade by means of a cap-and-trade type system.[1] Essentially, exporters would receive vouchers for each $1 of goods and services exported from the U.S. The vouchers would entitle the holder to import $1 of goods and services. The voucher could be exercised by the recipient or sold to someone else. Trade would become balanced since the value of exports would equal the value of imports.[2]


    At the time, the trade villain de jour was Japan which tended to follow mercantilist trade policies. But the Buffett system would not involve Japan-bashing by the U.S. since it was non-discriminatory as to the target of exports and the source of imports. A side effect, however, of the Buffett plan is that all countries wishing to export to the U.S. would have reason to put pressure on any country that sought to advantage its exports artificially through currency manipulation or other means.


    Today, the villain de jour is China but the argument for the Buffett plan remains the same.


    Despite the cogency of the Buffett proposal, it was never taken seriously by the folks Paul Krugman calls “Very Serious People.” Indeed, among those VSPs was (is) Krugman himself. The Buffett plan was easy to dismiss as “protectionist” or simply as an idea that didn’t come from a professional economist.


    The trade issue has made it back into the public conscious thanks to the presidential election campaign. Bernie Sanders raised the issue on the Democratic side, but – of course – he did not become that party’s candidate. Donald Trump raised it on the Republican side and did become the GOP nominee. Exactly what Sanders would have done if elected about the trade issue was never clear (to me). Trump says he would make better trade deals and somehow address currency manipulation. I don’t find that approach to be much clearer than Sanders’. The only comprehensive proposal anyone has ever advanced is Buffett’s.


    I have noted in past musings that bringing U.S. trade into balance would not restore some manufacturing golden age of job opportunities. Thanks to rising productivity and technological change in manufacturing, we are not going back to an era where manufacturing stood in its share of employment circa the 1950s and 1960s. But balanced trade would make the current manufacturing sector bigger by, say, 15-20% than it currently is. And that impact would provide some immediate relief to the displaced workers who are currently in play in terms of political affiliation. It would do so in ways that alternative proposals aimed at that group for such benefits as free community colleges – which seems to be the remedy of choice among the VSPs – can’t hope to do.


    At this writing, polls indicate that Hillary Clinton is the likely victor in the 2016 presidential campaign – not because of her trade policies, but because of being the not-Trump candidate. So now the question arises: In the political outfall that is likely to occur post-election, which party will reinvent Buffett’s wheel? Or will the issue Buffett was trying to address three decades ago remain unaddressed?


    There is already some indication that remedies to achieve balanced trade will be on the Republican agenda, in order to retain the disillusioned workers who were attracted to Trump and who might at one time been Democrats.[3] The VSP view – “those jobs are not coming back,” “protectionism,” “education is the key,” etc., that predominate on the Democratic side – is not going to be attractive to anyone except those who are stuck with such phrases. It’s up for grabs.

    ---

    [1] Warren E. Buffett, “How to solve our trade mess without ruining our economy,” Washington Post, May 3, 1987, p. B1. Available at: https://drive.google.com/open?id=0BzVLYPK7QI_4NmYyOGQzYzQtMWU1MC00MDEwLWI0ZGUtMzYxYmM2OTY5NjMz 

    [2] There would be some administrative issues regarding such services as tourism, verification of values of exports and imports, etc., as there are with any system.  

    [3] https://www.buzzfeed.com/bensmith/saving-gop-for-capitalism

  • 21 Oct 2016 11:36 AM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 10-17-16: Most Economists


    Daniel J.B. Mitchell


    I happened to hear a public radio broadcast from NPR recently on the recent depreciation of the British pound and the Brexit vote of last June.[1] The program began with this sentence:


    Since the U.K. voted to leave the European Union last summer, the country's currency - the pound - has lost about 16 percent of its value against the dollar. Most of the damage, according to economists, was self-inflicted.


    It ended with this sentence:

    The pound dropped again this morning trading below $1.23. Most economists think it has yet to hit bottom.


    In between the beginning and the end, there was what you might expect. There were references to the Brexit vote of June, anecdotes on how foreign tourists in Britain were benefiting from reduced costs, etc. But let’s start with the beginning sentence which references the fall in the pound.

    ---


    Source: XE.com as of October 11, 2016.

    ---

    As the chart above shows, relative to the euro, the pound at this writing is about where it was during and in the aftermath of the Great Recession. Until the Brexit vote, it tended to rise relative to the euro. When the vote occurred, it fell. And the pound has generally fallen since.


    The NPR program describes the fall in the pound as “damage” which was “self-inflicted.” There is no doubt that that the Brexit vote was an Act of Man rather than an Act of God. But is it correct to view a currency depreciation as “damage”? Note that if the pound declined relative to the euro, it is also true (by inversion of the pound/euro ratio) that the euro appreciated relative to the pound. So was the euro-zone “helped” by its currency’s appreciation?


    Other things equal, the decline in the pound made British exports more competitive and imports to Britain less competitive. So on that dimension, you could just as well say Britain was helped and the euro-zone was damaged. Suppose you applied the same logic to the U.S. and its dollar that the NPR broadcast applied to Britain and its pound. The chart below shows an index of the U.S. dollar relative to the currencies of its trading partners since 2000.


    If you equate the exchange rate with national welfare, we were never as well off as we were just after the dot-com bust and the related recession. During the recovery from that recession, things got progressively worse if we use the exchange rate as our measure. The Great Recession then gave our welfare a big boost temporarily. But the recovery from that recession made us worse off again. We didn’t see a big improvement until the 2015-16 election cycle made the future of U.S. economic policy uncertain. If nothing in that interpretation makes much sense to you, you now can see the folly of identifying exchange rate trends with national welfare.

    ---


    Source: FRED database of the Federal Reserve Bank of St. Louis.

    ---

    There seems to be an underlying assumption in the NPR broadcast that the fact that Brexit inherently changed some fundamental determinants of the British exchange rate means the pound must be lower than it was. However, the demand for the pound is ultimately a function of the demand for British exports and for British investment assets (British stocks, bonds, real property, etc.); the supply of the pound is ultimately a function of British demand for imports and foreign investment assets. How the demand and supply will balance out once the dust settles, i.e., what the eventual long-term exchange rate will be, is unknown. It will depend on such things as British inflation relative to that of its trading partners and rates of saving at home and abroad. But note that the question of whether or not Brexit was a good idea for Britain in terms of its national economic and political welfare is simply not the same thing as the exchange rate.


    Well, that’s fundamentals. The broadcast closes with the idea that “most economists” think – was there a survey? – that the pound will fall further. That prognosis isn’t accompanied by a time period. Is it by tomorrow? By next week? Whatever the time period may be, it seems to be a short-term prediction. And if it is short term, it should also be the case that most economists are going short on the pound because they know it will soon fall. But is there any evidence that, for example, British economists have been putting their holdings in euros? Are they going further and borrowing pounds and then investing them in euro-denominated assets? If it were evident that the pound would be notably lower in value relative to the euro in the near future, the rush into euros would make it lower relative to the euro today.


    Bottom lines:


    1) Will the pound be lower tomorrow than it was today? If you say “yes,” you have about a 50-50 chance of being right.

    2) Is it a Bad Thing for Britain that the pound exchange rate is lower than it was pre-Brexit? Other things equal, depreciation of the pound stimulates British exports and discourages imports. So let’s just say that the answer is more complicated than assuming that national welfare moves with the exchange rate.

    3) Finally, what should NPR have said in its broadcast? Probably not much more than with the decline in the pound, Americans might want to consider a London holiday.

    ---

    [1] “Brexit Results Prove Increasingly Costly to Britons,” Morning Edition, October 11, 2016. Available at: http://www.npr.org/2016/10/11/497487391/brexit-results-prove-increasingly-costly-to-britons

  • 02 Oct 2016 4:27 PM | Daniel Mitchell (Administrator)

    Mitchell’s Musings 10-3-16: Fed Politics


    Daniel J.B. Mitchell


    At the September meeting of the Federal Reserve, interest rates were not changed. Presidential candidate Donald Trump indicated he thought the Fed was being political, i.e., helping his opponent. Of course, decision makers at the Fed are aware that there is an election cycle in progress. And, in a sense, they were responding to political events, although not in the way Trump suggests.


    First, it should be noted that the case for raising rates at this time is weak. Not only is inflation low, it is expected to remain low. As the chart below indicates, financial markets are not anticipating a burst of inflation. The spreads between conventional Treasury securities and inflation-adjusted Treasuries –indexes of the expected rate of price inflation - remain below 2%. In fact, except during the Great Recession and its immediate aftermath, expectations are lower now than they were during previous years when the economy was softer. Put another way, price inflation expectations remain low, despite a seemingly tightening economy, so maybe the economy isn’t all that tight.



    And that is a second point. Despite a decline in unemployment to around 5% (the latest monthly figure is 4.9%), it is still unclear if the low level of unemployment in fact signifies “full employment.” As has been much discussed, the employment-to-population ratio is below previous peaks. The latest UCLA Anderson Forecast featured a chart for California. The equivalent for the U.S. as a whole would show much the same thing. As can be seen below, the ratio is still lower than at the previous cyclical peak. One explanation is that demographic changes account for the reduction. When you make “corrections” for demographic trends, the current ratio seems to be roughly equivalent to the prior peak, as the straight line on the chart shows.


    But even with that correction, there remains ambiguity. Why not consider the peak before the prior peak, i.e., the dot-com boom peak? The demographic trend would produce a line with a similar slope from that peak, and we would be we below it. In short, the evidence for the proposition that we have hit some kind of capacity constraint is ambiguous. Which peak is really THE peak for comparison?

    You could look at wage behavior rather than at prices. There, we do find some evidence of wage growth acceleration. The latest data on the Employment Cost Index did show some acceleration. But as the chart below indicates, the series can be volatile. The series stayed at about 2% per annum during much of the recovery, blipped up in 2014, but then came down again. So surely a case could be made for waiting a few quarters before passing a final judgment and making a policy change.


    Employment Cost Index, Total Compensation, Private Sector, 12-Month Percent Changes



    On the output side, real GDP growth has been relatively anemic so far in 2016. Generally, recovery from the trough of the Great Recession to the present has been slow. Perhaps, not surprisingly, that fact has given rise to discussion of whether the post-World War II growth rate was anomalously fast. But even if there is now a “new normal” of real growth at around 2% per annum, we haven’t seen even that pace in 2016. During the first half of the year, measured real growth was a bit over 1% per annum.


    Bottom line: Even if 2016 were not a presidential election year, the Fed might have been dovish about raising interest rates. When there is uncertainty about diagnosing economic conditions, the tendency is not to shift policy.[1] Apart from the unknowns described above, however, the presidential election itself – or rather its outcome – has created an even larger element of uncertainty than price inflation, wage inflation, or real growth.


    One interesting feature of the September UCLA Anderson Forecast was an attempt at economic modeling of the election results by Forecast economist William Yu. In recent years, there has been an increased interest in political forecasting based on economic conditions. Yu developed a model across states and time using as explanatory variables general economic trends, demographics, past voting behavior, and other factors. He looked particularly at electoral votes in the “swing” states. And the conclusion was that the election was too close to call. Popular votes in the swing states hovered around 50-50 for the two major party candidates.


    Given the oddities of the 2016 election, and the possibility that there could be economic turmoil when the results are known, why would the Fed raise interest rates two months before Election Day? It’s likely that election uncertainty, more than inflation uncertainty, drove the decision. It’s fine to forecast, but surely confidence in the results of the exercise must drop when you don’t know who will be making policy. In particular, what a Trump presidency would mean for economic policy and economic outcomes is hard to predict. In that sense, you could say the decision at the Fed to wait until after the election before making a change in monetary policy was “political.”

    ----

    [1] Some participants on the Federal Open Market Committee did want to raise rates. None of the members of the Board of Governors, however, voted for such an increase. The degree of uncertainty regarding economic trends is reflected in the official transcript of the news conference after the September decision:

    Fed Chair Janet Yellen in response to a reporter's question after the interest rate decision: "...I think we are trying to understand some difficult issues. There is less disagreement among participants in the (Federal Open Market) Committee than you might think, listening to speeches and commentary. I think we all agree that the economy is making progress, that we are close to an unemployment rate that is one that’s sustainable in the longer run. We all agree we are undershooting our inflation goal, and that we want to make sure we stay on a course that raises that to 2 percent. And we’re struggling with a difficult set of issues about what is the “new normal” in this economy and in the global economy more generally, which explains why we keep revising down the (real growth) rate path..."

    Source: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20160921.pdf


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