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Productivity and unemployment: the Dark Side?

Wednesday, December 31, 2003 | 05:38 PM

A quick post before heading out for New Years (what type of wonk feels compelled to write about these things on New Years's Eve? I shudder to think about it).

Alex Tabarrok has an interesting post over at Marginal Revolution.

Alex notes he is "growing increasingly annoyed with people who argue that the dark side of productivity growth is unemployment:"

the "dark side" of productivity is merely another form of the Luddite fallacy - the idea that new technology destroys jobs. If the Luddite fallacy were true we would all be out of work because productivity has been increasing for two centuries. Sure, some say, that may be true in the long run but what about the short run? Even in the short run there is no necessary connection between productivity growth and job loss. In the computer industry, for example, productivity growth has led to falling prices and a bigger not smaller industry. If demand is inelastic then productivity growth can create short-term unemployment, especially at the level of the industry experiencing the growth - less likely but not impossible is that productivity growth leads to short-term economy-wide unemployment.

I think Alex draws a defendable -- but wrong -- conclusion about the hand wringing over productivity: It's not that some economists are wishing productivity growth were lower, so employment would be higher; Rather, its a recognition that it may take a substantial uptick in GDP to overcome the productivity hurdle and to lead to a sustained increase in hiring.

First off, we should all understand that productivity is a "good thing" -- higher productivity raises everybody's standard of living; it makes goods and services cost less, or in the alternative makes them more profitable to manufactur/sell.

Here is the flip side (what he called the "Dark Side") of productivity: If it used to take 10 workers to make 100 widgets, and now it takes 7 workers, thats 3 less employed people (at least as widget makers). Back in June 03, I termed this "The New Productivity Paradox.”

During normal economic recoveries, as companies see demand rise, they add to headcount in order to be able to meet those new orders. At least, that's what they used to do; Today, it seems there is so much elasticity in the manufacturing and/or service process via productivity improvements that there is little need to add an appreciable number of employees.

With the labor pool growing between 1-1.25% a year, and productivity somewhere north of 4%, a GDP of a minimum of 5% is needed just to not lose any additional jobs. Despite the scorching 3rd Quarter GDP of 8.2% (annualized), we saw only marginal improvements in employment situation.

Thus, its not a desire for weaker productivity to creeat more jobs -- that would be terribly inefficient. To the contrary, it is a recognition of reality, and a hope for higher than typical GDP growth in order to see the economy grow on a self sustainable basis.

As long as productivity stays at the present lofty levels -- and we maintain high levels of excess capacity -- we should be prepared to see anemic job gains. At least, until the economy is running at a much higher GDP. Its likely that, at some point in the future, productivity will naturally drift down a bit to a level number. But that's likely to occur much later in the cycle, when employment won't be an issue.

Happy New Year!

UPDATE (1/1/04 8:19am: Alex happens to be the author of a very interesting book, "Entrepreneurial Economics: Bright Ideas from the Dismal Science." I first stumbled across the book by accident in Huntington (The Book Revue) over the summer. I thumbed thru quite a few pages, and found it intriguing. I hadn't realized I was fisking a published author.

Source:
Marginal Revolution: Productivity and unemployment
Alex Tabarrok, December 31, 2003

Real Business Cycles: A Legacy of Countercyclical Policies
Satyajit Chatterjee, Senior Economist and Research Advisor
Federal Reserve Bank of Philadelphia, March 1999
http://minneapolisfed.org/pubs/region/99-03/cycles.cfm

Schwab's Year-End Moves to Reduce Your Taxes

Tuesday, December 30, 2003 | 11:16 AM

in Finance

Good advice from the nice folks at Charles Schwab online brokerage:

10 Year-End Moves to Reduce Your Taxes

1) Harvest your investment losses in taxable accounts by Dec. 31 to offset any capital gains;

2) Max out on contributions to your qualified employer retirement plan and IRA;

3) If you're self-employed, open a business retirement account such as a SEP-IRA, SIMPLE IRA or qualified retirement account (QRP)/Keogh;

4) Open and contribute to a Roth IRA;

5) If you make quarterly estimated tax payments to your state, make your fourth-quarter payment by Dec. 31 instead of waiting until the New Year;

6) Prepay the second installment of your property tax by Dec. 31;

7) Make January's mortgage payment in December;

8) Open and fund a 529 college savings account;

9) Donate appreciated securities you've held for more than one year to a qualified public charity;

10) Consider postponing the exercise of incentive stock options (ISOs) until January.

These are just the bullet points --each topic is given the full treatment at Schwab's site. Check it out . . .

via Schwab.com

Tracking Down the Malfeasants

Tuesday, December 30, 2003 | 04:08 AM

in Current Affairs | Finance

Apparently, Tom Toles of the Washington Post has views similar to my own regarding the veracity of government statistics . . .

Source:
Washington Post via Yahoo

K&C tonite!

Monday, December 29, 2003 | 03:10 PM

in Finance | Media

I am scheduled to appear tonite (Monday, December 29th) on Kudlow & Cramer's "year in preview."

That's on at 5pm, 8pm, 11pm and 2am.

I'm the reluctant Bull, which compared to some of the breathlessly fanatical table pounders, makes me look downright Bearish. In reality, I am a wary optimist, but always aware of where the exit is.

Should be fun . . .

2004: How The Pros See It

Monday, December 29, 2003 | 11:55 AM

in Finance | Media

2004: How The Pros See It

I participated in this year's survey, even though I do not really believe in forecasting one year out.

I'll eventually have a piece up on it -- "The Folly of Forecasting." Meanwhile, you can go over to B-week and laff at my predictions. . .

Update: May 5, 2004:
I posted this in December, and for some reason it disappeared. (This is a repost)

Barrons picks up "The 3 Minute Mile"

Monday, December 29, 2003 | 05:27 AM

in Finance | Media

Our discussion on how silly so many economic releases are, Reality vs. Perception: The 3 Minute Mile, got picked up by Barron's.

Source:
MARKET WATCH: A Sampling of Advisory Opinion
Barron's, MONDAY, DECEMBER 29, 2003
http://online.wsj.com/barrons/article/0,,SB1072480440827600,00.html

2004: A test of Supply Side economics

Saturday, December 27, 2003 | 11:17 AM

in Finance

What are the Economic & Theoretical Ramifications of the 2003 Holiday Shopping Season?

The holiday shopping season of 2003 provided a fascinating glimpse into the goings on beneath the surface of the macro economy. It also provides a fresh opportunity to examine the validity of a specific economic theory -- Supply Side / Trickle Down Economics -- and to lay a fresh challenge to the proponents of that school of thought.

Our inquiry begins with this simple question: Why did the luxury sector do so smashingly well this Christmas, while the low end of the market -- in particular, the mass discounters -- performed below expectations? Contrast the year over year revenue gains for high end retailers Tiffanys, Coach, Nordstrom and others, with the performance reported by Wal-Mart, Target, CostCo, and the rest.

The explanation reads like an overview of 2003: The wealth effect from a rising stock market, along with a relatively healthy bonus pool this year, contributed to the surge in luxury goods sales following several years of pent up demand. But the true key to the 2003 holiday sales performance is found in the Bush economic plan. For higher income families, a holy trinity of tax cuts put a healthy serving of dollars into their pockets: Tax brackets were cut, capital gains taxes decreased, and an entirely new class of much lower dividend taxes created. The results from the retailers of higher end goods suggests that much of that money was spent on luxury items.

For middle and lower income families, the bulk of the tax benefits -- manifested in the form of $400 Treasury checks reflecting lessened federal witholding tax (due to the lowered tax rates and the larger standard deduction for married couples) -- were long spent prior to holiday shopping. This group may also have reined in their spending a bit, as they remain somewhat skittish about the employment situation. Bearing this out is the irregular gyrations of the monthly consumer confidence numbers. While middle income families will continue to see benefits from the Bush tax cut -- they will be rather modest. They will certainly not pay for many purchases from Nieman Marcus.

Viewing this phenomena through the lens of economic theory, the contrast between the luxury and discount retailers raises curious theoretical issues: Might some economists explain this discrepancy as an example of "Supply Side" economics in action? If the economy continues to strengthen going forward, will this school of thought finally be validated?

Long disparaged by classical econ scholars as the bastard stepchild of economics, the "Supply Side, Trickle Down Thesis" has been out of favor -- at least publicly -- since Ronald Reagan left the White House. While dedicated Supply Side proponents remained active in think tanks and media, they were at most influencing, but not pulling, the levers of power. Today, however, the Supply Side school of thought dominates the Bush Administration's economic policies as thoroughly as the NeoCons dominate its foreign policy.

In the 1980s, as Ronald Reagan's "Trickle Down" policies were put into effect, the top tax bracket was slashed in half, from 70% to 35%. That's the sort of meaningful change to the tax code which economists believe create significant changes in investor behavior. President Bush, on the other hand, made what many pundits (present company included) derided as an "incremental cut" -- less than 10% for the highest tax bracket. The assumption was that "incremental tax cuts for tax cuts sake" would not have all that profound of an impact.

What may have been overlooked at first blush was the cumulative effect of all the tax cuts discussed above. Capital gains taxes were sliced 25% (from 20% to 15%), and the new dividend tax cut -- at least for investors in the top bracket -- was more than chopped in half, (from 38.6% to 15%). Collectively, these three changes to the tax code seem to be having a meaningful effect on high end consumption. Whether it will have a trickle down effect on employment and business spending is as of yet unknown.

But we shall soon enough find out. Thus, Supply Side school of thought -- derided on the campaign trail by Bush the elder as "Voodoo economics" -- now has a golden opportunity to redeem itself. Failing to do so, however, may relegate it once and for all to the trash heap of economic theory.

The architects of President Bush's economic plans are former National Economic Council head Larry Lindsey, and former Council of Economic Advisers director Glenn Hubbard. Hubbard is widely credited as being the man behind the dividend tax cut -- he first proposed it while working for Bush I. Both are known as "strong supply-siders with conservative think tank roots." These advisers have since moved on. Lindsay resigned last December; Hubbard followed him out the door a few months later. These top bracket tax cutters were confident enough that their plan was irrevocably in motion that they retired to the worlds of think tanks and academia.

To us, here is where things get interesting: Harvard economics professor Gregory Mankiw replaced Hubbard at the Council of Economic Advisers. The Professor has been described as not a Supply Sider -- at least, according to Stephen Moore (Club for Growth President and NRO contributor).

Moore cites Mankiw's "Principles of Macroeconomics" textbook, where the professor disparingly refers to Ronald Reagan’s supply-side advisers as "charlatans and cranks." The obligatory excerpt:

An example of fad economics occurred in 1980, when a small group of economists advised Presidential candidate, Ronald Reagan, that an across the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would rise by so much, they claimed, that tax revenues would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as far too optimistic. Lower tax rates might encourage people to work harder and this extra effort would offset the direct effects of lower tax rates to some extent, but there was no credible evidence that work effort would rise by enough to cause tax revenues to rise in the face of lower tax rates. . . .

However, prominent Supply Side commentators strongly dispute Moore's cranky assessment; Mankiw, we are assured, has both feet solidly planted in the Supply Side camp.

So is there a split within the economic apparatchiks of the Administration? Bush continues to maintain prominent Supply Side/Trickle Down theorists, the most prominent of which is VP Dick Cheney. This group remains extremely influential with the President.

The present team seems to have more fiscal conservatives -- including budget balancers and otherwise traditional economists -- and self-described "responsible adults." Should the President win a second term, these budget balancers expect to be the "clean up team" -- imposing fiscal discipline on a White House and Congress that has yet to meet a spending increase they didn't love.

The rest of the President's term may play out as a fascinating economics drama between two schools of thought. We will be witnesses to a trial of the trickle down school of thought. The large disparity between the two end points of the retail sector that materialized suggests a real time, live test of the Supply Side economics.

Indeed, the key to which wing of Bush's economic team will win subsequent budget and tax battles is likely to be determined by how the economy behaves between now and Inauguration Day 2005.

Is Supply Side Already Working?
The recent economy has something for every school of economics: There's been enough deficit spending too keep the Keynesians happy; Money supply increases (at least, up until recently) were sure to warm the hearts of Monetarists. Yet the economy seemed not to respond to either of these stimulants -- not until the 2nd Quarter of 2003, when the second round of tax cuts kicked in. Indeed, supply siders might even argue that a test in 2004 is unnecessary, as the recovery in 2003 more than proves the case.

Perhaps that assessment is premature. As Ned Davis said, "give me a trillion dollars and I'll throw you one hell of a party." The proof of Supply Side success will come once the economy demonstrates it is on a self sustaining path - that includes robust job creation. That's something notably absent in this post recession recovery cycle, and which the Supply Side team expects to occur in the first half of 2004.

If the economy is in full recovery by this time next year, that will go a long way towards rehabilitating the supply side school amongst traditional economists. If on the other hand, the economy slips back into a slow growth mode without much in the way of job creation, or (gasp!) a contraction, that may very well spell the death knell of trickle down as a credible economic thesis.

As an economic agnostic -- I believe in the "smorgasbord approach" of taking a little of what works from each school of thought -- I simply can't wait until next year to see how this plays out.

Redemption or repudiation awaits . . .

Sources
Hail Hubbard
by Bruce Bartlett
National Review, January 13, 2003, 8:00 a.m.
http://www.nationalreview.com/nrof_bartlett/bartlett011303.asp

Think Twice About Gregory Mankiw
This Harvard economist does not belong on the Bush economic team.
By Stephen Moore
National Review, February 28, 2003 11:30 a.m.
http://www.nationalreview.com/moore/moore022803b.asp

Principles of Macroeconomics
by N. Gregory Mankiw
International Thomson Publishing; 2nd edition (June 2000)

Cheney the Supply-Sider
Cheney the Supply-Sider
Larry Kudlow,
National Review, 7/24/00 6:45 p.m.
http://www.nationalreview.com/kudlow/kudlow072400.html

David Stockman, The Triumph of Politics: Why the Reagan Revolution Failed
(New York: Harper & Row, 1986), p. 56.

The Education of David Stockman
William Greider
Atlantic Monthly, December 1981, pp. 46-47.
http://www.theatlantic.com/politics/budget/stockman.htm

Q&A Gregory Mankiw
Top economic adviser to George Bush
By JYOTI THOTTAM;
Time, Monday, Oct. 06, 2003
http://www.time.com/time/insidebiz/article/0,9171,1101031013-493318,00.html

Secondary Resources:

Trickle-Down Economics: Four Reasons Why It Just Doesn't Work
By Mehrun Etebari
July 17, 2003
http://www.ufenet.org/research/TrickleDown.html

The Rise of Supply-Side Economics
www.huppi.com/kangaroo/23More.htm

Trickle Down Economics and corporations: How corporate taxes cost jobs
By Brad Wardell
Posted Wednesday, September 03, 2003
http://www.joeuser.com/articlecomments.asp?AID=89&s=1

Trickle down economics comes of age
By: Tim Wood
Posted : 2002/06/14 Fri 04:00 | © Moneyweb 1997-2003
http://m1.mny.co.za/MNBTalk.nsf/0/C2256A2A002030FD42256BD60028F633?OpenDocument

Trickle-down Economics and Ronald Reagan
Jim Blair
http://www.bigissueground.com/politics/blair-trickledownreagan.shtml

The "Trickle Down" Economics Straw Man
by Thomas Sowell
September 27, 2001, Capitalism Magazine
http://capmag.com/article.asp?ID=1115

Trickle Down Economics in Full Flow (PDF)
Center for Impact Research, April 2003
http://www.impactresearch.org/documents/newsletterarticle403.pdf

Supply-side Economics has Supporters in Academia
Monday, September 29, 2003
by Bruce Bartlett
http://www.ncpa.org/edo/bb/2003/bb092903.html

A Supply-Side History And The Road Ahead Part I
By Wayne Jett, August 1, 2003 Part I
http://www.wanniski.com/showarticle.asp?articleid=2803
and Part II:
A Supply-Side History And The Road Ahead Part II
http://www.wanniski.com/showarticle.asp?articleid=2821

Fox Xmas Retail Discussion

Thursday, December 25, 2003 | 09:20 AM

in Finance

Today's discussion about 2003 holiday retail sales on Fox (what I jokingly refer to as the "Christmas Calvacade of Jews") will be on between 3 and 4pm. The discussion is tentatively titled "Whether the retail Grinch really stole Christmas."

Its tough to cover so broad a subject in only 5-7 minutes, here's what I hope to touch upon:

First, this has been the best Christmas season for retailers since 1999.

The final numbers may have disappointed some overoptimistic analysts, but they really were quite respectable. I think some observers got carried away by a few data points, and set their expectations way too high. Mostly, this was due to the 3rd Quarter GDP data, and they way people extrapolated it.

Looking at the actual sales and shopping habits of consumers in 2003, we take note of these three trends:

1) Luxury goods were far and away 2003's best performers:
The reasons? Luxury shoppers are feeling particularly flush in '03: The stock market rally has a wealth effect, holiday bonuses were respectable this year, and, of course, the tax cuts this year all put alot of money into the hands of the luxury goods shopper.

The flip side of this was the weaker than expected performance from the Discounters. Two reasons for this: Price sensitive shoppers are not feeling as flush; Their tax rebate checks from the summer has long been spent, and as a group, they are still a little nervous employment wise.

Additionally, too many stores played a game of chicken -- and lost. They waited too long to cut prices. They did eventually cry Uncle. Between WalMart, Target and the outlet centers, and of course, comparison price shopping engines on line, we've become a nation of very price savvy shoppers.

Finally there's a trend towards New American Luxury -- i.e., "Trading Up". A couple of marketing guys from Boston wrote a book that focuses on the middle market -- why buy mediocre? If it matters, buy the best, and pay for it by buying the cheapest you can find in everything else. Perfect example: The NYTimes had an article about how rear projection TVs ($2,000 - 5,000) are sold out across the nation. From Sears down to local chains, the retailers and manufacturers completely underestimated demand.

Believe it or not, in this category, its not the premium item. The flat panel Plasma screens -- at $10 - $20,000 -- are the luxury item in his category.

2) Gift Card purchases increased:
Last year's trend toward Gift Card purchases has accelerated. Solves a lot of gift selection issues, and avoids the dreaded Seinfeldian problem of "regifting."

Retailers expect to sell $45 billion worth of gift cards -- more than 5 percent of total retail sales this season. Recipients often spend 15 to 20 percent more than the face value of the card, another 10% -- $4.5 billion worth -- are never redeemed.

From a corporate accounting perspective, stores can not record sales of gift cards until they are redeemed for goods. (Recall how a few years ago, software companies got into trouble for treating new contracts as revenue --- before the goods shipped; That's improper). So this trend somewhat understates holiday sales -- And, it also creates a nice spillover effect into January. It extends the holiday retail season somewhat.

3) On line stores continue to grow rapidly (more so for the "non pure-plays"):
37 of the 50 largest internet stores are also Brick & Mortar retailers. Wal-Mart, Sears, Best Buy, Target, Radio Shack, J.C.Penneys, Starbucks, William Sonoma, all did a brisk business on line.

We saw a continued increase in online sales this year; That's part of the reason we weren't put off by the Snow on 2 consecutive weekends in the North East . . .

Bull!

Wednesday, December 24, 2003 | 04:31 PM

in Finance

I caught Maggie Mahar on K&C last nite (never heard of her before). She was discussing her new book: Bull: A History of the Boom, 1982-1999: What drove the Breakneck Market--and What Every Investor Needs to Know About Financial Cycles.

Her thesis is right up my alley -- its a fascinating study of longer term bull and bear cyles. Her concepts are very similar to the study "Looking at the Very Very Long Term" we did earlier this Fall.

Good stuff; I haven't read Mahar's book yet, but from what I skimmed of it, its looks like a keeper . . .