Growthology

Econ Blogger Survey Charts!

(KANSAS CITY, Mo.), July 28, 2011 – Optimism is out; pessimism is in among the country's top economics bloggers as they look to 2012 and beyond, particularly regarding jobs. A new Ewing Marion Kauffman Foundation survey released today shows that only 50 percent of respondents anticipate employment growth, a decrease of 20 percent from second quarter.

"This quarter's survey provides an unprecedented level of pessimism about the state of the U.S. economy among top bloggers," said Tim Kane, the survey's director and a senior scholar at the Kauffman Foundation. "But, it also contains a handful of unique questions submitted by bloggers themselves that offer new perspectives and new directions forward."

The full set of web-ready images of the survey charts are presented below:

 

 

Thanks to Mike Buster at ampersand for the design work, and to the team at Kauffman for getting the report assembled and published!
 
 
 
 
 
 
 

Super Congress!

The "Super Congress" is an impressive structural reform in the way politics operates in America, exactly the kind of thing needed to bring balance to America's economy (as opposed to another blue ribbon plan).  Critics will assail it as antidemocratic and devolution of legislative authority.  Which will be ironice, since the leaked proposal recommends a 12-member group made up entirely of elected legislators. 

This "Super Congress," composed of members of both chambers and both parties, isn't mentioned anywhere in the Constitution, but would be granted extraordinary new powers. Under a plan put forth by Senate Minority Leader Mitch McConnell (R-Ky.) and his counterpart Majority Leader Harry Reid (D-Nev.), legislation to lift the debt ceiling would be accompanied by the creation of a 12-member panel made up of 12 lawmakers -- six from each chamber and six from each party.

Downside?  Well, it locks in the 2-party system, at least on the surface.  But so what?  Get a viable 3rd party candidated elected, and then complain. Even in theory, the Super Congress works, because in theory and practice the two parties are coalitions of other "parties" (e.g. Tea, Christian, Hawk).  It stands to reason that each mini-party will have a seat.  Similar left-leaning mini-parties will have reps as well (e.g. Labor, Poverty, Trial Lawyer). 

Upside? Up or down votes.

No Side?  Constitutionality.  This is a non-issue.  Is the Pentagon mentioned in the Constitution?  No.  Nor is the Federal Reserve, the CBO, the IRS, or even the Ways and Means Committee. I'm pretty sure there is no Gang of Six clause either. 

Is Access to Capital Restricted from .... Banks (false) or Friends (true)

Two new pieces on access to capital are worth note.  The first, and by far more important piece, is an opinion by Professor Scott Shane arguing that the SEC should scrap the accredited investor rule.  I couldn't agree more.  The second is a NY Fed paper that sheds some light on the question of access discrimination against entrepreneurs (and finding little evidence for it).  I have some thoughts on Shane, first with a quote from his piece.

The accredited investor rule makes it harder for entrepreneurs to raise money for their businesses. Non-accredited investors are much more numerous than accredited investors. Analysis I conducted shows that there are nearly four non-accredited angel investors for every one accredited angel. And there are more than 7.5 non-accredited informal investors for every accredited informal investor. By limiting reduced disclosure requirements to fundraising efforts targeted at accredited investors, the SEC makes it more difficult for entrepreneurs to raise money from non-accredited investors, which, in turn reduces the amount of money raised from them. While some entrepreneurs would clearly benefit from tapping accredited investors, particularly if they will need to raise large sums of money or will need follow-on funding from venture capitalists, many would be just as well-served raising money from unaccredited investors, perhaps through processes like crowd funding. Making that process easier would make capital more readily available to private companies.

I agree with Shane, and have always found the rationale for the law is thin:  assuming that non-millioaires are dummies (i.e. income is a good proxy for financial sophistication) and that the cost of low-grade financial fraud outweighs the benefits. The only avenue left for non-accredited investors (accreditation = having a net worth of $1 million or more), is public stocks, mutual funds, and the like. 

Two observations.  One, was high-grade investing less dangerous to the public over the last decade?  Experience seems to confirm that small investors were damaged pretty severely in the "safe" markets during 2008.  Two, doesn't this rule diminish the power of local investing.  By forcing uncle Charlie to put all of his $50,000 in savings into a Manhattan-based mega bank rather than sprinkling some it around the neighborhood, who wins?  Even if centralized mega-funds (whether in NY or San Jose) look for worthy entrepreneurs in Uncle Charlie's neighborhood, there is a non-trivial transaction cost.  This geographic discrimination erodes local knowledge and trust networks.  And one can only guess at the damage it causes to early stage entrepreneurs, with confidence that it is real and also non-trivial.

Why Do We Expect a "Normal" Recovery?

The thrust of all debates over economic policy and government debt these days seems to be that this recovery ought to look like previous recoveries. We are insistent that unemployment fall faster, jobs be created more rapidly, consumption rise quickly, and economic growth pick up steam. All desirable outcomes, unquestionably. But we keep ignoring the factors that made the "Great Recession" of 2007-2009--and, accordingly, also the subsequent recovery--an outlier in terms of recent historical experience.

This is only natural, of course; our only comparative frames of references are other recessions since 1948 and, in terms of personal experience, the recessions of 2001, 1990-1, and the early 1980s. But this recessions was clearly of a different order, for a variety of reasons. For starters, the expansion that preceded it was one of the weakest--if not the weakest--since World War Two, as measured by job creation, per capita income, and the employment-to-population ratio.

Of the growth that did take place, we obviously know now that a significant portion of it was distorted by all things housing bubbled-related: construction, real estate, finance, etc. The plural of anecdote is not data, but I find Paul Kedrosky's parable of the highway ladder debris amusingly illustrative. Looking at Statistics of US Business data from 1998 to 2006 reveals that, of the net increase in the total number of firms of 442,000, fully one-quarter of that growth was in Construction (NAICS two-digit industry code). The only larger share went to the Professional, Scientific, and Technical Services (PSTS) sector, which includes businesses in R&D testing, ad agencies, computer design services, engineering services, law offices, accoutants, payroll services, and so on. Overall, a good sector in which to experience growth; yet, both the Construction and PSTS sectors are comparatively small job creators because average employment per firm is nine and ten, respectively, compared to the all-sector average of about twenty.

We keep wondering why job creation isn't automatically bouncing back to expansionary levels, and blaming sluggish job figures on fleeting factors like discretionary government policy. But because job creation in the prior expansion was low and because the driver of job creation--consumption--was built on sand (i.e., housing bubble), we shouldn't expect it to come roaring back. The employment-to-population ratio barely budged from 2002 to 2007, a historical first. The Federal Reserve of San Francisco, moreover, has calculated that personal consumption took a hit equivalent to about $175 per month per person as a result of the recession and is nowhere near returning to pre-recession levels. This is due, in part, to the completely unsustainable level of consumption the US enjoyed in the last decade. We shouldn't expect a return to that.

This points to the deeper factor underlying the slow recovery: this recession was marked by a financial crisis. And, as Reinhart and Rogoff have convincingly showed, post-financial crisis recoveries are very, very slow. Combine that with deep-seated challenges facing the American economy--geographic asymmetries, skills mismatches--and you can't help feeling that this is going to take a while.

California's Poisonous Business Environment

When economists talk about business environment, this is what we mean.  For years, the agglomeration momentum of Silicon Valley has trumped the bad governance, but the tide will turn, I'm afraid...

CNN: California companies fleeing the Golden State
... Companies are "disinvesting" in California at a rate five times greater than just two years ago, said Joseph Vranich, a business relocation expert based in Irvine. This includes leaving altogether, establishing divisions elsewhere or opting not to set up shop in California.

Startups stifled = jobs leakage

Great new paper about the demise of startups in the modern era by my colleagues, EJ Reedy and co-blogger Bob Litan.  What I call the repression of entrepreneurship is now clear in the data.  This is yield from big firm bias in policy. Key nugget from Reedy and Litan:

In fact, since 2006, the annual number of new employer businesses tracked in government statistics has plummeted 27 percent for new independent firms and approximately 23 percent when considering a broader measure of new “establishments” (new independent businesses and new expansions of existing businesses).

The Great Jobs Drought

The concept of a jobless recovery has been redefined, both for America and for my family, with the new jobs report out this morning. For America, this is the first jobless recovery lacking not only jobs, but also a recovery.  A freind the other day noted it was the 2 year anniversary since that recovery officially began.

With recoveries like these, who needs recessions? 

The mainstream news is saying the paltry job growth is a surprise, but it's not to me. I'll tell you this: as long as the weekly UI claims are above 300,000, there will be no significant recovery. And the reality is that UI claims remain north of 400,000.

For the first time in my family, the 9.2 percent (and rising) unemployment rate is personal.  You see, it's summer time, and we have a newly minted 16 year old male in the house. Annie Lowrey at Slate reminds us that kids these days have drastically worse summer job prospects (25% unemployment) than any generation of kids since such measurements began.  I mean, I'm all for child labor laws, but this is getting ridiculous. We told Sean he couldn't play on his XBox until he got a job, and it looks like the "summer of no fun" is becoming a reality. Next thing you know, the politicians will define away the problem by raising the age of childhood to 33.  Or better yet, wait for them to "means test" the definition of unemployed.  "Don't have a job?  You're officially a child!"

Jobs, Jobs, Jobs

In Kauffman's 1st quarter 2011 survey, I asked top economics bloggers to identify the causes of persistently high unemployment.  The answers were fascinating, but the powerful consensus about uncertainty as the leading cause was a surprise. Here's the chart and table (below) and a link to the full survey.

 
 
All of you following this issue have heard five or ten plans to create jobs - just today! - because every interest group has their pet solution. Surely, some of them have to be right, but can we all agree that they're not the ones being tried?

Here at Kauffman, we tend to believe that since all net jobs are created by new firms less than one year old, gee, maybe policy should focus on a better startup environment and less on big-old-firm bailouts.  But setting all that aside (for a few weeks at least), let's admit that some of the policy perscriptions in place have been, how shall we say, wrong. Doing more harm than good. Colossal embarassments. Ideologically blind. Naive. Failures. No really, please stop helping.

I've already beat the drum against the increased minimum wage (enacted by the Pelosi congress, signed into law by President Bush), and I blame that for our son's predicament, not to mention the sky high unemployment rates among teens, inner city youth, and low-skill workers generally. We have made it illegal for them to work at their marginal value, and thus gain skills that would enhance their marginal value and employability. Nothing like hobbling the weakest among us.

But the minimum wage surely can't be to blame for magnitude of joblessesness.  I do wonder: Is there any bolt of enlightenment shocking Congress to the realization that extending UI benefits from the norm of 26 weeks to 99 weeks didn't work as planned?  Essentially, paying a jobless person half of their salary not to work for 99 weeks all but guarantees their skill set is atrophied and any post-99 job prospects are dim. It was a radical experiment in the blindest kind of Keynesianism, and the results are probably too painful for its authors to ever admit.  I know this isn't one of the top explanations listed above, but the unique persistence of our current joblessnes strongly suggests that the cause is unique.  A sudden quadrupling of UI eligibility is too strongly linked with record-setting long-term unemployment to ignore.

Unemployment is hardly a sleeper issue.  But fixing a dysfunctional UI system is too wonky for most wonks.  That has to change.