Welcome to the 27th issue of The Outsider Perspective, brought to you by The Beltway Outsiders.
Good Friday Morning! The Christmas season is upon us, 2016 is coming to a close, and Inauguration Day is still over a month a way. While there are certainly important stories to talk about out there, it is, overall, a quiet time. Which provides some time to reflect. Something I plan on doing over the next several weeks to see where my writing and predictions were right, wrong, or needed work. That writeup will come in a couple of weeks. While I’m going through those old issues, this week will be shorter than normal. This week I’m going to cover three broad domestic policy issues looming for the new administration.
The new labor market: Stagnate wages, job openings, and growing skills gap
Last week, the Bureau of Labor Statistics (BLS) released the latest jobs report. Unemployment in the US was listed at 4.6%, the lowest mark since 2007. The report said the US created an overall 178,000 jobs in the previous month. This would be considered a slightly below-average output for jobs (generally, you want to see 200k+ jobs created in a month). The main reason the unemployment rate shrank was because the Labor Force Participation rate decreased. More people dropped out of the labor force than got a job.
To understand the important of this, you have to understand how the official measurement of unemployment works, the U3. The U3 unemployment rate counts people unemployed as follows: “people are without jobs and they have actively looked for work within the past four weeks.” In other words, these are people who actively want to be part of the labor force and are searching for employment. So when the BLS releases a report that says the unemployment rate is 4.6%, they’re saying 4.6% of Americans were unemployed and had actively tried to seek employment in the last 4 weeks.
This is an incomplete measure, however. Observers, like myself, consider true unemployment to be the U6 measurement. The U6 measures the U3 plus:
“Discouraged workers”, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them; other “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work, but have not looked for work recently; and part-time workers who want to work full-time, but cannot due to economic reasons (underemployment).
The U-3 unemployment rate is a comparatively narrow technical measure that leaves out a whole swath of out-of-work people who are willing and able to take a job but who don’t fit the narrow BLS definition of “unemployed.” For example, a stonemason who wants to work but who has become discouraged by a lack of opportunity in the midst of a deep economic recession would not be included in U-3 unemployment. A marketing executive who is laid off at age 57 and stops scheduling new job interviews due to her experience of age discrimination would not be included in U-3 unemployment. A person who only works one six-hour shift per week because no full-time jobs are available in his area would not be included in U-3 unemployment.
In contrast to the U-3 rate, the U-6 unemployment rate includes all of these cases. Consequently, the U-6 rate is much truer to a natural, non-technical understanding of what it means to be unemployed. By capturing discouraged workers, underemployed workers and other folks who exist on the margins of the labor market, the U-6 rate provides a broad picture of the underutilization of labor in the country. In this sense, the U-6 rate is the true unemployment rate.
The BLS releases the U6 number each month along with the U3. Unemployment for the U6 sits at 9.3%. And if you compare the current U6 to the 2007 U6, you’ll see that our current U6 rate is higher than pre-recession levels. Why does this matter? It matters because the difference between these two rates explains the plummeting unemployment rate as illustrated by the labor force participation rate. The Civilian Labor Force Participation rate is the percentage of Americans actively engaged in the labor force. That number currently sits at 62.7%, the lowest number since the 1970’s. Part of this is explained by an aging baby boomer population retiring from the workforce and dropping out entirely. But that doesn’t account for the entire drop. A large number of these workers could work, but are discouraged and have simply fallen through the cracks of society. Which is reflected in the difference between the U3 and U6 rates. Returning the Labor Force to something close to the recession level of 64% would mean a huge jump in the number of employed people.
With all these people dropping out of the work force, you might think that these people simply lacked job openings. That would be a natural thought. You’d also be wrong. The BLS currently estimates there are 5.5 million job openings across the US. In other words, the number of job openings is very high, while the labor force participation rate continues to shrink from discouraged workers. American firms are starving for new workers to join up and lack applicants. In turn, this is causing wages to stagnant and grow slowly. Wages typically go up when the US is near full employment, when firms have to coax employees from other businesses with higher wages and benefits. So while certain workers are seeing wage jumps, wages are not rising overall for everyone. Right now, firms simply can’t fill the positions and wages have largely been stagnate since the recession. Why is this? There’s a growing skills gap. The Harvard Business Review came to the same conclusion 2 years ago:
Why are skills sometimes hard to measure and to manage? Because new technologies frequently require specific new skills that schools don’t teach and that labor markets don’t supply. Since information technologies have radically changed much work over the last couple of decades, employers have had persistent difficulty finding workers who can make the most of these new technologies.
Consider, for example, graphic designers. Until recently, almost all graphic designers designed for print. Then came the Internet and demand grew for web designers. Then came smartphones and demand grew for mobile designers. Designers had to keep up with new technologies and new standards that are still changing rapidly. A few years ago they needed to know Flash; now they need to know HTML5 instead. New specialties emerged such as user-interaction specialists and information architects. At the same time, business models in publishing have changed rapidly.
Graphic arts schools have had difficulty keeping up. Much of what they teach becomes obsolete quickly and most are still oriented to print design in any case. Instead, designers have to learn on the job, so experience matters. But employers can’t easily evaluate prospective new hires just based on years of experience. Not every designer can learn well on the job and often what they learn might be specific to their particular employer.
The labor market for web and mobile designers faces a kind of Catch-22: without certified standard skills, learning on the job matters but employers have a hard time knowing whom to hire and whose experience is valuable; and employees have limited incentives to put time and effort into learning on the job if they are uncertain about the future prospects of the particular version of technology their employer uses. Workers will more likely invest when standardized skills promise them a secure career path with reliably good wages in the future.
Under these conditions, employers do, have a hard time finding workers with the latest design skills. When new technologies come into play, simple textbook notions about skills can be misleading for both managers and economists.
For one thing, education does not measure technical skills. A graphic designer with a bachelor’s degree does not necessarily have the skills to work on a web development team. Some economists argue that there is no shortage of employees with the basic skills in reading, writing and math to meet the requirements of today’s jobs. But those aren’t the skills in short supply.
There are three quick means of filling a gap like the one US employers are experiencing: 1) Outsource the jobs to more talented workers abroad; 2) Increase immigration to bring higher skilled workers to America; or 3) Focus on policies that help retrain workers with new skills to compete in an ever changing marketplace. This isn’t just an issue for the Trump administration. State and local leaders can help bridge this issue for their local communities. If the goal is to Make America Great Again, then the goal needs to be giving American workers a leg up in the world marketplace. Otherwise, American firms will turn outside the US for answers. Either through outsourcing or immigration.
The Carrier Deal is crony capitalism and bad economics
All of the above brings us to the big story of the week: Trump’s deal with Carrier to keep about 1,000 jobs in Indiana. There’s really no other way cut the deal: it’s crony capitalism with hints of socialist central planning. It’s forcing an inefficient business on a community. There’s little difference in what Obama did with the auto-bailouts in 2009 and what Trump is doing now. Picking winners and losers in a market economy is just wrong. Robert Tracinski in the Federalist made a similar point:
So how did Trump make this deal? With your money, of course. The company agreed after a personal call to the CEO from the president-elect—and oh, yeah, after Mike Pence, Indiana’s current governor and our vice-president-elect, offered them a big fat chunk of what the New York Times report calls “economic incentives.” That’s buried in the eighth paragraph, demonstrating that our media is doing its usual bang-up job. So in place of crony insider deals made in Washington DC, we get crony insider deals made in Indianapolis.
But wait, it gets worse. The Indiana incentives are probably not the real reason for the decision. They don’t offset the $65 million a year the move to Mexico was going to save Carrier. So part of the story here is that Trump “helped” a manufacturing company by costing it millions of dollars a year in extra expenses. But the $65 million was actually small change. What’s really at stake is buried even farther down than paragraph 8:
While Carrier will forfeit some $65 million a year in savings the move was supposed to generate, that’s a small price to pay to avoid the public relations damage from moving the jobs as well as a possible threat to United Technologies’ far-larger military contracting business.
Roughly 10 percent of United Technologies’ $56 billion in revenue comes from the federal government; the Pentagon is its single largest customer. With $4 billion in profit last year, the company has the flexibility to find the savings elsewhere.
Members of Congress have been pressing to punish big military contractors if they move jobs outside the United States.
So let’s see: the president cuts a deal with corporate executives to give him favors—in this case, a press conference and some good PR—in exchange for straightforward handouts and the implicit promise of greater rewards in the future, to be gained from personal access to public officials. What would you call that?
A New York investment banker sums up the situation: “If we step back and I’m looking at earnings of $6.60 per share this year, 2 cents is an easy concession if the president-elect listens to some of the company’s bigger concerns.” Or, as a trade expert puts it, “Goodwill is an asset. Companies all the time want to build goodwill with their governments.”
I call that a form of pay-to-play…
This pay-to-play was over a fear of losing present jobs in old businesses. Saving old businesses also underscores how out of touch Obama and Trump are with the shifting economy. As I pointed out in the first section, the overall labor force is changing with new skills requirements. Saving business and jobs that are on the way out the door with losing skills does nothing more than trap these workers in jobs that will not advance their overall careers. Change forces businesses and employees to adapt into better markets and jobs. We should be more interested in improving the skills of these workers instead of saving inefficient jobs that will leave, if not now, then later. The market hates inefficiencies. And sooner or later, those jobs will be gone. Trump cannot stop market forces. He can try to delay them. But that will only make the costs greater down the road.
Instead of engaging in crony capitalism and socialist forms of market economics, we should be helping transitioning these workers into different skill sets. Or even into different careers. That is the way forward.
The Repeal of Obamacare with… _____?
One of the first battles ahead for the new administration is the fight over Obamacare. Repeal is straightforward. The GOP can use the same budgetary measures used to pass Obamacare to repeal it. This type of measure only requires a simply majority of votes. Which means it’s guaranteed to pass in both the House and Senate. The GOP holds majorities in both chambers. The question is what comes after that point. In both chambers, the GOP holds only basic majorities. In order to pass a new form of healthcare reform, the GOP will need to get past a Democratic filibuster in the Senate. And the concern I have is that we are looking at a repeat of the Government funding fights of 2013. You can see this fight shaping up:
Congressional Republicans are setting up their own, self-imposed deadline to make good on their vow to replace the Affordable Care Act. With buy-in from Donald Trump’s transition team, GOP leaders on both sides of the Capitol are coalescing around a plan to vote to repeal the law in early 2017 — but delay the effective date for that repeal for as long as three years.
They’re crossing their fingers that the delay will help them get their own house in order, as well as pressure a handful of Senate Democrats — who would likely be needed to pass replacement legislation — to come onboard before the clock runs out and 20 million Americans lose their health insurance. The idea is to satisfy conservative critics who want President Barack Obama’s signature initiative gone now, but reassure Americans that Republicans won’t upend the entire health care system without a viable alternative that preserves the law’s popular provisions.
“We’re talking about a three-year transition now that we actually have a president who’s likely to sign the repeal into the law. People are being, understandably cautious, to make sure nobody’s dropped through the cracks,” said Senate Majority Whip John Cornyn (R-Texas).
The tentative strategy is reminiscent of Capitol Hill’s infamous “fiscal cliff” days, when Congress imposed simultaneous deadlines to raise the debt ceiling, extend expiring tax cuts and fund the government. The hope was that it would create irresistible political pressure to get behind a bipartisan mega-fiscal deal.
This time , however, it’s access to health care for tens of millions of people that’s on the line.
“I think once it’s repealed, you will have hopefully fewer people playing politics and [instead] coming together to try to find the best policy,” House Majority Leader Kevin McCarthy (R-Calif.) said Tuesday. He added that when there is “a date certain that something’s going away … you know you have to have something done.”
The strategy presents significant risks. The fight over a replacement is guaranteed to be messier than the cathartic repeal vote. Giving themselves as many as three years to figure it out shows that Republicans are well aware of how tough it will be.
The problem won’t be a solid replacement plan. Republicans have numerous replacement plans. Most of which contain the most popular provisions of Obamacare. The problem will be passing a new system without Democratic support. Republicans currently are signaling they’re kicking the can down the road 3 years. To a time when they may not even hold the House (always a threat with midterms 2 years away – don’t ignore this possibility. The GOP won massive gains after the 2008 election). Adding to this pressure, Trump is unlikely to want a protracted 3 year fight over healthcare. If Trump forces the GOP and Democrats to deal with each other sooner than later, what kind of compromise deal arises? There’s no telling…
Add to the mix Supreme Court nominations and Cabinet selections getting confirmed, the toxic environment brewing in DC for 2017 is just getting started. Obamacare may already be dead in the water. If the GOP for sure signals a repeal, insurance companies may jump the gun and completely drop out of the exchanges. Which would create a lurch for those currently insured. If the big insurance see a chance to completely leave the markets, they will. There’s little need to stay on a sinking ship at that point. It’s better to cut losses and see what Republicans come up with as a replacement.
The goal for Trump and Republicans is to put considerable pressure on Democratic Senators in states Trump won. If those Senators want reelection, they may try to deal with the Trump administration. If those Democratic Senators think Trump’s coalition of voters will turn against him in the midterms, the Senators will oppose him. In 2008, Democrats held filibuster-proof majorities. Which meant they didn’t have to work with the opposition. They chose to shove their ideas down the throats of Americans. That attitude cost them dearly electorally. How will Republicans govern? And will that governance cost them?
What I’m reading
“The Past is a Foreign Country” by Carl R. Trueman, in First Things
Carl Trueman has a wonderful column in First Things this week. In it, he covers why he studied history as a profession. And how that study as a whole has changed over the years to reflect more modern politics instead of historical understanding. This shift in attitudes is dangerous to the history profession overall and risks blinding us all. It’s worth your time, as this segment can attest:
History is both my profession and my hobby. Every year a student will ask me why I chose to study and teach church history. I give numerous answers, but all perhaps are variations on the same theme. It is not church history that primarily interests me, but church history. I love reading, writing, and speaking about the past. Unlocking that past and seeing thereby the complexity of what it means to be human—those are the key attractions for me. History forces me to engage with times and places and people who think and act differently and yet with whom I share a basic humanity. It thereby helps me to understand the world I now live in. And it forces me to relativize my world and my pet concerns.
That points to the problem with the contemporary discipline of history: Put simply, it is not history. It is politics dressed up as history, and rather skimpily dressed up at that. It operates, either consciously or unconsciously, under the shadow of the young Marx, who declared in The Eighteenth Brumaire of Louis Bonaparte:
“Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like a nightmare on the brains of the living.”Was ever there such a passage of brilliant historical insight and philosophical mischief? Yes, Marx is right: We all must live as heirs of the past. But to posit that past as a nightmare is a tendentious political point, sweeping in its generalization and corrosive in its implications. All of the current malaise in the historical discipline—from its obsession with trivia to its mindless iconoclasm—might be seen as nothing more than an extended footnote to Marx’s comment. The recent speech by Niall Ferguson at the Folger Shakespeare Library is a brilliant summation of what many of us who teach history have thought about the direction our discipline has been taking for decades. When history is there only to be erased or overcome, we detach ourselves from our roots and place ourselves in the merciless hands of the sempiternal flux of present tastes and fancies. To borrow from L. P. Hartley, the past—our past—is a foreign country. We should therefore visit it first to learn in all humility. To do otherwise might look just a wee bit, well, racist, as the charming campus SJWs would no doubt phrase it.
What I’m watching
December 7th marked the 75th anniversary of the Pearl Harbor attacks, spurring America’s entry into WWII. In honor of that anniversary, I pulled up video of FDR’s famous speech on December 8th, to Congress, declaring war on Japan.
Thanks for reading!