Monthly Archives: August 2010

Stay skilled my friends. The economy so far…

These four graphs help illuminate where the economy is moving…

Employment graph from Econbrowser:

Employment isn’t trending anywhere near a high growth trajectory.  The econ blogosphere blames either the lack of AD (demand) or structural unemployment.  I say structural for several reasons.  First, the unemployment rate has edged lower, not because of the slight increases in employment levels, but because workers are leaving the labor force. Although the total amount of discouraged workers are low, it could also include stay at home parents, resorting to an underground economy, going back to school, etc…  Second, job openings are outpacing the employment growth rate, which means that there are jobs out there but employers are not finding people skilled enough for the job.  Anecdotal evidence from the news such as the lack of well-trained computer engineers and medical technicians help illustrate the point that these high-growth fields are having a tough time finding skilled hires.  Third, rising capacity utilization rates and business investment growth, both of which are indicators of an increase in AD, are on the rise. (see graphs below)

Capacity utilization rate, from Calculated Risk:

Gross Private Domestic Investment, from St. Lois Fed:

Aggregate demand is actually beginning to increase, without the lift from employment. Businesses are starting to take advantage of low interest rates in order to build more productive capital.

This leaves me to my last reason: Housing is providing most of the drag for the recovery in employment because construction workers have no where else to go.

Housing starts, from Calculated Risk:

As you can see, there is a huge gap from the peak of home building and its present level. A large share of construction employment was lost during that drop and the home buyer tax credit failed to bump housing starts any higher. There is no expectation for housing starts to rise back up to pre-recession levels. Those who were employed in the construction industry are pretty much screwed.

A recovery in employment is going to be terribly slow. Hiring skilled workers is going to be a slow process. Many of those who were employed in construction will have to face the decision of leaving the labor force, which is a decision that is even slower than the hiring process. Structural unemployment is exactly what is ailing the economy right now, but demand will continue upward as the economy reorients itself toward services.

Taking a Shot at WA’s New Liquor Privatisation Proposition

Had the pleasure to find this in my reader today: (here)

State and local governments stand to lose hundreds of millions of dollars if voters pass either of two initiatives on the November ballot putting Washington state out of the liquor business, according to analyses by the state’s Office of Financial Management (OFM).

The reports, released on Wednesday, paint a far different picture from most of the scenarios analyzed in a state auditor’s report earlier this year, which predicted revenue boosts if the liquor business were privatized.

The OFM reports also conclude that consumption of hard liquor would go up.

Initiative 1100, which is backed by Costco Wholesale and other large retailers, would reduce state and local revenues by up to $277 million over the next five years, OFM said.

Initiative 1105, which is funded by large distributors, would decrease revenues by as much as $730 million — a bigger bite because that proposal also would eliminate the state’s liquor tax.

Backers of both initiatives say the state Legislature could raise taxes to make up for any deficit. Initiative 1105 recommends a new, simplified liquor tax that — along with other aspects of the measure — it says would increase revenue by $100 million beyond what the liquor board now projects.

The OFM reports conclude both measures would increase liquor sales in Washington by 5 percent, based on sales growth experienced in Alberta, after the Canadian province privatized its liquor stores.

Liquor sales would increase partly because the number of sales outlets would multiply as grocery and convenience stores that currently sell only beer and wine put liquor on their shelves. Both the state auditor and the new OFM reports estimate that 3,357 outlets would sell liquor, compared to 315 liquor stores now.

Given my research on this,  I feel I must comment.

  • Eliminating taxes would be a bad idea, as liquor taxes can be a boon to state coffers helping to fund many state programs and alleviate damages caused by drinking.  The benefits outweigh the costs on this one.
  • The demand for liquor is inelastic, meaning the state has more flexibility in keeping taxes and revenues high.  Moreover, the tax burden would be placed more on the consumer.  Any drastic drops in the tax rates for liquor won’t increase liquor demand by much (I calculated around .5% drop in consumption for ever 1% drop in the price relative to the tax rate) and the same in reverse, increasing taxes won’t do much to decrease the amount of liquor bought.
  • The OFM is underestimating the increase in revenues that will happen when the number of outlets selling liquor will increase by 965%. One thing I found with my research is that liquor licenses have a very strong positive correlation with liquor consumption.  So, the increased availability will increase sales.  By how much? While it is still an inelastic change, (b=+.187) a 965% change in liquor outlets will actually yield an increase in consumption of 1.8%.  Alcohol sales in 2008 was $825 million.  A 1.80% increase in consumption would translate into an increase in sales by $14 million.  Combined with anticipated sales growth from recent trends, liquor sales would increase by $85 million dollars for 2009.
  • While the change in consumption is underestimated, it isn’t a large share for revenue.  With a 965% increase in licenses  to sell liquor, WA should auction them off.  It provided West Virgina with realized revenues of 38.7% of net sales in the auction as evidenced in this paper.

Why can’t economic forecasters act like weather forecasters?

If economic forecasting is more akin to weather forecasting, (in accuracy) why wouldn’t economic forecasters practice the same presentation styles as weather forecasters? That is, given any usual business news (or even national and local news), economic forecasters present economic forecasts that resemble the presentation styles of weather forecasters.  It would include clear and concise explanations from a relatively attractive, well-spoken  person (don’t think actual economists like that exist) who can dictate changes in forecast trends for the economy who is aided by a green screen, supplying graphical information to aide in making their point. I could see this being viable on a business news network, where viewers are more economically literate.

How much credence would viewers give towards economic forecasters than weather forecasters? Much like climatologists who are a huge step away from meteorologists, are traditional economists a huge step away from forecasting economists? Both disciplines may be a few and far between in practice, but actual consumers of forecasts don’t let the difference phase them. As much as most still watch the weather, many still pay attention to economic forecasts. (For one, clients pay attention to mine.)

Would this ruin the perceived legitimacy of economic forecasting? In other words, is the ramification of being wrong more costly? Betting on good weather may result in the unfortunate situation in which one is with wet clothes, but much like the housing crisis, betting on economic forecasts may leave one underwater.

HT: Chartporn (for Picture above)