Businomics Blog

Economic Subsidies for Economic Development: Not a Good Deal

Oregon Business Magazine quoted me in its article about two subsidies, one that clearly failed and one that, they say, worked.  If you think these things ever work, here are the facts cited in the article regarding the "good" subsidy.  Genentech received over $32 million of incentives, in exchange for which they agreed to hire 300 workers by 2015.  A great bioscience coup?  Hardly.  The facility will receive large barrels of pills and the workers will divide them into small bottle of pills, then prepare the small bottles for shipment.  High tech?  Cutting edge biochemistry?  Hardly.  This is slightly better than minimum wage work.  And we paid over $100,000 for each job "created."

I expounded on this topic at some length many years ago in a Cascade Policy Institute Report, "The Unseen Costs of Ribbon Cutting."

Better Presentations Through Better PowerPoint Slides

I've seen plenty of bad presentations, but the good news is that we have plenty of resources for better PowerPoint presentations.  Here's a good lesson from presentation expert Dave Paradi:

Dave has more great tips on his website, www.ThinkOutsideTheSlide.com.

The Unemployment Rate and State and Local Economic Policy

My friends are telling me I'm an idiot.  I was quoted in the local newspaper last week saying that our high unemployment rate was a bit of a mystery.  Both friends and strangers have told me that it's simple: our state has high unemployment because of bad policy, such as high tax rates and restrictive controls on growth.  Here's why they are wrong and I am right.

Unemployment is a labor market phenomenon, not a general economic phenomenon.  Weak demand for labor may arise from bad policy.  "Businesses won't create jobs if they are taxed too high" is the common theme.  But labor demand is not based solely on public policy.  The number of workers that a business will hire depends also on how much those workers need to be paid.  I would expect poor public policy to lead to weak demand for labor, and thus low wage rates rather than high unemployment.

The price system usually brings supply and demand into balance.
Nobody wants to sit in the middle seat of an airplane on a long trip, but those middle seats are pretty much full.  Why?  The airlines set prices so that the seats sell.  Or consider gasoline.  People drive fewer miles in the winter than in the summer, but we don't see unemployed gasoline in January.  Instead, we see (on average) lower gas prices in winter than in summer.  When we have unemployment, we ask, "Why doesn't the wage rate drop to keep all of the people employed?"

There are both long-run issues and short-run issues.  In the long run, there's a natural level of unemployment that reflects the time it takes for a person to find work.  We have new people coming into the labor force, as well as people quitting and being dismissed, and most of these people would rather take some time looking for a good job than accepting the first job opening they come across.  This natural unemployment rate is higher in states that have a great deal of in-migration (such as Oregon), because the newcomers need time to find jobs.  While they are looking, they are unemployed.

The minimum wage prevents price adjustment for low-skilled workers, so states with higher minimum wage rates experience higher unemployment rates, especially for youth and minorities.  This is an instance where state policy does come into play.

In the short run, recessions bring high unemployment because wage rates are slow to adjust to weak demand, for a wide variety of reasons.  The extent of unemployment in the recession depends on how the state or local area is impacted by the recession.  Those places (such as Oregon) with a greater concentration in manufacturing and construction have a bigger change in labor demand and thus a greater rise in unemployment.

However, aside from the minimum wage, bad long-term public policy does not explain a higher unemployment rate.  It could explain lower wage rates in general, though.

Bank Earnings Looking Better in 2009 First Quarter

Breathe a sigh of relief.  Bank earnings are not strong, but they are positive.  Red ink seems to be so 2008:

It seems the farther we get from the fall of 2009 and the Lehman bankruptcy, the better things look.  Although I do not forecast bank earnings to grow rapidly and return to the 2006 levels any time soon, we are likely to get moderate, gradual gains from here on out.  Of course, that's in the aggregate.  Your bank's mileage may vary.

Consumer Confidence: A Very Positive Economic Sign

Today's report on consumer confidence lends credence to economic forecasts that call for a recovery soon.

This is a big enough improvement in consumer attitudes that I'm confident it's not just a temporary blip.  Although consumer confidence isn't the only thing to worry about, recall that the housing crash itself did not send us into recession; it was the collapse of consumer spending that pushed us over the edge.  Now we're likely to see an improvement--not a return to the exuberant spending of 2005, but a measured increase in spending.

An Optimistic Economic Outlook, At Least for the Long Term

Take 20 minutes and watch this wonderful Ted Talk by Alex Tabarrok of George Mason University.  He's a professor but he speaks English.  Much of what he says will be familiar to those of you who have heard my presentation, Freedom and Prosperity: The Case for Optimism.  Like all Ted Talks, this one is both insightful and crisp--not a single extra word.

My favorite graphic is this picture of world GDP per capita for the last million years or so.  We don't have exceptionally accurate GDP figures for the caveman era--but we actually know enough about their food and shelter to make a crude estimate.

Growth is a fairly recent phenomenon, and despite the recession, its long-term outlook is very good.

Turning Point in the Economy? Maybe

One of the most useful measures of the economy is initial claims for unemployment insurance.  Although the concept is somewhat narrow, it turns out that the correlation with other, broader series is very strong.  We get new data weekly, so we can see turning points in this data series sooner than we can catch the change in GDP or industrial production.

We may be just past the turning point.  Here are the data:

 

Like most everyone else, I use a four-week moving average to smooth out the wild weekly fluctuations.  The raw data (available here) show even more of a spike and subsequent drop-off.  The peak was in the last month of March.  However, here's a warning.  The data have enough wiggles in them that I'm not positive we saw an overall peak, rather than a local peak, followed by a local trough, followed by a subsequent upward trend.  Every week that we stay below that peak, though, adds more hope that we'll soon put the recession behind us.

Business planning implications:  Do your economic contingency planning for a turnaround in sales.  Are you ready to increase production, staff up, get more product from your vendors, and finance your working capital?  If you have not thought through all of these issues, get working on it.

New Consensus Economic Forecast: Not Much Different

A new consensus economic forecast is out, courtesy of the Philadelphia Fed, and it's not too much different from before, except that Q3 of 2009 is noticeably weaker.  Here's the forecast of GDP growth:

The economy is contracting slightly this quarter, according to the average view, and will begin to grow in the third quarter of this year.  Here's the comparison with last quarter's consensus:

What's notable about the consensus is not that the recession ends, but that the recovery is so mild.  Housing construction typically surges early in the recovery (even beginning to surge during the recession), but that's not happening because of the huge overhang of excess supply.  Consumer spending in the consensus view is very weak.  It grows, but at a very anemic pace, due no doubt to continuing poor confidence combined with the credit crunch.  Non-residential investment is also slow to recover, thanks to the weak overall economy.

Businesses should not bet the store on an economic forecast, not even mine.  (Years of forecasting has humbled me.  If you find a forecaster who is not humble, he's either young or foolish.  Or both.)  Using the consensus economic forecast is a good way around the challenge of picking an economic guru.

Wolfram Alpha: Great News for Information Junkies

If you, like me, love to find cool facts, you absolutely need to know about Wolfram Alpha.

As an example type in "zip code" followed by your zip code.

Inventory Swings & Recession: Watch Your Ultimate Customer

An excellent Wall Street Journal article, "Clarity is Missing Link in Supply Chain," accentuates a point made in my favorite economics book, that inventory swings are tremendously destabilizing.  Here's a stunning macroeconomic impact:

In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers' deep cuts made it tough to keep shelves stocked. Suppliers "all decided to build a lot less," says Best Buy merchandizing chief Michael Vitelli.

The reason for this problem is explained:

Companies all along the supply chain live in mortal fear of piling up inventory. Profit margins are razor thin, and unsold inventory only loses value as newer technologies hit the market.

The article highlights how difficult it has become for companies to always know where their products are going.  In Businomics, I emphasized the need of an upstream supplier to understand the ultimate users of the product.  So the company making computer chips needs to understand how those chips are being used.  One company thought their chips were going into computers, only to learn later that they were destined for electronic picture frames.

OK; it is hard to know how your product is being used.  That does NOT mean it's less important to know how it's being used.  You still have to understand ultimate users, at least if you want your company to survive this business cycle.

If you have a copy of Businomics on your desk, re-read pages 54-58 for a basic explanation of how de-stabilizing inventory swings are, then all of Chapter 7, "Managing Through the Business Cycle" for how to manage your own inventories.