The Connection of Depressed Wages to High Oil Prices and Limits to Growth
Posted by Gail the Actuary on March 22, 2013 - 11:44am
In my view, wages are the backbone an economy. If workers have difficulty finding a job, or have difficulty earning sufficient wages, the lack of wages will be a problem, not just for the workers, but for governments and businesses. Governments will have a hard time collecting enough taxes, and businesses will have a hard time finding enough customers. There can be business-to-business transactions, but ultimately somewhere “downstream,” businesses need wage-earning customers who can afford to pay for goods and services. Even if a business produces a resource that is in very high demand, such as oil, it still needs wage-earning customers either to buy the resource directly (for example, as gasoline), or to buy the resource indirectly (for example, as food which uses oil in production and transport).
It is not just any wages that are important. It is the wages paid by private companies (rather than governments) that are important, as the backbone to the economy. Governments tend to get their revenues from private citizens and from businesses, both of which are dependent on wages of private citizens. There are a few pieces outside of this loop, such as taxes on imports from foreign countries. With the advent of free international trade, this source is disappearing. Another piece outside the US wage-loop is taxes on resource extraction, if these resources are exported.
Instead of using the analogy of a backbone, perhaps I should say that wages are the base that ultimately determines the quantity of goods and services an economy can afford.
Obviously there are other kinds of income, such as “rents,” but these, too, ultimately come from wage earners. Furthermore, businesses cannot earn money to pay dividends unless some consumer, somewhere, can afford to buy the goods and services their business is selling.
I have written recently about how the proportion of Americans with jobs rose to a peak, and since has been declining.
I decided in this post to look at the dollars these workers are earning. In particular, I decided to look at wages, other than government wages, adjusted to today’s cost level using the “CPI- Urban,” cost index of the Bureau of Labor Statistics. I discovered that these wages are doing very poorly. I also discovered a disturbing connection between high oil prices and flattening or declining wages. Putting all of these pieces together suggests a connection to “Limits to Growth.”
Per Capita Non-Government Wages
If we take inflation-adjusted non-government wages, and divide by the total US population (not just employed workers), we get a measure of the extent to which wages have been growing or shrinking. Some of this growth will be from a second wage-earner in a family joining the workforce. Some of this growth will be from families in recent years having fewer children, so that adults make up a larger portion of the population. If some jobs move overseas and are not replaced, this will act to reduce wages.
Comparing Figure 2 and Figure 3, we can see that they follow generally the same shape. A major portion of the increase in wages in Figure 3 is thus driven by a higher proportion of the population having jobs, at least up until the year 2000.
Figure 3 emphasizes how poorly wages have performed since the year 2000. Average wages on a Figure 3 basis hit a high point of $$19,112 in 2000. They then dropped back to $18,145 in 2003. In 2007, they briefly surpassed the year 2000 high point, hitting $19,573. More recently they dipped again and (with government deficit spending) have recovered a bit, rising to $18,053 in 2012. This is very low by historical standards; it is between the level they were in 1998 and 1999.
Looking at Figure 3, the other time when wages were flat was the period between 1973 and 1983. The thing that is striking is that both the current period and the previous “flat” period took place during periods of high oil prices (Figure 4, below). The vast majority of the rise in non-government per capita wages that has taken place has happened when the inflation-adjusted price of oil was less than $30 barrel.
We have discussed previously why high oil prices can be expected to have an adverse impact on wages. There are multiple ways this can happen. For example, oil plays a very direct role in growing and transporting food and in making gasoline. Thus, the cost of food and of commuting increases. This causes people to cut back on discretionary expenditures, leading to layoffs in discretionary sectors. Lay-offs in discretionary sectors means fewer jobs.
Another thing that happens is a change in the competitive situation that indirectly leads to layoffs. Oil is used in transporting many types of goods, and is used in producing a wide variety of products, such as asphalt shingles and synthetic cloth. Wages don’t rise at the same time as oil prices rise. The result is a mismatch between what citizens can afford, and the cost to manufacture and transport products. Some customers are “priced out” of the market. Businesses find that they must scale back the size of their operations to produce only the amount customers can afford. For example, a delivery service will operate fewer vehicles, if demand is lower, laying off workers.
Also playing a role in reduced employment is increased competition from China, India, and other low wage countries. These countries typically use a lot of coal in their energy mix, so are less affected by high oil prices. As a result, their prices become more competitive as oil prices rise.
Changes in trade agreements can also be expected to play a role in the competitive situation. China started growing rapidly immediately after it joined the World Trade Organization in December, 2001. The big drop-off in US employment coincides very closely in time to the time China started growing quickly.
Another factor in reduced wages is increased automation, in an attempt to compete with low-wage countries. An employer may replace several workers with a single worker, using a new high-tech machine. The worker with the new machine may earn more, but the others are left to find jobs elsewhere.
Going forward, increased retirement of “baby boomers” is likely to add further challenges. Retirees will need to be fed and cared for, mostly from taxes on current workers. In theory, the retirement of baby boomers should leave more jobs for unemployed young people, but this will depend on whether such jobs are really available.
One important point is that the impact of high oil prices on wages doesn’t “go away” to any significant extent over time. This is clear from Figure 4, and is a point I have made previously. Increased fuel efficiency helps a bit, as do adaptations like finding a job closer to where a person lives. But high oil prices continue to make goods that are made using oil less competitive on a world market. High oil prices also continue to make increased automation attractive, and continue to keep the cost of transport of high. Individuals find they need to permanently cut back on discretionary spending to balance their budgets.
Oil prices are likely to remain high, and in fact, rise in the future. When we started extracting oil, we began with the easy (and cheap) to extract oil first. Now, the inexpensive to extract oil is mostly gone; what is left is high-priced oil. Over time, the price becomes even higher, as diminishing returns set in. The recent publicity about the possibility of more tight oil in the United States doesn’t change this dynamic. What the press releases don’t say is that this oil will only be available if it is sufficiently high-priced. A recent survey by Barclays indicates that North American oil and gas companies are anticipating less than a one per cent increase in “exploration and production” expenses in 2013; current North American oil and gas prices are not high enough to justify much increase in investment.
Per Capita Real GDP
In recent years, the economy as a whole has tended to fare better than wage earners. This happens partly because deficit spending is being used to provide income to the many unemployed people, and partly because businesses are able to “bounce back” from an earnings point of view better than wage-earners, because they can cut back the size of their operations to keep profits high. Sometimes they can even substitute low overseas labor costs, or automation.
If we compare per capita real (that is, inflation-adjusted) GDP with oil prices (both in 2012$), this is what we see:
There is some stalling in the rise of real GDP per capita, with high oil prices, but it is not nearly as pronounced as the stalling of wage growth. Nevertheless, Economist James Hamilton found that 10 out of the last 11 US recessions were associated with oil price spikes.
On a per capita basis, real GDP per capita in 2012 is between the 2005 and the 2006 level. This is far better than the situation with non-government wages. In Figure 4, we saw that in 2012, non-government wages were only between the 1998 to 1999 level. Ouch!
Hitting “Limits to Growth?”
I wonder if the situation we are reaching now isn’t “Limits to Growth,” as described by the book by that name by Meadows et al. written in 1972. The way we seem to be reaching Limits to Growth is through high oil prices, and the impacts these high oil prices have both on wages and on competitiveness with other countries. I explained some of these issues earlier in this post. There are also impacts on governments:
- Low wages in total mean less tax revenue for governments;
- Fewer employed means more government outlays for unemployment benefits;
- Low wages lead to more problems with debt defaults, and more need for bank bailouts;
- Governments can’t raise taxes fast enough or reduce benefits quickly enough, so they find themselves with rapidly rising deficits. If governments do raise taxes, workers are even worse off. If they reduce expenditures (less unemployment payments or allowing banks to fail), citizens are also unhappy.
Over the last several thousand years, many civilizations have grown up, reached limits of one sort or another, and eventually collapsed. Based on the work of Peter Turchin and Sergey Nefedov in the book Secular Cycles, there were financial issues not too different from the ones we are seeing now involved in these collapses. I showed in my post 2013: Beginning of Long-Term Recession? that there seem to be significant parallels to our current situation. These collapses often took 20 years or more, but the situation is still concerning.
While the situation we are looking at is unpleasant, if we understand the source of our problems, we can at least look at our situation a bit more rationally. We may not be able to find solutions, but we can at least eliminate some approaches as being unrealistic. We may be able to find partial solutions, such as making survival possible for a subset of humanity, if not everyone. If we don’t understand our predicament, there is no way we can rationally address it.
This post originally appeared on Our Finite World.
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Good article. The 'oil tax' is sucking wealth out of the economy, causing all sorts of reactions that you describe. It seems to me that while politicians are not clueless they are held by their constituents to maintain BAU in one form or another. The most drastic reaction being Cyprus and direct taxing(taking)of bank deposits.
I believe your comments are spot on in regards to hitting the limits of growth, the glass ceiling imposed by oil price. 'Seeing' is hard to do, even harder to discuss, because you, I ,we are battling psychological defense mechanisms.
Wiki -"mechanisms (or defense mechanisms) are psychological strategies brought into play by the unconscious mind[1] to manipulate, deny, or distort reality (through processes including, but not limited to, repression, identification, or rationalization),[2] and to maintain a socially acceptable self-image or self-schema.[3]"
"...to manipulate, deny, or distort reality...to maintain a socially acceptable self-image or self-schema."
Man, does this sound familiar; governments, individuals, leaders, etc.. The likely hood of overcoming these defense mechanisms I think is very very small. For the most part I believe we are collectively intelligent enough to understand or able to figure it out, but this is fundamentally an emotional issue, which we are not evolved enough to tackle. My 2 cents.
Part of the problem is that companies' profits are hit when oil prices go up. Their natural instinct is to fix those profits.
Wages tend to be the largest source of outgo for most corporations. Almost any way of fixing the reduction in profits will affect wages. This includes outsourcing manufacturing to a lower-wage country, automation, or "making a smaller batch" (closing unprofitable locations, or cutting back unprofitable flights, or downsizing in some other way, to match lower demand for a now higher-priced product.) I made the following illustration to show this situation. I don't think it is in any TOD post. It is in a newer post Our Energy Predicament in Charts.
These changes fix corporate profits, so GDP doesn't look too terrible, after a time. But wages/employment still tends to remain low, as long as oil prices remain high.
Wages - As an employer I have to pay minimum wage to every new hire.
I walked in and this kid is sitting on the floor because his neck hurt to look down at a table while standing. Moved himself and his work to the floor. Next I suppose he will want to lay down.
My industry cannot pay $16.00-$18.00 for someone who works twice as hard.
So I yell and bitch, and want to wait years before considering a raise to make up for slow work, poor work ethics.
This is what you get when a politician thinks they can legislate wealth into every job(every job paying a living wage, from the start).
This is also part of the problem - too high of minimum wage.
Wages - As an employer I have to pay minimum wage to every new hire.
Yes. That is the law.
I walked in and this kid is sitting on the floor because his neck hurt to look down at a table while standing. Moved himself and his work to the floor. Next I suppose he will want to lay down.
I don't know what your business is supposed to provide for its customers. Why did he not have a chair/stool to sit on? Maybe he has a congenital neck deformity. If so, what does that have to do with his worth as a worker?
My industry cannot pay $16.00-$18.00 for someone who works twice as hard.
Why not?
So I yell and bitch, and want to wait years before considering a raise to make up for slow work, poor work ethics.
I do not understand what you are saying. First, if work does not speed up, why ever consider a raise? Second, if poor work ethics, why continue to pay the individual?
This is what you get when a politician thinks they can legislate wealth into every job(every job paying a living wage, from the start).
Again, it is a mystery to me why you think a worker is not worthy of his hire. If he does the job, he should be paid a living wage. Otherwise he will die, become unhealthy and unable to work, etc. Plus, no one has claimed minimum wage is a living wage, which is part of the problem. If employers will not pay living wages to their workers, how will their workers become consumers of their products and services?
This is also part of the problem - too high of minimum wage.
I maintain minimum wage is not too high; in fact if anything it is too low.
Having said all that, I did work for minimum wage while in school. I attended private college and law school, worked full time and graduated debt free. Also, purchased my first house then. Of course, I was a bit frugal as to other things, and remained single. Also, the last 3 years I was privileged to receive GI bill benefits, which made the house purchase possible.
Craig
In short, what matters? Getting the work product, to specification, without compromising the safety of co-workers? Or ensuring the worker performs "the right actions in the right sequence"--i.e., "doing it the way I like to see it done"?
That latter is important in many industries, but it's a bit hard to also require a high rate of finished product if "doing it the right way" is the core requirement.
Clarifying expectations is good for everybody.
Absolutely. I find it difficult to understand how people/employers cannot realize the cost of living today is such that someone making minimum wage just barely has enough to live on. Depending on where someone is living they may need to work 60 hours a week at min. wage to pay the bills, and probably have nothing left over for discretionary spending. I get the impression those against min. wage would pay workers two bucks an hour or even less if they could. Then there would be people living in squalor. So how are they suppose to groom themselves and have clean cloths to go to work if they live in the gutter (so to speak)? This is suppose to be a civilization, not the Serengehtti.
"If he does the job, he should be paid a living wage."
"Absolutely. I find it difficult to understand how people/employers cannot realize the cost of living today is such that someone making minimum wage just barely has enough to live on."
"IF" he does the job? Sure and in case you missed it THAT seems to be the problem.
If he doesn't do the job, hire someone else. If you can't hire someone better at the wage you are willing to pay, raise your pay. If you can't afford to pay more, then you should be satisfied with what you can get. The labor supply/demand situation is stacked in your favor. Were the government not taking in a never ending stream of millions, including illegal millions, from other countries, and allowing CEOs to send a never ending stream of jobs to other countries, minimum wage wouldn't even apply anymore. The minimum wage has not kept pace with inflation and has definitely not kept pace with housing in our overpopulated metropolises. Minus immigration and job exportation, labor would be scarce enough that it would drive the lowest wages well above minimum wage. Government mandates a minimum wage, but they allow and participate in other policies, without which, the "minimum" wage in society would be much higher that it is.
What I see is the price I can get for my product has not risen with inflation either. We have suffered with a competitor who believed they could take losses for many years(having other sources of income), drive out all competition, and dominate the entire market. They are now in financial straits, it took longer than I thought it would but they single-handedly hurt the market when it was easier to get a better price for your product.
The other problem I face is competitors going bankrupt. In a declining market this can kill your sales for a year or more depending on their size as you must wait for fire sale priced goods to work their way through the market.
Yes the labor market is stacked in my favor right now. Yes, I can and will replace this worker. Yes I agree that minimum wage buys less than it used as well. Running a business in this economic climate is no fun, the pressure on prices has never been more intense.
Our economy malaise was covered up for years by people going into debt to maintain lifestyles that was not sustainable. We had a "debt based" economy. I suspect the majority of our economics activity was financed by rising house prices, but still based on debt. That is over.
Rising energy prices and the end of a debt bubble, the two worst factors facing all business.
the issue here is that there is a lot of work which is simply not worth doing if it will cost the minimum wage to get it done.. work which nonetheless has _some_ value which would be sufficient to meet _someone's_ survival requirements (i'm not talking about comfortable living). There is of course plenty of work which simply has not sufficient value for anyone to at all survive by doing it- this work simply has no economic value and nobody's willing to pay for it, so nobody could survive by doing it.
The gap between minimum wage and the real threshold of survival is something which in regimes with high legislated minimum wages, you simply don't find this work being done.
When times are good there are plenty of sufficiently profitable alternatives that nobody really cares.. people can find work that pays well enough elsewhere. When times are rough, you find a lot of people adjusting their expectations lower and lower and people willing to work for even well below the official minimum wage just to get enough to eat. That's the real cutoff point.
Businesses who work on things of marginal value are the ones where minimum wage is a squeeze. They themselves are doing something which is not worth very much to anyone, and so theyve got very little to run with. If they have to pay a minimum wage which is in excess of the economic value of the work they can get in return, they go bankrupt and disappear. If they're right at the boundary, small fluctuations can put them over the line and of course one will find many business owners in this category saying exactly what the previous poster had said, complaining that the minimum wage is squeezing the life out of the business.
In any ecosystem there are the hangers-on in marginal niches. The original poster's business is in one of those marginal niches given the enforced reality of the minimum wage. The underlying work being done, whatever it is, is on the fringe of sufficient value to occur at all. If for example the minumum wage were to rise further in that environment, the work (and that business) would simply disappear, because it's just not worth doing anymore. We have many examples of labor-intensive handwork which simply became too expensive to continue doing in the western industrialized countries. Ever wonder why there are so few tailors in the west whereas the third world is full of them? everyone knows why. decades ago their labor became too valuable (even if they simply went to work in some other field) in thos environments and not enough people were willing to pay the huge sums, they mostly closed up shop and stopped being tailors.
You cannot legislate away the fact that some work is more valuable than other work, and some of it is of only marginal value. In a living ecosystem those at the margin sometimes find themselves on the wrong side and either find somewhere else in the ecosystem to survive, or else don't survive. Trying to legislate against this can temporarily use surpluses in other parts of the ecosystem to prop up a failing strategy but ultimately runs into thermodynamic limits and fails, and if the society practicing this redistribution has gone too far with it, it might fail as a whole.
I'm not sure your example of tailors is quite whole - I think ready-to-wear and the ubiquity of cheap sized (not fitted but sized) clothing probably hit them harder than anything else. That and the decline of formal wear.
In this case, you could see them as a classic example where international wage arbitrage destroyed their profession. Sweatshops open in Bangladesh, there are 100 sizes of whatever you need, and suddenly the tailor sare out of business. Clothing is cheap, if it doesn't fit you replace rather than resize, one less job for the tailor. Perfectly fitted formal wear is out of fashion, a T shirt and jeans is good enough. Bam, the job is gone.
Ironically it is the service occupations that suffer from low wages but have the best protection from this sort of arbitrage. You can't have a barista in India make your morning coffee. Raising the minimum wage would benefit the vast majority in the US as the service industry is the biggest piece of the economy now. It would probably cause a minor rise in prices but the rise in wages and standard of living for the bottom sectors of the economy would absolutely dwarf the price effects.
The number I've seen bandied about was 15 million workers directly. But there are usually knock-on effects that buoy those close to it. Because many of the people affected work for large corporations this would pull money, which has been sitting on the sidelines in their bank accounts, and put it back to work in the economy.
What's interesting about the prospect of raising the minimum wage is that it should remove some of the burden the government is bearing regarding SNAP (foodstamps), welfare, medicare, medicaid...as more people will be moved out of poverty level and pay more in payroll taxes.
Not worth doing for a business if the profit level is not high enough. If what's being done requires a lot of capital investment or has high overhead this can be true because it takes a large business with capital-sway to pull off. If it's something that can be done in a home business it's less so. Note that the fellow who's complaining is being paid by the work done by the person he's complaining about - he doesn't appear to be doing the work himself.
So whatever work is being done the profit is sufficient to support not only the worker, but a supervisor/owner and pay for a building the work is being done in. If it's really a matter of labor intensity and not infrastructure the work could be home-based reducing overhead and cutting business owners/supervisors out of the equation since the profit would only have to then support the worker.
I can say from experience...when your work is not appreciated and you don't feel appreciated - the amount of f*cks one gives drops to absolutely zero. This guy sounds like a terrible person to work for and I'd be putting in sub-minimal effort as well, while simultaneously looking for somewhere else to work. When you're appreciated, you're willing to put in extra and call it even.
I think this kind of thing is working on a societal level as well - people are noticing that the government is no longer working for the people, but as lies repeated often enough become the truth - they've been convinced that there is no fixing the government and that it needs to be abolished rather than fixed to work for them again.
Other than the medicare part, you are correct. Medicare, though, is an entitlement that ennures at age 65, no matter whether you work or not. However, the additional wages pay additional moneys into the programs (medicare and Social Security, as well as Unemployment).
Good post. Your comment on fixing the government is spot on.
Craig
"Note that the fellow who's complaining is being paid by the work done by the person he's complaining about - he doesn't appear to be doing the work himself."
In the real world I get paid for my products from my customers not my employee's. I have seen this twisted argument before. I get paid for the management, sales, and administration work I do. I also earn a return on my capital investment. My employees get paid for the work they do. If my employees paid me to work for me I would hire everyone including you.
Paid by the work done
You hire people because they do a service for you that makes you money. If you have 0 workers you make 0 money unless you're doing the work yourself. Yes the products they make must be purchased by customers, but you need to hire people to make those products so that you can sell them. So why don't you appreciate the people making the things that are making you money?
It's a bit mysterious - rather than taking the incident of the guy moving to the floor to be comfortable as a warning sign that you should probably be concerned about your other employees who might be suffering from the same problem and not saying anything which, over time, will decrease productivity, decrease quality, and decrease job contentment.
It's like seeing spiking gasoline prices and going "damn speculators!" You may have just gotten a glimpse of an underlying problem at your workplace and your response is "lazy SOB!" So you're left with a choice...blame the speculator and ignore the root cause of the problem...or start asking questions. There are reams of research which say that while people work for money - how much is not the main cause of their content or discontent - but whether they're appreciated and feel their work matters. It could be that the people working for you are suffering physically - but have you asked? Just asking if they're comfortable or if there's anything you can have an effect.
I provide a table set a working height, so arms are not stressed. Everyone else works at these tables. The work involves lifting 3.5 lbs in each hand and setting it down again after completing the necessary steps. This is not exactly line work where you are locked in one position every minute(ie lots of arm leg body movement). Also work is varied throughout the day. this job might last 2.5 - 5 hrs of 8 hrs. Some days not at all. there is a place to lift one foot - ergonomics.
but if you had or wanted to place your workforce under stress for greater competivness would you do it?
you see the problem.
If the driving force is competitiveness then there is a race to the bottom in some regards...no? You imply its almost out of your hands
A race to the bottom, in some regards this is true, I charge more for my product but offer smaller minimums which eats up the extra. Some are willing to pay more because they see the value added others shop by price and price alone who can save 15% over my prices if they what to drive an extra 50 miles and get it themselves saving the cost of delivery.
I cannot control my competition. I cannot tell them what they should charge. In this economy people are extra frugal and margins are slim at best. Some businesses are selling below cost to convert inventory back into cash. I have never in 32 years seen anything like this.
Large chains whom I do not supply are well known to change vendors for 1/2 of a cent. They cut their workers hours to avoid paying health insurance because they have competition too. The retail shopper is getting pinched by high and rising prices so they are watching prices as well.
So my point which is getting lost is that you cannot legislate wealth. You can raise the minimum wage but their will be impacts as businesses are forced to react to competition. Minimum wage used to be considered a learning or training wage because you are not as productive when you are learning something you have never done, that is fact. Once trained you are then more valuable and were paid more, or could leave fully trained and earn more somewhere else, which should be obvious to everyone including the owner.
So teaching someone to not sit on the floor seems beyond the realm of basic, reasonable, work ethics to me. This person will not stay in my employ for long. I have people begging me for work. The employee has competition as well.
surely thats the other way round THE ONLY THING constraining a squezze on wages is legislation..but it has to be universal.
Have you considered that competition may not be everything its cracked up to be in each and every case. If it is all in the hands of this competitive system that by definition defies a optimum result then perhaps the notion of competition is flawed?
"Paid by the work done"
Let me be very clear, I do not get paid by the work done, I get paid for the products I sell. This gets twisted by those who do not run a business.
How the work gets done is the issue, don't confuse this with paying or receiving, they are different. I must compete, therefor my prices are set by the market, not by me, not by you, but by what people are willing to pay me for what I sell. This sets what I can pay and how much has to get done to sell at the market determined price. It is fairly straight forward for those willing to look.
I bet there are many employers laughing at me for this useless foray, people believe what they want to believe. Running a small business is easy just ask anyone who has never done it.
On whose side is the argument being twisted? What's your income in comparison? Do your workers know? What do they do? What's the company's overall take and pay-ratios? Decision-making? Control? Power?
Where's your company located? Mars? What is your product? How is it created? Whose land and resources? Yours? You sure?
Sounds awesome... Where do I sign up?
So I yell and bitch, and want to wait years before considering a raise to make up for slow work, poor work ethics. ~ DelusionaL
Sounds awesome... Where do I sign up?
I have an idea - you should hire him, because it is always easier to bitch when it isn't your money that goes down the drain. Oh wait! You didn't want to throw your money out the window...just mine. ;-/
But that's one of my points: 'Your' money. How did that happen? Magic? Thin air? If it's your money, what does he care? If it's your control, what does he care? If it's your business, what does he care? Do you believe in sharing your(?) things/fruits, or clutching them tightly to your chest. Or is your notion of sharing more along the lines of sucking the cheese doodle dust off your fingers?
But it's not your business or money per se. It's everyone's, so to speak, because it exists within the larger context. But the system plays it as though the more funny-money you have the more serious-land/resources/power you can take from-- and often, spoil for-- everyone else standing on the planet... Water, land, oil, coal, minerals, social stability, health, happiness... Yes, that finite ball we're all occupying and require for the sustenance of our lives. You know-- Earth?
Also, I wouldn't 'hire' him, so you're making a proposal apparently from within your box to someone outside of it (and/or trying to get out).
(No, someone else-- a 'competitor' [by-force? a la dog-fight?], say-- would hire someone in Bangladesh... and then buy you out...)
BTW, it's maybe subliminally surreal to be discussing this with someone with a nickname such as yours, but I won't hold it against you. ;)
"You can't have a barista in India make your morning coffee."
Perfect example. At some point minimum wage becomes high enough that the cost of that coffee is deemed too much, and you either do without, or bring your own.
So the work doesn't get done, or you do it yourself. Or as will soon happen, the robot will do it.
Remember when the counter person filled your drink for you? Now they toss a cup at you and you do it yourself. Same principle.
I walked in and this kid is sitting on the floor because his neck hurt to look down at a table while standing.
Moved himself and his work to the floor.
Q: did this make him less productive ? did this affect the quality of his work?
Next I suppose he will want to lay down.
Q : did you ask him ? mores the point did you ask him if he had any medical condition that would affect the work you were going to give him ?
Q: what would you pay for the work given no restrictions ? - you've not mentioned what the work is
and would you work for that rate?
Q whats the ratio of your wage to the lad you took on? , assuming you pay your self one, include shares options because I know of the trick to pay yourself the minimum wage and then top that up with bonuses - well I do thats just given isn;t it ? why give the tax man the money ....
I'll grant that too high a min wage has lead to jobs going offshore - but thats tied with the global trade agreements made with low cost low wage economies like China . You cant catch up with them and note they all view their current standards as transitionary to the higher wage economies of the West - they aspire to be as rich as us .
They have learnt that a healthy well paid work force can afford to pay for the goods they want to sell , todays distortion in the markets needs correction
and you're right , thinking there, that hey I'd like to have min cost to make my stuff and sell it to rich people for big profits - not your job to look after all the waifs and strays
but it is the Governments - hence min wages , safety rules , police , a standing army and enforcable laws - and taxes ofcourse
Forbin
There are an awfully lot of disabled people in the world. I know, because I am the mother of an adult son with Aspergers Syndrome. These disabled folks end up working in low-wage jobs, and frequently find themselves unemployed. This is a difficult problem to handle. If we can't find jobs for these folks, we end up with a need to support them some other way. Governments in poor financial situation find themselves increasingly unable to deal with the many at the margins of society.
Over here, there's a lovely cafe I've begun to frequent that's apparently run in large part by people with "challenges", and, interestingly, they have so far gotten my custom drink correct more often than those at other cafes. Perhaps it is in part because they are being more conscious about what they are doing. They are a very cool bunch too.
Also, someone I know was remarking how good their home-baked bread is that they make their sandwiches with.
How many of you have ever run a business? Hmmm?
I would love to pay higher wages, If you could just force everyone to buy my products no matter what the price. Yes that is the answer!! Force everyone to buy my products while some kid sits on the floor. And yes he is WAY less productive, what a stupid comment.
As a former employee I understand the attitude, as an employer I understand reality, which very clearly many of you do not.
So lets make the minimum wage from $8.95 to $18.00, most of you will agree with that. So I will need to decide whether my competition will automate, if they do I will have to as well. So I will get rid of 4 employees and keep 1. The other 4 can go look for work elsewhere, go on unemployment, get food stamps, what ever. Assuming full time my payroll dropped from 3600 to 760, leaving me 147680 a year to buy machines with. And boy did you teach us greedy employers a thing or two.
So lets make employers pay health insurance. Great idea right? Let call full time 32 hrs a week? Lets go after larger employers, make the threshold 200 employes. Sound familiar? Then what? Seriously just what in the hell did you think would happen?
So now we have large employers hiring people for 25 hrs a week. Seriously. This is not living 'income', even though you have a 'living wage'(which many of you do not think is high enough). So now you must get 2 part time jobs and you still do not have health insurance being paid for by employers for every employee. So 'unemployment is down' and we should all feel happier.
Good employee's always get better wages, the 'compression' in wages is the problem. Just 'showing up' is not enough to demand a living wage.
Perhaps just about every wage-slave that has ever slaved.
Make it a cooperative. Maybe an even lower take would be accepted in exchange for some fair ownership, control, decision-making, etc..
Perhaps just about every wage-slave that has ever slaved.
Wage slave? Wow! Free to leave, free to start their own shop, slavery? Obviously you have never had to worry about making payroll. Perhaps you should take all the advice you give?
Co-operative, right. Lower take? Hmm, like less than minimum wage? Sounds like my job. I guess it would be legal because it is a co-operative. I would be in huge trouble for doing that. Obviously you think everyone would make decisions that are in the long term interest of the business continuing. I do not share this belief.
I think you have painted yourself in to a me vs the rest of the site paradigm. There are a rake of small business owners on this site you do not have a monopoly on that perspective..
OTOH It could be said that there is a over dogmatic use of anti-capitalistic theories from time to time but this usually arises out of some equally dogmatic confrontation
Yair . . . Bloody Hell! There are some gormless stupid comments here and from my experience Delusional is spot on.
If you have never run a business you just can't understand.
Yeah there are some poor downtrodden workers But the average sixpack cannot get it through his/her head that for a job to exist he/she has to make some profit for the boss.
Some years when farming and paying the minimum seventeen bucks an hour there was only two dollars fifty an hour left after expenses for the wife and me . . . and we take all the risks with the crop, we do the paperwork, we pick the "workers" up in town because thier car is broken and even after a fortnights training the out put per worker is less than fifty percent of what we could do ourselves.
I won't start on labour I employed in earthmoving/engineering/slipways or I'll realy start to rant!
That statement could just as easily be uttered by someone operating an overseas sweatshop and says nothing about ethics, etc..
Less than minimum wage for all your true partners in the co-op then.
I will offer benefit of doubt that we at least share some ethical/moral concerns, and how, fundamentally, the system within which we all toil is rigged against pretty much everything/everyone anyway.
Since I have no idea what you produce, I don't see how it is possible to make much of a judgment or any recommendations. There is a cooperative in California called Alvarado Bakery which makes organic bread. I used to buy from them when I lived in California and I still buy from them here in Colorado even though they are more expensive than their competitors. I buy the bread because it seems to me to be a better product than its competitors. But it also helps that I like their business model. They pay extremely well for a bread maker and they have very little differentiation in pay between the workers and top management. One of my biggest gripes about big corporations is the obscene ration between top management salaries and line workers.
This example may have no relevance to what you do so as I say I am not in a position to judge what you should be doing one way or another.
In your particular situation, it is apparent that you are pretty much forced to charge near the market price and you personally are not getting rich from all this. The only obvious piece of advice would be to fire the worker in question if he is not performing adequately.
Part of the key to making the big bucks, it seems to me, is the ability to differentiate your product. The most obvious example is Apple.
The key question is what would happen if a higher minimum wage were legislated. All your competitors would have to raise their wages if below the new minimum so no one would have a particular advantage. Presumably, prices would rise somewhat but that seems like it would be worth it to society as a whole. Again, however, this is a rather abstract discussion and we do not really know what would happen to your particular situation.
The other issue is outsourcing which is where the corporations have the worker by the cojones. Try to get a higher wage and they simply ship your job overseas. That calls into question how much we really want a so called free market.
There are clearly examples of cooperative businesses where the employees appear to care about the long term future because they profit from that future. However, I do not know why that wouldn't be true of your business since I don't know what it is.
Without ethics, upholding natural rights and equality and so forth, there is no real economy, but a glorified "elite game", masquerading as an economy-- a game of power and acquisition.
A dearth of the aforementioned, simply ratchets open the divide/social strata (among other effects) over time until the elite gaming is no longer viable. False/Lopsided profit over people, over Earth.
(What was Chavez doing anyway? Redistributing land? Trying to reduce poverty?)
What many, especially these days, are calling for is a maturing of the species. This globalization/centralized nation-state oligarchic system that upholds the private acquisition of land and resources as rewards/profit is a kid's game and worse.
(What did Proudhon say? Property is theft?)
While there is an ethical component to this argument, I think that one needs to take the capitalist argument head on. From my economics courses, the basic argument was that capitalism is superior with respect to overall productivity. That may very well be true but of course this does not deal with the issue of providing people a living or better wage. What good is productivity if you do not get to benefit from the fruit of your labors. Productivity has gone way up but wages are stagnant. To that extent, capitalism is a failure. It is a failure, that is, if you care about other things besides productivity.
But I would use a different argument. Emphasis on productivity is obsolete since it it our amazing productivity which is contributing to the potentially fatal degradation of the planet, including the air, water, resources, and climate. Increased productivity has become an argument against pure capitalism not an argument for it.
Agreed and well-put. But what does productivity even mean? What productivity? The whole game is bent on destruction.
Federal Government Pay vs. Private Sector Pay
And the Heritage Society reports that overall Federal employee compensation is 30% - 85% higher than the private sector (consider the source). With Mother Jones and Heritage Society both reporting that Federal workers are getting significantly higher compensation than private sector workers (at least until one has a PhD or other professional degree), it's pretty clear that govt. takes care of it's own. It would be interesting to include govt. wages in charts 3 and 4.
Our local government recently gave themselves a chunky little raise, saying they haven't had a raise in three years (welcome to the real world). There was some outcry, but I think most folks decided it isn't wise to fight city hall. I don't begrudge govt. workers making a reasonable living, but understand that these imbalances can become problematic. Also, when government scales back on the number of people it employs, the private sector suffers.
Chris Martenson gives us a basic lesson on how these metrics have been manipulated over time in his Crash Course. See chapter 16; "Fuzzy Numbers".
The big difference between public sector and private sector workers is benefits, especially pensions. Defined benefit pensions are the norm in the public sector whereas they have become practically non-existent in the private sector. Even those private sector firms that still have defined benefit plans are likely now providing a defined contribution plan to new employees. I doubt you could find a single defined benefit plan that is not seriously underfunded to meet future liabilities and taxpayers will be on the hook to ensure that these benefits are payed out.
The other big ticket item in the US would be health care. Most if not all public sector workers get good health care whereas that is much more variable in the private sector.
The GELM (Government Export Land Model)
Let's think of local and state (provincial), and for that matter, national governments as being similar to oil exporting countries, in that they consume a percentage of tax revenues and net debt infusions, in order to pay current benefits to employees and operating expenses and to pay current and future retirement/health benefits.
And let's just really focus on current and future retirement benefits.
As Michael Lewis noted in his recent book, "Boomerang," a lot of local governments, especially in California, are on track to consist of little more than a small staff that collects taxes and forwards virtually all tax revenue to retirees. And of course, most public pension systems are assuming a (highly unrealistic) estimate of 7% to 8% on future annual returns. Of course, the lower the actual investment return, the larger the unfunded pension obligation.
In any case, if we assume flat to declining tax revenue, combined with rising retirement obligations (especially as investment returns continue to disappoint), it seems to me that the net result would be an accelerating rate of decline in services provided to the taxpayers, perhaps even as governments try (probably) unsuccessfully to materially raise tax revenue, by raising tax rates.
From an Amazon review of "Boomerang"
One wonders how much these un/underfunded liabilities are being factored into growth projections. Pardon the worn out phrase, but robbing Peter to Pay Paul (as in raising taxes, or borrowing - robbing future Peters) doesn't create wealth, it just moves it around. Throw in a little financial entropy, it becomes a net loss. My sister is almost totally dependent on her State pension, which she says is being very well managed. I haven't burst her bubble yet by explaining that a large portion of her pension is tied up in vapor capital investments (CDOs, derivatives, MBSs, etc.) and has been leveraged many times over. No Messiah will come along to feed the masses with the loaf of bread that actually exists.
Not nearly enough chairs when the music stops, which is why they have to keep playing the same song over and over. This reality applies to virtually everything our civilization (such as it is) depends on to stay afloat. CELM (civilizational export land model), soon to have no buyers or sellers?
I expect to see something like a Civil Service Civil War, between a dwindling number of taxpayers--furious at rising tax rates and declining services--and civil servants demanding the retirement benefits that they were promised.
Also, I think that we are seeing a kind of spreading political paralysis, in the US, Greece, Cyprus, etc., as politicians, faced with having to choose among an array of bad choices, elect not to make any choices.
Hi WT,
To put things into prospective, if you take the Federal Budget and divide it by 100 million, it comes out like a family budget:
$167K mortgage (instead of $16.7T in debt)
38K in spending
22K in income (tax collected)
$3.85K argument and none of that amount was cut.
As a prospective pensioner and potential Social Security recipient, I am not expecting this to end well.
Also there is anywhere from an estimated 4 to 10T of fraud on the Federal books. That's $2 to $5 for every tax dollar collected. Just ask yourself: How much did I pay in income tax? and then multiply it by 2 to 5. I think felony fraud in most states is around $500 and no one has gone to jail.
hello peter
so for the UK ( figures from Government web site and Institute Of Fiscal Studies)
677 billion pounds in spending
592 billion pounds income ( taxes collected )
1.16 trillion pounds in debt
62 million in uk
311 million USA so we have about a 1/5 your population so devide by 20million
58K mortgage
34K in spending
30K in income ( tax collected)
and adjust for exchange rate of 1.52 dollars to the pound and we get
$88K mortgage
$52K in spending
$46K in income ( taxes)
back of a fag packet calculation but interesting none the less
Forbin
I wrote a post specifically on the government funding shortfall, that I don't think I ever submitted to TOD. It is Understanding our oil related fiscal cliff. I agree that the situation is essentially unfixable.
Gail: doesn't the situation self correct when the government in question goes bankrupt (defaults on their debt). At that point, it becomes impossible to borrow, and yet there could be sufficient income to pay expenses, since interest and debt is such a huge part of those. In fact, taxes might even be able to drop, so long as the government/people do not go wild and start a war or something.
In fact, a massive debt unwind is something that is predictable in our near future, IMHO.
Craig
The super-low interest rates that allow some parts of the economy to behave almost as normal (real estate, government debt, stock market prices) have the effect of hurting pension plans very badly. The robbing Peter to pay Paul leaves dislocations in other parts of the economy. I agree that there won't be enough chairs when the music stops.
The point being that there is no free lunch. And, every action tends to have a corresponding unanticipated reaction is some other direction, in economics, just as in physics. It is difficult to comprehend how many fewer chairs there may be when this thing winds down. Also difficult to predict who might be sitting in them, and why (how to prepare for a likely hard landing).
Craig
Yes but without real estate, government debt and stock market prices there is no pension...I don't understand when some people talk about collapse it sounds like it is going to happen to everyone but them....I have often heard older people say they are sad for younger generations looking for work etc...as if they are insulated from all the problems. There are a lot of different scenarios but pensions could stop, medicare payments could stop, 401ks could disappear....every day we have BAU it makes this crash worse.
I tend to look for the simplification:
Would you agree that in essence the whole piece you write there is a surrogate for EROEI. Basically EROEI impacts the discretionary spending power of the consumer base that the "head" is trying to sell too?
the whole phenomena of declining spending power is exactly what one would expect if the energy return on fossil fuels falls.
As time passes the reality or even simplistic enormity is or has become clear(er).
The government sector is increasingly unsustainable. It is caught in the middle between lower ability to collect taxes (from wage earners who are earning less, and from companies that are increasingly offshoring their wages and profits) and a need to pay all kinds of things besides wages (including unemployment to the many unemployed, and subsidies to preferred energy sources). And of course, the "true cost" of government pensions has not really been determined. Even if employees are laid off, I would expect many would be eligible for retirement benefits at a relatively young age.
The thing about pensions, and this is particularly relevant to state financed pensions, is that most of the money paid returns to the economy and so mostly isn't lost.
Pensioners spend the money they get, on food, heating, clothes, transport, and everything else, so this money returns to the taxpayer in other forms. If the pensioners save and leave the money to family and friends, then it will still largely return to the economy, later.
Certainly, imported energy and foreign travel 'exports' some money, as do imported essentials, but essentially the pension money comes home.
Rich pensioners may of course buy properties abroad and even live there, so taking money out, but they are a small percentage and largely not 'state' pensioners.
What I am saying is that most pension money isn't lost, it just returns to the economy in different forms. Entropy was mentioned I noticed.
"What I am saying is that most pension money isn't lost, it just returns to the economy in different forms."
Only if that money actually exists and gets paid out. That was my point, in that many pension funds include vapor capital that never will be returned to the economy, because it never actually existed other than as derivatives and other "creative financial instuments". Expected future pension fund payouts based on unrealistic growth estimates are going to disappoint a lot of future pensioners, and overall growth projections based on the realization of these moneys returning to the economy are simply financial pipe dreams. Besides, most of this money is already flowing through the economy, such as it is.
I totally agree. its the corny old adage of growth paradigm applies something physical has to generate more e-con-o-me.
One thing that is interesting is that most large private sector employers used to have defined benefit pension plans and other retiree benefits that were 100% employer funded. Now, even if one is fortunate enough to still have a defined benefit pension plan, one is paying ever increasing premiums and still worry about underfunding.
We seem to be looking at a transition from a situation where most people can retire at 65 or earlier with a relatively high level of affluence, due to good pensions, medical coverage and valuable assets, to one where hardly anyone can afford to retire.
At the same time when very few can afford to retire, very few new jobs are being added to the economy. So if the older folks don't retire, the young people don't have jobs.
As a side benefit, companies hiring older workers (post 65) have lower health care expenses since medicare is their primary provider. As more and more find themselves with inadequate retirement, they will continue working, either delaying or offsetting Social Security benefits; this is a direct benefit to the government and seldom accounted for in projected deficits.
The older people, strangely, may find themselves supporting their out of work children. Multi-generational households are already increasing, and that trend can only be expected to continue.
http://money.cnn.com/2012/04/03/real_estate/multi-generation-households/...
Craig
Ran across this just this morning.
http://www.usatoday.com/story/money/personalfinance/2013/03/21/census-ho...
"...drums keep pounding rhythms to the brain.
And the beat goes on, ..."
Craig
I would be leery about using statistics from a "think tank" to assess these sorts of issues. There is almost certainly a political agenda involved and it is apt to be an ugly one. There are many politicians and interest groups that have become adept at selecting groups and manufacturing public outrage about self-serving elites as a diversion while they look after their own interests. Most of us are acutely aware of the nonsense about how climate scientists are conspiring to manufacture an imaginary crisis so they can get big grants while steering freedom loving Americans into slavery under UN imposed socialism, or, how in Canada, cabinet ministers denounce environmentalists as "terrorists".
The real issue is how economies that are largely based on services, independently of whether these are provided by the public or private sectors, can work, or even survive.
The chart is from Mother Jones, pretty much the opposite of Heartland. Both showing the same thing, if to a different degree. And as I said, I don't begrudge govt. workers being paid a fair wage, just concerned about the effects of any growing imbalance between the public and private sectors. And please, never mistake me for a neocon ;-/
What's worse is that with (federal) government contractors you're not getting the government you're paying for...
http://www.nytimes.com/2011/09/13/us/13contractor.html?_r=0
So taxes are going to the profits of big corporations - and not properly recycled back into the economy through employee wages. If the government were to directly employ those who are now working under contract, often side-by-side with government employees, and cut out the contractors overhead there would be significant savings.
If you're not familiar...the contract agency gets paid and they pay the contract worker some amount of that - the difference is skimmed off as contract agency profit. What generally happens is that the contract worker makes less than the federal worker, doing the same job right beside him/her - though it looks like a savings on the face, when you add what's being paid to the worker plus what the agency is skimming off - the contractor costs more.
http://www.pogo.org/our-work/reports/2011/co-gp-20110913.html
Since there's been such a push to go to contracting because of its "benefits" - what you also have is a few government "handlers" overseeing a sea of contract workers. The untrained eye would see only government employees because what they do is indistinguishable from that of the government workers beside them...but the trained eye sees the difference, knows the contract employees are getting paid less (for the same work) and represent a sea of profit for the contract agency. You're not getting the government that you're paying for.
I am a unionized IT worker working for a publicly funded university. My union consists primarily of female administrative staff. I am serving on a committee that is developing a new job evaluation system for the union. I am the only IT worker and the only male on the committee.
I know from my experience in the IT field that there is a tremendous variation in capability among individual IT workers. A particular project or problem may be easily solved by highly skilled IT workers but at the same time be unsolvable regardless of the amount of time expended by people of lesser ability. So will the new job evaluation system recognize this wide variation in ability? Well there is virtually no chance of that happening. This is simply the way unions work -- they are much more focused on providing good pay and benefits to those with low or average skill levels. No union will ever properly recognize the most skilled workers. In our workplace, if the union pay scale is too low to attract a highly qualified individual the employer will either hire a contract employee or they will side step the union by placing the employee into a management position even though they may not be managing anyone.
Not all contract employees hired by a government will be there because they have superior skills. However, some percentage of them will be and it is entirely justifiable that they are making more money than the average government employee.
I worked as a scientist for nearly 35 years in a government R&D organization. In my work I frequently had dealings with contractors. There were a few stars, but there were also many dim bulbs. One of the most striking things was that many of the larger contractors, some of whom you would recognize instantly, employed surprisingly mediocre staff. I often saw technical proposals/designs that had fundamental flaws and would never work without major changes (and the contractor. Not only were we paying serious money for this shoddy work, but I had the further frustration that my managers had difficulty believing that a well known company could possibly be so inept,
As for government compensation levels, I can remember long periods where we had to work really hard to find competent hires - the government was not seen as a desirable work environment for scientists and engineers. In recent years, this certainly changed - I saw people with graduate electrical engineering degrees AND industrial experience applying for entry level technologist positions. This probably reflected the demise of large high technology companies in the area; there certainly hadn't been any significant improvements in compensation. Perhaps it was indicative of a general reduction in the stability of the available employment.
I worked for a short period for a large government contractor. There was a lot of discussion of contracts, projects, and project management. This was normally phrased in terms of how many "resources" would be needed for each sub-project or task, with relatively little discussion of the skills needed or the availability of specific talents needed to be successful in completing the project.
A fair amount of management in the firm were ex-military officers. Perhaps the thinking was in terms of how many companies are required in order to take an objective. That's probably not the way to run IT projects. When I hear of new government organizations being set up to fight "cyberwar", I'm really dubious about whether anything useful will be done.
I had the experience of advising my management that a particular employee did not have the ability/knowledge to do a specific task and, in return, receiving a stern lecture on how that employee could certainly do that task because it said so in his job description. I did not make that mistake a second time. Aside from this, there was the curious situation where (relatively) recently graduated engineers were hired to do project management and technologists were hired to do engineering. While some of the technologists were excellent, it was a nevertheless a peculiar situation that everyone else seemed to take for granted. I have a vivid recollection of working on a schematic when my manager came by; he gave me a nasty look and pointedly said "You're overqualified for that!" and abruptly departed in a an obviously annoyed state.
In general, large organizations tend to have HR processes and cultures that can lead to perverse situations.
I thought of your comments when reading the following article from the satirical newspaper The Onion: Epic Saga of Employee's Ineptitude Passed Down Through Generations of Coworkers.
I've had interviews with a few government (US state, county and city) organizations for an engineering position: The experience makes me wonder about the quality of the organizations.
Governments, for sure, have their problems. But they don't have a monopoly on stupidity or incompetence (or inability to deal with it) - there is plenty to go around. At my first "real" summer job, I worked in an office of a private sector organization. I recall the staff discussing how a certain senior manager had worked in the organization for many years and during this time, had held various positions, all of which seemed to have been created as sinecures. In no case, did any of these positions exist before or after he held them. I later had a co-op job in a semiconductor company that had been spun off from a telecom company and was still half owned by the telecom company). If I recall correctly, the CEO apparently was a former mining executive (i.e., no expertise or experience in the semiconductor business) and, moreover, insisted on setting his office up in a city that was a two hour drive to get to (note that this was long before the advent of the internet, cell phones. or even PCs). This venture only lasted a few years.
The "lateral arabesque" -- movement of an incompetent upper manager to a position with a longer title and less responsiblity. This leads to upper management ranks filled with staff positions that have no real function.
The fact that contractors make more money than the regular employees is not solely a government thing. In private industry it is true as well. We employ several groups of contractors.
Why do we not hire our own in-house talent? Because when the job is over, or when the economic situation goes down, you can tell the contractor goodbye. No fuss, no muss. Also, in some specialties we don't have enough need for that experience to keep someone consistently busy. As long as we can get the specialists when we need them we are content.
So since the contractor does not have a guaranteed work load, they charge more per hour of time to make up for the risk of slack periods.
Plus the contractor has to pay the equivalent of the employer's share of social security and medicare taxes, as well as make up for any other benefits that an employer would pay all or part of, like health insurance, disability insurance, etc. But yes, a contractor has to charge more than the fully loaded salary of a full time employee in order to compensate for "on the beach" time between jobs. Contractors may also pay intermediary firms to help find work, process the contracts, do the legal work, etc. Some companies that use contractors require that they come through selected intermediary firms which keep the companies out of legal trouble with the state, IRS, etc.
In Canada at least, it used to be that being a contractor had the attraction that there were possibilities for taking advantage of certain tax breaks that were not available to regular employees. However, Revenue Canada has really clamped down on this situation; there are now stringent criteria that have to be satisfied, one of which is that there has to be a number of different clients.
Also, employers apparently have the complication that they may be on the hook for tax liabilities if it is determined that "contractor" staff are actually employees. I recall that, in the last few years I worked in the federal government,whenever we went through the contracting process, there was some substantial paperwork that had to be filled out concerning the issue of whether an employer-employee relationship would exist. Supposedly, contractors were supposed to provide their own computers; of course, from the computer security perspective, this was the last thing that IT wanted.
I've wondered a bit about how the statistics that are published for incomes take into account the mix of different work circumstances. In Canada the published numbers generally seem to show an upward trend which I have often found difficult to understand. High salaries in the oil patch might partly explain this, but I suspect that it could also be that situations where people are switched/forced to contractor status show up positively because they are receiving a higher immediate income, without the loss in benefits being fully considered.
I should probably have been a bit more clear. There are definitely certain situations, particularly "one-and-done" special skills tasks, where contracting the work out makes sense.
The thing is...the federal government hires its basic workforce now through contracting. I'm talking about the mundane day-to-day operations. Whenever a contract is re-bid and another contractor "wins" the contract - nearly 100% of the time it's the exact same people doing the exact same work...the people already working just work for "contractor B" instead of "contractor A" - and nothing changes.
Imagine your workplace for a moment and assign the status of "government employed" to all of your supervisory positions. Now for all of the rest of the building, randomly make 10% "government employed" and 90% "contractor A." In three to five years change the name of "contractor A" to "B" - but don't change the people. In another three to five years change to "contractor C" - but don't change the people. The reason you don't change the people is because they're your basic workforce...unless something catastrophic happened you wouldn't want to get rid of or replace 90% of your people in one day - they're the ones you trained to do the work and know what they're doing (because they've been doing it for you for years)! During this whole time the 10% who are "government" keep doing their job (the same job as the other 90%) without changing their name every 5 years and though they get paid more on an individual basis, they cost you less overall because you're not paying the overhead to the contractor.
As a former government contractor who then moved into a federal slot- doing the same thing, in the same office, I can attest to this. However, there is one big factor not mentioned: politics. First, by transitioning to contractors, the pols could claim they were shrinking the federal workforce- because those jobs were, and are, off the books. Secondly, the gov contracting quickly became a massive profit center for some well connected capital firms. This plays into two mantras of the right: the free market can do anything better then government, and, whenever possible, transfer public dollars to private pockets. A fed GS slot costs about 1.28 to 1.45 times more than salary- ie, overhead is 28 to 45%, depending on benefits. The last contractor (who got so greedy they were dumped) started at 1.8 and ended up at a 2.2 multiplier.
I read that government workers used to make less that the private sector, but they had the benefit of a great pension with retirement at 55 and indexed to inflation, to make up for it. Now they make as much or more and still have the pension. In fact, the pensions have gotten sweeter and sweeter. And I believe that is from the fact that the people determining the pensions also get the pensions. Or at least the government management determines the pensions of government workers. And the higher the pensions of government workers, the higher the pensions of government management, regardless of who is awarding the management pensions.
Long ago I watched the US bridge wages with credit. The turning point in my old mind is 1955 when, as I remember, General Motors started loaning money to buy it's cars. Didn't have to go to the local bank anymore and credit got steadily easier from then on. Years later I saw an ad reading "buy a room of furniture, no money down and no payments for a yr" and I knew we were on a very slippery slope. Eventually one could buy a house if they were breathing, didn't have a job and no savings. Wages weren't budging but credit was ballooning. Few saw a problem with this. Now we have an economy based on everyone being in debt to the maximum level. And we prattle on like a bunch of first graders whether this is a problem or not. On and on we wonder, what is causing the problem? Very simple to me but, apparently, far more complicated to minds better than mine: We're spending more than we make and doing it at an escalating rate. I see a headline this morning: Should we pay down the debt or grow the economy. Guess what the answer will be? Endless debates about how far in debt can we go with endless rationalizations re it's THE way to go and we'll borrow more.
I'm retired and living on Social Security. Everything I have is paid for. Have an older truck, motorcycle, boat, camper, etc that I wrench on myself just as I have done all my life. I saw debt slavery 30 yrs ago. People look at my boat, 24 footer, and can't believe how cheap I bought it. I got it cheap because nobody wants that old thing. So I follow along behind a society endlessly debating debt while overspending every day.
Zeke, I'm about 40 years behind you but for me, the whole credit bubble came into focus in the mid nineties when I would see average wage earning family guys pull into the gas station on Friday afternoon with $100,000 worth of tow vehicle, camper and ski boat ready to blow even more money on a weekend at the lake.
Thanks for your perspective! The number seem to show the same thing.
I understand that money conflicts are one of the big reasons behind divorce. If people would stay away from debt, and live within their incomes, they would have a lot fewer problems.
Do you think it can stop before everyone finds themselves paying all they make to their owners? At which point, slavery will have again become the order of the day.
Craig
There was a long time when population was essentially limited by resources. This would seem to mean that a large share of the population had virtually nothing beyond what it took to support minimal subsistence.
Prior to the explosion in population that took place with fossil fuels, what seems to have happened is an increase in resources led to a larger population (more babies surviving to maturity, perhaps). There wasn't much of a rise in standard of living until the fossil fuel era, based on Real GDP per Capita estimates of Angus Maddison.
...and indeed a good half of the earth's present population still lives in those conditions.. and after this FF-powered bonanza sputters out and it crashes, it will again stabilize in the same regime (at a much lower total population level).
Correlation is not causation but I will grant you that higher energy prices should have a negative impact on wages and GDP.
It is still true, however, that GDP is holding up better than wages and the U.S. has tremendous inequality which is reflected in the GDP vs wages occurs. Those at the bottom are getting a decreasing share of overall GDP. Those at the top are doing better than ever, for now.
As you say,companies are addressing the economic problems by exporting jobs and generally keeping wages down. The question is, how long can they shed jobs and keep wages down without this having an impact on overall GDP and their bottom lines. If things cannot be squeezed much more, it will be GDPs turn to start heading down in line with wages.
The basic question that arises is that how do we share the economic pie which may have reached limits to growth. In a steady state economy, one can no longer promise trickle down economics. (not that it ever made much sense). I think it is imperative that income be redistributed but obviously there is a significant set of our population that does not share that perspective.
Meanwhile, the stock market continues to set new records in the face of the basic facts that you have laid out. To the extent that is based on profits, at a certain point, profit related cost reduction has to stop. When that stops, I clearly don't know based on my investment behavior over the last few years.
But I wonder how much of GDP "growth" in developed net oil importing countries like the US is a function of deficit spending, funded by real creditors and by accommodative central banks.
GNE = Global Net Exports, Top 33 net exports in 2005, BP + EIA data, total petroleum liquids
CNI = Chindia's Net Imports (China + India), BP
The US still has massive amounts of cheap energy, when compared with most other OECD nations. You are (temporarily) drowning in natural gas, and have enough coal to fry the planet. You are producing enough oil to meet the average (non US) OECD per capita consumption. You have massive food surplaces and can afford to burn huge amounts of corn in your hideously inefficient vehicles.
If you cannot manage your economy on that bonanza then you need to fire your economists.
If you want to see the limits to growth in action come to Greece or Spain.
[edit]
Did I mention your potential for renewable energy production, especially PV, or your world class hydro electric supply?
"If you cannot manage your economy on that bonanza then you need to fire your economists."
It's our previous investments and expectations that we can't manage. Americans simply aren't wired for contraction. Too many claims on static or declining resources is a relatively new reality, here in the US, and isn't something we believe in :-0
Adapt or die out.
But the scientific theory behind that is also rejected in quite a few parts of the US ;-)
But American middle-class wages have not kept up for a good while now? So is it more a matter that rhetoric has not caught up with reality?
(And this inequality thing keeps on going - not just in the USA. UK more unequal than for decades; perhaps a century. We still deliver 'public goods' here on a more equal basis than we do income or wealth, but not sure for how much longer. High incomes have gone stratospheric.)
The U.S. has been based on credit since the end of WWII. That being the case, we are based on growth because that is the only way you can pay off the debt.
Thanks to globalization and lots of debt, we may all get the opportunity to go down together. I agree, though, that countries with little resources are in many ways worse off. Japan's debt level is extreme.
I think a lot of our GDP is caused by deficit spending and artificially low interest rates. I have also heard the comment that higher oil prices lead to higher reported GDP--even though the quantity obtained is smaller. A person would think the inflation adjustment would sort of handle this, but the resource part of the economy seems to be "inflating," while the rest of the economy is closer to flat.
When there are not enough resources to go around, the instinct among primates (plus dogs and many other "k-selected" species) is toward hierarchical behavior. This means the ones at the bottom of the hierarchy will tend to be left out. You and I (who are likely near the bottom of the hierarchy) may want to fix this, but I expect it will be difficult to fix.
Gail, I have a problem with GDP concepts in general.
For instance, if Joe Homeowner pays $5,000 for levies around his home as floods are nearing, his purchases add $5K to the GDP. He does not get reimbursed by his insurance company.
His neighbor pays nothing to prepare, sustains a $50,000 loss (reimbursed by his insurer), and that adds $50K to GDP.
In our strange system, the second scenario is presumed to be 'better' b/c it helps to 'grow' the GDP. It would seem that we are better off in the second case than the first. And, yet... why?
It seems to me that a true conservative would rather keep and maintain real assets; we would rather pay more for goods that work well and last than less for goods that fail in use. And still the former state has lower GDP than the latter. And that is worse? Why?
If we, as a people, are so ingrained with cheap, we deserve the crappy pay we accept for the lousy work we perform.
My personal recommendation, and one that I urge on my children and grandchildren, is to find a trade the allows you to create value and is necessary to sustainable living. Farming (you should know enough to feed yourself and your family at the least), woodworking, leather work, sewing, smithing (black-smith, cooper, word-smith), medical care giving. We do not know how things will turn out, when or whether there will be a devastating crash. We need to be nimble and adaptable, and willing to adapt!
As for inflating, it seems to me that if inflation was possible it would be ongoing today in a wild fashion. It is deflation that is the bug-a-bear that seems to stand on our horizons, and IMO is responsible for preventing hyperinflation today.
Craig
Part of our problem now is that it takes an increasing amount of investment, just to extract the same amount of resources. In the case of water, it can mean drilling deeper wells, or using desalination instead of getting water from lakes or wells. All of this extra cost goes into reported GDP, even though the amount we get out at the higher price tends to be lower. My post related to this was Our Investment Sinkhole Problem.
Excellent point. Debt financing by every level of government as well as public and private utilities has done a great job of masking the fact that the marginal cost of providing additional services has been rising exponentially.
This is the hidden cost of population growth. Home builders and others who benefit from population growth reap the financial reward while the general public gets stuck with higher costs for the same or even reduced level of service.
I and Bill Mitchell, I'm sure, agree with Gail that household income, which primarily comes from wages, is the foundation of the economy.
Were I writing the article, my only disagreement with the pyramid is that it is upside down. The wage base of the economy has the
largest number of members, far larger than the number of businesses, or government agencies. So the peak of the pyramid should be up, and
again wage earners should occupy the broad bottom.
Given both the UK, where Gail lives, and the US, where I sojourn, are fiat currency issuing sovereigns, their sovereign governments do not
need to tax in order to spend. As a matter of fact, sovereign spending in both the UK/US is the source of all currency in circulation.
Taxes in both countries, actually help manage the amount of currency in circulation, and make the currency valuable, because by fiat, only
the sovereign's coin may be used to pay taxes.
Given the purchase of goods and services by the sovereign, using it's own freely created fiat currency, puts money into the hands of the public.
Given the source of funds in a fiat currency system does not affect spendability of those funds, which includes funds created out of thin air
by banks when they make loans, it matters not whether wages are paid by a company operating in the civil sector, a foreign country, a foreign spy agency, in individual who wants his car washed, grass cut, clothes laundered, children watched, or a government agency.
Wage income from whatever source, is spendable, period!
Of course, wages could be paid for sleeping, when the employee is supposed to be watching for intruding aircraft. Of course, the sleeping
general, if promoted, would increase his wages, and have more to spend. This is disfunctional. People die when such things happen.
We don't want that sort of thing.
So, it makes sense for sovereign currency issuers, to structure their job guarantee such that wages paid to JG workers, are minimum wages, with
minimum benefits, so JG workers will have incentive to migrate to the private sector, when opportunities come to fore.
In the meantime, JG workers can do things like the following:
1. Eradicate leafy spurge from grasslands in Montana
2. Eradicate roundup tolerant weeds in cotton fields in Georgia
3. Eradicate the woolly adelgid infestation in the fir forests of Appalacia
4. Insulate, install R-12, leak proof windows, and tyvek wrap housing
5. Plant trees in the national forests
6. Build 60 million passive solar homes as part of a conversion project from fossil fueled housing to passive solar heated/cooled housing
7. Fix the millions of bridges falling apart across the US
8. Double track and electrify 65,000 miles of class 1 Railway in the US
9. Electrify 150,000 miles of class 2 railway in the US
10. Construct 250,000 miles of light railway in the US
11. Care for the homeless
12. Teach children
13. Man previously volunteer fire stations
14. Walk beats as patrolmen
15. Install clivus mulstrom toilets in every bathroom in the US
16. Harvest fruits and vegetables, or grow gardens
17. Pursue their art, whether it be sculpture, photography, watercolors, oils, weaving, or architecture
18. Counsel the depressed.
19. Perform their reserve duty
20. Haul trash
I'm certain some neoclassical economist will shout in an attempt to drown my message through threats of imminent destruction of all and sundry
from inflation. Rubbish! If it's ok to funnel 15 trillion down the gaping hole of the megaBanks, a few hundred billion to put people to work
won't matter a dime.
Besides, with the JG we can eliminate Unemployment Compensation, Welfare, AFDC, SNAP, Medicaid, and other programs I forget.
AND...
If you really want to do something for the economy, you could triple social security payments to the elderly, to bring their purchasing power back to what it was 40 years ago. At that time, Social Security assured me that my pension would be $500/month. My apt rent was $75/month, gas
cost $0.30/gal, A new Buick Century Automobile cost $3,000, and as a starting teacher, I made $14,400 / year. Today, apts rent for $750/month,
gas costs $3.85/gal, a Buick costs $30,000, but my pension is not $5,000/month, and beginning teachers don't make $144,000 / year.
NeoClassical economists tell me that it should be this way, Rubbish! They are all paid by the big banksters, to fleece the body politic,
and are insulated from these issues.
So Gail, you're getting there...
INDY
"Given both the UK, where Gail lives..."
FWIW, Gail lives in the Atlanta area, unless she moved. Nice list though! I expect we're too far gone to ever get there. Maybe when oil was $20.
A different image that I put together gives a better idea of where the government is placed. It is more or less in the middle.
Thanks to globalization, businesses are increasingly not paying taxes to local governments. In fact, they don't even need to hire locally. Wage-earners find themselves in poor financial shape. The government finds itself in the middle, paying out increasing amounts to the unemployed, retirees, and others, at the same time it is paying out subsidies.
The US government can indeed print money, but that money doesn't make its way to wage-earners. Instead, it makes its way to inflated asset prices--stock and bond prices, for example. Even housing prices are now being inflated, according to one person in real estate I recently talked to. With the super-low interest rates available for borrowing, and the crummy yields available for investing, pension plans and other large investors are now buying up large numbers of distressed properties and renting them out. This is what is raising prices. In his view, these large investors are not considering the large amount of hands-on management that is needed to keep up with renters who often have recently defaulted on debt elsewhere. All of the money printing is likely leading to asset bubbles that will eventually burst, as all asset bubbles do.
Scoundrel! You put that EV picture under subsidies to get a rise out of me, didn't you? ;)
DrHousingBubble has been running a number of articles on the Fed pumping up housing, cash, and non-traditional investment buying:
I had 4 other good links lined up - but TOD BOT thinks I iz a spam. :( I highly recommend reading some of the articles over at DHB.
The Wall Street fascination with rentals: Is the big rush with investor buying locking up the supply of real estate? How retail buyers are priced out of the equation
The echo housing bubble across the United States – Rising home prices in the face of stagnant household incomes. How the Fed is manipulating the monthly payment to keep home prices inflated
Wall Street Landlords – REO-to-rental program designed to reduce shadow inventory by selling to big money investors. Yet the market is hungry for real estate inventory so why is the government helping banks again?
How the Fed is creating another speculative market for housing: Fed balance sheet now over $3 trillion and low interest rates are causing speculation in non-traditional markets
There was one where he analyzed what the ROR would be for these investors if they hired a property management firm to care for the rentals - IIRC it was 3%, which is better than a lot of investments are paying these days.
The employment percentage has been in long-term decline due to simple demographics -- aging baby boomers -- as the BLS data clearly shows:
* Participation rates are highest for age 25-34 and 35-44, slightly lower from 45-54, and much lower from 55-65.[1]
* Population in the 25-44 age bracket fell from 2000 to 2010, but increased sharply in the 45-54 and especially 55-65 brackets.[2]
As a result of these two facts, it was inevitable that the US's labour force participation rate (and, hence, employment rate) was going to fall between 2000 and 2010, and will continue to fall from 2010 to 2020.
[1] http://www.bls.gov/emp/ep_table_303.htm
[2] http://www.bls.gov/emp/ep_table_302.htm
"The employment percentage has been in long-term decline due to simple demographics..."
Seems I've read this somewhere...
The Coming Generational Storm
2030? It's happening now. I guess they didn't factor in peak oil, and I think we have a far more systemic predicament than simple demographics. There are plenty of folks 55-65 looking for work. They just aren't getting hired.
The people who forecast real GDP growth seem to be oblivious to the rise in the percentage employed in the past, and its fall in recent years. If it is a person's what a person does that contributes to GDP growth, shouldn't a big piece of past GDP growth be related to the growth in employment? And shouldn't future growth be a whole lot lower?
People are having fewer children now, meaning that fewer need to stay at home for taking care of children. There are still many who are looking for full time work, but only able to find part time work, and others who are "discouraged workers". It is hard to believe that the drop in employment is purely demographic.
The analysis should include the government. About 1/7 of workers are employed by the government. The government was about 18% of GDP. Despite the traditional practice of economists, government is now too big to handle as a perturbation to or a control subsystem for the economy, and it needs to be analysed as part of a single, tightly-coupled system.
GDP is only end-use consumption and it ignores economic transactions and payments in the supply chain that gets the goods or services to the consumer. If a hospital buys a scalpel it doesn't count. When the hospital charges the patient for the scalpel it does. Consequently, the volume of business transactions and business-to-business payments is much greater than the GDP. Indeed, personal income doesn't show up in GDP either until it results in a purchase of goods and services or assets.
Also: 40 Percent Of Americans Will Be Freelancers By 2020
See my chart in response to a comment above showing the role of the government in the middle.
The government is now absorbing many of the problems of other sectors of the economy. As layoffs from the government take place, it will adversely affect the unemployment rate and the needed tax level. Raising taxes will lead to consumers cutting back on discretionary spending, and more recession.
I am sure the change to freelancers will be pushed along by the requirement that businesses provide health insurance. Moving to freelancers is a way of pushing down wages. Not only does it cut back on health care, it cuts back on pension contributions, and the need to provide office space.
Another element that reduces wages or the number employed is the private sector attempting to increase efficiency (and thereby profits) through merger with competitors. As redundancy is eliminated, number of employees are reduced. The recent wave of mergers in the bellwether airline industry might be a sign of things to come.
This is particularly true for employees that fall into the "General and Administrative Expense" lines of account. Departments like HR, accounting, finance, regulatory affairs, public relations, information technology, marketing and sales, and general management are departments where redundancies can be eliminated through merger, either by mergers of like companies or by mergers with suppliers so that external transactions are converted to internal transactions with less overhead.
Obamacare is clearly going to accelerate the decline in percentage of adult Americans who are working. Although some of you are suspicious of the Heritage Foundation, here is Dick Morris' take on their analysis.
""It's worth remembering that President Obama decided not to let his new ObamaCare scheme take effect until 2014. At the time of its passage in 2010, it seemed politically wise to delay its implementation. Republicans won the election of 2010 and lost that of 2012. But the full impact of the new law will begin to become apparent in 2014 and the effect will be horrific, deeply damaging the Obama administration and the Democrats who backed it.
The main brunt of the impact will be on premiums for health insurance coverage. They will skyrocket in very short order. The Heritage Foundation estimates the increases by state. Here's a sample:
State Premiums Rise By Percentage
California 42-69%
Florida 61%
Georgia 61-100%
Illinois 61%
Michigan 35-63%
New Jersey 39%
North Carolina 61%
Ohio 55-106%
Pennsylvania 39%
Texas 35-63%
Virginia 75-82%
Why such draconian increases? Heritage ascribes it to two provisions of the new law.
The first restricts health insurers from charging any one age group more than three times the premium it charges any other one. This 3-1 ratio -- typically between the older, non-Medicare portion of the covered population and the young group -- is the brain child of the social planners. The actual figure is about 5-1 -- it costs about five times as much to insure older patients than younger ones. Because, obviously, companies are not going to cut the premiums for the older patients, they will increase them for the younger ones so they can meet the 3-1 ratio. That means big increases for younger families.
The second provision that pushes up premiums is the tendency of the new law to kill its customers with kindness by requiring all manner of illnesses and treatments to be covered, and covered generously. Mental health, dental care and such are all required in any policy. And the law restricts any effort by insurance companies to limit the utilization of these services. So the premiums will rise for everybody.
The result of this premium inflation will be that more and more employers will refuse to continue to cover their workers and will find it far cheaper to pay the penalties in the law than to underwrite the vastly more expensive policies. Tens of millions of Americans will lose their insurance and have to buy coverage from the insurance exchanges Obama is creating -- at a multiple of their current premium's cost. The ObamaCare subsidies are limited and will not begin to make up for the increased costs. And, to make matters worse, employers will be obliged to pay an annual $65 tax per employee to subsidize catastrophic coverage for the most expensive patients.
Obama's real goal, of course, is to destroy employment-related insurance and force everyone into the insurance exchanges. This will lay the basis for single-payer, government-funded, socialized medicine in the United States: his stated goal.
The political consequences of these premium increases are going to be horrific. Voters will realize how fraudulent Obama was in predicting average premium cuts of $2,500 per family. And the full dimensions of this misguided law will become apparent...".
http://us-mg6.mail.yahoo.com/neo/launch?.rand=c60hasali6dkf
While you may quibble with the numbers, they are a very likely indicator of the HUGE costs this program will be costing. At the age of 74, I will be less affected. But God help those in their 50s and60s who are approaching retirement and have this Damoclean Sword swinging over their employer's neck [If you work for the Fed, its no big deal !].
No real discussion about cutting the costs of healthcare by,, actually cutting the cost of healthcare. The lawyers and HCAs of America won't allow it. What we'll end up with is defacto economic triage; heck, we're already there. We'll be seeing battlefield style triage before it's over; "Leave'im in the waiting room long enough, maybe he'll go ahead and die. Be sure to clock out before midnight."
Very little healthcare expense goes to caring for average, mostly healthy people who get sick or injured, are treated, and who recover.
The vast majority of healthcare expense goes to:
- caring for premature or congentially defective infants,
- caring for patients with congenital defects, chronic illness, or unrepairable effects of accidents,
- caring for end-of-life patients who die prolonged deaths from expensive to treat conditions.
As a result, levelized health care premiums result in most people paying far more in premiums than they receive in benefits.
Show me the numbers, including knock-on costs. Compare these costs to other healthcare systems whose costs are much lower and overall results are better, then explain to me about who pays for what...
...oh, and I'd enjoy hearing your ideas about where this is all going.
Hear are some figures for end of life care:
How do you want to die?
Note that the 30% of Medicare did not include the out-of-pocket costs of dying patients and it was only for the last few months. If you extend the "before death" interval to 18 months and include deaths of patients not on Medicare, the figure I've seen is 25% of all medical costs occur in the last 18 months of life.
Obviously, if energy shortages cause an economic crisis, lots of people will live shorter lives. Life expectancy in the former Soviet Union decreased during its dissolution and their economic crisis.
"...the figure I've seen is 25% of all medical costs occur in the last 18 months of life."
Imagine that; there's a lot of profit in end-of-life care.
Seems we have a choice: near/end of life care for our elderly, or watching more ambulance chasers advertize on CNN and corporations taking care of shareholders and their own inflated incomes. Maybe others think our for-profit healthcare system promotes better healthcare, but it doesn't seem to be working out that way, especially for those left the with obscene bills. Personally, I think it's a sign of a sick society, and when my time comes, I'd much rather crawl out into the forest behind my home and die with some peace and dignity. I think, however, that's illegal in the US, certainly frowned upon.
There's a lot of expense in end-of-life care as well. Consider the modern medical center. It is usually sited on expensive real estate, and it is constructed to high standards. It is as good or better than the best Class A office space in the city. Inside the building are a wide array of equipment, mechanical systems, medical instruments, surgical instruments and apparatus. There are a vast number of supplies, most of which modern hygiene dictates be discarded after use. Imaging systems, monitors, measuring systems, etc. are readily available. Some of these, such as MRIs are highly complex apparatus, and their acquisition depends on a long chain of intermediate suppliers that extends back to suppliers of metals and energy. The same extensive supply chains apply to implantable devices and to pharmaceuticals. All this is overseen by an immense regulatory regime and paid for by the most complex insurance systems in the world. These require extensive IT systems simply to cope with the complexity and volume of business processes. Meanwhile, the insurance systems, public and private, shield the patient and their family from the true cost of care, so there is little incentive to resist the most agressive efforts to prolong life.
And you say that as if it were a bad thing...
Based on discussions had with many MDs who are personal friends, we will see universal medical care in the US being driven by demand from the doctors! Pharma and hospitals will hold on as long as they can to the present system.
Businesses may join when the discover that their costs would be lower (at present our med system is a huge disadvantage to international competition with corporations who do not have the medical cost to add to their pricing).
Craig
I notice that the WSJ today has an article titled, Health Insurers Warn on Premiums. (Type the name into Google to get it free.) It says:
It points out
Someone, somewhere has to pay for all of these subsidies. I expect that there will be overhead costs in getting these subsides transferred around as well.
I agree that the new healthcare program is likely to be a problem. Part of our high healthcare cost are related to the fact that our system encourages poor lifestyle choices--eating way too large portion sizes, eating way too much processed food and meat and too little vegetables and nuts, and not getting enough exercise. Part of it too, is that our healthcare system pays out way too much for individuals who are likely to die regardless, within the next year or so. Our healthcare system is also very much into using high priced gadgets. Once a doctors' office or hospital has such a gadget, there is a tendency to use it to excess, to pay for the gadget.
The US spending on Healthcare, even before this addition of coverage to more individuals, has been far in excess of those of other countries. See this chart from a report by the Commonwealth Fund.
According to a new report by the National Academy of Sciences the US does miserably when compared to other countries, when a person looks at actual health results:
The report summary does not highlight the finding that US mortality is 17th out of the 17th countries analyzed. (I discovered that reading a summary elsewhere.) If you download the report itself (free with registration), page 28 shows that the age-adjusted all-cause mortality rate in the United States is 504.9. The lowest is Japan at 349.3. Switzerland is second at 371.2. Australia is third at 378.0.
Life expectancy at birth in the US for males is 17th out of 17, and for Females is 16th out of 17. (Denmark is lower.) This is shown on page 39 of the report.
@ jinxedeabay:
Obama's real goal, of course, is to destroy employment-related insurance and force everyone into the insurance exchanges. This will lay the basis for single-payer, government-funded, socialized medicine in the United States: his stated goal.
I have been living under socialized healthcare for 60 years in Canada, starting in Saskatchewan where I was born and which was the first jurisdiction in North America to implement it. While eliminating overnight the tragedy of poor families who could not afford private medical insurance having to sell their homes to pay for private healthcare for their ill children or elders, Premier Tommy Douglas also ran 21 consecutive balanced budgets. Public medicare clearly did not bankrupt his province or later, the country when it went nation-wide in the mid-60s. It has benefitted me and my family, friends and colleagues more than anything else in the public realm. Try dealing with ALS or decades of long-term accute care for children under the constraints of private medicine and limited income.
It is not a perfect system and could be improved in many respects (especially when guaged with northern Europe standards), but when compared to the US private medical insurance industry it is painfully obvious that it is very affordable and less of a drain on the financial resources of a nation of wage earners on a per capita cost basis.
Moreover, the public healthcare system factors largely in the reasoning why many corporations locate to Canada. It frees them to offer limited extended health benefits packages only as supplemental to the core public insurance costs.
Isn't it a bit late to fight the last US election? Believe me, the rest of the world is tired of it.
My question is, where are all the "free market" people? I've heard the suggestion that prices for common procedures should be posted on a menu to the public, but where are the "free market" politicians passing the law that makes all prices public and highly visible?
Simply put, nobody wants to fix the real problems. I think you're totally wrong about Obamacare - it IS intended to separate healthcare from employment, but that's because fewer people get healthcare from their employer. It is a massive giveaway to insurers, NOT an bridge to government healthcare.
It's all about the money. If you think Obama wants ANYTHING "socialist", I'll ask you - when did he nationalize anything?
Any talk about healthcare costs that ignores the opaque and intentional hiding of costs from patients is a conversation not worth getting in.
Yes, if only Obama were a socialist we might have a single payer healthcare system. Obama made a deal with the insurance companies early on behind closed doors to ensure that there was not a chance in hell of even an option to have a single payer system. To be fair, however, it is not likely there would be any form of Obamacare without that deal.
"but where are the "free market" politicians passing the law that makes all prices public and highly visible?"
Bought and paid for by the health-industrial complex.
Karl Denniger points this out regularly on his blog. I really wouldn't mind trying out his fully-capitalist health care system, but it's not going to happen. Instead we have the most dishonest way of getting from here to single payer ever invented.
Unless that was part of the deal. Big Health was granted four to six years of all out looting before Medicare goes universal to avoid tanking another industry while the economy was already half-dead.
If you go to FRED and make some charts you'll see that:-
In summary, the reason why private sector wages are falling is because of changes in demand. People are demanding more from industries that have low wages and less from industries that have high wages. And some employers are using an improved bargaining position to reduce their wage bill.
Why haven't we felt the effects before now? In a way we have, but we didn't realise it. The rise in L&H and Healthcare employment was matched by the increasing proportion of women entering the workforce. By strange coincidence, those industries were traditionally "female". The women entering the workforce took the jobs, because some income is better than none. So there wasn't much grumbling and household incomes grew (although more slowly than they "should" have).
Female employment peaked in the late 1990s, but the shift in employment demand from "working with things" to "interactions with people" has continued. So now men are having to shift from thing-oriented full-time work to people-oriented part-time and casual work. They're not dealing with it too well.
* * *
China, and the developing world in general, may be a contributing factor. Michael Pettis has argued convincingly that China has deliberately suppressed its internal demand for the last three decades. As a result, instead of being a net importer, as a country in its stage of development theoretically should be, China has been a net exporter. Some other developing countries are too disorganised and/or too corrupt to have the internal demand that they "ought" to. So developing-country labor that is in the "global labor pool" is supplying demand in developed countries, rather than at home--there isn't any (or enough) demand in developing countries.
In other words, there are alternative explanations for depressed wages: supply and demand, for one. Wage depression is not evidence for Limits to Growth, and there's not necessarily a connection to high oil prices.
EDIT: For clarity, "Female employment peaked" should be "The female labor force participation rate, the percentage of working-age women who want to work, peaked".
an observation form here in the UK - If I wanted a hands on job I'll find it hard to get one because Manufacturing and the like is now done abroad
I can compete in the services sector against women who also want the same job and have been traditionally paid less.... maybe the female peak is because men are competeing with them for those job ?
Forbin
Just because there may be mitigating factors that help explain some aspects of the connection between Limits to Growth, high oil prices and depressed wages, it in no way invalidates the undeniable underlying connection.
BTW limits to growth directly affects supply and demand. When you have a glut in the supply of labor and decrease in demand for the products and services of that labor due to high oil prices and reduced availabity of discretionary income, what exactly do you suppose happens to wages?
You need to analyse the system as a whole and understand the feedback loops, once you do that the connection between the high price of oil being a major factor as a limiter of growth and therefore depressed wages, becomes rather obvious. To attempt to argue against it is to pretend that the fresh steaming pile of elephant dung in the middle of the living room doesn't necessarily indicate the presence of an elephant...
Whether or not you can explain things this way does not affect in any way the validity of what I am saying. "Thing" employment is more closely energy related, and more quickly moves to areas of the world with lower costs--both energy costs, and wages of employees--these wages are low because the workers use little energy themselves. There is an oversupply of potential workers for the remaining jobs, tending to hold wages down.
The percentage of females who want to work depends on a lot of things--the availability of good-paying jobs is obviously high on the list. When good-paying jobs are not available, they will leave the labor market--go back to school, for example.
I have been wondering about the relation with Fordism. Consider the situation one hundred years ago or so when mass production started. At that time, Henry Ford had the insight that keeping the wages of workers down means hurting the future profit. So he raised the salary. If I am correct, the end of (cheap) energy will mean not only the end of mass production, but also, as a corollary, the end of Fordism. In other words, it will in the future help profits even in Western societies if wages are kept low.
The reasoning is not that simple, I admit. To raise the salary means to lower current profits with the hope of gaining even more in the future, since your workers will be able to buy your products. That is Fordism. But now, with the end of mass production, raising the salary of your workers will probably not guarantee rising profits any longer, at least for most companies.
The fundamental difference between the era hundred years ago and now is that we are in a zero-sum game energetically. You cannot expand production without someone else having to cut back. You cannot move up the ladder without someone going down, and so on. This, I'm afraid, also means that the downward pressure is far stronger than in the last decades.
If one wants to avoid the excesses of this change, one needs to implement certain regulations. Free market will probably be desastrous. It works well when it does work, but I am not so sure that it will continue to work under these circumstances.
-- Marcus
PS: I have written more extensively on this here (unfortunately in German):
http://www.domokos-kracht.eu/marcus/
The idea that Henry Ford raised wages so that his company could benefit by selling his worker cars is mostly myth.
Henry Ford had a high turnover rate in employees, hiring 52,000 in 1913 to keep a workforce of 14,000. This was too high, even for a workforce performing simple tasks building a primitive product.
He raised compensation from $2.25 to $5.00/hour, partly wages and partly bonuses, but the increase also came with some intrusive strings attached regarding sobriety, home life, etc. His objective was clearly to get a more responsible and stable workforce.
Production in 1913 was 170,000 and in 1914, the year of the raise, was 202,000. Clearly, the added 32,000 vehicles were not all sold to employees.
The Story of Henry Ford's $5 a Day Wages: It's Not What You Think
The Assembly Line and the $5 Day - Background Reading
@Merrill. Thanks for the links. So the causality is different, as you say. Rather than attributing it to the genius of Henry Ford, it seems partly a forced move. Though it did have the effect people say, which is an important point, because this was later picked up as a rationale by trade unions why employers should grant them higher wages. It worked, but only for a while. Essentially, since the 90ies the rules of the game have changed dramatically for the West. The threat of going to China has done a great job in keeping wages down.
-- Marcus
This was just about at the start of WW I, and European orders for supplies began flooding the US. During 1873-1896, the US had been deflating at about 1.1% per annum, and during 1897-1914 it inflated at about 2.0%. During WW I, inflation became much higher. Various controls and production boards were put into place, the railways and the telecommunications systems were nationalized, and the economy was put on a war footing by the time the US actually entered the conflict. http://www.nber.org/digest/jan05/w10580.html
As a result, wages rose strongly in the industrial cities, such as Detroit. After the war, the economy slumped, materials costs dropped, etc. but the combination of decreasing material costs made cars cheaper, relative to the wages in Detroit, which were negotiated more and more by the auto unions.
The auto manufacturers had enough pricing power to pass on labor costs inflated by successive contracts so long as Detroit maintained an effective oligopoly of the market by consolidating all the US manufacturers into the "Big Three". This system of auto company oligopoly and UAW monopoly worked fine as long as there was no outside competition from foreign auto makers.
Marcus,
You make a good point about the end of Fordism. Also, that we are reaching a zero-sum game energetically. You have no-doubt seen my chart showing how world oil consumption has changed in recent years, for groupings of countries (FSU is Former Soviet Union):
Rather clearly, the countries that are having the most problem with recessionary forces are losing the contest for limited oil supplies.
I talk about the disastrous impacts of globalization on wealthy countries in Twelve Reasons Why Globalization is a huge problem. I have more articles on Our Finite World. Some of them are reprinted on TOD, but not all of them.
Nice website! I didn't notice a place for comments on your blog. If you want a blog that accepts comments, you might try a Wordpress blog. They are easy to set up, and essentially free of cost.
Yair . . . There is a thing going on in Asia about the labour/capital investment/oil thing I don't understand. I have mentioned it here before but it drew no comments.
In Laos there is a huge industrial/manufacturing precinct being established to utilise power from hydro on the Mekong . . . partly financed I believe with Russian money.
A young aquaintance of mine who is in the excavation business watched the goings on with interest . . . he was doing the backpack/bicycle thing and ended up in places where he probably shouldn't have been.
He reckoned his mouth was watering when he saw the kilometers of trenching that was going on in all that lovely red clay. What intregued him was there were two types of contractors/crews.
There were those much like his own with an eight to twelve ton track-hoe or tractor/loader back-hoe combinations . . . dozens of them, or others doing exactly the same work by hand.
The hand work crews would arrive twenty or thirty blokes in the back of a brand new dump-truck, they had their shovels, axes crowbars, generators to run power tools and trench dewatering pumps. . . the whole works and jerks . . . and the boss bloke had an electronic staff that was plugged into the onsite GPS
They looked well fed and happy had phones and music machines and little butane burners to boil up at lunch time. . .so what's going on, one contractor obviously would rather pay wages than machinery payments/breakdowns/fuel?
Or what?
Cheers
Gail – You’ve mentioned that while the very low interest rates have benefited some business sector it has also hurt pensions. But other damages also. I don’t tend to make risky investments, such as in the stock market…many don’t. So we’re left with fixed interest earnings which have obviously yielded little. I do know many folks who are heavily invested in the stock market that wouldn’t have that exposure if there were better fixed rates available. And thus, IMHO, just one more reason Wall Street loves the FED for supplying so many customers.
So while the MSM loves to tout the benefits to the housing market et al by the feds keeping rates low they tend to be silent on how much income from savings (pensions and otherwise). I’m hoping you can toss out a quick and dirty number: the income difference in the amount of money from the current low rates compared to a higher rate. But not those 8 -10% rates of long ago…say just 5%. I suspect that over the last 10 years (in 2002 CD’s and pass book rates were less than 1%) that the population has lost hundreds of $billions in revenue. Maybe more than a $trillion? That’s would represent a huge loss in purchasing power that has to effect economic growth. OTOH lower mortgage rates have left folks with more money in their pockets. But not everyone has a mortgage.
http://www.bankrate.com/brm/publ/passbkchart.asp)
Just hoping you can add some sense of scale to this dynamic.
That is a good question.
If we just look at Domestic Non-Financial Debt, according to the Federal Reserve, this amounted to $40 trillion dollars at December 31, 2012. If interest rates on this amount averaged 3% lower than the amount they would otherwise have been, the difference in interest payments would amount to $1.2 trillion dollars. The total wage payments of private industry (that is, non government) was $5.7 trillion dollars in 2012, according to BEA. Total US fossil fuel costs in 2011 amounted to 658 billion dollars based on EIA data.
In theory, interest rates are a big enough lever that they should more than make up for the drag on the economy of fossil fuel costs. The reason this doesn't really work is partly because of the Robbing Peter to Pay Paul problem you refer to. Folks who would be the beneficiaries of higher interest rates have less to spend. Insurance companies have to charge higher premiums. There may also be an issue of them not really giving you what you really need--a larger quantity of fossil fuels, at a cheap price.
Lower interest rates should add jobs, in several ways. They translate to more investment in marginally profitable endeavors, including oil extraction in areas that are barely profitable, so in that way increase employment somewhat. Low interest rates also allow people who couldn't otherwise afford to buy cars to buy a car, helping automobile sales. The fact that the economy is still doing miserably, even with all of the stimulus, makes one wonder what it would look like with normal interest rates.
Gail - Complex dynamic, eh? Even the question as to what are good results: lower rates allowed folks to buy more stuff but also increased their debt load. That didn't work too well for the housing/banking industry when the bust started a few years ago. And it doesn't look like cheap capex has helped Chesapeake too much given they've had to divest over $25 billion in assets to keep their doors open. Or go really big: US debt: what happens when if in a few years rates jump up to a whopping 5% and we have to refinance those many $trillions in govt debt at the higher rates.? I doubt the little bit of inflation we've had and whatever exchange advantage has happened will offset doubling the interest on $16+ trillion in debt.
Some folks don’t pay attention to how much of the budget goes to pay off just the interest and not the balance. And that one could view it as our borrowing money to pay that interest. Sorta like using your Visa to make the minimum payment on you Master Card. Eventually that didn’t work out very well for my brother who lost anything. LOL.
IMO rates can't rise w/o causing major havoc and that's why the fed is keeping them low. I keep reading how asia is always booming but if this was truly so then money would shift to higher yields over there thus forcing interest rates up here. So the fed can only keep them low because there is no good alternative which indicates the world economy sucks. I just read that when they do start to rise people will go on a borrowing /spending spree boosting the economy and market - maybe so but i'm not too sure.
Peter schiff i think said like savings is the only real investment which is kinda hard to understand when assets are inflating, but the busts help increase that understanding. So a measly 5% would give 50%+ over a decade as opposed to a wipe out WS gamble. THe fed has caused immense damage by coaxing risky plays and normalized rates -though painful- would be best.
The peanut sized cyprus mess could be a trigger. I'm surprised runs havent started in the PIGS.
More than ever, people are invested into high risk investments to squeeze out a return to make it possible for them to survive or have a decent life during retirement. This includes both stocks and high risk bonds. High risk bonds are at an all time high in value and an all time low in return. We may be in a double bubble so that the next crash will be a wipeout worse than we have ever seen. Whether it will be worse than the great depression, I do not know.
I think you might be right a wipeout that we have never seen...I just wish people would realize that it will touch all of us---then and only then would we have some chance to avert this crash...but as it stands now even people who see the crash coming think it won't touch them..otherwise the snowball would be picking more snow up...otherwise there is just us crazy doomers and our tinfoil hats saying the sky is going to fall.
Interesting discussions of medical care above. Insurance and of life issues are particularly important. End of life care is not always profitable. With prepaid or taxpayer funded medical care early death may be profitable. Kaiser Permanente and certain government entities have been accused of killing patients. I do not know if this is true but certainly patient dumping has been popular with private hospitals. In the long run, preventive medicine does not save money. It can do no more than postpone mortality and add to the social security/medicare burden.
----In 1948 I was considering pre-med among other things. My family doctor advised me not to go into medicine - said it was certain to be socialized. It is my understanding that socialized medicine came within one or two votes in the US. The National Health Service in England did start in 1948. I ignored my doctor's advice. Money didn't seem to important at that time and the scientific aspect of a medical education was a huge draw.
--Medicine was so simple in 1948. There were few drugs for cancer and relatively few antibiotics. X-ray (now imaging) technology was primitive I did summer volunteer work at Amarillo's largest hospital in 1948, helping the x-ray/EKG technician. The hospital had only one technician at that time. Heart transplants were unthinkable. Bionic man had not been invented. It is interesting that the hip replacement was developed by John Charnley in England before malpractice judgements became an issue.
--Single payer may replace the disastrous insurance/medicaid/medicare industry but I do not believe that there will be sufficient energy, material or manpower to provide free high-tech medical care for all.
Robert Wilson MD Radiology ret.
Then maybe, depending on definitions, etc., it's the wrong kind of economy and/or backbone, and doomed to failure.
"The exchange of money and debt for work traces back to the disintegration of the 'playful' work in hunter-gatherer gift economies and the establishment of prostitution as a 'fundamental feature of human civilization'."
~ Wikipedia
"According to Noam Chomsky, analysis of the psychological implications of wage slavery goes back to the Enlightenment era. In his 1791 book On the Limits of State Action, classical liberal thinker Wilhelm von Humboldt explained how 'whatever does not spring from a man's free choice, or is only the result of instruction and guidance, does not enter into his very nature; he does not perform it with truly human energies, but merely with mechanical exactness'... Both the Milgram and Stanford experiments have been found useful in the psychological study of wage-based workplace relations."
~ Wikipedia
Running with my previous TOD comments on the concept, I suggest that the wage is yet another kind of human extension/remote control that removes one from, say, a more visceral or tangible sense of ownership. This is perhaps along the lines also of the idea of money not equaling land or labor (but an economy and/or culture pretending it does, for an increasing social divide and/or stratification and so forth)...
Over time-- say, borrowing a page from chaos theory-- this sets in motion the ultimate failure(s) of a system as its various components gradually get ratcheted/knocked-on/feedback-looped over time over some kinds of equilibrium and tipping-point precipices... and...
Collapse
By extension, the corporatism that is driving out family businesses will, in the end, suffer the same fate as soviet style socialism.
The "free market" in wage labor was adopted because it was economically more efficient than slavery in various forms.
Slavery involves a significant investment in capital, and entails a continuing expense to provide food, clothing, shelter, etc. to maintain the health and well-being of the investment. There is also the problem of providing appropriate incentive or coercion in order to get a proper return from the slave. This was all not too difficult in an agrarian society where the food was raised on part of the land, the clothing made by the slaves from available fibers, and the shelter erected from local materials.
However, for the industrialist looking for labor, slavery had the disadvantages of large investment that might better be used on buildings and machinery, and the wherewithal for maintenance of the slaves had to be purchased at retail, rather than wholesale costs.
As a result, it was more efficient for the industrialist to pay for labor by the hour. This saved the industrialist the capital investment, and when labor was not needed during economic slumps, the labor could be left to fend for itself until needed once more.
Yes I've heard about that. You've got to appreciate the elegant internal logic of some fundamentally-perverse and/or self-defeating/contradictory systems sometimes.
I should probably say, "The way our economy is set up now, wages are the backbone."
For a while, the system seemed to sort of work, but now it is increasingly less the case. There are too many available as workers, and there is too much competition from automation. Wages seem to be part of the system that doesn't work any more.
There are definitely connections between wage labor and slavery. Of course, if a person cannot obtain land to feed himself, he has no choice but to submit to the slavery of wage labor.
The economists have a belief that the world is predictable and that growth is to be expected. Somehow, they seem to have missed both obvious connections that make the situation not work, and chaos theory.
US Economy has been contracting and collapsing since 2008 !
I know this falls into the "Its even worse than we thought" category-because it really is ! Not only have high oil prices yielded a leveling in GDP growth as so clearly demonstrated by Gail, but in fact were it not for QE over the last 4 years, the real contracture in GDP would be obvious. Here is a take on it by Karl Denninger whose handle on the reality of the situation is quite sobering to say the least !
"According to Higgins, if it were not for the monetary stimulus, the economy would probably be facing growth of a 1% annual rate or less. As it is, he expects growth to come in at a 2.5% pace in the first quarter.
The U.S. central bank has held overnight interest rates near zero since December 2008 and has pumped about $2.5 trillion into the economy by purchasing Treasury debt and mortgage-backed bonds in a bid to foster faster growth and lower unemployment.
On Wednesday, it recommitted to plans to buy $85 billion worth of bonds each month and said it would keep buying assets until it sees a significant improvement in the labor market........
$85 billion of "QE" monthly = $1,020 billion annually.
This must result in a nominal increase in GDP of that same $1,020 billion, or 6.4%, because every dollar injected into the economy via such a process has to be spent on something.
Since nominal GDP is in fact going up at less than 6.4% this means the economy is in fact contracting -- you are seeing your purchasing power destroyed instead to the tune of about 5% a year!
And this, in fact, is almost-exactly what the numbers show. Nominal household income hasn't been growing but the cost of living has. While the so-called CPI shows little inflation the CPI tables intentionally understate many expenses such as claiming that health insurance costs are 0.65% of the household budget (Really? Less than 1%?)
This is laughable even if you ignore the cost-shifting into the employer side and look only at people who are (1) self-employed and (2) over 65 and thus paying Medicare, Part D and Gap premiums. Even only accounting for those people this percentage is a farcical claim.
The salient point is that when you perform "QE" you are increasing the amount of credit and money in the system and that percentage of "growth" is thus guaranteed to show up in GDP. It thus must be subtracted back off the reported nominal GDP figures to figure out what the real economy is doing.
The fact of the matter is that the real economy is and has been collapsing since 2008 and nothing The Fed has done since has addressed this....".
http://market-ticker.org/
Hence you see why I suggest that things are really worse than we thought !!
A COLLAPSING economy is a very scary situation !
Thus to Gail's suggestion that the currently high oil prices are establishing a "limit " or leveling on growth, we are forced to aknowledge that we have moved to a "LOSS" in growth.....it sounds like we are in a real Depression and thanks to the Fed and QE, we do not even know it !
Please elaborate on your statement about FED buying being injected into the GDP has to spent on something. Don't think that is obvious. Why wouldn't some of this money be saved?
Since the Fed is mostly buying mortgage backed securities and other "toxic assets", much of this "money" isn't really going into the economy. The Fed is just assuming the risk and trying to retire unpayable debt to prop up yhe housing market, etc.. It's a stop-gap measure; the money (such as it was) flew the coop some time back.
The money is flowing onto the balance sheets of the banks who then use it to speculate. The losses are buried on the Fed balance sheet and result in reduced payments to the treasury.
Their stated intention is to lower interest rates and help the housing market and the economy. No doubt some of these MBSs are toxic but I am not sure that this is the purpose of the transactions nor do I know what percentage of these MBSs are toxic. Do you have some data on this issue?
Also, I do not know how much of these underlying mortgages are unpayable. Again, do you have data showing the extent to which these mortgages are unpayable.
There is also a private market for these MBSs in the form of MREITS or Mortage Real Estate Investment Trusts. They rely on the spread between what they pay for these instruments and what they get paid in interest from the underlying mortgages. For the last few years, they seem to be doing fairly well so not sure that defaults are a big issue otherwise these MREITS would tank and would not be able to pay dividends.
I think the housing market has been helped to the extent that interest rates have been driven to such low levels. It is not clear, however, to what extent this is helping the overall economy.
I gather that the buck, so to speak, tends to stop at the banks and does not get widely injected into the real economy. It appears that it is mainly helping the rich and the stock market. So, therefore, it appears that the FED is getting a rather low bang for the buck. I guess when you are printing money, however, it doesn't matter as much as the return required for a real investor.
A lot of the MBS will look good until the servicer runs out of foreclosed homes to sell and can't make the coupon payment. That's the point of the Fed paying face value, to bury the losses before the banks and investors realize the losses.
I am not sure that the QE money is really getting back to the economy in general--just running up asset prices, including stocks, bonds, and even houses.
But there are other things that are doing the same thing. One is the low interest rates that QE permits. That is injecting money into the economy, by allowing very low interest rates on cars and homes. Some people can refinance their homes and take advantage of the lower rates.
The other thing is the huge deficit the country is running. By not raising taxes, the government is effectively putting money back into taxpayers pockets.
So I pretty much agree with you, but not directly because of QE (or QE by itself).
Be careful about that inverted wage pyramind. Theoretically you could have no private economy at all; that is, all productive work would be done by government enterprises. If well-organized an incentivized, such an economy could even be more productive for the long term welfare of society that a private economy, which wastes vast resources on luxuries for the affluent.
So how would such a government finance itself? Just taxing its own employees would not obviously not be sufficient. But it wouldn't need levy any taxes at all if it were well run enough to earn profits on its many enterprises. That's right, it could be entirely self-financed out of its own profits (from both domestic and overseas sales). Initially it could put money into circulation simply by printing what it needed to pay its expenses. With economic growth leading to excess capacity, it could lower prices and cover the deficit by printing more money to cover the difference. With economic decline, it could withdraw money from circulation by raising prices to give the government a surplus that it would retire.
Dick – To be honest at first I thought you lost your marbles. LOL. But I quickly realized there’s a perfect example of what you describe existing today: Saudi Arabia. Even better than your model: not only do they not tax their citizens they send them checks. Thanks to exports they are obviously the most profitable govt operation on the planet. Of course they do need to plan ahead for the day when their oil export income will drop and they’ll need to produce something else the rest of the world is willing to buy in mass quantities.
So there’s the solution for the US: develop some sort of export commodity the world needs in mass quantities and is willing to pay for. We’re already doing pretty good now with weapon sales but that’s not enough. Do you think we could breed the Kardashians fast enough? There seems to be a strong public demand for them.
Please, please export the Kardashians.
That is a good point.
I am not convinced that government enterprises have been run very well, in most cases. Too often, there is no profit motive, so they add an increasing number of employees.
I am trying to represent the US economy, not just any economy. There are quite a number of others pretty much like the US.
Gail your first graph -
30% of the pop was employed in 1960...what... 1960 was boom times I think
I am just speculating, but I think it is correct.
a) Many women stayed at home rather than working outside the home (being "employed")
b) Baby boom - larger percentage of the population was underage
Right. Wages of men were high enough that they could support a wife and several children.
This analysis is all wrong. Wages used to be the backbone of the economy before we had such high energy intensity. Now, energy is the backbone of the economy.
Looking at this with respect to oil is all wrong because oil is no longer a source of energy. We used to get net energy from oil, but that is no longer true. We get no appreciable net energy from oil at this point.
Oil is still valuable as an energy carrier (like electricity) and for other uses (like lubricants). However, from an energy/economic standpoint, it has no net energy value for the US: it is subsidized by all the other energy sources that actually provide net energy (e.g., coal, natural gas, hydro, and others). Oil still provides net energy is some countries (i.e., oil exporters), but pretty soon, you'll be able to count the number of those countries on one hand.
From every thing I have read here and elsewhere, you appear to be wrong. It would be interesting, however, if you would support your assertions with some facts and figures. I think we are at least several years away from no net energy from oil but would not mind to be shown that I am wrong.
ts – A valid point IMHO. We’ve discussed the energy input to finding and producing energy. As usual there’s the difficulty in estimating the embedded energy in the infrastructure. But in the context of this current discussion that’s a very minor factor in that that energy has already been spent. So now it’s down to how much energy I use to develop additional oil/NG production. Virtually all that energy is in the form of gasoline and diesel. It might take 24 months of production to recover the capex I spent to drill a well compared to a couple of months to produce the total amount of energy utilized to drill that well. After more than a half century of developing modern drilling tech we’ve really gotten very efficient.
And that’s where I think some of the disconnect develops. While it may cost a great deal to drill a hz well and frac it the total fuel cost is rather small…perhaps 6% to a max of 10%. But more important it takes very little production to replace those spent Btu's. OTOH even with high oil prices it takes a lot of production to recover the capex. And in the case of the shale gas boom a few years ago many of those wells never recovered the investment. But the vast majority produced much more energy than was consumed drilling them…even wells that were money losers at the higher prices. And during the production phase an even smaller percentage of energy is consumed.
If oil prices crash as badly as the price of NG did back at the end of ’08 there will be a drastic pull back in drilling. But not because the net energy has collapsed but the economics. A I pointed out before low economic viability will curtail drilling long before low EROEI will IMHO. To put some very rough numbers assume a company uses 1 million gallons of fuel to drill and frac an Eagle Ford Shale well. I’m not sure what the typical amount would be but that number is certainly too high. That would be over $4.5 million based on drill site delivered diesel prices. More likely a third of that amount. But is would only take about 25,000 bbls of oil to break even on the energy input of 1 million gallons. It would take at least 100,000 bbls of oil to just recover the investment with no profit margin. So again the economics would kill drilling programs long before EROEI can get very low.
When you say that "Virtually all that energy is in the form of gasoline and diesel," this is clearly wrong. Every dime spent on energy production represents an expenditure of energy. Any person hired that has anything to do with energy production has to drive to work ... energy spent. They have to buy food for fam ... more energy spent.... and so on.
When we fully appreciate that money spent means energy spent, the energy costs of producing energy become better understood.
Oil is worthless as an energy source, at this point... to the US and most of the world.
d – “When you say that "Virtually all that energy is in the form of gasoline and diesel," this is clearly wrong.” No it isn’t. “Every dime spent on energy production represents an expenditure of energy”. You seem to be confused: every Btu spent on energy production represents an expenditure of energy. When I pay $6 million to drill a well very few of those dimes are spent for any energy. That’s what EROEI means. “Any person hired that has anything to do with energy production has to drive to work ... energy spent.” True and a completely insignificant amount of energy compared to what a well will produce. You seem to be magnitude challenged. “They have to buy food for fam ... more energy spent.... and so on.” I’m pretty sure those folks will still need to eat the same amount whether they are involved in energy production or not.
I suggest you focus on the critical details of my post: how many Btu’s are used to produce the Btu’s from those added reserves. It impossible for energy production to happen at a low EROEI lets alone a negative EROEI as some discuss. The economic support to develop any oil/NG reserve disappears long before you get to such EROEI.
You say, "It impossible for energy production to happen at a low EROEI lets alone a negative EROEI as some discuss."
This is baloney. It is quite possible and happens all the time. We can produce "fuel" that has no net energy value for the same reason we produce electricity. We deliver the electricity, at negative EROI, because it comes in a form we need. The primary fuel producing the energy may have high EROI, but not the elect production. Electricity is an energy carrier, not a source.
Gasoline is uneconomic at current prices that oil importers have to pay. Our infrastructure was built when gasoline was economical.
Natural gas at $4 per MBTU is about the same cost/btu as oil at $24 per barrel. Large fleets are converting to Nat gas. Of course, once large scale conversion kicks in, the price of nat gas will be jacked to $8.... still half current oil costs.
In any case, oil needs to be abandoned as transportation fuel asap.
d - I think you're still confusing producing with developing hydrocarbon reserves. Describe the situation where I'm using more energy to produce an amount of energy that less then I'm using. And the cost to produce a well is more than just the cost of the energy involved. A well would be abandoned for economic reasons before long before EROEI get too low.
That's on the production side of the ledger. Now for the development side: the amount of energy used to drill a well is typically less than 10% of the costs. The largest portion of the cost to drill is the profit margin of the various service companies involved. there is the embedded energy in the infrastructure used to drill a well but when you amortize that amount of the hundreds of wells that will be drilled with that infrastructure that portion of the energy input is still relatively low.
It’s really simple: I'll spend X Btu's to develop and produce a well that produces Y Btu's of energy. Obviously for a dry hole the return on energy spent would be zero. But we're talking about wells that produce. The amount of energy needed to recover the amount of energy used to drill that well, including the embedded energy, is still a small portion of the total cost to drill a well. I can even drill a well that losses money (costs $5 million and I sell only $2 million worth of oil/NG) and still have a positive EROEI because I produced much more energy than I used to drill that well. If I'm presented with a project that will produce twice as much energy as I'll use to drill it but will recover only 90% of the capex cost of that project am I going to drill it? Obviously not even though the project has a positive EROEI.
So describe even a hypothetical situation where I would intentionally drill a well that has a very low EROEI if the project calculates out to be an economical investment. But I agree that we need to lessen our dependency upon oil for transportation. But, in any case, that isn't the discussion at hand. Please stick with our topic.
Maybe you're reading bad stuff, ts. Let me give you a clue: a good economical car today might get 30 mpg, which leads to a cost of maybe 13 cents per mile for fuel. A car with similar form factor and performance, like Chevy Volt, will cost less than 2 cents per mile for fuel running on off-peak electricity. So, why do people prefer to pay 13 cents per mile as opposed to 2 cents per mile?
There are reasons, of course, like higher cost of the car, range limitations, and so on. But gasoline is uneconomic.
We may continue to use oil for "fuel" even if EROI goes negative because of these factors. Our infrastructure is heavily geared to it. Exxon, Koch Bros, et al, have the public brainwashed into thinking we need more oil because we need more energy.
We need more energy but it can't possibly come from.... certainly not in the US and not in most every other country in the world.
I think you're confusing the recent non-conventional oil with conventional oil. The stuff like shale and the tar/oil/kerogen/bitumen sands are rather squeaky-lowish on the EROEI scale...but there's by far still a lot of conventional high EROEI that's providing an immense amount of net-energy to the world. I saw a graph of net-energy just recently (I think it was posted on TOD) but I'll be damned if I can find it right now - it showed that within the past few years we've hit peak net(liquids)-energy even though all-liquids continues to rise.
You say that there's "still a lot of conventional high EROEI that's providing an immense amount of net-energy to the world..." However, it's the exporter that gets the EROI benefit, not the importer. Most countries in the world (including the US) are importers ... US big time. If it costs someone $30 a barrel to produce it and we pay $90, guess who gets the benefit of high EROI? For importers, EROI of oil is so low it is virtually worthless. Oil is mostly an energy carrier now, not really a source of energy for importers like the US.
Even if energy in some form that does the real work, the output of that energy needs to get back to 310 million people in this country, in some usable form. That form has in the recent past been wages. If we start using the energy of some other country, and the wages end up over in that country, then we have a big problem in our country.
The competing country that we are losing jobs to is likely using higher EROEI resources than we are. Competition moves jobs and manufacturing output to the countries with the highest EROEI (and lowest wages), which is often China with all of its coal use. To some extent, the high EROEI of coal allows workers with relatively low wages to have fairly high standard of living. If the country were using our fuel mix, workers would need much higher wages. So the high EROEI is to some extent an enabler of low wages too.
The focus is too narrow looking just at that.
To make a completely dreamed up breakdown - lets look look at two hypothetical barrels of oil which each have the same EROEI and each country has paid the same for:
China's barrel: 60% used to make export goods, 20% for domestic durable goods, 10% for non-durable goods, 10% used for leisure activities.
United State's barrel: 30% used to make export goods, 20% for domestic durable goods, 20% for non-durable goods, 30% used for leisure activities(home heating, useless commuting).
When looking at these (fake) numbers one can acknowledge that though "leisure activity" is economic activity - it does not promote international competitiveness. So for these (fake) numbers, China only "throws away" 10% of their barrel while the US throws away 30%...advantage China by 20% vs US.
Domestic durable goods could potentially lead to long term competitiveness...ports, bridges, railroads, roads, housing. But they could also just be a waste and/or lead to un-competitiveness...excessive roads/roads to nowhere, energy-hog McMansions, SUVs, etc. Between the US and China it might be getting closer to a wash on this one.
% of barrel for export goods. This is where "the rubber meets the road"...if in (fake) China 60% of the barrel is used to produce value-added goods for export, and if in (fake) US only 30% of the barrel is used to produce value-added goods for export, then China has a 2:1 advantage, barrel-to-barrel over the US.
Because of the (fake) 20% extra thrown away as leisure and extra 10% in non-durable goods, (fake) 30% less of the barrel is used to create goods for export...in this (fake) scenario the US is getting 50% less value of the barrel for international export. This would suggest that (fake) China could pay 2 times the amount that the US could for the same EROEI barrel, or use a barrel 1/2 as good.
So a large part of this picture in international competition is subtracting non-productive internal consumption from EROEI.
So a lot of what makes America 'Merica, the big houses (with big heating/cooling and other electrical demands), big trucks and cars, big gas guzzling powerboats, roads and bridges everywhere (excessive infrastructure to maintain)...is, on an energy basis, killing international competitiveness. A society composed of people who live in a small easily maintained houses that walk to work and live in a country that doesn't require a lot of taxes to maintain excessive-infrastructure doesn't require a large income to live and would be very competitive.
This is a situation begging for analysis with real numbers.
[Edit] - Should also note this investment sinkhole which China doesn't really have to go along with the SUVs and McMansions
http://en.wikipedia.org/wiki/File:PerCapitaInflationAdjustedDefenseSpend...
I was working on a rebuttal post to the main post about depressed wages connecting "sinkholes" like military spending and tax breaks for millionaires, as well as throwing in large "game changers" like NAFTA, but I keep getting distracted and have now lost the ambition to do so. I'd recommend seeing how those things factor in because they appear to have more bearing than oil in earlier years.
One of the solutions proposed for the United States to deal with the issues of depressed wages and workers permanently leaving the workforce prematurely is to import more workers every year, and export jobs every year. You might think that this solution is just the wild-eyed rant of a mad man or the dirty legislative proposal of a "bought and paid for" politician, but it is in fact not just a proposal but rather, a practice. In fact, this solution is the primary reason for the problem.
Have to keep the ponzi going at all costs!
Both parties say it is about jobs, jobs, jobs. No it isn't. It is about low wages, low wages, low wages.
Enclosure or inclosure is
I think this is a large key to the question of 'the job'-- the wage-slavery-- being what it was and is, and something important to reflect on in any related discussion.
To say nothing of other slave-trades, land-grabs, colonial and native histories.
Civilization! - *Some Restrictions Apply
"If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience."
~ George Bernard Shaw
Thanks!
Yes, taking land away from the peasants has great benefits for those who need workers for factors and in armies. The link you give to the movie tells it pretty much like it is, but is sort of disturbing.
Quite welcome, Gail and thanks too for your good articles.
Edit:
Democracy Now
March 25, 2013
starting at 44 min 30 seconds
Guests speaking about democracy at work, the current crisis and worker co-ops.
(What one of the studio guests, Richard D. Wolff, author of 'Democracy At Work', seems to miss, though, is that the nation-state-- his Fox-News/Bill O'Reilly-referenced term, 'nanny-state'-- is not fundamentally democratic, despite his invoking of it as the mechanism to 'bring democracy' to the workplace.)