A Lost Generation

A Lost Generation

It is pretty well established that a tax increase, especially an income tax increase, will have an immediate negative effect on the economy, with a multiplier of between 1 and 3 depending upon whose research you accept. As far as I am aware, no peer-reviewed study exists that concludes there will be no negative effects. The US economy is soft; employment growth is weak – and yet we are about to see a significant middle-class tax increase, albeit a stealth one, passed by the current administration. I will acknowledge that dealing a blow to the economy was not the actual plan, but that is what is happening in the real world where you and I live. This week we will briefly look at why weak consumer spending is going to become an even greater problem in the coming years, and we will continue to look at some disturbing trends in employment.

Last week, I noted at the beginning of the letter that an unintended consequence of Obamacare is a rather dramatic rise in the number of temporary versus full-time jobs. This trend results from employers having to pay for the health insurance of employees who work more than 29 hours a week.

I quoted Mort Zuckerman, who wrote in the Wall Street Journal:

The jobless nature of the recovery is particularly unsettling. In June, the government's Household Survey reported that since the start of the year, the number of people with jobs increased by 753,000 – but there are jobs and then there are "jobs." No fewer than 557,000 of these positions were only part-time. The June survey reported that in June full-time jobs declined by 240,000, while part-time jobs soared 360,000 and have now reached an all-time high of 28,059,000 – three million more part-time positions than when the recession began at the end of 2007.

That's just for starters. The survey includes part-time workers who want full-time work but can't get it, as well as those who want to work but have stopped looking. That puts the real unemployment rate for June at 14.3%, up from 13.8% in May.

As it turns out, the unintended consequences of Obamacare are not the only problem. Charles Gave wrote a withering indictment of quantitative easing this week (which we will look at in a few pages) and included the following chart, which caught my eye. Note that the relative increase in part-time jobs began prior to Obama's even assuming office. The redefinition of part-time as less than 29 hours a week and the new costs associated with full-time employment due to Obamacare simply accelerated a trend already set into motion.

An Ugly Secular Trend in Part-Time Work

Look closely at this graph. It turns out the trend toward part-time employment started in the recession of the early 2000s, paused only briefly, and then really took off in the recent Great Recession. This is clearly a secular trend that was in place well before 2008.

This development is very troubling, especially because it primarily affects young people and those with fewer skills. As I documented in letters last year, workers 55 and older are actually taking "market share" from younger workers. I went back tonight to see if that trend is still in place. The first graph below (the next few graphs are from the St. Louis Fed's FRED database) is one we are familiar with: the actual employment level over the last ten years. We are still two million jobs down since the onset of the last recession, some six years later. The only reason the unemployment rate has fallen at all is that several million people have simply left the labor force for one reason or another.

The next graph is the number of employed 25-54-year-olds. What you will notice is that the above graph shows about 7 million new jobs since the very bottom of the employment cycle, yet employment in the 25-54 age cohort has barely risen. Who got all the jobs?

That mystery is solved courtesy of the next chart, which shows the number of employed in the 55+ age group. Even acknowledging that there is a growing Boomer population does not account for the rather spectacular increase in employment in the 55+ age group. Can you find the recession in this chart? If the St. Louis Fed hadn't shaded the recession in gray, you certainly couldn't find it in the data. Not only did Boomers see a rise in employment, they took jobs from younger groups. If you dig down deeper, you find that the younger you are, the higher the unemployment level of your age-mates. I will spare you that exercise, as this is already depressing enough, unless you are 55+.

Note that I am not arguing that those of us over 55 should be put out to pasture. Many can't afford to quit working (especially when their kids are living with them!). I am just reporting on the facts. The only way to solve this is to grow our way out of it, yet whatever we are doing is not working.

The Emergence of a US Underclass

Let's turn back to my good friend Charles Gave's analysis, picking up in the middle of his work. He has divined a rather interesting reason for our current employment malaise. I am going to quote at length because this is just so good and deserves a wide audience in the current debate over monetary policy.

This chart [below] shows a steady increase in part time employment since the early 2000s back toward levels that persisted through the 1976-2001 period. The big change is the precipitous decline in full time jobs which started in 2002 and accelerated after 2008. It can be seen that the number of part time jobs has risen by 3mn, while full time jobs have decreased by a similar amount. This compositional shift is unprecedented.

The next step is to measure the difference in job growth for part time and full time workers. This is done by comparing the rolling seven year series for each classification of jobs and noting the differential. As this gap widens in favor of part time employment, we would expect a greater share of the US labor force to be earning lower wages. To test this proposition we compare this seven year differential measure with the median income level for US households.

The results are quite striking. The correlation between our differential measure for the kinds of jobs being created and the real median income was 0.82 between 1974 and 2013; from 1997 to 2013 it moved up to 0.95. This matters because periods when individuals have stable full time jobs are associated with rising median income, while incomes tend to decline in an unstable job market.

Put simply, median income has slumped because a very large share of Americans can no longer find proper jobs.

Behind this economic, political and social disaster, stand many factors such as technological change which has undermined traditional low-skilled employment and the rise of China as a fierce industrial competitor.

What is less well understood is the pernicious impact that US monetary policy has had on the US labor market.

A collapse in the US median income level has historically coincided with the Fed running a policy of negative real interest rates. The reason why unemployment tends to be lower during periods when capital has a real cost attached was explained in some detail in a piece written in early 2011. This dour relationship has been maintained over the last two years and median income has, as I suspected, continued to fall. Make no mistake, if monetary policy is not substantially changed, then median incomes will continue to fall.

When poor people cannot earn a return on their savings or on their labor they remain trapped in poverty. The effect is to subsidize what are effectively overpaid financial jobs and undermine employment prospects within traditional sectors.

As a result, periods of negative real rates tend to be accompanied by the Gini coefficient rocketing higher. Today, this policy is effectively leading to the emergence of a poorly paid and chronically insecure "lumpen proletariat". At least half of the US population may be moving deeper into a poverty trap, which, over the long-run, must negatively impact consumption. Moreover, I never saw a structural bull market in equities take place against a backdrop of falling median income.

So why is Bernanke doing it? It would seem for the same reasons that the Japanese did 20 years ago. He is protecting not so much the banks as the bankers. To cut a long story short and to paraphrase a famous quote: What is good for the US Investment Banks is bad for America.

Bernanke's policies are aimed at guaranteeing the prosperity of this elite, and as such he has been wildly successful. Paul Volcker, arguably the best ever central banker, cared for the interests of ordinary people over those of investment bankers. By contrast, Bernanke has helped create his own "lumpen proletariat" and a parallel class of the "super-rich." This will have many consequences, not all of them pretty.

  • Marx is back! Class struggle will be the main political theme in the years to come. This is what happens when you entrust a common good such as money to an over educated technocrat who believes he is smarter than the markets.
  • In a democracy it is bad politics to follow a monetary policy which favors the rich and condemns the majority to an ever more difficult life (witness damages caused by the euro). This is the "Road to Serfdom" towards socialism or technocracy rather than a sustainable capitalist economy.
  • This system will become increasingly unstable: socially, financially, economically. Such unfairness breeds the conditions for political instability. Under similar circumstances, Theodore Roosevelt and the US Congress went after the "Robber Barons." Franklin Roosevelt acted 20 years later during the depression to separate commercial banks from investment banks. The obvious parallel in the crisis of our times is that President Obama is no Roosevelt.
  • I have no idea how this problem is going to be addressed, but addressed it will be. My hope is that a normal monetary policy will resume in the near future lest we end up dealing with a vengeful demagogue some way down the line.

For this reason, I saw the potential for so called tapering as the first step towards a return to economic sanity (see Volcker's Return). Alas, I seem to have been wrong. Bernanke has the fortitude of a cheese cake, and once again, I misjudged him. The implications for job creation, fair income distribution and indeed the future prosperity of the US may be far reaching. I am worried.

A Lost Generation

We are watching the Fed employ a trickle-down monetary policy. They hope that if they pump up the banks and stock market, increased wealth will lead to more investment and higher consumption, which will in turn translate into more jobs and higher incomes as the stimulus trickles down the economic ladder. The kindred policy of trickle-down economics was thoroughly trashed by the same people who now support a trickle-down monetary policy and quantitative easing. It is not working.

We have a younger generation that is having trouble finding full-time work and developing the skills needed for the transition to more stable, higher-paying employment. The longer the situation persists, the more difficult making up lost ground and lost time becomes for them. As Charles wrote, we may be seeing a new underclass develop, which has disastrous implications for the country. This week President Obama gave a speech on the economy that sounded like a campaign speech except that he should not be running any longer. He blamed the rise of technology for the loss of jobs, the decimation of the power of unions for flat incomes, and the policies of his predecessor for the current malaise. The speech was a wish list of new programs and promises, yet nothing is getting done. He fails to engage with the most pressing problems of our time and doubles down on a healthcare plan that is a train wreck even his most ardent supporters are walking away from. Did you see the recent letter from multiple union leaders asking for a course correction on healthcare?

The Congressional Budget Office now estimates that 7 million people will lose their employer-provided health insurance at the end of the year. One would assume that those are almost all full-time workers. So instead of getting health insurance in some form as a benefit, they will likely soon be paying $1400 a year (minimum) in mandated taxes (the level set by the Supreme Court), and those costs will rise dramatically over the next few years, according to the current schedule. That is a HUGE tax increase for those people.

Young people who have no insurance and are making more than $10 an hour will be paying about $1300 a year, or close to 10% of their after-tax income. That blows a monster hole in their disposable income at those levels. There is no other way to look at this: it's a huge lower-middle-class tax increase. Yes, they get a benefit (health insurance) that someone somewhere in society was already paying for, but they personally did not have these costs before.

The unintended consequences of the healthcare bill are going to be vicious. Not only is there a tax increase on the rich and on small employers, there is a tax increase on young people and the middle class. And it's a tax increase that comes in the middle of the slowest recovery on record. It is possible that we grew at less than 1% this last quarter. And the burden piles on top of a secular shift in employment practices that is making life more difficult for the younger generations.

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We are getting close to the point where not only are there no good choices left, but the difficult choices are starting to look pretty bad indeed. And no one in DC is talking about the budgetary choices we are going to be forced to make. The recent drop in the deficit is temporary, fueled by people taking income in 2012 and paying taxes at a lower rate. That "tax dividend" is just about done. Deficits are going to be the number one topic in 2016, with jobs a close number two. Hide and watch.

Maine, Montana, and San Antonio

I have been in Newport, Rhode Island, at the Naval War College, where I attended a small Summer Study Group for the Office of Net Assessment for the Department of Defense. My mind is on overload trying to absorb all I heard and learned and to fit all that into my limited understanding of how the world works. It is a very complex world that the US military finds itself in. Shrinking budgets and an expanded menu of options and demands mean difficult choices. Factor in rapidly changing geopolitical and technology environments, and the challenges become even more complex. When I think of the limits our budget process is going to force on our set of choices, the situation does not make me comfortable.

The one thing that did make me feel good was the caliber of the people I met. They were most impressive. Admittedly, those in the room were among the best and brightest in the military; nevertheless, it was comforting to see the quality of thought and training going into the decision-making process. These are scholars with wide-ranging educational backgrounds as well as warriors proud of their service. I have to tell you, I do not get that same level of comfort when I am in a roomful of political leaders. There are some good ones but not enough of them.

I am in New York for a few meetings before I head on to Maine. My partners in Mauldin Economics, David Galland and Olivier Garret, will be here Wednesday; and as a special treat I get to have dinner with Jack Rivkin on Tuesday. I may even try to attend a meeting of the Friends of Fermentation if they allow teetotalers to show up. My youngest son, Trey, will fly up to meet me here, and we'll head north on Thursday morning. It will be good to be with friends and talk about the issues of the day at Leen's Lodge, amidst the beauty of Grand Lake Stream . Then I'll be home for a week before heading out to join Darrell Cain at his summer home in Montana. My fall schedule looks to be light on travel for some odd reason, and that's ok with me. I need some catch-up time.

And speaking of Mauldin Economics, I continue to be impressed by Grant Williams' ability to see through the smoke in the market today and pinpoint where it's headed. This skill lets him spot investment opportunities that others tend to overlook. You get his Things That Make You Go Hmmm… for free as a subscriber to my letters, but if you haven't yet subscribed to his excellent monthly advisory, Bull's Eye Investor, I recommend you do so. You can sign up now at a 50% discount by clicking this link: http://www.mauldineconomics.com/go/bwXwl/MEC

It is time to hit the send button. Have a good week and enjoy your summer. I intend to.

Your worried about the kids analyst,

John Mauldin Thoughts from the Frontline
John Mauldin

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July 28, 2013, 11:01 a.m.

I respect Mr. Maudlin immensely and have read his newsletter for many years. I respect his opinions because they are based on the data and insightful analysis. This newsletter, at least the first part, does not measure up to his usual standard. Using the graphs given to us, there is no way to back up the claim that Obamacare is accelerating part-time workers. The graph you give us shows a steady increase in part time workers since 1968. I see no acceleration due to Obamacare in this graph.

In the later graph showing the increases and decreases in US employment over 7 years, there is a dip after each recession that lasts around 5 years after the end of the recession: ending in 1982 with a rise beginning in 1987 and ending in 1992 with a rise beginning in 1997. This didn’t happen after the 2001-2 recession. In 2008 a new recession hit instead of a rise in employment. We had 2 recessions less than 10 years apart with no time for employment recovery between them. This explains our current situation regardless of tax policies. If we were to use past performance as indicative if future performance we would expect employment to rise 5 years after the end of the last recession which should happen in 2014.

Blaming Obamacare for trends that have been in place for almost 50 years and for 2 recessions without an employment recovery between them is unsupported by the data given. By the way, if Obamacare (a tax increase) is really responsible for the slow employment recovery and increase in part-time employment, why didn’t the tax cuts of the 2000’s lead to faster growth of employment and a decrease in part-time employment?  Also, if Obamacare is really responsible for an increase in part-time workers, could it be because full-time employment would not be as critical in order to get health insurance?  Could some of these part-time employees be entrepreneurs working on their own businesses?  How many people stay with full-time jobs for the health benefits?

July 28, 2013, 10:22 a.m.

Your comments were excellent.

I retired early in 1985 to get a less demanding job not requiring travel to be with my children in high school.  To cope with their college costs, I joined the world of lower income part-time jobs and outsourced jobs, which major firms already were heavily into, even engineers and whole purchasing departments.  So, this is not something that started in 2000.

I think Obomacare should be given a chance to work and modified if necessary to fix some things.  Employers should not be providing health care.  This reduces competitive advantage world wide.  Jobs in the health care field and associated industries will greatly increase.

Why would a low income employee/family reject health insurance and pay a $1300.00 penalty, when they can select their own coverage from a list (Obamacare) and receive subsidized or even free coverage?

July 28, 2013, 9:47 a.m.

John, I would like to hear your thoughts on another secular trend which I believe is impacting part-time versus full-time work, and how this will play out in our economy in the future.

As you articulate, many young people are forced to settle for part-time work today. This means less disposable income for them, and less tax revenue for the government, both from them paying less and the impact of reduced economic growth. If QE stokes growth and full-time work becomes avaialble, will they jump on it? Well, that depends what they think it will bring them. Will the increased disposable income seem worth the lifestyle adjustment? How many of these people will have kids by then who need their time and attention? Are they accustomed to living within their means? Even if they are not, has continued QE made cheap loans so accessible to them that they are resigned to living in debt? Do they trust the financial system enough to even consider earning enough to get out of debt and pursue saving and investment? Or will the increased tax burden on increasing their salary make it a zero-sum game? If they answer yes to one or more of these, they may decide to remain in permanent part-time status, rely on the government health care system, and assume they will continue working part-time into their seventies and not really have to worry about saving for retirement, as they are already effectively there.

I think businesses and government have only a few short years to stoke things into growth, or the pattern I articulate above will be set for a large enough portion of the next generation that the conversation will need to move from warning that it’s happening in hopes of changing it, to figuring out how to live with it.

Shawn Heneghan
July 28, 2013, 8:22 a.m.

It is too bad that We gave the nation such a huge tax cut in the early 2000s. One that was unneeded and really unaffordable. The insistence on not raising taxes (in fact lowering qgain) later in the first decade - even as the economy continued to roll right along just added to the problem.

The problem? - things turn around. The economy was bound to go south. With the nation wrapped up in two unfunded wars, and 500 billion dollar a year deficits when it did there wasn’t much left in the way of tax policy to help the recovery.

Of course at the same time we had nearly zero interest rates and 4% ten year notes. This restricted monetary policy intervention.

Unfortunately for Mr. O, trying to improve the state of health care delivery does as noted put a burden on society. There is no free lunch. Too Bad someone before him hadn’t made this effort when times were ripe - rather than just give a couple trillion dollar tax cut to his friends.

July 28, 2013, 5:23 a.m.

Do you have a link to Gave’s 2011 explanation of why unemployment is lower when there is a real cost to capital? I would like to read it.

July 28, 2013, 5:07 a.m.

To what extent do your conclusions depend on the time frame you choose to analyse, and how do you justify your choice?  You choose to analyse e last 7 years.  If you look at the first chart, you could choose a 20 year period and you would have to explain a part time job curve that is flat except for a step change i. Its middle.  If you were to fit a regression line to the whole of Chart 1 , it would show a straight line continuous rise from 1968 until now.  What then would you need to explain, and what would. Be your causal model?  Tis choice if time period for analysis seems to me to bedevil almost all economic analyses that I have ever read, and I have never heard or read a convincing account of how to choose a model apart fro. Intuition.  But that seems ti be the nature if economics.  No science, for sure, and highly selective choice of data to model.

Neville Moray

July 28, 2013, 3:51 a.m.

I have no idea whether Bernanke is interested in the masses. I presume not, as the reason that the money has not reached them is the absolute greed of the next level down banking elite. He would know this, and would make other arrangements if he were.

The money pumped into the system each day/week/month is being used by the recipient bankers to manipulate commodity markets, aluminium calls, gold puts, etc., stock markets, bond markets, currency markets, all with money provided by the State, purported to be for the benefit of all, but going no further. It has served to make them, and their chosen ones, astonishingly rich, as least in monetary terms.

Bernanke and co. would say that all can profit from this if they want. Buy shares, why don’t you - no risk here, is there? Anyway that is not true for those with nothing to start with, and not realistic for those who see the man behind the curtain. Alice will wake up sometime. Just a question of when. Now, if you knew that, you could be richer than the bankers! If you have any money left to invest, of course!

Throughout history, democracies have been followed each and every time by dictatorships. Democracies have lasted a couple of hundred years or so, until those who rely on the state for a living are over 50% of the population, and they vote for the party who will give the cake to those who do nothing to earn it. No more cake, no more democracy. The Status Quo is worried that they will be worse off in this change, so why not get in first, eh? Now we are seeing dictatorship by the back door, sneaking in under the mantle of terrorism, state protection, etc.

Back to your article. The fact is that there is so much good will towards the populace it is sickening. Sorry. Irony was never my strong point.

Marcus Goodfellow
July 28, 2013, 12:56 a.m.

I’m baffled that we keep saying “unintended consequences.”  Are the people who rule us really so stupid they don’t understand what they are doing? I don’t think so; how could people smart enough to gain the power they have not understand something so obvious?  Or am I thinking something that decent people just wouldn’t think?  Isn’t the time for self-delusion about over? 

Jack Hiller
July 27, 2013, 11:41 p.m.

Gave’s analysis of the function and effects of QE is insightful, but his explanation of its purpose is seriously incomplete. A major function of QE is indeed to keep the yield curve low, but a significant reason, and one that the Fed actually grouses out loud over in B’s Congressional testimony, is the $17 debt that continues to grow (the 1st qtr surplus of $350 Mil was the result of the Treasury’s postponing regular payments, such as to the federal employee pension fund, presumably to create breathing room for the upcoming fight over the deficit ceiling).

The Fed is now able to facilitate the Treasury’s servicing of this massive debt with low interest rates.  If rates rose higher, then insolvency would loom, and to prevent that, the fed would have to create such a large increase in QE that the markets would be scared over hyperinflation. So, good ole Ben is really enabling the current Administrations share the wealth Socialism.

Too bad sharing the wealth is not leading to prosperity (has Socialism ever worked?), but instead is reducing our living standard.

July 27, 2013, 10:42 p.m.

An unintended consequence of a minimum wage here in Australia is that those with such jobs do not have health care premiums and thus more money to spend. As an additional result of such policy, a family can afford for one of the couple to stay at home and take care of the baby and thus they do not need to pay for day care. Additionally, the bread winner, and/or the stay at home spouse can afford to engage in higher education to better their future. Yes, $17.50 as a minimum wage makes the cost of living high here. Yes, public health care has pimples and warts, and most of means pay for private health care on top of their taxes.  To be sure, this is a civilized approach to problems America “just can’t contend with”... And oh yes, with a livable minimum wage that allows for a spouse to stay at home and watch the baby, more jobs are the job the would need in the US model is available for those seeking work. The government mandated Super fund is a guaranteed wage that will support you when you retire and takes 9, and soon 12% of your salary. Not a perfect world but one that makes quite a bit more sense than what I read being discussed here in this article or the other comments.  I miss my country but I am happy to be living and working here in Melbourne, Australia. If your 31 or under, visas are easy and you will be paid at a livable minimum wage for 3 months of farm work, and mostly service industry jobs for a year.  It will not be easy, but it can be an adventure.  Part-time work at minimum wage, with no health care is adventure too, albeit a tragic one. Pioneers can make their way as was the historical past of the US; beware, without papers in the US, you are maligned as the nation’s problem by those whose forefathers once immigrated to build a nation.  Hard work neither appreciated or paid for in the US anymore, let us just make some tea:)

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