Joe Klein, Kevin Kline, and Qualifications for the Oval Office

Many journalists, pundits and politicians have offered opinions about whether Mitt Romney’s experience at Bain Capital is an asset in his bid to become the next President of the United States.  Joe Klein, who writes for Time magazine, may have the most misguided analysis of all.  This weekend he was a guest on the Chris Matthews show and offered this assessment of private equity and profit maximization:

You know, it’s true that it’s kind of cheesy to go after Romney because some of these companies that he tried to change, you know, failed and jobs were lost. The real argument against Romney and that form of capitalism is that it was all about short-term. It was all about maximizing shareholder value.  And what the president’s argument could be and should be is, `I’m not about short-term. I’m about long-term, and it’s going to take us a while to get out of this mess.’

Maximizing shareholder value is about the short-term?  Does Mr. Klein understand that the market value of a company’s equity depends on the expectation of future earnings?  Has he paid any attention to the debate about the price of Facebook shares in the wake of its IPO?  If the shareholder value of a company only depends on the short-term, why is there so much disagreement and uncertainty about the appropriate stock price for Facebook?  The uncertainty arises because the future profitability of the company is unknown.  Future profits depend on how well Facebook will be able to sell advertising to its hundreds of millions of users, and how that may change as more Facebook users access the site through their smart phones.

Joe Klein knows little about the way private companies or the economy works.  Increasing the shareholder value of a company requires changing expectations about the future stream of profits from a company.  It is all about the long term.

Klein’s ideal Presidential candidate, other than Barack Obama, may well be the Kevin Kline character from the movie Dave.  Dave was the manager of a temporary help agency before filling in for the President in the 1993 movie.  Helping people find jobs sounds like the ideal experience for the Oval Office for movie-goers and voters who believe that Presidents create jobs.  Dave’s last act as President was to initiate “a program to try to find a decent job for every American who wants one“ because “if you’ve ever seen the look on someone’s face the day they get a job — I’ve had some personal experience with this – – they look like they could fly.”  Hollywood wouldn’t support a President that said “I’ve seen the look on investors’ faces the day they realized they had turned around a company and created a lot of wealth.”  But, as Brit Hume of Fox News said over the weekend “the business of making a profit has jobs as a by-product.  It’s not as if there’s some favorite industry out there called Jobs R Us, which is in business for the purpose of creating jobs.”

The President and the Congress establish and enforce the laws, taxes and regulations that impact the creation of wealth and consequently the creation of jobs.  Running a business is not the same as governing, but private sector experience helps one understand the costs and benefits of government intervention in markets.  President Obama believes that the Presidency is different than running a private company because maximizing profits is “not always going to be good for communities or businesses or workers.”  The President also said: “When you’re president, as opposed to the head of a private equity firm … then your job is not simply to maximize profits. Your job is to figure out how everybody in the country has a fair shot.”

Voters should consider how each candidate proposes to change taxes and regulations to encourage more wealth and job creation and provide equal opportunity and a fair shot for everyone.  Mischaracterizing the economic role of private equity firms and trying to count the number of jobs that were created or lost as Bain invested in start-ups or troubled companies is largely a waste of time.  The Romney campaign believed that promoting Bain as a job creator would ameliorate the view that their candidate is an out-of-touch rich guy.  The Obama campaign continues to push this unimportant issue and their best explanation seems to be that Romney was the first to mention job creation at Bain.  Let’s hope that both campaigns get off this topic and turn to the important economic policy issues facing our country.

Heroes

Chris Hayes of MSNBC and The Nation offended many people on his show Sunday morning when he said he was “uncomfortable” using the word hero to describe soldiers who sacrificed their lives in Iraq and Afghanistan.  Hayes acknowledged that he is a pacifist; all four of his guests seem to believe that the wars in Afghanistan and Iraq were either immoral or misguided, and had no particular insights about duty, honor, or heroism.  Consequently it was both irritating and pointless to listen to their discussion of whether soldiers who sacrificed their lives in these wars should be called heroic.  Once the discussion between Hayes and his guests hit the internet a torrent of anti-Hayes tweets ensued.  (What is the point of hate tweets?  If you don’t like Hayes show join the many millions of Americans who haven’t watched it and never will.)  On Monday Hayes issued an apology for, among other things, not showing the appropriate respect and empathy for the families of soldiers who sacrificed their lives.

The anti-Hayes tweets brought responses from defenders and prompted Josh Barro, a policy wonk at Forbes, to tweet:

All jobs have risk/reward characteristics, and some people freely choose risky jobs to gain other benefits.

Similarly, lots of jobs are essential. Without the military we wouldn’t be free, but without farmers, we’d starve to death.

We never talk about the heroes who catch our tuna, though commercial fishing is crazy dangerous, more than military service.

I actually think conscripted service is more heroic than volunteer service.

I think the lionization of military service both is unwarranted and encourages extra use of the military, which is bad.

Barro implies that we can gain insights about heroism from labor economics models of self-selection.  We can’t.  There is no economic model that suggests that someone being paid for their work is less dedicated to their job, their country, or their fellow citizens than someone who is conscripted into service.  There is no economic reason why the same act of bravery should be considered more heroic if performed by someone forced into service rather than by someone who enlisted in the military.

Barro’s ramblings seem to suggest that people who contribute their time and money to charitable organizations may not really be charitable.  A donation to a charity is, after all, a voluntary exchange.  Could it be that conscripted contributions (i.e. taxes) are a better indication of charitable behavior than voluntary contributions?

No economist worth his/her salt should presume to guess an individual’s motives based only on his/her actions.  In a free market system even selfish people will engage in socially beneficial activities because they can earn profits (and yes, create jobs) from providing goods and services to customers.  The fact that our system works well even when people are motivated only by self-interest does not mean that everyone is completely selfish.  We do not want to rely on a system that only works if everyone behaves altruistically, but when individuals display acts of charity, honor, courage, or heroism they should be recognized.  It is absurd to assume that because a person chooses a career in the military, police, or as a firefighter that all of their subsequent actions are based solely on self-interest and that acts of honor and heroism are precluded.

It also makes sense for society to value groups of workers by more than just their earnings.  In a free market system the wage represents the marginal value of an individual’s contribution to output.  Some jobs pay less because there is an abundance of labor willing and able to perform those tasks.  In many of these cases society’s total value of labor services received far exceeds wages paid.  We, as a society, enjoy tremendous surplus from workers who perform jobs for less than our maximum willingness to pay for the task.  It is only the marginal worker for whom the value of services provided just equals the wage.*  The value of the contributions of soldiers, teachers, or tuna fisherman, as a group, exceeds the wages paid to them.  Soldiers provide far more value to the U.S. than the wages and benefits they receive.  For this we should all be thankful.

I am humbled by the men and women who responded to the call of duty and sacrificed their lives to defend freedom, liberty and our national interests.  This essay by Ralph Kinney Bennett describes how many of us feel on Memorial Day as we try to express our profound appreciation to these fallen heroes and their families.

*Students of Economics 101 learn about the water-diamond paradox; the price of diamonds is much higher than the price of water even though we couldn’t survive without water.  At the margin, a gallon bottle of water costs much less than one filled with diamonds because diamonds are scarce.  We are fortunate that water is abundant and its price is low; this generates tremendous surplus for our society.  We would grossly underestimate water’s total value if we merely multiplied the price of water times the amount of water consumed.  In this sense soldiers are like water and Kim Kardashian is like a diamond.  Kim earns much more than a soldier but we could survive without reality TV stars.  The issue is complicated by the fact that national defense is a public good and there is no private market for soldiers, making it more difficult to quantify even their marginal value to society.

Starting Position Matters

Ryan Briscoe is in the pole position for today’s Indianapolis 500 and if history is our guide, he has the best chance of winning the race (14 of the past 50 winners started in the pole position).  Briscoe’s qualifying speed was less than two thousandths of one percent faster than James Hinchcliffe’s average speed.  Along the first two rows of cars (starting positions one through six) the difference in average qualifying speed between adjacent cars/drivers is about one tenth of one percent.  The following chart illustrates the relationship between the probability of winning the Indy 500 and starting race position.  Both the actual raw probability and the fitted probability from a logit model are included in the chart.

Among cars/drivers in the first two rows, each one place reduction in starting position is associated with a 25% reduction in the relative likelihood of winning the race.  For starters in rows three through five (positions 7 through 15), each one place reduction in starting position is associated with a 10% decline in the relative likelihood of winning the race.  A driver’s starting position has a much bigger impact on the likelihood of winning the race than one would expect from the small differences in the speed of the cars in the time trials.  Finally only 2 of 800 drivers in the bottom half of the field, ordered by qualifying times, won the Indianapolis 500 over the past 50 years (these cars/drivers are not included in the chart).

Starting positions for the Indy 500 have a disproportionate impact on the likelihood of success in the race.  A car with a poor starting position in today’s 500 mile race can still come from behind and win, but the odds are against the driver.  For an electorate that appears concerned that the economic playing field is not level, it is interesting to note that relatively small differences in initial conditions have a disproportionate impact on who wins and who loses the most iconic American race .

More Hours of Work are Required to Buy a Gallon of Gasoline

Gasoline prices this Memorial Day weekend are about $3.67 per gallon, about 12 cents less than last year and down about 27 cents from their peak in April.  Gasoline prices were higher, on average, in 2011 than any other year and 2012 looks to be about the same.  The nominal price of gas peaked in 2008 but fell rapidly as the recession hit the U.S. economy and ended the year at under $1.70 per gallon.  Although there are some news reports that households will drive more and travel further for vacations in the summer of 2012, any increase in travel will occur despite historically high gasoline prices.

One way to measure the relative change in the price of gasoline over time is to compare the price of a gallon of gas to the wage rate of a typical worker with a given set of skills.  The following chart calculates the number of gallons of gasoline that the median high school graduate could afford to purchase with their gross (pre-tax) earnings when working full-time.  In 1998 the median high school graduate could afford over 463 gallons of gasoline with their gross weekly full-time earnings.  By 2011 the median high school graduate could afford less than 182 gallons of gasoline with their gross full-time paycheck.

The typical blue collar worker had to work 2.5 times as many hours to fill their car’s gas tank in 2011 compared to 1998.  The situation looks no better for working class families in 2012.  The price of gasoline increased by 9.5% from the first quarter of 2011 to the first quarter of 2012.  This rate of increase was more than three times as large as the increase in the median weekly earnings of high school graduates.

The outcome of the Presidential election will depend on consumer confidence and the perceived state of the economy in swing states in November.  Working class families are likely to be encouraged by the decline in the unemployment rate and private sector job creation over the past 18 months.  But optimism about the recovery will be muted by the fact that weekly earnings for blue collar workers have increased very modestly while the price of gasoline has more than doubled since the depths of the recession in early 2009.

The Slowdown in Government Hiring

Employment in the public sector has declined over the past three years as state and local governments struggle with budget shortfalls.  Public sector employees are unlikely to quit their jobs and government agencies lay off workers much less frequently than private sector firms.  Consequently government agencies adjust to budget reductions by larger reductions in the rate at which workers are hired.

The following chart shows that public employees are about 70% less likely to quit their job than private sector employees.  It also indicates that quit rates declined in the recession in both the government and private sectors.  Workers are more willing to stay in their current job as the prospect of a better job offer becomes less likely.

Layoff rates are also considerably lower in the government sector than in the private sector.  In 2010 the layoff rate in government peaked at about half the private sector rate.  In all other years over the past decade the public sector layoff rate was about 70% lower than in the private sector.

Government workers are much less likely to quit their jobs and government agencies are more reluctant to lay off workers than in the private sector.  Hiring reductions have become a primary way that government entities adjust to budget reductions.  The government hiring rate declined by 26.4% from 2007 to 2011 compared to a 14.7% decline in the private sector over the same period.  In the first quarter of 2012 government hiring was 18% below the 2007 rate.

The decline in government hiring is one reason why the unemployment rate has remained relatively high over the past few years.   According to the BLS JOLTS data about four million government workers were hired per year from 2004 to 2007.  In 2011 just over 3.2 million workers were hired into government jobs representing a decline of about 836,000 over the pre-recession average.

Alternatively, the Wall Street Journal’s Justin Lahart calculated that the unemployment rate would be 7.1% if there had been no cuts in state and local government jobs.  Lahart acknowledged that his calculations are based on the smaller and noisier household survey which may be poorly suited for tracking fluctuations in the number of government employees over time.

A 1% decline in the unemployment rate requires an employment increase of 1.54 million which is about 7% of total government employment.  A 7% increase in government employment would result in the highest government share of employment in three decades.  It seems plausible that budget cuts reduced government employment by an amount closer to 836,000 than 1.54 million workers.

The NBA’s Small Market Ratings Problem

NBA Commissioner David Stern breathed a sigh of relief last night when the Miami Heat took charge in the fifth game of their playoff series with the Indiana Pacers.  The NBA already faces a ratings challenge in the Western Conference with the small market Oklahoma City Thunder and San Antonio Spurs.  After a protracted strike that shortened the season, compressed the schedule, and lowered the quality of play, the Association was hoping for a more appealing Finals match-up than they are likely to get.  The Thunder and Spurs are clearly the best teams in the West; the problem is they don’t have many fans.  An NBA Finals matchup against the Indiana Pacers would have produced historically low ratings.

Oklahoma City and San Antonio are the third and fourth smallest television markets in the Western Conference.  Only Memphis and New Orleans have smaller markets.  Before the season began there were 105 possible Western Conference Finals matchups, and 98 have larger combined markets than Spurs-Thunder.  There are fewer television households in Oklahoma City and San Antonio combined than there are in Minneapolis, alone.  The combined size of the television market for the Spurs and Thunder is 52% smaller than the median matchup (Minnesota Timberwolves – Denver Nuggets) and 81% less than the best matchup of the Lakers (or Clippers) and Dallas Mavericks.

The ratings of NBA Finals are directly related to the market size of the participating teams.  There have been 13 NBA Finals played since Michael Jordan left the Chicago Bulls.  The Spurs have played (and won) in four and the Los Angeles Lakers have played in seven of the Finals.  The ratings are 24% lower when the Spurs are in the Finals compared to the Lakers.

The challenges of a Spurs-Thunder matchup would have been compounded by an Indiana Pacers win last night.  Indianapolis is the sixth smallest market in the NBA and only Milwaukee is smaller in the Eastern Conference.  There has not been an NBA Finals from smaller markets than Oklahoma City and Indianapolis since the Fort Wayne Pistons played the Syracuse Nationals in 1955.  Conspiracy theorists were probably silenced last night because the game wasn’t close.  Nonetheless, the NBA and ABC, the network televising the Finals, are hoping that the midsize market Miami Heat (with considerable star power) or large market Celtics or 76ers prevail in the East.  Regardless of the Eastern Conference winner, however, the ratings for the NBA Finals are likely to be the lowest in history edging out the 2007 matchup between the Spurs and Lebron James’ Cleveland Cavaliers.

Peer Effects

Some of the benefits from attending a more selective school are due to learning from smarter and more dedicated classmates whose parents encourage success in school.  Similarly, student athletes who attend schools with better athletic programs benefit from not only better coaches and facilities, but also by being pushed harder and learning from superior teammates in practice.  In principle the magnitude of these peer effects can be determined in a sport such as track and field where objective measures of an athlete’s performance are readily available.

Most high school state championship tournaments segregate schools by enrollment size to provide greater parity among competing teams.  In team sports, it is obvious that larger schools have an advantage.  A football, baseball or soccer team will be more successful if they have more good players, which is more likely to occur at a larger school.  In individual track and field events it is less obvious why a student from a larger school should be faster than a student from a smaller school.  Larger schools may have better coaches and facilities, but some of the benefit from attending a larger school is the chance to practice and train with superior teammates. 

The magnitude of peer effects became clear as I watched my daughter compete this weekend in the San Diego Section prelims for high school track and field.  In the prelim heats athletes in all events are grouped into two divisions based on the enrollment size of their school.  In the finals for the 1600m (which will be held next weekend) the 12 runners with the fastest times, regardless of school size, compete for positions in the California State High School Championship meet.  This year two of the top twelve runners in the 1600m race were from a smaller (Division II) school.  Over the past six years 25% of the top 12 runners each year were enrolled in a Division II school.

In San Diego about 36.4% of students are enrolled in Division II schools.  If track and field ability was identically and independently distributed across student athletes, 36.4% of the top twelve runners each year, on average, would come from a smaller school.  In fact only 25% of the top twelve runners over the past 6 years have been from a smaller school.  The likelihood of observing so few runners advancing from small schools, due to random chance, is just 2.7%.  In other words there is reasonably strong evidence that female high school runners from larger high schools in San Diego are faster than their competitors from smaller schools.

Larger schools may have better coaches and facilities than smaller schools, but students at larger schools also benefit from training and practicing with stronger and faster teammates.  Peer effects are important for human capital accumulation as well as athletic training.  Students relegated to weaker schools, where many of their classmates are disinterested and unmotivated, are disadvantaged.

Badgering Wisconsin’s Jobs Data

Next month’s election between Wisconsin Republican Governor Scott Walker and Milwaukee Mayor Tom Barrett is arguably the most significant statewide election in 2012.  Governor Walker created a firestorm of controversy when he signed a law limiting the collective bargaining rights of state and local government employees not long after his election in November 2010.  Since then over 900 thousand Wisconsin residents signed a petition for the Governor’s recall.  The economic health of Wisconsin is a key issue in the recall election.  Democrats argue that Republican budget cuts and the corresponding decline in state and local government employment have hurt the state’s economy, while Republicans argue that more fiscal discipline and the promise of lower taxes and regulations will increase Wisconsin’s economic growth rate.

 In the past few days the debate in Wisconsin has shifted to an argument over the reliability of competing jobs data series.  The Democrats point to the widely used establishment payroll survey that estimates monthly employment.  The payroll survey oversamples larger employers but has a difficult time tracking the births of new establishments that are (by definition) not part of the sample frame.

The Republicans, led by Scott Walker, note that the Quarterly Census of Employment and Wages (available since 2001), shows stronger employment growth than the establishment survey.  There is no question that a Census of employers provides more accurate information than a survey.  In fact, the survey data will eventually be revised according to benchmarks provided by the Census.

The problem is that Wisconsin politicians are impatient and the Census data are not available as quickly as the survey data.  The latest official Census figures are only available through September 2011, while the most recent establishment survey is reported through March 2012.  Earlier this week Governor Walker presented preliminary fourth quarter Census data that showed annual employment growth through the end of 2011 while the payroll survey indicated a loss of jobs over the same period.

The following chart, using data from the BLS website, presents comparable non-seasonally adjusted data from the Census and payroll survey.  The employment levels from the Census and establishment survey have a correlation coefficient of .985 over the past decade.  This is not surprising because the Census data are used to benchmark the payroll survey.  Nonetheless, the two series appear to begin to diverge in the second half of 2011.

The next chart illustrates the annual percentage change in the two employment series.  Year over year changes are presented (e.g. the percentage change in employment from January 2001 to January 2002 is reported in January 2012).  The percentage changes in the two series have a correlation coefficient of .99 over the past decade.  The payroll survey indicates that employment growth slowed in the summer of 2011 and turned negative in October 2011.  Employment has declined even further in the first three months of 2012 in the payroll survey.  In contrast, the Census data indicated that employment growth did not decline in the summer of 2011, and according to Governor Walker’s preliminary data, that trend continued throughout the last quarter of 2011.

The two employment series yield conflicting information about employment growth in 2011.  This has generated some political controversy but when the final Census employment data are reported for the last quarter of 2011, they will be a benchmark for revisions of the payroll survey data.  When all revisions have been made the two series are likely to track closely in 2011 as they have throughout the past decade.

It is understandable that political rivals have different views about which policies are more likely to promote growth and prosperity.  It is unusual, however, for candidates to disagree about the reliability of economic data series.  Census data are more reliable than a survey.  The payroll survey provides a valuable, but somewhat noisy, indicator of employment changes that have occurred since the latest Census benchmarks.  Stronger employment growth in the Census data in the last half of 2011 may well be the result of a higher “birth rate” of establishments and start-ups that aren’t included in the payroll survey’s sample.

56.5% of the Job Losses Since 2009 Occurred for Women

Last month the Romney campaign cited Bureau of Labor Statistics (BLS) data to report that 92% of all job losses since President Obama took office in January of 2009 were suffered by women.  The media reaction to the Romney campaign’s claim was mixed, but most analysts did not question the accuracy of the underlying data.  Some analysts opined that it was expected that most of the job losses in the past three years occurred for women because government employment has contracted slightly since January 2009.  My blog post from April showed that 95% of the jobs eliminated at the U.S. Postal Service were held by women.  The problem with all of these analyses is that they are based on faulty data.

The BLS announced on its website yesterday that:

Estimates of women employees in the U.S. Postal Service and some related series from the Current Employment Statistics survey were temporarily removed from the BLS data-retrieval system on May 14, 2012. BLS staff discovered data-processing errors that occurred during the November 2009–April 2012 period and resulted in an incorrect ratio of women employees to all employees. Correcting these errors will increase the number of women employees but does not affect total employment levels. Series of women employees were removed for the U.S. Postal Service, federal government, government, service-providing, and total nonfarm.

Although I am not sure about how the BLS discovered their error, I believe I have an explanation.  Alan Robinson of the Direct Communications Group (@CEP_Observer) didn’t believe the numbers in my April blog post (three weeks ago) about women’s job losses at the US Postal Service.  After I sent him the data I used and a link to the BLS website, Alan still didn’t believe the data.  His inquiries to the BLS caused their economists and statisticians to take a closer look at the data, which uncovered the apparent errors.

The BLS is assigned an incredibly difficult task, and generally produces extremely reliable and valuable data.  This time they made a mistake, and are working to correct the problem.  Until the establishment employment data for women are updated, our best information on the gender composition of job losses comes from the household survey, also administered by the BLS and the Census Bureau.  The household survey shows that the fraction of the adult population that was employed:

• Declined from 66.2% to 64.3% for men, between January 2009 and April 2012
• Declined from 55.3% to 53.0% for women, between January 2009 and April 2012

Women comprise about 52% of the working age (civilian) population.  The 2.3% decline in employment relative to population for women means that 2.89 million fewer women were employed in April 2012 than would have occurred if the employment to population ratio for women had remained steady since January 2009.  Similarly, there are 2.24 million fewer men employed in April 2012 than would have occurred if the employment to population ratio for men had remained constant since January 2009.

The calculations above indicate that the best estimate is that 56.5% of the relative employment declines since January 2009 were suffered by women.  Next month the BLS will post updated data on the gender composition of employment based on the establishment survey.  There are many reasons why the household and establishment survey data will look somewhat different, but it is likely that the revised establishment numbers will mirror the household data and show that the majority (but far less than 92%) of the jobs lost since January 2009 were jobs held by women.

Durable Goods Manufacturers Struggle to Find Qualified Applicants

The typical job vacancy in durable goods manufacturing remains unfilled longer, on average, than at any time in the past decade.  This suggests that durable goods manufacturers struggle to find qualified applicants for their job openings as the economy slowly recovers from the deep recession of 2008 and 2009.  In contrast the average construction job vacancy remains unfilled half as long as it did during the construction boom because there are many qualified jobless workers for each job opening.  Construction employment fell by almost 30% between 2007 and 2010, and has not grown since January 2010.

The BLS JOLTS data report job openings at the end of each month and the number of persons hired per month, by major sector of the economy.  For example, there have been an average of 194,000 job openings in durable goods manufacturing at the end of each month, and 157,000 workers hired per month over the past three months.  This implies that the average job vacancy remains unfilled for about 38 days.  In contrast, at the depth of the recession in the fall of 2009 the average durable goods job vacancy remained unfilled for less than two weeks.  The following figure shows the average number of days a job vacancy remained unfilled over the past decade in three sectors impacted by the recession: construction, financial services and durable goods manufacturing.

 

The average job vacancy in financial services now remains unfilled for about 40 days compared to 25 days in the fall of 2009.  The financial services labor market had the least slack in the summer of 2006, when the typical job vacancy remained unfilled for about 7 weeks.

It was most difficult to hire a construction worker in the summer of 2007 when the average job vacancy remained unfilled for about 15 days.  In contrast, in the early fall of 2009, the average construction job opening remained unfilled for less than 5 days.

The average job vacancy in financial services now remains unfilled for about 40 days compared to 25 days in the fall of 2009.  The financial services labor market had the least slack in the summer of 2006, when the typical job vacancy remained unfilled for about 7 weeks.

It was most difficult to hire a construction worker in the summer of 2007 when the average job vacancy remained unfilled for about 15 days.  In contrast, in the early fall of 2009, the average construction job opening remained unfilled for less than 5 days.