Economic Reflections On Jobs Friday

In light of today’s white hot jobs print, we wanted to address something that’s been bugging us for quite sometime.

It’s one thing to observe an economic trend and explain, preferably using data, why you think it’s undesirable or otherwise suboptimal based on your utilitarian view of what’s best for society. That’s great. It’s called “research.”

It’s entirely another thing to observe an economic trend that’s so readily explainable as to be almost not worth talking about and trot it out month after month after month as though it’s, i) somehow surprising, and ii) indicative of some kind of deleterious societal backtracking.

We’re going to pick on Bloomberg here because it’s a recognizable name, but trust us, this narrative is being parroted in all corners of the financial blogosphere and has played a big part in the rise of Donald Trump and Bernie Sanders. Here are some excerpts from a Bloomberg piece out Friday entitled “U.S. Companies Have Enough Confidence to Hire, If Not Invest”:

“The 255,000 gain in payrolls exceeded all forecasts of economists surveyed by Bloomberg and followed a 292,000 increase in June, according to Labor Department data Friday. This came on the heels of a disappointingly soft report on gross domestic product last week that showed business spending on buildings and equipment dropped in the second quarter for a third consecutive time.”

“While such disparity between hiring and investing is probably overstated, it’s also symptomatic of an economy that has been increasingly dependent on services such as health care and retailing that require more workers and less capital. Manufacturing, where new factories and assembly lines are arguably more important than increasing staff, has been hit hard by weak global demand and the plunge in energy investment.”

So that’s a nice way of saying this: “American manufacturing is dead and the US economy now produces Starbucks baristas instead of good old factory workers.”

First of all, that’s true. But news flash: the US is a services-driven economy. That didn’t just happen last month. Why are we still talking about this?

Let’s be clear about one thing: we’re not being insensitive to all of those who have lost jobs as the American manufacturing sector gradually bowed to cheap overseas labor. “You don’t know what it’s like for these people and their families,” is a straw man argument. Of course we do. They lost their livelihood. Their lives were turned upside down. It’s terrible.

You know what else is terrible? The fact that all kinds of coal miners have lost their livelihood as the world shifts away from what they pull out of the ground. And you know what else is terrible? Every mom and pop local retail store that’s been put out of business by Wal-Mart. And you know what else is terrible? All the buggy makers whose livelihoods were destroyed when Henry Ford forever relegated the horse-drawn carriage to the annals of history. All else equal, people losing jobs is bad everywhere and always. We get that.

But this thing that seems to come up every single month where someone is shocked - shocked! - that there were more service sector workers added than manufacturing jobs is just silly. It’s a services-driven economy. Of course it added more services jobs. Do you know how many Argentine cattle ranchers the US economy added last month? Zero. Do you know why? Because we’re not in Argentina. See what we’re saying?

The other thing Americans need to come to terms with before they end up electing a Bernie Sanders or a Donald Trump is that these manufacturing jobs aren’t coming back. Sorry Bernie. Sorry Donald. And neither are the coal jobs. And neither is the buggy-making industry. It’s over.

Unless you want to strangle global trade and commerce and drive up prices on everything from TVs to t-shirts by some astronomical percentage, you’re not going to make “Made In The USA” viable at the consumer level ever again. For the umpteenth time: that’s not an attempt to be cold hearted. It’s just the cold, hard fact of the matter.

Plus, we don’t hear too many people complaining about the dozen or more services they require to maintain their comfortable standard of living everyday. We’ve never once heard someone standing in line at Starbucks say “it sure is a shame that young lady isn’t making airplane wings at a Boeing factory in Washington state.” No, instead all we hear is this “yes, hi, grande skinny vanilla latte no whip.” We’ve also never heard anyone at an Apple store say “gosh, I sure wish this iPhone was $5,000 instead of $500.”

Maybe instead of using industries antiquated by harsh market realities as political fodder or as an excuse to cast aspersions at whomever is in The White House (and that always happens by the way, doesn’t matter Republican or Democrat, somehow one guy is always responsible for what is actually just the market doing what the market does), we should start thinking about paying people more for the services jobs. After all, guess where those laid off factory workers are working now? In the services sector. It’s sometimes the very same people talking about revitalizing the manufacturing sector that are steadfastly opposed to raising the minimum wage for the very same people who were laid off from that very same manufacturing sector. How does that make any sense? Let’s say, for argument’s sake, that Henry Ford wasn’t paying his original workers as much as they were being paid in the horse and buggy industry that Ford put out of business. Would the solution have been to “revitalize” the horse and buggy industry?

Is there some truth to the fact that if you raise the minimum wage you’ll force companies like McDonald’s to fire people or cut hours or “hire” machines?

 

Well, of course that will happen in some places. But that’s not a reason to not do it.

There’s a cost-benefit analysis associated with every economic decision anyone makes every single day. But frankly, the idea that the aggregate economic benefit of raising the minimum wage would be outweighed by the number of people who would be fired is patently absurd. If I’m a McDonald’s franchisee and I have to start paying fry cooks $15/hour, I might fire one or two cashiers, but I’m not very well going to just up and fire everyone and cook those fries myself.

And besides those two unfortunate cashiers, the entire rest of the staff will have more disposable income to go out and spend on their days off. The whole minimum wage debate is another example of people letting their politics get in the way of their common sense; something we’ve repeatedly warned can be dangerous for investors. It’s equally dangerous for economic policy.

Now have a look at this:

(Chart: Illinois Policy Institute)

If you’re familiar with the term “welfare cliff”, you already know what that is.

Basically what it shows is that a single parent with two children would have to make $38/hour in Chicago in order to be better off than they would making $12/hour and receiving maximum benefits. Now there are a lot of conclusions we can come to based on that rather disconcerting statistic, and a system that’s set up that way probably disincentives some people to work.

But believe it or not, some people use that as an argument for not raising the minimum wage. Here’s the argument: “Until we get to $38/hour it makes no difference, and since we obviously can’t pay $38/hour, we might as well pay $12 that way all the single mothers of two in Chicago can collect the maximum government benefits and make the equivalent of $65,000 a year. See, everyone’s a winner.”

Obviously that’s absurd.

Is $38/hour thus the “right” minimum wage in Chicago? Well, probably not. That seems a little high, but to say that a single mother in Chicago would prefer to make $12/hour (i.e. be poor) while making the welfare adjusted equivalent of $65,000/year as opposed to making say $50,000/year in real income (i.e. not be poor) seems like a ridiculous proposition.

Let’s look at one more thing before we wish you a happy weekend. The Bloomberg article seems to argue that the services-driven economy is partially responsible for a dearth of capex. No it’s not. The fry cooks aren’t rubbing sticks together to make fire then heating oil in a pot and hand-dipping the frozen potatoes. All businesses require capital - both human and otherwise. Do you want to see what’s responsible for the dearth of capex? This:

(Chart: Deutsche Bank)

Now then - have a good weekend.

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2 Comments

  • David

    August 7, 2016

    Typical ignorant,"sophisticated," know-it-all, collectivist, anti-free-market claptrap. This person would never understand what a really true free market could do. What a market without government mailed-fist in every single thing that goes on. We deserve what we get because we don't stand up a say: "I've had enough! I'm not going to take it anymore!" Only when the great collapse occurs and the sheeple are starving and looting will things ever revert to the mean.

  • Sippo Postma

    August 7, 2016

    That's what is called in Europe the Dutch disease.