Guesstimation No one ever said that economics was an exact science. This is particularly true with many statistics related to economic performance such as employment estimates, income measures, and most of the other numbers thrown out in various media outlets. We do the best we can to describe what’s going on, but let me explain something here—it’s largely guesstimation.
On the first Friday following the end of every month, US unemployment numbers are released. That little percentage sets off a media frenzy as analysts compare the figures to expectations, history, other countries, and anything else they can think of. Wall Street takes notice, and the stock market may move hundreds of points on the news—whether good or bad. In short, it’s probably the most-watched economic data series bar none.
What many people don’t realize is that it’s far, far, far from precise. The process works like this. Each month, local agencies conduct surveys of their area to determine how many people are unemployed (and employed) and the size of the total available workforce. (You divide these two numbers to get the unemployment rate, with the unemployment as the numerator and total workforce as the denominator.) All of these local agency results are then compiled at the state level—then at the national level.
While every effort is made to ensure accuracy, there are several potential pitfalls with regard to the procedure. First, the information gathering process consists of surveys, meaning that only a small percentage of all households are contacted. Second, local agencies vary in terms of the quality of their staff and resources to conduct the surveys. Third, there could be issues with the compilation at the state and national levels. Fourth, this all happens in a matter of days. Naturally, there could be data issues, and this series is never revised.
But the problem goes beyond the quality of the information. A larger issue is whether the unemployment rate is even a good measure of economic health. There are at least two scenarios where such a statistic can be very misleading. Take, for example, the case of a rapidly growing economy. In such an instance, many people may be moving in to take advantage of the opportunities. Because of this increased pool of available workers, some of whom may still be in the transition phase and thus indicate that they are jobless, the unemployment rate may actually increase. So you could have an economy in great shape, but rising unemployment. (This situation happened in Texas a few times during the Oil Boom of the late 1970s and very early 1980s.)
On the other hand, if an area has seen persistent hard times, people may begin to drop out of the workforce. The way the process is set up, to be counted as unemployed, a person must be looking for a job. So here you could have an economy in bad shape, with people giving up on finding work and essentially dropping out of the available workforce, but the unemployment rate actually improving. This pattern has also occurred occasionally.
Another issue is the variance between this measure of employment and others, such as the one based on surveys of businesses. Recently, these two series have diverged, with the number of jobs indicated by the household survey going in a different direction than the business establishment series indicates. This could be an indication of several things, including rising numbers of self-employed people (which wouldn’t show up on the business survey). The opposite problem could arise in the case of people with two jobs, as they could be counted twice. Which is more accurate? Depends on your perspective.
A final problem worth noting is seasonality. As a simple example, changes in the weather can impact construction jobs in random and unpredictable ways. Such matters can’t be accounted for by traditional adjustment methods that must be implemented in advance.
I’m certainly not complaining about the quality of economic data. It’s frankly amazing that it can be compiled with as much accuracy as it is, given the inherently difficult nature of the process. The problem is that many people—from the media, to businesspeople, to Wall Street gurus—take the unemployment rate as absolute gospel. Billions of dollars change hands, political careers are made or broken, consumers and investors decide to spend or pull back, and article after article after article appears every time the unemployment rate is released.
Instead, we should all remember that this isn’t a precise accounting; rather, it’s a quick-and-dirty look at the state of things. Use it to get a feel for whether the economy is growing, shrinking, or stagnant, but don’t go much further than that. In fact, I focus more on the job growth (or decline) than the rate itself. After all, it’s guesstimation.
posted @ 11:17 AM CST [link]
Friday, September 19, 2003
Brew-ha-ha Kansas City and barbeque. New Orleans and jambalaya. New York and bagels. There are few cities more inextricably linked to a specific food—or product of any kind, for that matter—than Seattle is to coffee. Home of Starbucks, Seattle’s Best, and other coffee companies known around the world, the region represents one of the highest per capita coffee consumption areas there is. So it was with great interest that I watched the recent flap over the proposed tax on espresso. The tax would not have applied to drip coffee, just the more expensive latte, espresso, and similar drinks.
The ten-cent levy would have been in addition to the sales tax already collected on the drinks. Coffee houses, who already pay business taxes, decried the complex bookkeeping hassles they would have to deal with given the structure of the tax. Administration would have been involved for city government, too. But childcare providers would have gained millions each year.
More than 100 years ago, Thorstein Veblen suggested that as a society’s resources grow beyond mere subsistence, the purchase of goods and services not strictly necessary for survival can take on new meanings. In his argument, he dealt more with the types of things some people buy just to show they can afford them—conspicuous consumption. Studies indicate higher-income households are more likely to consume espresso and other expensive coffee drinks. Clearly, Veblen’s idea that certain patterns of purchasing and behavior have significance beyond the obvious applies here. In Seattle, the ritual of coffee drinking is certainly not about providing the body with needed fuel. Attempting to tax espresso raised the ire of many, needless to say.
For some, the chief complaint wasn’t the addition of 10 cents to the cost of every cup. In fact, the increment isn’t all that big given the cost of latte or espresso. However, the idea of the government collecting taxes on a specific product for an unrelated purpose rubbed many wrong. There have been “sin” taxes on alcohol and cigarettes for decades, but these are at least loosely linked to the ultimate use of the tax receipts. Taxes on cigarettes, for example, are often used to improve healthcare; gasoline levies typically go to better transportation systems. Moreover, there was fear that this tax would open the door for other, product-specific taxes in Seattle and elsewhere.
On the positive side, the tax would have been largely recession proof, and few are arguing against the merits of additional funding for childcare. However, even among the strongest childcare advocates, there are those who suggest that the issue of funding is far too important to leave to a mechanism such as the proposed tax.
As I’m writing this, it appears that the tax failed to pass. I must say that I think that’s a good thing. Although funding for childcare is a noble goal, a tax on a specific product represents an undesirable way to achieve it. Such actions reflect poorly on the attractiveness of the area as a place to do business and distort consumer spending in capricious ways. Moreover, the incremental gains were insufficient to justify the administrative nightmares—both at the coffee houses and the city—that would likely have ensued.
posted @ 07:59 AM CST [link]
Friday, September 12, 2003
Two Years After Two years ago was the end of the world as we knew it. A true loss of innocence, if you will, as the seemingly impossible became a dust-filled, flame-laden reality. Some 3,000 persons lost their lives, and thousands of families struggle daily to fill the gaps. We continue to rebuild—physically, emotionally, financially, and otherwise. The tragedy of that day will always be with us, and there are no words to adequately describe the psychological and emotional toll the events of September 11, 2001 have taken worldwide. I do want to mention, however, some key aspects of the economics of the events of that day.
One of the biggest problems with 9/11 from an economic perspective was the timing. Two years ago, the US economy was coming down from the highs of one of the most amazing periods of growth in our nation’s history. The stock market was through the stratosphere, and income and employment levels had been setting records on a regular basis. However, there was an ominous buildup of inventory and capacity occurring at the same time. In part, this was due to the vagaries of the Millennium Bug and the rush of purchasing to ensure Y2K compliance. The underlying health of the economy was eroding, and, although we didn’t know it until a data revision several months later, we had already slipped into a mild recession.
Add to the scenario a catastrophic external shock in the form of the terrorist attacks and things began to go downhill in a hurry. Naturally, shutting down the financial markets, transportation networks, and many other critical systems was very harmful to the economy. What came next, however, did at least as much damage.
Just as business activity and equity markets began to show signs of life, the massive wave of corporate scandals struck. As allegations flew, investors began to lose confidence in the information they were receiving related to the companies they were purchasing. Without reliable information, markets falter; we saw the stock markets lose ground at an alarming rate. With that erosion in the values of equities, many Americans lost a substantial portion of their hard-earned nest eggs. Spending was stifled, and the caution lingered.
The uncertainty associated with the ongoing war in Iraq has dampened the nascent recovery. In addition, fears persist that another attack on American soil is only a matter of time. Even more depressing is the very slow rate of new job creation given the stabilization and growth in the economy. Ironically, we have exhibited positive expansion in gross domestic product in every quarter since September 11, a remarkable achievement which is often overlooked in the wake of a sluggish labor market and lingering investment woes.
Nonetheless, airline bookings are up. Security has improved, and efficiency is growing. The burden of overcapacity is shrinking, and businesses are finally gaining ground in terms of profits. Corporate scandals are waning and investors are beginning to trust the information coming out of board rooms and Wall Street. The Federal Reserve Bank has dropped interest rates to historic lows and the fiscal policy has remained generally faithful to an agenda of stimulating the economy. And the so-called jobless recovery cannot persist; just give it a little time, and the jobs will come.
Ask anyone who knows me and they’ll confirm that my natural tendency is to be an optimist, always looking for the hidden elements of the positive in any given set of circumstances. And even though the positives came at far too great a price, we would not be honoring the memory of those who perished if we didn’t also reflect on the glints of a silver lining behind the enormous cloud that is 9/11. The courage displayed that day inspires awe; the resurgence of American pride and patriotism both in the immediate aftermath and now, two years later, is unprecedented in my lifetime. Just as we heal, so does the economy. We will never forget, but the power of the American way of life—including our strong markets, innovation, and productivity—will persevere and prosperity will be sustained on a long-term basis.
posted @ 08:22 AM CST [link]
Friday, September 5, 2003
College Crunch Time If you have a college-aged child or one approaching that stage (or you happen to be one of those lucky young minds), you’re well aware of recent developments in the area of higher education. As a father of five such persons, I am painfully aware. My lovely wife, who serves on the Texas Higher Education Coordinating Board, is another source of knowledge of the forces coming to bear on the colleges and universities across the state. Although the issues are far more complex than I can adequately address in this forum, here is the gist of the problem.
First, the demand for space in the state’s institutions of higher learning, both public and private, is rising rapidly. Recent headlines speak of enrollment at 30-year highs at one smaller university, for example, a condition experienced by a number of facilities. Also, the level of competitiveness of entry into the larger state schools, such as the University of Texas at Austin and Texas A&M, is reaching the stratosphere.
This demand surge is driven in part by a sluggish economy, as there are fewer jobs waiting to tempt high school grads into immediate entry into the workforce. In addition, as the nature of business changes, an increasing number of occupations are requiring higher levels of training. These factors have slanted the decision process of many young people toward matriculating at one of the state’s colleges. This is a very good thing in the long run in that it improves the quality of the Texas workforce, thereby making us more competitive in the global marketplace. Moreover, the gap between the income potential of those with degrees and those without is enough to illustrate the economic value of an education to an individual.
As all of these bright young people enter college, the pressure on the schools grows. The need for classroom space, instructors, dormitories, parking, and so forth and so on increase. Providing these things takes money. Which brings us to the second part of the problem.
The second prong of the issue is shrinking funding to the state schools. Texas’ $12 billion shortfall meant a significant decrease in monies to higher education institutions. While most facilities cut internal budgets to the extent they could, tuition hikes were widespread this fall to avoid compromising either long-term financial viability or educational quality. However, this clearly decreases the affordability of a college education, placing it out of reach for a too-large segment of the population.
So wherein lies the answer? Different schools are taking different approaches. Some schools are reviving programs such as night schools in an effort to both better use resources and offer a broader range of students a shot at a degree. Other universities are chasing research dollars with unprecedented vigor; UT and A&M combine for well over $700 million in funds for Research and Development each year, the lion’s share of it from the federal government. A number of schools are dipping into reserve funds, clearly not something they can do perpetually.
There have been great strides made in the area of ensuring that the degree programs offered are the right mix for today’s needs. The slate of offerings by the state’s colleges and universities are examined for excessive overlap, with superfluous options being pared away. At the same time, more attention has been turned to the needs of business in an effort to see that graduates are better prepared for the workforce. We’re doing what we can to be sure the system as a whole functions as efficiently as possible, but there’s a limit to the relief such actions can offer.
The heart of the problem is that even as demand for college education grows, funds available to the state’s public institutions shrink. Until and unless we see a return to better fiscal times, the prospects for bigger state infusions into school budgets are slim. Future hikes in tuition are inevitable, as are increasing levels of competition for entry into the state’s top schools. When these forces are combined with evolving demographics, the need for greater opportunity and access, and the issues of adequate preparation in the public schools, the challenge only compounds. It is imperative that we find a workable solution; otherwise, our potential as individuals and a society are irreparably diminished.
posted @ 07:58 AM CST [link]