Where are the Jobs and What Creates Them?

Clearly, late in the Bush Administration, the US started a severe recession. I don't think that anyone will argue with me that we were in a recession then. When did the recession start? I'm not sure, and for purposes of this post, it doesn't matter. Similarly, early in the Bush Administration, we were in a recession. At some point, that recession ended and we had a recovery (the exact timing doesn't matter for purposes of this post). Many say that we are currently in a recovery (some would argue with that, but that's not the point).

My point is that during the recovery that began likely sometime in 2002, something was missing. If we are in a recovery now, the same thing is missing. It's a four-letter word, but it shouldn't be an ugly one -- JOBS. And, to the extent that there are jobs, many who are taking them are moving into lower-paid jobs than they were in during their previous period of employment. Said differently, unemployment didn't come down as quickly as we might have like in the early part of this century. And, when it did come down sharply, underemployment (employment in a lesser job than one held previously) was rampant. Similarly, now, even among people who are finding re-employment, many are earning far less and working more than they were before they were laid off.

So, what happened? Recoveries used to bring jobs, lots of good jobs. I remember what it was like finding work in the very early 80s -- in two words, not good. I remember what it was like finding work in the mid 80s -- lots more jobs, lots of good jobs. In the early 90s, it was tough to find jobs. By the end of that recession, good jobs they were aplenty.

The economy has changed. You may or may not be a fan of his, but Thomas Friedman wrote a book called The World is Flat that talked about it. In 1981, it wasn't practical to move large chunks of a company's work from the USA to India or another Asian country. Communications were difficult. Your choices were by telephone when both parties were awake at the same time, something called Telex which was neither cost-effective nor particularly useful, or something that I remember from days of yore called "air mail." Fax machines existed, but they were not prevalent. E-mail was just starting to come on to the horizon, but it was neither common nor cost-effective.

Now, I often wonder what a telephone is. Even in the business world where verbal communication has its place, you just don't find that much of it. Most communication is done via e-mail or instant message. Being on different continents typically only slows things down by seconds. Being in different time zones is rarely an impediment. So, US jobs disappear.

When they reappear, to my view, they fall into two categories -- lower-paid and previously non-existent. The first of those is easy to comprehend. Let's consider the second.

I listened this morning to some sort of a jobs expert. I didn't hear who exactly she is, who she represents or what her credentials were. But, she was talking about companies that are hiring. Of the five that she mentioned, two are among the so-called Big 4 accounting firms. When asked why they are hiring, she brought up the name of an old 'friend': Dodd-Frank.

You remember Dodd-Frank. I have ranted about that law many times here. Perhaps it and its nearly 3000 pages of new rules has its place, but one thing that is certain is that it has placed an incredible added compliance burden on not just financial institutions, but virtually every large company in America. But, where there are losers, there are winners. In this case, the winners are those who can assist with that compliance burden. And, from where I sit, none appear to be bigger winners than the Big 4 (this is not meant to disparage the accounting profession, just a statement of what I believe to be fact).

So, jobs have been created by government intervention. If you are a fiscal liberal, you are thinking of course they were. If you are a fiscal conservative, you are thinking that a few were created while millions were lost. The purpose here is not to debate that issue, but to figure out how to create them.

I know. You are waiting for the answer.

You know what. If I had the answer, my blog readers would not be the first to know. Sorry, but that answer would be way bigger than this blog.

For those few people who delight in seeing what I may be ranting about on any given day, this blog is taking a well-needed vacation until after Labor Day. Check back then to see what's new, exciting, trendy, or just aggravating.

What is Really Causing High Rates of Unemployment?

This is one of the most controversial topics of the day -- unemployment. One thing is clear: unemployment rates are high. I need to give a special warning before moving on that the opinions given in this post are not those of my employer and may not even be my own. I am simply positing that there may be some hidden causes that we have never considered. I'd like for you to think about them. Maybe, you will agree with what I am saying even if I don't agree with myself (I might agree with myself, I'm just not sure).

In order to understand this, we need to understand how the rate of unemployment is calculated. Essentially, it is a fraction the numerator of which consists of those people who are currently unemployed (you are considered unemployed if you are not considered employed AND you have actively looked for work in the previous 4 weeks) (you are considered employed if during the survey week you either worked for pay or profit or you would have worked except that you were on vacation, ill, having child-care problems, taking care of a family or personal obligation, on maternity or paternity leave, involved in a work dispute, or prevented from working by inclement weather) divided by the total number of people who are either employed or are unemployed. In other words, if you are not currently employed, but you are not looking, you are not in the fraction.

OK, I don't think I've really said anything controversial yet, but give me a chance.

Think about how unemployment rates are calculated. If someone had been looking for work for two years, but is so despondent that they have given up, they are no longer considered to be unemployed. Hmm?

So, who is responsible for the current high rates of unemployment? Is it former President Bush (43)? The Democrats would tell you that. Is it current President Obama? The Republicans would tell you that.

I am going to posit that the blame needs to go to four places (remember, I may not agree with what I am saying):

1. Financial Accounting Standards Board (FASB)
2. Pension Benefit Guaranty Corporation (PBGC)
3. The internet (no acronym needed)
4. The credit markets

I know. You think I've lost it. Stay with me for a few minutes. I'll tie this all together ... or not ... I promise.

Way back in the 80s, most American workers were covered by corporate pension plans, defined benefit (DB) plans if you prefer (for those young readers, DB plans used to be prevalent and 401(k) plans were virtually non-existent). Financial accounting (balance sheet and income statement) for these plans was done under APB 8. For the most part, that meant that a company recorded a charge to earnings for any contributions that it made to its plan. For CFOs, this was palatable. But, the FASB said that companies needed to switch to accrual accounting under FAS 87. Later (by about 5 years), the same FASB said that companies needed to switch to accrual accounting for postretirement medical benefits under FAS 106. So, what happened? Companies moved swiftly to get rid of their pension plans and postretirement medical plans. I'm not saying that FASB was wrong, I'm just saying that this is what they did and what happened, partially as a result of this action.

FASB didn't create quite enough turmoil to eliminate all the plans that were gone. But, the PBGC picked up where FASB left off. You see, the PBGC is a governmental organization, but it needs to be self-sustaining. So, the premiums that it receives need to cover the benefits that it pays to former participants in plans of largely bankrupt companies. The PBGC was a major influencer in the move to change the funding rules for defined benefit plans. Once upon a time, US corporate pension plans were generally funded on a projected basis. That is, an actuary would project benefits into the future, discount them back using a set of actuarial assumptions and assign some piece of the related obligation to the past, the present, and the future. The PBGC's thought was that plans needed to be funded in a way to limit the PBGC's liabilities. That meant market interest rates and accrued benefit funding. What it also meant, initially, was multiple competing funding rules that produced peaks and valleys in funding patterns for corporate DB plans. Later on, when projected funding went away entirely, companies saw funding as even less predictable. More plans disappeared. I'm not saying that the PBGC was necessarily wrong, just that this is what happened.

Now, what could the internet have to do with this. Recall that in the late 90s, everyone started to get on the internet. And, everyone included start-up firms that provided for online trading platforms. So, people started day-trading. And all was good, as the prices of tech companies went up, up, and away (remember the 5th Dimension?). But, more often than not, those day-traders spent that money. And, the day traders were far too in touch with the 5th Dimension, but they forgot all about Blood, Sweat and Tears (what goes up, must come down). Margin calls abounded and so did loss of capital.

And, then there were the credit markets. I bought my first house in 1985. I had to put 20% down. And, my mortgage payments (plus property taxes and homeowner's insurance) couldn't exceed 28% of my pay. Before that, I had applied for my first credit card in 1979. I got turned down, not because I had bad credit, but because I had no credit at all. Fast forward to 1999. You wanted a house, you took out a first mortgage for 80% of the value of the house and then a second mortgage for another 15% of the value of the house and perhaps a third mortgage for the last 5% of the value of the house or perhaps even more. And, remember that 28% that I mentioned. Forget about that. By 1999, you were qualifying for those mortgages so long as the sum of your mortgage payments, property taxes and homeowner's insurance didn't exceed 50% or sometimes 60% of your pay. And, that credit card that I couldn't get in 1979 ... in 1999, I could have gotten a deck-full (as in 52) of them if I had wanted. The application process? We'll send you a card and you activate it.

Well, we've seen the results of all of these unknowing conspirators, haven't we. 15 years ago, if you asked workers who were in their early 40s at what age they would retire, a fairly large number of them would have told you in their late 50s or early 60s. Those same people are now in their late 50s. Very few of them are retired. Further, very few of them think they can retire in the next five years. Sadly, an awful lot of them don't think they will be financially able to retire in the next 15 years.

So, what has happened? 15 years ago, we knew roughly how many people were going to be trying to enter the workforce today. We were worried, though, that with all the baby boomers retiring, there would not be enough new workers coming into the workforce to fill those jobs. Something happened along the way. The baby boomers can't retire. Instead of too many jobs for the workers, we have too many potential workers for the jobs.

I know that you want to blame it on Obama, or if not, you want to blame it on Bush. But, I am saying that blame may be misplaced. The Four Horsemen of the Apocalyspe (FASB, PBGC, internet, and credit markets) have come into town and ruined our ability to retire. And, with that ruin, has come significant underemployment. Perhaps when we listened to the 5th Dimension instead of Blood, Sweat and Tears, it should have been Richard Kiley singing "The Impossible Dream" (if it's before your time, check it out on YouTube, it's a Broadway classic). Perhaps it doesn't matter. Perhaps this is the new reality.

GOP-Obama Compromise Would Lower 2011 Employee Portion of FICA Taxes

Have you been hiding under a rock? If you are reading this, I'm guessing not. In that case, you know that (surprise, surprise) the President and Congressional Republicans reached a compromise yesterday.

The well-publicized items were that:

• The so-called Bush tax cuts (enacted through EGTRRA in 2001) will become permanent for incomes less than $200,000 (for singles) and $250,000 (for married)
• For higher earners, those cuts will delay their scheduled sunset until the end of 2012 presumably setting up more Congressional warfare after the 2012 elections
• Renew jobless benefits for the long-term unemployed

Not publicized, but perhaps more important to many were these:

• A 2% of pay reduction in the employee-provided portion of FICA (Social Security) taxes for 2011 only. What this means is that workers will get an effective pay increase for 2011 of 2% on the first $106,800 of pay. This may not seem like much, but more US workers than not pay more in FICA taxes than they do in federal income taxes
• Estates would be taxed at a 35% rate for amounts in excess of $5 million

Beware! This is not law yet. House Democrats will need to support this in order to pass it in December. And, whether an associated bill comes to the Senate floor during the lame-duck session of this Congress or during the next Congress, a meaningful number of Senate Democrats would have to support passage in order to make it law.

We'll continue to cover this here.