Sunday, March 21, 2010

Unemployment? Or Unwillingness to Pay for Services?

Once again the daily newspaper provides important policy information, if you read carefully and connect the dots.

On Wednesday, March 3 (2010), the Los Angeles Times carried a front page story describing the lack of quality control and discipline in the county probation department -- because there are "too many cases and not enough staff." As a consequence, juveniles under the department's supervision are almost undoubtedly being abused by sworn officers who should be disciplined or fired. And the situations are not trivial. One case that was resolved involved an officer convicted of having sex with three juveniles in confinement. Another case involved an officer directing five teenagers to beat another juvenile suspected of stealing her cell phone.

More front page news: You already know that Toyota is suspected of building cars with major electronic throttle design problems that result in unexpected and uncontrollable acceleration. Why didn't the National Highway Traffic Safety Administration take a more pro-active role in investigating the reports that started coming in seven years ago? There may be several reasons, including coziness between regulators and the industry allegedly being regulated and/or incompetence. However, depending on which report you believe, NHTSA has only two -- or five -- electrical engineers on staff, clearly not a sufficient number to investigate carefully and get to the bottom of a complex issue.

Los Angeles County Sheriff Lee Baca (according to an article on page AA3) is cutting his budget by $128 million over 16 months through reductions in overtime and reassignment of administrative personnel to field duties.

States all over the country are experiencing their worst financial crises since, well, maybe forever. Thousands of teachers are losing their jobs, as school districts run out of money.

In today's Los Angeles Times, we discover that approximately half of California residents eligible for food stamps don't get them. One of the problems: welfare offices cannot afford the staff members required to process the applicants. Lines sometimes stretch out the doors, and the telephone goes unanswered. Some applicants simply give up.

Meanwhile, millions of people look for work. No, they're not all trained to be police officers, probation officers, electrical engineers, or teachers. But many of them could be. And most of the rest are either qualified or COULD be qualified to perform tasks that provide society with useful -- even necessary -- services.

If we were willing to pay for these services, we'd get not only more effective government but lower unemployment. Not a bad combination.


  1. "If we were willing to pay for these services, we'd get not only more effective government but lower unemployment. Not a bad combination. " But by paying for them, we'd be taxing someone, which would cause some people to lose jobs.

    Further, I've been crunching the numbers, and the Toyota accelerations appear to be caused mostly by driver error. The main red flag is the age of the drivers. Average driver is 39, average driver in a Toyota unintended acceleration is 59. The sample is large enough to say the difference is significant at 99% confidence.

    Now, back to your original point. There is no free lunch. Paying salaries and benefits (which often are as big an expense as salary) for public workers means taxing that money away from someone else. And those taxes cause real hardship. The top marginal rate paid in New York State is already almost 50% for example (it's on income between 86,000 and 106,000; 28% federal income tax, + 5% state, + 15.3% social security and medicaid). And there's a 9% sales tax, and quite high property taxes.

    Also, note that the top marginal rate is not on millionaires, because Social Security is regressive.

  2. Peter, thanks for your comment. I agree that spending more money on social services means that money has to be raised from someone. However, I cannot agree that "those taxes cause real hardship," at least not in many all-too-common cases. The person who earns $5 million most likely socks $4 million away; you would say "invests" $4 million, but what kind of productivity increase occurs when one person sells stock and another buys it? I don't think the economy suffers a great deal if that person invests $3.5 million instead.


  3. If you're familiar with Keynesian economic theory (by the way, Keynes is not a right-winger by any stretch), you'd do well to recall that government spending and investment are seen to have the same economic effect. So if you tax $500,000 from a rich person who would have invested it, then you have roughly the same effect, minus the direct costs (time, paperwork, IRS agents) associated with the collection and distribution.

    I would argue that beyond that, investment has the second benefit of promoting efficiency, which government spending does not. Investment sends resources to companies that are likely to succeed and makes resources difficult to acquire for those likely to fail. This speeds up the process of success expanding and failure getting wrapped up and finished with. This means more successful enterprises, which produce more jobs, products, and services, all of which benefit society.

  4. As to the question of buying and selling stock, let's get into the details.

    There are 3 types of stock sales that matter here: Initial Public Offering (IPO) sales, regular bid/ask sales, and short sales.

    IPOs are the easiest case. In an IPO, the investor buys stock directly from a company formerly owned wholly by its founder(s). This directly invests the price paid by the investor into the company's treasury, with which it goes out and does it's thing (usually creating a bunch of jobs in the process).

    Short sales are the next case. In a short sale, I borrow shares of a stock for a period of time, usually a few months, and as soon as I've borrowed them, sell them, hoping that I can buy them more cheaply by the time they're due to be returned. So if I borrow 1,000 shares of Apple at $200 each, selling them immediately, I have $2,000,000 cash. If apple shares are only $190 next week, then I can buy them for $1,900,000 and pocket the $100,000. The short sale allows investors to bid down the price of companies they believe to be poorly run, or otherwise unlikely to succeed. This is important, because it's a very powerful way of punishing sclerotic bureaucracies for being sclerotic bureaucracies, and telling people that they should take their money elsewhere.

    Bid/ask sales are regular sales of stock, that do the same thing, except without all the fancy borrowing. If there are more buyers than sellers, the price goes up until they match. If there are more sellers than buyers, the price goes down until they match.

    So, the question comes down to "why does the stock price of a company matter?" They've gotten the IPO money, so it would seem irrelevant what they trade at afterwords. It's not for two reasons:

    1. Bonds. Companies borrow money alot, and they do so by issuing corporate bonds. In order to find buyers, the company has to look like it can repay those bonds. If the company is worth less in market cap (price of shares * number of shares), than it's outstanding debt, then it's like a person with more debts than assets: someone with a good chance of going into bankruptcy. So a lower share price makes borrowing more difficult for failing companies, which is a good thing, because that means borrowing is easier for successful companies. And successful companies create jobs; failing companies don't.

    2. Buyouts. When a company is poorly run, one of the best things you can do is to replace the people who are poorly running it. In order to do this though, you need to own the company. Owning the company for a public company means owning 50%+1 shares. When the shares are cheap, due to investors bidding them down, it's relatively easy to buy out enough shares to take over a company and reform it. If the company is running well and the shares are expensive, then you can't buy it out easily.

  5. Wow, Peter, you've outdone yourself! I will comment only briefly before moving on to tomorrow's post.

    First, in regard to your Toyota statistics, I'm not convinced, for the very simple reason that if older drivers were causing the problem, the incidence of accidents would be proportional to the percentage of older drivers operating each model (or brand) of car. I've seen no evidence that this is the case. Many older drivers operate Acuras, Hondas, BMWs, Buicks, etc. -- yet none of these has experienced anywhere near the frequency of acceleration problems reported in Toyotas.

    More importantly, your pure economic analysis (derived from academic theory) ignores a simple fact: the reality it creates bears no relationship to human values. Despite some regulation in this country, we experience largely a capitalistic, free market economy (witness the defacto AND legal deregulation of the financial markets during the Bush years, to cite just one example). The outcome was not the economic nirvana your theories predict; in fact, we had close to the exact opposite -- as close to "melt-down" as anyone wants to experience. Even prior to the meltdown, but certainly following it, millions of Americans were homeless and jobless -- and most of them not because they were/are lazy, but because the economic system doesn't care about human suffering. It always bothers me when one of our local politicians (about once a week) loudly proclaims the value of PRIVATE SECTOR jobs, as if people working for government (as he does, ironically) or the non-profit sector are worthless, just because they provide services rather than manufacture (and create a market for) widgets. Please give me a little economic inefficiency, if necessary, to create a society "with justice for all."

  6. "none of these has experienced anywhere near the frequency of acceleration problems reported in Toyotas."

    Reported is the key word here. The numbers I got came from news reports. They don't keep government stats on unintended acceleration as far as I know. So a similar number of Acura drivers could be unintentionally accelerating and we'd have no idea.

    As to the question of public vs. private jobs, you can have the preference you have with regard to being willing to have inefficiency in order to create public services. My point was that they won't grow the economy, since you shrink the economy by at least the amount you create by giving out the jobs.