All-In Nation: Are You In or Out?

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Are you in?

All-In Nation is a collaboration between the Center for American Progress and PolicyLink  and it is centered on exploring ways to create broad-based economic growth.  Their progressive agenda is to lower income inequality by ensuring that barriers and obstacles are eradicated through encouraging more public investment and breaking down employment discrimination through stricter regulation.

Here are three reasons why the U.S. should buy in to All-In Nation:

  1. Minimizes income inequality, which is a threat to a stable democracy.

  2. Improves the skill-sets of workers currently not desired by the private sector.

  3. Ensures a more diverse leadership body by rectifying institutional bias through stiffer regulation.

Minimizes income inequality, which is a threat to a stable democracy.  Since 1980, there has been a steady erosion of the middle class as an emphasis on technology has transformed our workforce.  It was also during that time that we saw a drastic reform within our tax code where marginal income tax rates were substantially slashed at the very top from 70% in 1980 to a low of 28% in 1988.  While that encourages more investment and higher economic growth, the downside is that it could enrich few and impoverish many.  This result has given rise to grassroots movements, such as Occupy Wall Street, that are demanding that wealth be redistributed to the masses.  If this goes unaddressed, the basic fundamentals of capitalism could be threatened.

Improves the skill-sets of workers currently not desired by the private sector.  Businesses are committed to maximizing profits and that implies a lesser commitment to investing in individuals with less marketable skills.  In those instances, the public sector can fill those gaps through workforce development investments.  That could entail more funding to various local Department of Labor locations or grants to local colleges and universities.  There are also opportunities where there can be greater collaboration between the public sector and private sector, so that market forces are more aligned.

Ensures a more diverse leadership body by rectifying institutional bias through stiffer regulation.  It is human nature to have conscious or subconscious biases when it comes to hiring staff.  They can occur through distorted images from media or limited interactions with people of different cultures.  When making key hiring decisions, it is often more convenient to rely on an insulated network that is not as diverse.  With both instances, we see a management structure might not be attuned to their market and ignore highly talented prospects.  This can be rectified through affirmative action or other legislative acts that force management to broaden their job search scope.

Here are three reasons why the U.S. should pass on All-In Nation:

  1. Compromises future economic growth with taxes rising on more productive assets.

  2. Bureaucrats in Washington are ill-equipped to make decisions that will optimally benefit society.

  3. Discourages incentives by enabling counter-productive behavior.

Compromises future economic growth with taxes rising on more productive assets.  The U.S. has accumulated successively higher budget deficits because their spending has outpaced revenues collected.  Making investments in infrastructure that cannot be supported with current fiscal conditions will likely worsen future economic prospects.  While the U.S. has been fortunate to finance deficit spending without a huge increase in interest rates, this is not a sustainable strategy in the long-term.  Rising interest rates will undoubtedly occur in the future and that will hamper both businesses and consumers ability to access cheap credit.

Bureaucrats in Washington are ill-equipped to make decisions that will optimally benefit society.  The danger in placing more control with government is that they are either incapable of adjusting to dynamic market conditions or are more interested in fulfilling their selfish pursuits over more valued needs of society.  While the free market system allows market forces to veer to projects that will yield the highest economic benefit to society, yielding control over to bureaucrats might result in funding initiatives where political connections trump overall economic benefits.

Discourages incentives by enabling counter-productive behavior.  In an attempt to reduce inequality, many anti-poverty programs are designed to provide financial and food support.  Even though this is certainly helpful in the short-run for families falling on tough times, there are inadequate mechanisms in place to encourage people to wean off public support.  In fact, there are instances where people opt to stay on public support, even when work is available because they find it more financially beneficial.  While that might be helpful in the short-run, their future job marketability is compromised when the length of unemployment continues to rise.  Prolonged periods of unemployment end up hurting them more in the future and creates a poverty cycle that is hard to reverse.

Or are you out?


Why Are Gas Prices Rising?


You might have noticed a spike in gas prices over the last couple of weeks.  Neil Shah of Wall Street Journal’s Real Time Economics reports that crude oil prices are at a 52-week high.  Specifically, crude oil prices have risen to $108.05 a barrel.  When looking at the market for gasoline, the price of gas is affected by the market forces of supply and demand.

Neil Shah mentions two factors:  a rise in crude oil prices and an improving economy.  Crude oil prices affects supply, while a stronger economy boosts demand.

There are four factors that affect supply.

  1. Change in input prices (any process or resource that goes into making a good)
  2. Change in technology
  3. Change in the number of sellers
  4. Change in the expectations of sellers

In this case, we want to focus on input prices.  Regarding inputs to providing gasoline, think about labor, land, and capital.  In this case, crude oil is considered land, which refers to any natural resource.  Without crude oil, it is impossible to produce retail gasoline.  Crude oil is accessed by refineries, who are then able to convert it into retail gasoline used by cars.

There are five factors that impact demand.

  1. Change in taste (activity is more or less attractive)
  2. Change in income 
  3. Change in the price of related goods
  4. Change in number of buyers
  5. Change in the expectations of buyers

When Shah stated that greater economic optimism is causing prices to rise, this relates to the first and second factors of demand.  When an economy is improving, that means incomes are rising and consumers are more likely to drive and travel because they have more money to spend on shopping.  Even though the unemployment rate remain elevated, consumer spending has been trending up.

It was a little confusing when Shah referred to a boom in American oil production.  That typically results in an increase in supply and drives prices down.  However, that would explain previous dips in prices.  What is happening now is that the utilization of refineries are near full capacity at 90.7% as of the week ending on June 28.  In fact, U.S. refineries are operating at the highest level since 2007.  That indicates that driving activity is on the rise and that would place upward movement on prices due to the first factor of demand again.  If the utilization of refineries start to fall due to refineries expanding capacity through improved technology, then that would be an example of an increase in supply that would drive prices down due to the second factor.

Speculation also plays a role in gas prices and we can look to uncertainty with Egypt.  Even though Egypt is not a major source of our gasoline supply, political turmoil there could impact global supply.  This scenario would be consistent with the first factor dealing with supply.  In this case, prices are driven up not by current market forces of demand and supply, but potential future disruptions in oil supply if the Middle East experiences more political instability.  If disruptions are severe enough, then that would drive the price of crude oil up, which is an example of an input price.

When wondering why gas prices change, one can often look to the market forces of supply and demand.  However, we must also realize the role of market speculation in influencing gas price movements.

Let’s Amend, Not End, Capitalism

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The United States prides itself as being the “land of opportunity”.  With the U.S. being a favored destination for immigrants across the world, that distinction still has merit.  However, there are disturbing trends where many are questioning the value of capitalism due to its contribution to income inequality.  Even so, we must acknowledge the role that capitalism played in lifting not only Americans out of poverty and into prosperity, but in Canada, Europe, and all parts of the world.  Having said that, we must recognize that our current economic system needs to be amended to level the playing field.

Many Americans are divided on the moral implications of income redistribution.  On one hand, there are those that believe that extravagant wealth is immoral and that there should be a limit on executive pay.  In fact, Japan has embraced this culture and have stifled executive pay.  Their executives must publicly disclose their pay if it exceeds $1.1 million and only 7.5% of them exceeded this baseline.  That is dwarfed by American executives, whose top 10 earn between $43 to $131 million in annual salaries.

Then there are others, who believe too much income redistribution is immoral because it unfairly penalizes hard work and achievement.  When an individual makes sacrifices in their education and career, why should they be forced to give up a portion of their earned pay to subsidize an irresponsible individual, who squandered opportunities by not valuing their education early in life?  If taxes are increased substantially as your income rises, then the payoff of extra work and risk is lowered.  Why go through the rigors of medical school, engineering, and law school, when one can make a similar amount in a less demanding field?

In deciding between two competing narratives, the difference comes down to economic mobility.  Is our present economic system more conducive to promoting competition between social classes?  Unless one believes that effort and ability is only consigned to the affluent, one would think that the U.S. economy and its promotion of economic liberty would result in healthy movement between the poor, middle class, and upper class.  However when compared to our peers, we are laggards Markus Jantti’s study comparing the U.S. with the United Kingdom, Denmark, Norway, Sweden shows that Americans are less likely to rise from poverty across generations than any of those four countries.

Certainly, it is fair that a successful professional, who has excelled at their craft, should be able to pass their hard-earned dollars to their children to help them compete.  One of the motivations to taking on additional responsibilities on a project or working 60-70 hours a week is to provide a better life for our children.  That means living in a better neighborhood and access to superior schools.  However, should there be limits imposed on those advantages in the form of higher taxes?

Specifically, there’s a growing body of research that income inequality imposes significant costs on the economy.  In order to counter these costs, there are policy initiatives that would boost equality and shift the economic gains would shift from the affluent to the low and middle class.    When there is too much income inequality, it can actually inhibit economic growth and cause more instability.  Raghuram Rajan elaborates on this view in Project Syndicate.  Specifically, he blames deregulaton and legislative acts promoting home ownership as the root causes of the financial crisis as low- and middle-income households took on too much debt to maintain their standard of living in the face of declining income growth.

With rising inequality, the occurrence of rent-seeking is more prevalent.  This is where individuals use their financial resources and influence to affect policies that benefit their interests over society.  The prevalence of special interest groups and less restrictive campaign financing laws provide the potential to seek loopholes and other avenues to enrich themselves at the expense of others.  Columbia University economist Stiglitz pointed to lack of effective oversight of the financial industry where irresponsible mortgage products caused our steep recession.  Then there are exploitations of the tax code where societal benefits are minimal when these advantages boost corporate balance sheets, rather than worker payrolls.  Lastly, it stunts the progress of competitors who are not able to buy influence.

It is imperative that we achieve legislative reform that minimizes the influence of special interests and replace it with investments toward minimizing the skills divide.  A two-pronged attack is necessary.  First, we need a quick fix in updating adult skill sets that are struggling to meet the requirements of a technology-based economy.  As for schools, they must find ways to increase academic performance within low-income and middle-income households despite challenges within family structures and less than ideal neighborhoods.  This must start with better parental training and access to early child education resources.  Both will require more funding and resources.

Capitalism remains the ideal economic system in the world, but ignoring the negative effects of income inequality can lead to its demise.

Why A Lower Unemployment Rate Is Not Always Good

When one says that a falling unemployment rate is actually not good, the natural inclination is to say “huh”.  Should we not look at a declining unemployment rate as a good sign, especially when most experts did not expect such a drop?  Actually, that is not the case here and that’s due to a misunderstanding of what the unemployment rate measures.  Even though the August job report shows that the unemployment rate dropped from 8.3% to 8.1%, there were only 96,000 jobs added, which was less than expected and not enough to cover normal population growth.

A look at the employment data shows that the unemployment rate declined due to diminished prospects at gainful employment.  While there were slight declines over a number of age and gender demographics, young males aged 16-19 stood out.  They left the labor force at a rate  of 7.2% over the last month, which was much steeper than women of the same age group, which fell  by 1.6%.

While one could argue that this could be a good sign because that means that they are more likely to attend school, not participating in the labor force at an early age hampers their future earnings potential due to lower productivity rates by not being able to enhance their labor market skills.  Unfortunately, this pattern has been occurring over the last decade and is evidence that this generation will likely experience less prosperity than their parents.

It is instructive to note how the Bureau of Labor Statistics collect and analyze employment data.  They actually compile a whole series of statistics relating to the labor market, but most people concentrate on the unemployment rate.  The unemployment rate is a measure of only the labor force and it does not always accurately reflect joblessness.

The key unemployment rates are seasonally adjusted, so fluctuations that occur due to irregular weather patterns are minimized.  When calculating unemployment, they only include active participants that are 16 years or older.  Active participants are individuals working part-time or full-time and those actively seeking employment, but are not currently working.  Since they do not include individuals that desire a job, but have stopped looking due to limited opportunities.   They are called discouraged workers and result in unemployment being understated.

When looking at solutions to this troubling pattern, we must find ways to enhance our youth’s critical thinking skills  and better utilize technology.  Our economy is shifting from industrial to information, so more value is placed on individuals that possess strong critical thinking skills.  With so much information available, firms value prospective employees that are able to access, synthesize, and communicate valuable information that can be used to improve profitability and increase market share.

If employers are not hiring, then our youth must create their own opportunities through cultivating an entrepreneurial mindset and leveraging technology.   Our younger generation are highly skilled in using social media and various forms of technology.  They just need to learn how to transform this knowledge into profitable enterprises.   Unlike any other time in history, the cost and barriers of starting a business have never been lower.

However, we must first learn discipline over financial matters; possess a strong work ethic; and appropriately use our creative energies to exploit opportunities in the highly competitive global economy.  Distinguish needs from wants when buying consumer goods, so that you can build up your savings.  Realize that you may have to downsize your expectations of income in finding a more stable job that will complement your own business on the side.  It might mean not striking it out on your own and delaying decisions on starting a family.

Through vision, perseverance, and following through your plan, one can excel in any economy.