Author: Derek Thompson

Official unemployment held tight at 9.7% in March, and the economy added 160,000 jobs, the most in three years. There is a lot of good news in the BLS report, as Dan Indiviglio finds and animates with some fascinating graphs. Unemployment seems to have peaked, discouraged workers are down 200,000 and some significant job sectors added workers, like health care, education and construction. But there are three less cheery factors I’ve got my eye on:

1) It’s hard out there for the young
Dean Baker makes an important point here: workers over age 55 accounted for 79% of the increase in employment for March. We’re seeing a trend. Their employment has increased 722,000 over the last year and fallen
by 2,671,000 for everyone else.

2) Slack is still a problem
Look at two slack categories: low work hours and high part-timers. Work hours are up slightly from
33.9 to 34 (33 is the all-time low). Those working part-time for
economic reasons grew by 300,000 to more than 9 million. This is rather distressing for those hoping to see a quick drop in unemployment. When demand comes back, employers will start adding work hours. But with the work week near its historic low and part-timers growing, it will be easy to add work hours by simply demanding longer hours or permanently hiring the part-timers. That increases payrolls and brings down U6, the broader measure of our unemployment. But it won’t show up in the official unemployment rate (that 9.7 figure).

3) Wages are suffering.
Average hourly earnings fell by 0.1%. It is only the sixth time in 50 years that nominal wages have decreased, Baker points out. This is important both economically and politically. Economically, it illustrates the mired state of demand and employment. Earnings have stalled, which constrains consumption, which in turn constrains profits and earnings.

Politically, it matters because there is a statistically significant correlation between weak disposable income gains and House seats lost in midterm election years. Here is the graphical representation of the axiom: it’s the economy stupid.

CNN is in trouble. Primetime viewers are down 40 percent in the last year. First quarter Nielsen ratings showed the network continuing to lose ground to Fox News and even falling behind MSNBC. How should the network shape up to compete in a world of partisan news and character-driven ratings?

It should be more like TheAtlantic.com.

After you’ve rolled your eyes and written this author off as utterly
entrenched and prejudiced toward his employer, step back and think
about what this suggestion would mean. As NYU’s Jay Rosen wrote, a galvanizing alt-lineup for CNN primetime might include an 8PM show hosted by a liberal, a 9pm show hosted by a conservative, and a 10pm show with a libertarian. This sounds smart. It also sounds like Voices.

CNN should rebrand itself as “the voice from everywhere” rather than “the voice from nowhere.” It should be analysis with attitude. Its hosts should strive for broadmindedness while approaching controversial news topics with disclosed and well-understood biases. In a nutshell, it should be more like TheAtlantic.com. What would that mean?

First, that would mean scrapping the painstaking centrism that Wolf Blitzer has turned into high art. Out with The Situation Room, Wolf’s late-afternoon motley of chatty diffidence. In with something like Andrew Sullivan’s Daily Dish: Live! A televised Daily Dish would be a spicier stir fry of issues with a loud, idiosyncratic, hard-to-place-on-the-spectrum host who isn’t afraid to clear his throat. You’d want someone with a reputation for skewering all-comers, but also someone who loves sharing the stage with a motley crew of commentators from wonky political scientists to tech futurists … with some loopy mental health breaks along the way. Rather than a show that hopes to offend nobody, it would be a show that aims to entertain, no matter whom it offends.

Second, it would mean transforming a lineup of famously middle-of-the-road hosts into a ragtag roster of opinionated blokes who mouth off on big issues, and then open the forum up to comments. This isn’t a new model for television. Bill O’Reilly often opens with a piquant sermon and then invites guests to scream at. CNN could protect its trademarked even-mindedness by finding hosts who are (or seem) open to dissent. But the important thing is to find a talking head who draws lines in the sand, stakes out turf on important topics, and defends that turf against criticism. That’s how to make drama, and it’s how to tell to partisan (all) cable news viewers: “make your home here.” What’s Megan’s position on health care reform? Her readers know. That’s why they read her. So what’s Anderson Cooper’s?

Finally Rosen is right that cable news is wrong to cede the valuable ground of peppery media fact checking to Comedy Central. Jon Stewart and his crack team are exceptional at taking a pol’s or media personality’s latest over-statement, finding an old quote that embarrasses that over-statement, and closing with a kicker. This is more than fact-checking. It’s about finding an amusing and bemused host with his or her finger on the zeitgeist who can play gotcha without seeming petty. That cable news won’t successfully recreate The Daily Show is not a good enough argument against trying.

CNN needs to look at itself and ask: Why should viewers be interested in following the opinions of hosts who don’t really seem to have opinions? This is an age of loud mouths and transparency. It’s an age of speak-your-mind and show-your-cards. Out with the old non-partisan bi-partisan post-partisan! model, where each side gets 30 seconds to make canned points to a disinterested host that evaporate at the commercial break. In with something more like a broadcast op-ed page, something more like this: of all parties and cliques.

The latest “flash point” in the debate over health care reform is whether the United States government will have to add thousands of IRS employees to its ranks to keep up with the individual mandate and new responsibilities.

“There are going to be tens of thousands, maybe hundreds of thousands, before this is all over,” Sen. Jim DeMint tells POLITICO. “We are going to be looking for the real truth of what this means. Just on something as simple as having 16,000 IRS agents chasing them around, that is going to open a lot of eyes.” Slate’s Chris Beam makes an interesting point: even if the 16,000 number is true, why isn’t that job creation?

It is. Ideally the road out of double digit unemployment does not lead through permanent expansion of government ranks at the expense of private sector jobs. But DeMint’s critique is indeed strange in light of the fact that just last week, Republicans were fighting for the US government to spare the jobs of thousands of federally subsidized workers in the student lending industry. To make a long story short, the feds used to guarantee up to 97% of banks losses on student loans to encourage them to offer low rates to students without credit or collateral. This week Obama signed a law that made explicit the government’s formerly implicit backing of student loans for the purpose of saving billions of dollars a year. Republicans said the bill was “just another way that Democrats are killing jobs.” Rep. Dan Burton predicted that “the bill signed today will kill a lot of those jobs.”

Now consider the parallel. IRS workers are government bureaucrats performing the (pretty necessary!) task of making Americans comply with federal tax law. Private student lenders are superfluous federally subsidized bureaucrats who occasionally facilitate the exploitation of student borrowers. Hiring more of the first is the dangerous expansion of government. Decreasing the latter is “killing jobs.” Well, OK.

The broader question here is, do we want to use government spending to subsidize employment with joblessness near to 10 percent? Maybe. If so, what kind of jobs do we want the government to support?

No.

But that’s not stopping some conservatives from arguing that Obama’s stimulus is ruthlessly designed to shower money on Democrats at the expense of Republicans.

Veronique de Rugy recently published a paper in which she claimed that congressional districts who elected Democrats were receiving a significantly disproportionate amount of stimulus money. Nate Silver embarrasses this argument by pointing out that if you bother the check the cities in the most “stimulated” congressional districts, 18 of the top 18 recipients were state capitals, listing in relative order of state size. This isn’t exactly black art. Stimulus money goes through state agencies. These agencies are housed in or near state capitals. These state capitals tend to vote Democratic.

In fact, the argument that Republicans are footing the bill for lavish spending on Democratic states might be backward. Harvard’s Jeff Frankels finds that the relationship between federal spending and conservatism in the states actually flows in the opposite direction: conservative states get more government largess per buck.

He plots the relationship between federal expenditures per dollar of taxes paid on the X-axis (2005 data) against percent of Republican votes per state on the Y-axis. In other words, as you move to the right along the X-axis, states receive more federal spending per tax dollar. As you move north on the Y-axis, states get more Republican. Here’s the graph:
Per usual, Ryan Avent at the Economist strikes the perfect note: It’s tempting to make this a huge gotcha! and slam the Tea Partiers for cognitive dissonance, but it’s more useful to use this graph as a basic civics lesson. Big rich states tend to pay more taxes (and lean Democratic), while
poor, rural (Republican-leaning) states contribute less but receive disproportionate federal spending — perhaps this goes back to their two Senators giving them higher per capita representation in Washington. That’s not a political point, it’s just the way things are. Economic analysis would be more clear-eyed if researchers took off the red/blue shades.

As the looming debt challenge gains currency in the mainstream media, and conservatives and liberals show up on television debating the right combination of spending cuts and tax increases, it will be important to explain exactly why the deficit should be cut in the first place. Yes, interest payments are scheduled to rise to nearly 17 percent of spending toward the end of the decade. Yes, as the global economy recovers and the US starts to heat up we can expect interest rates to rise. But a lot of people are going to wonder why all these men and women in business suits are worried about in the first place.

One reason I imagine this debate will be confused and ripe with misunderstanding is that the statistic many deficit watchers pay most attention to — the public debt-to-GDP ratio — has no logical ceiling or warning signs. As a rule of thumb, rich countries are safe with a 60% ratio. But there are exceptions. The United States soared past the 100% mark during World War II, but we paid it down relatively quickly after the war ended so that it fell below 50% in the 1960s. On the other hand, as the Economist points out,

Britain’s debt burden rose from 121% of GNP in 1918 to 191% in 1932 and
did not return to its 1918 level until 1960. In a recent study Carmen
Reinhart and Ken Rogoff find that public-debt burdens of less than 90%
of GDP have scant impact on growth, but they do see a significant
effect at higher ratios. That argues against a single number for all.
With the world’s biggest sovereign-bond market and trusted
institutions, America will be able to carry a higher public-debt burden
than Greece.

By the IMF’s calculations the United States will require fiscal adjustments of almost 10 percent of GDP by 2030. The federal budget, by comparison, is about 20 percent of GDP.

If we agree that belt-tightening must happen eventually (and we should not raise taxes broadly or cut spending in the next few years), policymakers are going to have to get specific. They’re going to need debt goals, and reasonable explanations of what will happen if we exceed those goals for many years. It will not be enough to argue, as Walter Mondale once did unsuccessfully in 1984, that we should cut our debt burden “in half.” Half? What does that mean? Why half? Why not a quarter? Why not all? Americans implicitly understand the dangers of living beyond their means, but politicians and policymakers on the edge of the deficit debate have a responsibility to (debate with each other and) explain the difference between living at the edge of your means and living on the edge of a cliff.

Hulu is coming to the iPad. But you might have to pay to watch it.

That’s the rumor from this New York Times piece on the successes and travails of Hulu. The joint venture of NBC, News Corp and Disney, Hulu is newly profitable with video streams climbing to 900 million in January, according to comScore. But content providers are complaining that the company’s ad-only model, which returns between 50 and 70 percent of revenue to suppliers, isn’t generating enough dough, and big names like Viacom have already withdrawn programming.

Struggling industries like music and journalism have looked to Hulu as a viable Internet model. Record labels came together to make VeVo, a Hulu/YouTube hybrid that runs ads before high quality music videos. Meanwhile Journalism Online looks to introduce bundled payments to online journalism.

The irony is that Hulu might not want to be “Hulu” anymore. It’s aiming to be more like Netflix, a subscriber-based model that delivers all-you-can-eat content for monthly fees. In a way, magazines and Hulu share the same problem, although Hulu has edged into the black. Both have relied on monetizing users’ eyeballs with online advertisements. But facing skimpy display and video ad returns, now they want to charge users to read and watch the content upfront.

The iPad gives them this opportunity. On the Web, publishers are loath to introducing strict new pay models because you don’t want to scare millions of readers away from your site forever by overpricing commoditized news and music. But with early iPad buyers, media publishers have something like an experiment group, a petri dish for pay models. Hulu and the Wall Street Journal and Esquire can dabble with prices and bundling and other payment options (here are five more) on the iPad to see which ideas stick. If users don’t bite, who cares? The iPad universe is only a couple hundred thousand anyway and the failure is small-scale. That’s why media publishers have every right to swing for the fences on the iPad. Never doubt that a small, upper-middle class consumer base can change the media world. Indeed, perhaps it’s the only thing that can.

Journalists like it when ideas and people seem to be in decline, because downfalls make for great stories (see: ObamaCare, Cap-and-Trade, Tiger Woods). But we also like to write about disaster because it sets up something even more irresistible: comeback stories (see: ObamaCare, Cap-and-Trade, Tiger Woods).

That’s one reason why some journalists are hyperventilating over the capacity of the iPad to save their industry. The collapse of magazine advertising revenue has inspired breathless hand-wringing about the death of magazines. But now the emergence of a hot new piece of hardware has publishers and media journalists equally thrilled that our industry can atone for past mistakes by charging for content on Apple’s news slab.  Please don’t get me wrong: the iPad is exciting. It could potentially revolutionize popular computing and entertainment. But would it really revolutionize publishers’ bottom lines?

Rory Maher of TBI Research crunches the numbers and finds that even with optimistic estimates about iPad sales and magazine app purchases, publishers should not expect e-readers to save them:

Even if iPad sales soar past expectations and reach, say, 16
million units over the next two years total magazine subscription
revenue would equal about $2.8 billion per year under the above case
scenario [50% of iPad owners subscribe to two magazines on average]. That’s less than 30% of annual circulation revenue for the
entire magazine industry and only about 10% of overall industry revenue
(circulation + advertising).

It’s useful to step back and consider the long game for publishers. Magazines get money from (1) readers and (2) advertisers looking for readers. The problem today isn’t the readers, who are all over the Internet. It’s the ads. Magazine advertising has slipped in the last two years by 12%. Nobody expects print ads to rebound to their early 2000s levels, and everybody is still waiting for That Big Idea that helps publishers monetize their online content. Maybe it comes from location-based ads. Maybe it comes from cross-publisher partnerships and a Netflix model that bundles magazine subscriptions and distributes them electronically to computers and e-readers. Nobody knows.

But this is the key to the story: magazines are losing ad revenue, but they’re not losing readers. In fact most of them are gaining readers — they’re just gaining them online, where our eyeballs are poorly monetized. All publishers really want is a platform where they can charge readers for reading. The iPad gives them that opportunity. It’s fair to say publishers are being overly-optimistic with their prices for iPad apps. It’s not fair to say they’re wrong for trying.

Productivity is a good thing. But reading about our super-productive workforce isn’t going to comfort the unemployed.

As Neil Irwin reported in the Washington Post, businesses are only producing 3 percent fewer goods and services than when the recession started, but Americans are working 10 percent fewer hours. Work hours are getting the squeeze, but we’re producing nearly the same amount of juice. In the long-run, that’s good news for America’s production engine. In the short-term term, it’s keeping millions of Americans at home.

I was on Larry Kudlow last night talking about the state of the consumer. He’s right that there are green shoots. Case-Shiller home prices are up. The stock market looks awesome. Our latest annualized GDP growth rate was 5.6%. My response was pretty straightforward: stocks look good, but consumers are people. More than 27 million working age Americans are out of work or looking for more work. You can’t have a confident consumer with a fifth of the labor force under- or unemployed.

The short story of the recession’s labor market goes something like this. Employers who saw the recession bottom out in mid-2009 have started to
restock (replenishing inventories contributed two-third of 2009Q4’s
5.6% annualized growth rate). But they’re making do with fewer
full-time workers, more part-time workers, and record-low work hours. On the one hand, you could could argue the job market is wound like a
tightly coiled spring waiting to pop, and our recovery could be a lot
more rigorous than the naysayers expect. On the other hand, when the economy really picks up, employers have a lot of slack before they have to wade into the jobless market. They can raise hours from their record lows. They can hire the part-timers. Maybe that helps to explain why even after two quarters of positive economic growth, job openings are basically where they were a year ago.

We’re moved beyond the hiring crisis, but we haven’t moved beyond the firing crisis. Until we do, the consumer will continue to be grumpy.

Is there another journalism beat more prone to hype and mood swings than technology? To wit:

Daniel Lyons, Newsweek, January 28 2010: Why the iPad is a Letdown

At the very least, we had hoped a tablet from Apple would do something
new, something we’ve never seen before. That’s not the case.

Daniel Lyons, Newsweek, March 26, 2010: Why the iPad Will Change Everything

Analysts say the device could generate $2.5 billion in new revenues
this year, which helps explain why Apple now stands ready to boom, with
revenues expected to soar nearly 50 percent, to about $54 billion in
the current fiscal year. Magical? Revolutionary? You bet.

Well, what a difference a February makes!

Today President Obama will sign a bill that overhauls the student loan industry. For decades, the federal government has supported student lenders by backing loans originated by private banks. Today we take back the bank subsidy and use it to spend down the deficit and pay low-income kids to finish college. Good day.

Our byzantine student lending system is essentially the product of two competing principles: managed affordability and capitalism. The government guarantees the loans because otherwise private banks wouldn’t make
low-rate loans to an 18-year old kid with no earnings, no credit history,
and zero collateral when he won’t start paying interest in four years. So the banks get the interest and the government gets stuck with 97% of the losses if the student defaults. Heads, students pay the bank. Tails, taxpayers pay the bank.

But the government has been loath to take over the industry itself — even if it means leaving tens of billions of dollars on the table — because reasonable efforts to simplify the system are met with hysterical screaming about socialism from former Education secretaries who should really know better.

Effective today, student lending will be a government-run program. What does that mean for borrowing students? Not a whole lot, as I understand it. They will fill out the same paperwork and pay similar interest rates. They’ll even see annual payments capped at 10 percent of current income. The only difference is that their interest — roughly $7 billion a year for the next decade — will go to the feds instead of the banks. The government plans to set some of that money aside for deficit reduction, inject billions into Pell grants for low-income students and channel some of it into education initiatives like community college support.

The opponents from the private student lending industry are right: they will lose some jobs. But not all jobs. Private lenders will still complete paperwork and administer the loans. All things equal, I’d prefer this policy go into effect when unemployment wasn’t clinging to double digits. But I support the change wholeheartedly. And as the New America Foundation’s Jason Delisle told me, these private lenders don’t particularly deserve my tears: “under the pretext
of competition and choice and the private sector is a smokescreen for
banks who want to highjack this federal student loan program and sell
kids credit card like loans when they’re least likely to know what
they’re getting into. Really, these are the jobs we want to protect?”

California’s initiative to legalize and tax marijuana isn’t the only wacky new tax idea bubbling out of our laboratories of democracy. Record states deficits — an average of 7% of FY2010 General Fund Budgets — are forcing governors to consider taxing all sorts of services: health clubs, dating services, pet grooming shops, bowling alleys. You know. Only the services with letters in their names.

The New York Times explains:

In Nebraska, a lawmaker has introduced a bill to tax armored car services, farm equipment repairs, shoe shines, taxidermy, reflexology and scooter repairs. In Kentucky, Jim Wayne, a state representative, and some fellow Democrats are proposing taxing high-end services: golf greens fees, limousine and hot-air-balloon rides, and private landscaping.

In June, voters in Maine will decide whether to accept a state overhaul of its tax system
that would newly tax services like tailor alterations, blimp rides, and
entertainment provided by clowns, comedians and jugglers.

The states are constitutionally required to balance their budgets, so they cannot run yearly deficits like the federal government. When tax revenue dries up in a recession, they don’t have the option to borrow a couple (hundred) billion from Japan and China. So they have to raise taxes or slash spending. What makes today’s news news isn’t that the states are responding to revenue shortages by raising revenue, but rather that the historic revenue dry spell is forcing them to cast their widest net ever across the service industry to trawl for cash.

Before the recession, some states already taxed a wide range of services and others taxed very few. Of the 168 services counted on the Federation of Tax Administrators’ state tax report, Hawaii taxes 160. Some examples of those services are in the NYT-provided graph to the right.

Is this a good idea? I think we’re passed the normative world of good and bad.* Raising taxes is necessary for the states —  dividing those taxes among services will be a matter of political wrangling. Some firms will get stuck with unfair bills and others with better connections to the state’s power levers will emerge unscathed.

In any case, the bigger point to make is that the state-by-state desperation for tax revenue is a funny colorful story that obscures dismal state budgets whose cuts will most immediately affect students, teachers, the poor, elderly and sick. That’s one more reason I wholeheartedly support the additional $25 billion in state aid lurking the Senate’s new $150 billion stimulus bill. Paul Krugman memorably refers to the states’ obligatory thrift as “50 Herbert Hoovers.” Yes, of course, the debt looms. But now is not the time to add a 51st.
_____
*Although the lesson of Washington, D.C.’s bag tax suggests that shrewdly designed Pegouvian state taxes could both raise money and correct for negative externalities. However, states are more likely to aim for services with more inelastic demand so that the taxes raise dependable revenue.

Californians will vote this November on a measure to make legal the growing and buying of marijuana. That would make it the first state in the country to broadly legalize pot. I spoke with Joe Mathews from the New America Foundation about the measure, whether it stands a chance, and who’s against it. Here are snippets of our conversation on:

Whether the measure will pass…

“I think it’s about 50/50. The polling is about where it need to be — 60 percent — before the campaign begins, because people who decide late almost always vote no.

“But you know the money in it is interesting. Prop 13 [which capped property taxes and required a two-thirds majority in Sacramento for future taxes] was a great centralizing force. It made all the control of tax and spending in Sacramento. So this would be devolution because it would allow for local sales taxes and regulation. From a civic government perspective, giving local tax power to localities is great.”

Why nobody knows how much the measure would save California…

“A billion was one estimate [if you combine the income from taxes and the money saved in policing and public health enforcement]. Nobody knows the answer to that question. I don’t think there’s any great data there. California has a strong recent history of making wildly optimistic assumptions about these kind of programs. Most prominently, Schwarzeneggar made a big deal when he came in about expanding Indian gaming to make money, that it would bring in billions. It’s raised negligible amounts. 

Social Security is going into deficit this year. This sounds like a really truly horrible event that threatens the solvency of the program. It isn’t. It’s evidence that private incomes have been shattered by the recession. The program returns to surplus in 2015, and then the red ink starts to flow. Still we are still many years away from facing anything resembling a Social Security crisis. As Time’s John Curran notes, this entitlement poses something like more like a challenge. Tinkering with Social Security will be like an unattended dress rehearsal for reforming Medicare.

The changes we would have to make to the program are fairly straightforward addition/subtraction tactics. On the addition side, we can raise the
cap on taxable income, currently at $106,000. On the subtraction side, we can tinker with indexing rates or means-testing benefits to keep full payments going to lower-income seniors. Delaying
benefits makes quite a bit of sense because average post-retirement longevity
has doubled since 1965 and will continue to grow, we hope.

The Wall Street Journal reported yesterday that it will set monthly iPad subscriptions as $17.99. This is what we in the biz know as cojones. I looked up WSJ subscriptions for Web and print today. It turns out that getting the WSJ on the iPad is more expensive than a subscription to WSJ.com; or WSJ the paper; or WSJ.com and WSJ the paper combined.

Let’s compare the weekly cost of reading the WSJ in various sizes and screens:

On an iPad: $4.15/week
On paper and Web: $3.50
On paper: $2.99
On Web only: $1.99
On iPhone: $1.99

Two more data points: Esquire Magazine’s first iPad issue will charge $2 less than its printed version; Men’s Health Magazine will ask for the same price ($4.99).

What’s going on here? A couple things that I see. First, the iPad is an upscale purchase and mags and papers are pricing high because they think the market can take it. Second, publishers are kicking themselves for giving away free content online and erecting paywalls defensively to capture more subscriber money while advertising waits to recover. This is The Empire Strikes Back: Media Edition.

The most honest reaction to this news — and the most logical conclusion to these awfully vague polls about how consumers would use iPad-like devices that they don’t actually own — is that nobody knows what exactly to do with the iPad because it’s an entirely new machine that nobody has used. Consumers don’t know what they’re going to use the iPad for because they still don’t know how it works, or how it types, or how easy it will be to transition between programs (like the iPhone the iPad has no multitasking). Publishers don’t know what to do with the iPad because they don’t know if consumers will prefer to read magazines on a glossy Apple screen, or on their phone, or on the old ink and paper.

One of the under-reported aspects of the iPad craze is that the rush to build iPad specific editions of magazines and websites furthers the splintering of the Internet into content pockets that make it cumbersome to reach wider audiences with one technology. As I wrote here, in a year, to reach the universe of new mobile browsers, you can’t assume
that your audience is using only a laptop to access the same version of
your content. You’ll need a website and a Kindle App and an iPhone/iPad app and another app for another device that has a distinct audience and requires a specific and exclusive template.

Gross Domestic Product grew by 5.6% in the last three months of 2009. That’s a small revision downward from the advance estimate earlier this year, but it’s still an enormous increase over the last three months of 2008, when GDP fell by 6.3%. GDP is a dubiously useful measure, as Megan explained in the magazine, but this report still tells us important things about the health of the economy. In short: we’re still sick, but getting better.

Roughly two-thirds of this 5.6% burst did not come from consumers. It came from the slowdown in inventory liquidation, which contributed 3.79 percentage points to fourth-quarter GDP. The Wall Street Journal has a wonderful explainer interactive about how inventories contribute to GDP figures. The confusing thing for most people is: how does a small increase in demand create a huge increase in output (GDP)? Here’s a simple way to think about it:

Imagine that you’re a kid at a lemonade stand. At first, business is good and you start filling a few cups every minute. Suddenly, the streets thin out and you find yourself with a lot of extra filled lemonade cups. Uh oh, inventory glut! As walkers trickle back into the street, you hand them already-filled lemonade cups rather than pour more, because you don’t want to waste lemonade mix if fewer people are buying lemonade. But when crowds start to pick up you think: I haven’t been filling lemonade cups for a while, I’d better start restocking because it looks like the crowds are coming back. Crucially this will require you to make even more lemonade than you were making at the beginning of this story, because you need to satisfy current demand and stock for future crowds by building back a normal inventory. And that’s how small increases in demand can produce huge increases in output, which is GDP.

Like lemonade itself, this story is sweet and sour. High GDP growth is sweet. The sour is that we shouldn’t expect the first three months of 2010 to experience similar growth. Factories went into overdrive to restock businesses after employers
dipped into inventories to save money. Without growing consumer
spending, that burst is unsustainable. Analysts expect something closer to 3% growth in Q1 2010, according to the AP.

And how is consumer spending? This useful graph from Calculated Risk tracing the GDP estimates finds personal consumption and residential investments, two key factors of sustainable growth, trending down across revisions.

Lastly, how’s inflation doing? It’s still pretty subdued. From the WSJ

The government’s price index for personal consumption increased 2.5%
October through December, compared to the previously estimated 2.3%
climb, reflecting upward revisions to the price of financial services,
insurance and health care. The core PCE gauge, which excludes volatile
food and energy prices, rose 1.8%, compared to the previously estimated
1.6% increase.

Californians will vote in November on an initiative that would legalize and tax marijuana. If passed, the law would allow anybody over 21 to hold up to an ounce of pot for personal use and grow up to 25 square feet of marijuana per residence.

To learn more about the news, check out this LA Times story. To learn more about why this is good policy, read Andrew and check out Reason.com editor Nick Gillespie’s column in the New York Times.

As for me, I think legalizing pot is a fine idea whose implementation will be more difficult than supporters imagine. On the one hand, I’m for expanding the legalization of drugs and slapping taxes on them.* (That includes lowering the minimum drinking age and raising the federal/state tax on alcohol.) I’m a fan of civil liberties. I’m a fan of taxes. I’m a fan of states not firing thousands of teachers when they face budget shortfalls. Legalizing pot is a three-fore.

Still, while bringing pot’s black market into the light could raise
quality and safety — not a huge concern for marijuana, but the argument
is there — the tax will also raise costs, which should
keep some sellers and buyers underground. (Today: drug war for public health and security; tomorrow: drug war to recoup tax dollars.) To keep
from overshooting on the drug’s price, the ideal tax would start around 25 percent.

Tomorrow I’m speaking with Joe Mathews, who studies California tax issues with the New America Foundation, about the future of sin taxes and their potential to raise state and federal revenue, in the name of regulating things that mainstream Americans don’t particularly think are wholesome. In the meantime, I’ll leave you with what I said six months ago: if Obama smoked more pot, our drug policy wouldn’t seem so high.

The government’s effort to manage tobacco rather than make it
illegal is exactly what belongs in the debate over pot and other
illegal substances that could, at the very least, provide significant
boons to medical pharmacology. The FDA has rejected
the possibility of making cigarettes illegal by saying the underground
product would be “even more dangerous than those currently marketed.”
So when you make popular products illegal, it has the potential to make
those products more dangerous. Gee, ya think?

I know that Gee, ya think
is about as far as you can get from a comprehensive plan for the
controlled legalization of marijuana and other substances. But let’s be
adults here. Obama understands the limits of cigarette law because he
understands the market for cigarettes. Maybe what the drug debate
really needs is a joint in the West Wing.

________
*To say nothing of the utterly absurd war on drugs, which is an enormous waste of police time, prison space, tax money, human life…

The 90s were a simpler time. No global war on terrorism. No looming debt panic. Hanson.

When I think back to the halcyon days of that decade, I can’t help but recall the rush of walking into my local baseball card store, perfectly named “The Dugout,” in McLean, VA. My friends and I would press our little fingers against the glass cases and point out the small glossy paper treasures within. We tore through packs of Upper Decks with the thrill of an oenophile opening a case of ’82 Lafite. Frank Thomas cards were a cause for celebration. Ken Griffey, Jr. special editions elicited dizzying euphoria. Beckett‘s card price guide for us was something between a Bible, a security blanket, and an addict’s stash. Ah, youth…

Little did I know that we was participating in a financial bubble on par with Nasdaq and credit default swaps — with admittedly less dire consequences. Slate’s Dave Jamieson has the story:

By the ’80s, baseball card values were rising beyond the average
hobbyist’s means. As prices continued to climb, baseball cards were
touted as a legitimate investment alternative to stocks, with the Wall Street Journal
referring to them as sound “inflation hedges” and “nostalgia futures.”
Newspapers started running feature stories with headlines such as
“Turning Cardboard Into Cash” (the Washington Post), “A Grand Slam Profit May Be in the Cards” (the New York Times), and “Cards Put Gold, Stocks to Shame as Investment” (the Orange County Register). A hobby bulletin called the Ball Street Journal,
claiming entrée to a network of scouts and coaches, promised collectors
“insider scouting information” that would help them invest in the cards
of rising big-league prospects. Collectors bought bundles of rookie
cards as a way to gamble legally on a player’s future…

In 1989, the Upper Deck Co. would transform the industry with
flashy, high-priced cards aimed at investment-minded collectors. As the
sales of new sports cards swelled to more than $1 billion a year,
children began to flee the hobby, turned off by the pricey packs and
confounding number of sets. The baseball strike of 1994 ushered in an
industrywide hangover that still hasn’t ended. Revenues from new sports
cards have fallen to around $200 million a year, roughly one-seventh of
what they were at their peak. While vintage cards like the T206 Honus
Wagner and the 1952 Topps Mickey Mantle have continued to soar in
value, baseball card’s boom times produced no such valuable
merchandise. Those 1988 Donruss cards, once considered a savvy
investment, can now be bought in bulk for around 1 cent apiece.

Read the whole thing. 

Oh God, more awful news about jobs. Now before you click away to read something lighter, please consider: this post is about something sad, but it makes its point with a numbered list. Easy enough, right? Right. So keep reading.

This Cleveland Fed report “Are Jobless Recoveries the New Norm?” is a fascinating, lucid and distressing look at why unemployment is still at 9.7% and why it’s not going down any time soon. Read the whole thing, if you have time. But here are three keys facts I want to pull out.

1. This is no longer a firing crisis. It’s a hiring crisis.
Job openings are still in the toilet, CF reports. Here’s a chart that makes that point ring loud and clear. These are numbers from the Bureau of Labor Statistics (in thousands). From left to right, we’ve got job openings, total unemployed in the labor force, and the ratio.

Lesson: hiring is in the dumps. Job openings have fallen
year-over-year even after two quarters of positive GDP growth. This, incidentally, is one reason I think extending benefits to people without jobs is still a good idea. Subsidizing unemployment would be much more of risky if job openings weren’t near historic lows.

2. More demand won’t fix the problem (at least initially).
The smart and common thing to say about jobs is that they will come back when demand for goods and services picks up. That’s not exactly true. Demand is a key engine of employment, but the nearer obstacle is the slack in the job market. What do I mean by slack? Consider: If you’re an employer and business is getting stronger, you’ll think about adding work hours. But that doesn’t necessarily mean hiring unemployed workers. It might mean asking more out of your current payroll (average weekly work hours today are at 33.1 hours, and all-time low is 33.0) or making part-time workers full-time.
The number of workers working part-time because of the economy (not by choice) has jumped by 4.1
million since December 2007. Before we see that 9.7% figure fall dramatically, the economy will start by absorbing 4.1 million part-time workers.

3. Get ready for another jobless recovery.
The unemployment rate tells us what percent of the labor force does not have a job. It does not tell us whether Americans are unemployed because they just lost their job (indicated by a high job separation rate), or because they have been out of job for an extended period of time (indicated by a low job finding rate). Today half of unemployed 9.7% has been out of work for more than 27 weeks, the highest number on record. This graph helps to explain why.

More than 95 percent of the change in the unemployment rate since the beginning of the recession is due, not to job separation, but record-low job finding. “During the past three recessions,” CF explains, “the decline in the job
finding rate has been playing a bigger role in unemployment rate
fluctuations. Relative to the change in separations, the job finding
rate changed (declined) much more in the last three episodes.” In other words, what we’re looking at is something like the mother of all hiring crises.

The first wave of health care reforms will target insurance companies, but it’s hard to see whether whether they — or the customers — will win or lose in the short term.

Factors that might provide upward pressure on insurance prices include new insurance industry fees, new insurance industry regulations (companies will be barred from rescinding care from sick customers,
discriminating by gender or denying coverage based on a pre-existing
condition), and a new rule that insurers can’t cap lifetime benefits. On the other hand, another rule requiring insurers to spend at least 80 cents of every premium dollar on claims should restrain the growth of prices. On top of all these changes, health reform injects 30 million new customers — many of whom will pay more into the system than they take out because they’re young and healthy — which could bring down the average cost of insurance for everybody else.

As the Washington Post’s Alec MacGillis explains, health insurance
might increasingly resemble a public utility: a larger base of customers,
with lower profit margins and stricter rules. But the insurance companies still have six to nine months to live free of health reform’s regulatory straitjacket. What will they do?

In the next few months, one could make the case that insurance companies might jack up their prices before the government regulations kick in at the end of the year. I called around to figure out whether customers could expect higher premiums, but the policy analysts I spoke to acknowledged they basically don’t know what’s going to happen.

“Do you want to have your head be the single one above the foxhole to get shot at? No. On the other hand, you have a problem with going out of business,” said Thomas Miller, AEI scholar and former senior health economist for the Joint Economic Committee. In the long-term, Miller said we could see some mergers among insurance companies. In the short term, “I would not expect sizable price hikes or low-balling. Some people think they’ll make it up on volume. Others think the medical loss ratio will hurt. To all of this is the simple answer is: we’ll see.”

“There are basically two factors,” added Paul Fronstin a senior research associate with the Employee Benefit Research Institute. “On the one hand, 30 million new people entering the market who are healthier should bring down premiums when we force them to buy coverage. The flip side is these new fees on insurance companies that drive up the cost of care.” Fronstin said the factors on both sides of the seesaw are too even to predict whether prices will rise dramatically.