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Guest Post: "RJS Analysis – Japanese Disaster Impact"

RJS had been a long-time commenter at my blog, News N Economics, and has joined Angry Bear’s thread of comments. RJS runs his own blog, Global Glass Onion, where he publishes a weekly newsletter encompassing news from around the world for his readership. Collaborating with Dan, we asked RJS to make a similar contribution to Angry Bear, where he has kindly agreed to format the topics and style to fit our needs. The style of rj’s Analysis is evolving, so please comment with your feedback. Rebecca Wilder

A guest post by RJS: “RJS Analysis – Japanese Disaster Impact”

Although some east coast Japanese ports were damaged by the tsunami, and most of the infrastructure in a primary agricultural region has been destroyed, it appears the major problem facing Japan right now is lack of electrical generating capacity; Citigroup analysts say it may be “irreversible”Tokyo has been warned of blackouts during cold weather; this is not so much because of the loss of the infrastructure; rather the 9.7 GW taken out of service with the six closed reactors is a lion’s share of the electric power in the east. These operate on US style 60Hz power, while the generating capacity in the west of Japan is a legacy of 19th century German generators, which run at 50Hz, and the two systems don’t talk to each other… We now learn that rolling blackouts will likely continue into the summer because TEPCO will only be able to supply 50 million KW per day, whereas typical peak summer usage is 60 million KW… The shortfall may eventually be made up by spare gas and diesel generating capacity; but as of yet, I’ve yet to see a timeline as to when. So at present, even many of the Japanese manufacturers who were not damaged by the quake have shut down their production lines; and as many are the sole makers of various automotive & electrical components, manufacturing around the globe is starting to be affected… How bad this can become globally is still anyone’s guess; but in the one similar experience we had with a resin plant fire in japan in 1993, prices of semiconductors doubled in a matter of days. In just one example illustrative of the problem, making the i-phone alone involves 9 different companies, in Korea, Japan, Taipei, China, Germany, and the US…
(Read more after the jump)

Stress Test for the Global Supply Chain – “Day in and day out, the global flow of goods routinely adapts to all kinds of glitches and setbacks. A supply breakdown in one factory in one country, for example, is quickly replaced by added shipments from suppliers elsewhere in the network. Sometimes, the problems span whole regions and require emergency action for days or weeks. When a volcano erupted in Iceland last spring, spewing ash across northern Europe and grounding air travel, supply-chain wizards were put to a test, juggling production and shipments worldwide to keep supplies flowing. But the disaster in Japan, experts say, presents a first-of-its-kind challenge, even if much remains uncertain. Japan is the world’s third-largest economy, and a vital supplier of parts and equipment for major industries like computers, electronics and automobiles. The worst of the damage was northeast of Tokyo, near the quake’s epicenter, though Japan’s manufacturing heartland is farther south. But greater problems will emerge if rolling electrical blackouts and transportation disruptions across the country continue for long.”

Made in Japan: What Is Country Exporting? – “The crisis in Japan triggered by the March 11 earthquake hasn’t just disrupted domestic production, but also poses problems to trading partners that rely on Japanese goods. (See an interactive graphic showing Japan’s exports.) Japan is the world’s fourth-largest exporter and most of the products it sends overseas are machinery and transportation equipment, which include everything from heavy industrial machinery and semiconductors to refrigerators and cars. The country accounts for about 14% of world exports of automotive products. Japan exported some $469.64 billion of machinery and transportation equipment in 2010. Japan also is a key supplier of advanced components to Asian nations that specialize in the final assembly phase of manufacturing. China depends on Japan for 13% of its imports, largely capital goods such as machine tools and electronic parts for manufacturing. Filed under miscellaneous goods are such products as precision instruments, particularly scientific, optical instruments.”

Japan Quake Could Have Big Impact on U.S. Output – “Investors counting on robust manufacturing data for March may be in for an unpleasant surprise next month. When the March data come out in mid-April it will likely mark the second month in a row of declining U.S. industrial output and could mark the start of a worrying trend. Industrial output slipped 0.1% in February. Why will this decline likely happen? It’s because the after-effects of the March earthquake in Japan are disrupting automobile manufacturing in North America in a hefty way. This matters because, despite popular belief, automobile manufacturing still is a meaningful part of the industrial sector. Here’s how it’s playing out: Japan still is a major supplier of parts to U.S.-based car factories. It isn’t just Japanese car brands, like Toyota and Honda, which both announced they would temporarily halt production at some plants in the U.S. General Motors has been impacted by the problem, notably furloughing workers in New York state and Louisiana. It doesn’t take a supply disruption of many car parts to mean that a auto maker has to halt output for an entire plant, at least temporarily.”

Supply Shortages Stall Auto Makers – “General Motors Co. will stop some work at two European factories and is mulling production cuts in South Korea, amid growing uncertainty over how its plants around the world will be affected by the crisis in Japan. A shortage of Japanese-built electronic parts will force GM to close a plant in Zaragoza, Spain, on Monday and cancel shifts at a factory in Eisenach, Germany, on Monday and Tuesday, the company said Friday. Both factories build the Corsa small car. Meanwhile, the company’s South Korean unit said it is considering cutting production to deal with a potential shortage.”

Toyota: Quake to affect US – “Toyota Motor Corp. says it is likely to experience production interruptions at its North American factories because of the disruption in supplies of auto parts coming from quake-ravaged Japan. Toyota’s automaking operations in Japan have been halted since March 14 as it reviews the condition of suppliers providing the 20,000 or more components that make up vehicles. Auto engineers scouring the northeastern region have found many facilities that were damaged and others that were destroyed, and most automakers haven’t completed their assessments. Toyota’s U.S. manufacturing subsidiary in Erlanger, Ky., told its U.S. employees, plant workers and dealers Wednesday that some production interruptions in North America were likely. The automaker said it could not predict which sites would be affected or for how long. Most of the components used in Toyota’s North American assembly operations come from some 500 suppliers in the region.”

Libya war, Japan disaster putting brakes on auto industry‎ – “There are about 15,000 parts in most cars, but the absence of just one can wreak havoc. That’s especially true when it comes to microprocessors, which control everything from an engine’s fuel mix to the car’s global positioning system.About one in every five microprocessors is made in Japan, and many are made at plants that were severely damaged in the March 11 earthquake and tsunami. So just as U.S. auto sales gather steam, the unexpected war in Libya, surging gas prices and now production cuts triggered by the earthquake have thrown uncertainty into automakers’ rosy 2011 outlook. Automakers could lose production of up to 5 million vehicles in the next four months,”

Automakers Still Reeling From Japan Quake – “The earthquake and tsunami in Japan are still disrupting the auto industry worldwide, and it could be harder to find that car you want as a result. Toyota (TM) says it will probably idle a truck plant in Texas because it can’t get enough parts, according to Reuters. “It is likely that we will see some nonproduction days coming,” a spokesman said. “At this point, we are still not sure of when those might hit or, if they do it, what the duration may be.” The entire sector is feeling aftershocks from the tragedy. Even American automakers are not immune, as they import parts from Japan. General Motors (GM) temporarily stopped production at a plant in Louisiana and laid off more than 50 workers at a plant in New York. But the Japanese automakers are the hardest hit, with recovery efforts hampered by widespread power outages. Post continues after video about Toyota and Honda production:

Toyota and Ford to stop making cars in certain colors – “Automakers may run low on certain paint colors because of a shortage of a pigment produced in an area close to the damaged Fukushima-Daiichi nuclear power plant in northeastern Japan. Ford Motor Co. has alerted dealers to stop ordering vehicles in tuxedo black and three shades of red. Toyota Motor Corp. and Chrysler Group LLC also are among automakers that will be affected by the pigment shortage. The German pigment manufacturer Merck Group confirmed that the Japanese plant that makes a pigment called Xirallic had halted production because it was in the exclusion zone around the damaged nuclear power complex…once engineers can get inside the plant, the company believes production can be restarted in four to eight weeks.”

Panic buying raises prices on Prius, Fit – “Americans have begun snapping up Toyota Prius, Honda Fit and other fuel-efficient models made only in Japan almost the way shoppers denude bread and milk shelves in a supermarket when a storm is predicted. The intensity first spurred by rising gas prices has been amplified by predicted shortages of many models as the Japanese auto industry remains disrupted by the March 11 earthquake and its aftermath. “We’ve gone from 60 (Priuses) in stock to 16” over the last two months, . A dozen are coming, “but we are told they are going to dwindle” quickly after that. Indicating the shortages may not be brief, Honda has told dealers it’s not taking orders for any vehicles made in Japan in May. March and April orders already were delayed.”

Japan crisis could prompt Ind. autoworker layoffs -“Shortages of auto parts from earthquake-stricken Japan could lead to layoffs at some Indiana factories in the coming weeks. Business analysts don’t expect large cutbacks, but anticipate that some Indiana plants that employ about 50,000 autoworkers will use short workweeks, scattered short-term layoffs and slower line speeds to keep workers busy during the downturn. “I’m not sure it’s going to be a major event. It’s not clear yet,” said economist Thomas Klier of the Federal Reserve Bank of Chicago told The Indianapolis Star. “We still don’t know what the extent of the damage actually is in Japan.” Trying to determine which plants might be affected by the tumult in Japan is made difficult by the global supply chain that has developed in recent years. Subaru, Toyota and Honda assemble vehicles in Indiana, but the supply system runs to almost every major automaker.”

Bracing for the pinch on auto parts from Japan – “The disaster in Japan already is affecting the U.S. auto industry. Two key questions now are, how much and for how long? Toyota’s 13 factories in the United States, Canada and Mexico have been told to expect shortages of parts made in Japan, and U.S. makers that use Japanese parts also are expecting supply disruptions. And that could mean a temporary drop in inventoriesfor some high-demand vehicles in Texas showrooms. “The biggest unknown in the industry is the parts supply chain,” said Jesse Toprak, vice president of industry trends at, a new car pricing site. Parts shortages could reduce global auto production by about 30 percent”

Automakers May Lose 600000 Vehicles as Quake Hits Parts, Paint‎ — “Global automakers may lose production of 600,000 vehicles by the end of the month as the earthquake in Japan halts assembly lines and work at suppliers including the maker of a paint pigment. About 320,000 vehicles may have been lost worldwide as of March 24, and manufacturing at plants in North America may be affected when parts supplies start running out as soon as early April, said Michael Robinet, vice president of Lexington, Massachusetts-based IHS Automotive.“The next surge of shutdowns comes when the pipeline of parts that were already built dries up,” Robinet said yesterday in a telephone interview. “The rate of lost production will accelerate once North American plants join in.” Toyota Motor Corp., the world’s largest automaker, said it has lost output of 140,000 vehicles, and Honda Motor Co. has lost 46,600 cars and trucks and 5,000 motorcycles. Mitsubishi Motors Corp.’s was lowered by 15,000. Ford Motor Co. hasn’t lost any output, said Todd Nissen, a spokesman.”

Global auto output may fall 30 percent due to quake‎ – “(Reuters) – A shortage of auto parts stemming from Japan‘s earthquake may cut global vehicle output by 30 percent within six weeks in a worst-case scenario, research firm IHS Automotive said on Thursday. This translates to a drop of as many as 100,000 vehicles per day, IHS analyst Michael Robinet said, adding there could be more North American plant shutdowns in the meantime. “We’re already feeling the impact in Japan,” “North America, Europe, China: those three areas for sure will feel some impact.” Last week, General Motors Co (GM.N) idled its pick-up truck plant in Shreveport, Louisiana. Toyota Motor Co is likely to idle its own pickup truck plant south of San Antonio.The delivery of parts from transmissions to electronics to semiconductors is being hampered by the Japanese earthquake and subsequent infrastructure problems. About 13 percent of the global auto industry output has been lost now because of parts shortages, Robinet said.The slowdowns could grow even more severe by the third week of April.”

Toyota, Sony Disruptions May Last Weeks After Japan Earthquake – “Toyota Motor Corp. and Sony Corp., two of Japan’s biggest manufacturers, are facing worst-case scenarios of long-term production shortfalls as scores of plants remain closed and workers are idled in the aftermath of the March 11 earthquake and tsunami. “The current situation is still difficult,” . The company has shut eight plants in Miyagi, Ibaraki and Fukushima prefectures, and workers are inspecting equipment and facilities, he said. Toyota has said it will keep 21 auto and components plants closed until March 22. Sony and Toyota’s efforts to resume production are complicated by the need for hundreds of different components to build TVs and cars from a variety of different suppliers that may have suffered plant damage in the earthquake and tsunami. Japan is also facing electricity shortages because a nuclear- power plant was crippled by the temblor. “This will be played out not in days, but in weeks,” . “Nothing on this scale has really occurred before.””

Shockwaves reverberate from mobiles to jewelery -“Nokia on Monday became the latest company to warn of disruption to its supply chain, highlighting Japan’s role in producing crucial components for a rangeof global manufacturing industries. The Finnish mobile phone maker, which sources about 12 per cent of its components in Japan, said the disaster was likely to affect its manufacturing and supply schedules. “Nokia expects some disruption to the ability . . . to supply a number of products due to the currently anticipated industry-wide shortage of relevant components and raw materials sourced from Japan,” the company said. The Japanese disaster has exposed the risks associated with modern global supply chains, in which companies rely on just-in-time deliveries from a network of global suppliers with little surplus inventory to cushion them from any disruption. Technology manufacturers are particularly exposed to Japan because of its importance as a supplier of semiconductors and other critical components in products such as mobile phones and computers. Several big Japanese technology companies, including Panasonic, Hitachi, Nikon, NEC and Sony, have reported disruption either from earthquake damage or power shortages since the disaster. Ericsson, the Swedish network equipment maker, and Sony Ericsson, its mobile phone joint venture with Sony, are among other non-Japan-based companies which have so far warned of supply chain problems.”

Sony | Japan Disasters Could Hit Consumer Electronics Hard… “Sales of consumer-electronics items, including television sets, DVD players, cameras, personal computers, and video-game players are likely to be impacted by the devastating Japanese earthquake and tsunami, Advertising Age observed today (Thursday). The trade publication observed that while the final assembly of those products takes place in other Asian countries, the components are made in Japan. With Sony, Nintendo, Panasonic, Canon, Nikon and other Japanese-based electronics companies forced to shut down plans, parts shortages are likely to increase prices of many items and produce product scarcity even into the holiday season, AdAge observed. Earlier this week research group iSuppli reported that two Japanese plants that account for 25 percent of the global supply of silicon wafers had been forced to suspend operations. Moreover, two other companies that account for 70 percent of the worldwide supply of the main raw material used to make printed circuit boards have also temporarily shut down.”

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Is Scott Sumner Reality Based ?

Scott Sumner wrote

If pressed, Keynesians will usually point to real interest rates as the right measure of monetary ease or tightness. By that criterion the Fed adopted an ultra-tight monetary policy in late 2008. Monetarists will usually say that M2 is the best criteria for the stance of monetary policy. By that criterion the ECB adopted an ultra-tight monetary policy in late 2008. And yet it’s difficult to find a single prominent macroeconomist (Keynesian or monetarist) who has publicly called either Fed or ECB policy ultra-tight in recent years. Maybe tight relative to what is needed, but not simply “tight.”

To me this means that he claims that US real interest rates have been high “in recent years”. Of course he also says “in late 2008” but suggests that the real interest rates then were a policy choice and that the policy continues.

In fact real interest rates in the US are extraordinarily low. The 5 tear real interest rate is negative. I think Sumner made a definite claim about published numbers which is definitely false.

Sorry I don’t know how to embed Fred graphs. Please click this link.

I added the chart for you — spencer

update: thanks spencer. Also I have added the link to Prof. Sumner’s post.

More after the jump.

I’d say he is crazy and delusional. Basically, I’m convinced that his methodolical a priori is that everything is determined by monetary policy. Since unemployment is high, he claims US monetary policy is tight. I think you quoted a declaration of religious faith and not a description of reality.

I don’t agree with Sumner’s claim about Keynesians. In fact Keynesians follow Taylor (a Republican hack and new Keynesian) and evaluate monetary policy by comparing the federal funds rate to the level given by a Taylor rule. The absolutely standard view among Keynesians is that the loosest possible monetary policy occurs when the federal funds rate is essentially zero. This explains why all Keynesians agree that US monetary policy has been very loose since the crisis began.

Note the careful qualifier “late 2008.” He has picked a cherry. In particular in late 2008 world financial markets were in a total panic with a desperate race for liquidity. This drove up the price of normal nominal treasuries and drove down the price of any asset with a thinner market (that is all other assets). This was not a shift in monetary policy (just as no Keynesians would call it a shift in monetary policy). It was also very brief.

The current 5 year real interest rate in the USA is negative. Real interest rates are extremely extremely low in the USA. But Sumner will not allow facts to weaken his absolute faith, so he decided to ignore all evidence from 2009, 2010 and 2011. He just talked about a brief spike about which neither the Fed nor any other entity could do anything.

He tried to write something which was technically true, but he slipped up. I quote with a totally fair elision

“By that criterion the Fed adopted an ultra-tight monetary policy in late 2008.
late 2008. … Fed … policy ultra-tight in recent years.” Late 2008 is not years recent or otherwise. It is part of one year. Sumner’s absurd claim is based on describing a few months over two years ago as “recent years”. Basically he claims that because real interest rates were briefly high years ago (during a panic) they are high now.

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Because He Would Never Name N. Gregory Mankiw or R. Glenn Hubbard as Arsonists Screaming for a Fire Hose

Go read Mark Thoma. Because he’s a kinder, gentler human being than I am:

The time to stand up to the budget busting was when it happened, and when members of the list had the power to affect policy, not many years later in an article at Politico. Many on the list were either part of the decision making team in the 2000s that opened the hole in the budget, or supported what the team did.

Or, as The Pragmatic Capitalist said on Twitter (h/t Joe Weisenthal, whose own take on the cabal is here; translated into English):

So, 10 former White House economic advisers (who, judging by results, suck at their jobs) now say USA is bankrupt from high deficits.

Grandpa died last week
And now he’s buried in the rocks
But everybody still talks about
How badly they were shocked
But me, I expected it to happen
I knew he’d lost control
When he built a fire on Main Street
And shot it full of holes

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Health Care thoughts: Obamacare Suffers Serious Set Back

Health Care thoughts: Obamacare Suffers Serious Set Back

The Community Living Assistance Services and Support (aka C.L.A.S.S.) is a lesser discussed but important feature of Obamacare (PPACA).

The Act requires the feds to set up a quasi-insurance self-funding mechanism for long-term care services (for more details see my write up at ISSUU/healthcarethinktank.

During testimony in February before the Senate Finance Committee DHHS Secretary Kathleen Sebelius admitted that as designed by Congress C.L.A.S.S. is not financially sustainable.

The battle now is whether or not Sebelius can 1) fix the Act via regulatory changes or 2) Congress must redesign the Act.

In the latest volley the Congressional Research Services says the regulatory powers are NOT broad enough for Sebelius to effectively rewrite the statute via regulation.

A bigger question remains for many of us, “can this program ever be financially sustainable?”

As predicted, with Obamacare the devil will be in the regulatory details.

Tom aka Rusty Rustbelt

(Dan here…lest opponents of PPACA get too excited, Rusty thinks the idea and some of the details of C.L.A.S.S. are a really good idea…)

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Europe’s industrial new orders: 3 very different stories

Spain vs. Germany vs. UK: production trends showing holes in some growth stories

Eurostat reports new orders for January:

In January 2011 compared with December 2010, the euro area1 (EA17) industrial new orders index2 rose by 0.1%. In December 20103 the index grew by 2.7%. In the EU271, new orders increased by 0.2% in January 2011, after a rise of 2.9% in December 20103. Excluding ships, railway & aerospace equipment4, for which changes tend to be more volatile, industrial new orders increased by 1.6% in the euro area and by 1.9% in the EU27.

This was a disappointing report, as Bloomberg consensus was expecting a 1% monthly gain. The Eurostat press release reports new orders by country and production type only(capital, consumer, intermediate, durable, and nondurable). However, I look at the origination of orders by region: domestic, non-domestic extra-euro (which is the same as non-domestic for the Euro area as a whole), and non-domestic intra-euro.

The idea is, that with ubiquitous fiscal austerity, Euro area countries rely on external demand for growth. So here’s my question: how’s Spain to survive? (more after the jump)

Exhibit 1: Spain’s industrial sector is barely growing amid fiscal austerity

No industrial production growth = a big problem. It’s not just fiscal austerity, per se, it’s that the economy needs plenty of nominal income gains to improve the cyclical budget deficit in order to even see the benefits of structural adjustment. The structural balance cyclically adjusts the government deficit (or surplus) for non-structural items to leave just the structural deficit (net spending on pension payments, unemployment insurance, normal capital expenditures, etc.).

Without growth to increase nominal revenues, the negative cyclical balance will keep the overall balance very much in the red. Spain needs growth! Apparently, it’s not coming from the industrial sector.

Spain was deriving quite a bit of industrial demand from within the Eurozone (the red line in the chart above) through the end of September 2010; however, that source of order growth is tapering off. Now, it seems that extra-euro industrial orders growth (the green line) may start a sideways trend, too. Normally I wouldn’t put too much stock in one data point – but with tightening across Asia and possibly the UK (not the US for a bit), slower orders growth is inevitable.

Exhibit 2: The German industrial machine

The German machine is also deriving industrial production growth from extra-euro orders. Notably, too, domestic orders have been strong. But for all of the talk about Germany’s overheating export sector, industrial production is still near 6% below its Q1 2008 level.

And finally,

Exhibit 3: The poster child for fiscal austerity, the UK.

Why? Because they’re nominal exchange rate depreciated quite markedly, allowing the trade-sensitive industrial base to find a very shallow bottom. On a trade-weighted basis, the British pound is 24% lower than in mid-2007, according to the JP Morgan nominal effective exchange rate index.

I’d like to hear how you all think that Spain’s going to get through this as the ECB raises short-term rates (for those of you who do not know my Euro-centric commentary, you can see a list of my recent commentary on the Eurozone, which includes articles on the ECB by my name on the AB sidebar), Germany slows, the US struggles to keep the consumer alive, and emerging Asia tightens its belt.

Spain’s a trillion dollar economy, and the fourth in terms of GDP in the Eurozone…

Rebecca Wilder

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Guest post: Prometheus and Bundled Payments

As an extension of one of my posts, Global payment system, as the current buzz in healthcare reform, Michael Halasy points us to one of his choices for a plan.

Guest post by Michael Halasy, Practicing Emergency Medicine PA, Health Policy Analyst, and Health Services Researcher

Prometheus and Bundled Payments

So, one of the more intriguing propositions in the midst of health reform is to reform payments. Make no mistake this has been tried before, and many physicians and hospital administrators remember the days of capitation and DRG’s with Medicare.

I attend a lot of health policy meetings and symposia, and the common theme on the priorities coming out of these meetings centers around bundled payments, and payment reform. The thought of course being, that as you change the payment system, other changes will be more palatable, and easier to enact. We’ve had some discussion of the ACO concept here, and make no mistake, bundled payments tied to outcome measurements will be one of the chief indicators of the ACO model success, and/or, it’s demise.

The problem is, that the current fee for service model is broken. Almost everyone knows this. It encourages fragmentation, volume over value, and quantity over quality. This is not sustainable, and is one of the main drivers in some respects of healthcare cost increases.

Prometheus happens to be one of the most studied, and well known of the new payment models (and yes, also a Titan who was condemned to watch his liver being eaten every day by an eagle).

Prometheus was first developed under a Robert Wood Johnson grant in 2006 in Rockford, Illinois, but has shown a great deal of promise for expansion. The initial premise behind it was to hold physicians and hospitals accountable for the care that they provide, but only for those outcomes that were within their control. They termed these PAC’s, or Potentially Avoidable Complications.

There has been some work that shows that these PAC’s may account for about 22% of all private sector expenditures. Reducing not only the occurrence of these incidents through incentives, but also through payment mechanisms has the potential to save a lot of money.

This data on Prometheus was retrieved from this article

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Is Economics a science-three comments

by Mike Kimel

Is Economics a Science – Three Comments

In the last few days I came across three very different posts, each of which covers (to some extent) the question of whether economics is a science. In order of how focused on the posts are on that particular question….

Barry Ritholtz is on fire with this post on Alan Greenspan.

Mike the Mad Biologist on when economists misunderstand biology. (My answer to whether economics is a science appears in comments to Mike’s post.)

Brad DeLong provides an insider’s view of the problem.

Update: Discussion hits a chord with bloggers and readers. Here are other links to the discussion.

Noah Opinion blog

Barry Eichengreen

Peter Dorman at Econospeak

Links section at Naked Capitalism in comments.

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The Unemployment Rate and Compensation Growth

Crossposted at The Street Light.

Last week I took a look at the way that higher labor productivity has not translated into higher worker compensation, particularly during the 1980s and 2000s. This is at odds with classical labor market theory, which suggests that as workers become more productive, their increasing value to firms should cause their wages to be bid higher so that their compensation rises accordingly.

There are a number of possible explanations for the divergence between productivity and compensation, and for how this may play into the broader phenomenon of stagnant wages for average workers. Part of the explanation is that an increasing share of worker compensation takes the form of benefits rather than wages and salaries. As shown in the chart below, fully one-fourth of worker compensation in 2010 took the form of benefits. (Source: BEA personal income data.)

This upward trend has been driven almost entirely by the rise of health care costs in the US, and the corresponding rise in health insurance premiums. Note that the one dip in the series in the late 1990s was due to the widespread implementation of HMOs – but they clearly proved to provide a one-time gain rather than a permanent increase in health insurance efficiency. So part of the reason that workers’ paychecks have not been rising is directly attributable to the rise in health care costs in the US.

But that’s not the whole story, and doesn’t address the question of slowly growing total compensation (as opposed to stagnant wages). There are, I think, reasonable arguments to be made about social and political factors, such as the decline in the power of unions. Along similar lines, Mike Konczal recently wondered to what degree this could be due to the Fed’s consistent and explicit desire to prevent wage increases.

And then there’s plain old supply and demand as a possible explanation. What did the 1980s and 2000s have in common from a macroeconomic point of view? One answer is this: multi-year long periods of high or rising unemployment rates.

The chart below shows, in blue, the seven-year moving average of the portion of increased labor productivity that were paid to workers in the form of higher compensation. During the 1960s and 70s, for example, workers typically received around 80% of gains in labor productivity over any given seven year period. Then during the 1980s that portion fell to about 40%. Meanwhile, the series in red is the seven-year moving average of the unemployment rate.

To make it a little easier to interpret, I’ve color coded the 60 years shown in the chart by shading the periods when workers were losing their share of productivity growth red, while the periods when workers were increasing their share of productivity gains are shaded in green. This helps to make it quite clear that “green” times – i.e. times when workers seem to be enjoying more of the gains in productivity – were periods when unemployment was falling. “Red” times (I guess it actually looks more pink than red in this chart) are clearly associated with periods when the unemployment rate was stagnant or rising.

One implication of this is clear: the high unemployment rate in the US right now, which is expected to decline only slowly over the next several years, is likely to mean that it will be a long time before worker compensation begins to rise as rapidly as worker productivity. Put another way, the overall level of high unemployment right now not only has the obviously enormous personal implications for those who are unemployed — it also is likely to seriously affect the compensation of workers who have never lost their jobs, for years and years to come.

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