Friday, December 2, 2011

A Little Common Sense

The latest numbers are out. The unemployment rate has dropped to 8.6%, the lowest it has been in over two years. That sounds like great news and a point in favor for Keynesian Economics. But it is a coat of white-wash I am about to rain all over.

Here are the reasons for the drop in unemployment numbers. First of all, there were a large number of seasonal hires in retail, private portage (UPS and FEDEX), and hospitality jobs. 90% of those "new hires" will be let go by January 15th. So, expect a sharp jump in unemployment in the report at the end of January.

The second big reason is a change in the labor force. Some people idyllically delude themselves to believe that the labor force is every adult over 18. That is so far from reality it is disgusting. The labor force (or "work force") are people who are employed or seeking employment. If you have a married couple and momma gets knocked up, then decides to be a stay-at-home mom for the next 4 years until junior hits school age, well, momma is no longer part of the labor force. If you get a war veteran whose injuries have debilitated to the point he can no longer work, he is not part of the work force. If a federal contractor says "screw this" and decides to quit and go use his Post-9/11 GI bill full time, he is no longer part of the "work force". Because of the pension, even military retirees who are actually seeking employment are not calculated into the "work force". Well, let me give you the reality here. The work force/labor force shrank by 315,000+ people in the past month. That means more than 315k said "screw it, I give up" and stopped working or seeking employment.

Let's do some simple math. Let's keep this easy. Let's say the labor force is 100 people. Unemployment was around 9% for October. So, that would mean 91 people were employed and 9 were looking for a job. Then 31 people say "screw this". So now you have only 69 people in the labor force. 8.6% of them are now unemployed.  8.6% of 69 people is 5.9. You can't have 9/10 a person, so let's say 6. So you now have 63 people employed instead of 91. You now have 37 people not working, not producing, not paying taxes, etc.

If we had a truly "fair" system that employed a flat income tax (and that were the only payroll tax), then we can see even more dismal news here. Let's be nice and "fair" and say each of these working laborers earned the same amount at, let's say $5k a month. $60k a year is middle class, you know. Let's say the tax is a flat 10%. So, before this mass exodus from the work force, the government collected 10% of the $5k made by 91 people. $5k times 91 people is $455k of gross income to pull from. 10% of that is $45,500 for the month in federal tax revenue. That's a salary for a GS-5 level bureaucrat for a year (to pay one gov't worker). Now, those 31 people leave, the unemployment rate drops. We all jump "hooray, the economy is picking up". I look at you like you are an idiot. Why? Well, now you have 63 people earning that $5k. So only $315k in gross income is generated. Now revenue on that (tax) is only $31,500. That's a $14k loss.

Now let's take that a few steps further. First, the gov't isn't going to fire that GS-5 for lack of funds. It's going to borrow that $14k increasing the federal deficit (which is already over $15TRILLION). Also, the net income for those working drops from $410k to $283,500. That's a $126k drop in money being spent. Look at the logic here. That means $126k less is going to be spent on food, rent, real estate, gas, cars, toys, movies, cell phones, airfare, music, etc, etc, etc. You would think that it meant more job openings due to 31 people leaving the force, right? Nope. It is a 28% drop in productivity. That means 28% of businesses end up having to cut productivity or flat out close up shop. Demand for those services will drop a bit due to reduced income, sure. But there will be about a 1/4 drop in supply. That drives prices up for products produced by those still in business. So your $1 loaf of bread is now $1.25. You have less money to buy it. Those who are still working see their $4 per gallon of gas go up to $5. Heck, you think "take the bus" instead? Well, the bus ticket goes from $1.50 each way ($3 total) go to $3.80 each work day.

As you can see, this leads to inflation combined with a depressed or "malaise" economy. This is BAD news.

Oh, yeah, then the gov't needs to  pay its bills. So what do they do? If they cut social subsidies ("welfare") and education, everybody will scream. If they cut regulation programs (so-called "green" programs), "progressives" will scream. So, the gov't isn't going to cut their pork. Hell, no. Keynesians will INCREASE TAXES to cover at least part of their bills. So, that flat 10% gets bumped to 15% or 20%. Watch the spiral. That means that those few still working are taking home even LESS. Demand will drop a little. But necessities will stay relatively constant. So supply drops again. Prices go up again.

On the surface, this drop in unemployment looks good. But, when the underlying reasons behind it are examined, you can see that this is VERY bad news.

Now let me depress you further with another dose of reality.

Congress passed TEMPORARY cuts to payroll taxes. Big deal. They are temporary. However, they intend to let the Capital Gains cuts ("Bush Tax Cuts") expire. The temporary payroll tax cuts will expire before those. So, they produce no incentive to hire more people. It just means they get a short little break for those they already employ. It will affect NOTHING in the marketplace. Why can I say this? Well, they also passed a 3% surtax on people making over $1Million. I'll bet the "99%" idiots are happy about that. They shouldn't be. It means that they now have less capital with which to hire anybody. That 3% raise actually means they will be paying MORE than they will save from the payroll tax cuts.

Now let me rain more on your parade. 75% of those $1million a year earners are private business owners. That means they are NOT corporate employees. They are Doctors, Lawyers (I could care less about them), Restaurant owners, shop owners, software designers, etc, etc, etc. They own the local qwik-e-marts. They own your local bookstore or movie theater. They own your local cab company. They own your favorite "mom and pop" coffee house or nightclub. They own your local game store. They own the company that picks up your trash and recyclables.

So, 75% of them are now seeing up to a 75% marginal effective tax rate. Yes, 75%. They pay business taxes, regulatory fees, payroll taxes, income tax, sales taxes on their supplies and insurance, property taxes, etc, etc, etc. By the time they are added up with that 3% surtax and increases in other "hidden taxes", they face a 75% effective marginal tax rate in 2012.

How many of you would take an $8 an hour job just to take home $2 an hour? Say you work 8 hours in a day, 5 days a week. So, standard 40 hour work week. Would you work 40 hours, promised $320 a week before taxes only to see an $80 paycheck? Remember, it's costing you $3 to $5 a day just to get to work (travel expenses). At $3 a day that's $15 a week just to get TO work. So, now you have $65 a week for food, rent, utilities, internet. Would you work for that?

So what incentive remains for those 75 out of 100 millionaires to bother keeping their businesses going? Here's a hint:  THERE ISN'T ONE! So, expect them to start cutting productivity (reducing supply yet again, therefore prices go up). Also, prices will go up to offset those taxes. (A 3% increased tax becomes about a 5% increase in a price tag on items produced or services rendered). It is more cost effective to go to part-time or just quit the business. That means all those employees are now out of work. So, nobody on a payroll means payroll tax cuts go all the way to NOTHING being paid, because, well, nobody is employed.

If you study the past 100 years, you will find that the "theory" of Keynesian Economics has proven itself invalid. Yet our current administration (both sides of the aisle, mind you) are using a system they MUST know to be incorrect. And who suffers? We do. We have 315k+ people say "fuck it" and quit trying to work. We will soon have employers saying "fuck this" and not producing or employing because they cannot afford to do so.

I do not see the sense in these policies. They are not reasonable or logical. They are stupid. And they sugar coat it all when presenting it to the dumb masses in the public who just take cursory numbers from the news as gospel. If you don't bother to THINK and ask "Why?" you get deluded by the white-wash. I just rained on it. So, I guess Tom Sawyer will be hiring idiots to try to paint his fence for him again, though he'll have no capital with which to do so. And I'll be here to rain all over it again.

And I won't be the only one doing the rain dance: