Jobs Jobs Jobs
|December 14th, 2011, 03:50 AM||#1 (permalink)|
Jobs Jobs Jobs
Without sounding satirical, one must see the ironic nature to Steve Jobs passing away last week. The word on the lips of every politician in Anglo America happens to be his surname. That's right. Were talking about Jobs. Or more specifically, the lack of them.
Unemployment is like a virus, it can strip growth and confidence from an economy faster than one of CERN's Neutrinos . This age old dilemma has defeated the theories of Keynes, Hayek and a plethora of other economists leaving a trail of destruction in its wake. One must question why we are able to make a phone that we can talk to, and yet we are unable to create sustainable levels of employment.
Gordon Brown famously stated that gone are the days of the boom and bust economy - yes, he really did say that - only to later find out that his irresponsible fiscal behaviour bought the former world super power of the UK to its knees begging for more. Unlike Dickens, the good old folks at the Bank of England obliged. They're the good guys you see, their favourite activities include debasing sterling, boosting debt and not buying Gold.
So, what exactly is the issue with jobs? Well, depending on the sector you represent, the issues vary with magnitude. Here in the UK, we have serious structural and cultural issues that are becoming increasingly engrained into society as the days role on past. Before I move onto the real topic of this piece, the US, I believe it is only fair that I elaborate on the statement regarding the UK.
The UK has been on a continuous slide since the dawn of Globalisation where suddenly the world was a wash with cheaper imported goods from many a distant land. Globalisation has effectively sped up information transfer to a point where comparative advantage is solely based upon the cost of the labour force and political policy. Being a Libertarian (ebbing towards the right), I have a fundamental appreciation of the benefits that world trade encompasses but I am also quick to point out its faults.
In the UK, wealth distribution has always been skewed towards London where the financial and service industries reign supreme. Historically, London has been the financial centre of the world with particular specialisms in the Foreign Exchange and the Insurance Markets. As noted in Barry Eichengreen's book Exorbitant Privelege, it wasn't until after the World Wars that the US and its Dollar really started to prosper. Prior to this, companies from across the globe would bank in the UK and pay their dues in Sterling.
However, in the last 30 years, the concentration of business and wealth in London has grown considerably when compared to the rest of the country. At the turn of the last century, the north of the country fulfilled a pivotal manufacturing role in the world marketplace and British goods were available globally. But with the emergence of Asia, improved logistics and cheap manufacturing, this industry has collapsed, leaving deep scars across the north of the country and deep structural unemployment. Although the UK retains its engineering prowess on the world stage, the mass employment market of manufacturing has been transferred East to both emerging Europe and Asia.
To combat this issue, the New Labour government under Tony Blair, bloated the public sector in the worst affected areas to create both jobs and subsidiary business. In combination with the Further and Higher Education Act 1992, which encouraged individuals to attend higher education and converted polytechnics into full blown Universities, this created an artificially low level of employment. Although artificial, this strategy was particularly effective at wealth distribution whilst the country was growing from its new found leverage. However, a number of trends started to develop which have now left the UK in a dire state.
Think about it this way. When individuals become more educated, they will expect a higher level of pay as part of the cost benefit decision process. This leads them to deviate from lower income jobs or charge comparatively more for their services. As a result, migrants from EU countries that provide services at a far lower pay rate flooded areas like construction and basic retail, driving down the wage rate to levels at which higher educated individuals consider unacceptable.
This process, over time, has created a large terminally unemployed proportion of society that, in financial terms, are better off receiving social security than working. Leading up to 2008-2009, this process was talked about but was not an urgent concern.
Following the most broadcast financial crisis in history, the UK has been forced into vastly reducing its fiscal policy or as David Cameron puts it an "age of austerity". Mr Cameron and Osbourne quickly wielded their axe by suffocating the public sector and indirectly the north. "Unbeknown" to them, the glamour industries of finance and professional services that were meant to pick up the pieces started to trim off all the fat with Samurai Sword like precision. 1000 jobs here, 1000 jobs there started to add up to mass exodus of employments across the country. Now, not only do we have graduates competing for positions, we also have those with years of experience.
Earlier this year, a report by the Office of National Statistics revealed that graduate unemployment had reached 20% and unemployment of school leavers reached 44.3%. We expect these figures are out of date and the real figure is far higher than previously reported due to another academic year concluding since their publication.
Now, onto the US. Oh, the US. Where do we start? Lets start in 2005 when the world was covered in a thick layer of Benjamin Franklins. Life was good. Your cleaner had just bought her third house in Malibu and the cheeky chaps over at AIG were printing money by selling insurance on "investment grade" debt.
We were living on Earth 2.0, leveraged to the hilt and spending like rap stars. Then what started as a small rainstorm in the housing market, turned into the mother of typhoons, reeking havoc across lands far and wide. When all the dust had settled, the folks over at the Treasury and Fed decided it was time to save the day. Pumping billions (and in some reports trillions) of dollars into the US economy to keep it afloat. However, an ugly pattern started to emerge. Captain Ben and Heroic Hank started to pump more and more money into the system to boost confidence and rally the S&P just to prove that America was a fixed land and the American Dream was still alive.
Unbeknown to them, they were creating the foundations for the mother of all financial eruptions. One that we are not far from experiencing in our opinion. The problem lies in the fact that people across the world became used to this leveraged way of life. In the wake of 2009, the markets should have flattened but instead they continued to rise.
Do you ever consider why people take drugs? Is it the high? The rush? The escapism? Without being a neuroscientist it would be hard to make any conclusions but it probably lies with a whole host of factors ranging across social anthropology. The point is, drugs are bad yet people all over the planet still take them. They get used to a high which they want to last forever and when it starts to wear off, they go into a depression. Leverage is like a drug, when economies have it, it feels like the best thing the world. Everyone feels rich and the world is your sub-prime oyster. People from all walks of life feel like they can achieve the extraordinary, like buying a house without a job or profiting from these funky new products called CDO's - No one knows whats in em, but they aren't half making my pension look good - Maybe I should retire early? I am the American Dream.
Were we for real? Seriously….
The graph below shows the DJIA over the last 30 years, and as you can see, there has been an unprecedented growth in the last 15 years. Growth built on leverage and inflation. Our trend line, maybe a little pessimistically, points towards a level of around the 8000 mark as opposed to the 12 000 that investors are so used to.
Banding around words like leverage is all good and dandy but what does this actually mean. Well, in our opinion, the US economy is vastly overinflated and as a consequence consumption and compensation has grown disproportionately to the economy and, more importantly, what is sustainable. As a result, when times are bad, companies are forced to sack individuals to retain their margins and levels of pay which results in an increased level of unemployment.
See, CEOs must look after the shareholders, or in other words: your pension, otherwise they are swiftly given the boot in favour of someone who will be more aggressive and bulk up the dividend. No one wants to be the CEO who took a company from Hero to Average, yet by not doing so, they are increasing the odds of a Hero to Zero moment as the days roll past. The problem is that there is only so much cutting that one can do, beyond that point, revenue will have to be sacrificed and no one wishes for that.
This issue is far broader than many believe. A great deal of jobs could be created by merely flattening compensation and preparing the economy for reduced P/E ratios across the board.
The graph above shows the average wage rate growth of an individual in the US business sector. As you can see, growth has been prolific in the long run. However if you look closely, the growth rate between 1970 and 1997 represents a considerable slowdown when compared with the periods both before and after it. Between 1970 and 1997, the wage growth grew by around 15 index points, whereas between 1997 and 2007 compensation grew by almost 20 points. The US wage growth grew more in 10 years that it did in the previous 27. We believe that this is truly unsustainable.
Our argument is that by flattening wages or decreasing them in real terms, the US could make way for new workers with a reduced state dependence. Exactly the same amount of tax would be collected and arguable the same amount consumed, yet no one and I mean no one is considering such a measure. By doing so, the US would have to acknowledge its difficulties and prepare for economic slowdown which is oh so un-American. A factor that we believe could be America's final misgiving.
It is probably about time we talk about Mr Obama and his misconceived assumptions regarding job creation. Obama has been in some ways unfortunate and in others plain dumb. Before, we begin our critique, we ask you to consult this excellent graph from the Washington Post.
This graph compares the figures provided by his Recovery and Reinvestment plan against the real figures collected from the Bureau of Labour Statistics, and as is plan to see, his plan failed. Dismally.
Firstly, Obama was overly optimistic about the strength of the economy. What he failed to realise is that it will take years for the troubled assets to leave the system and, whilst they still exist, their economic paralysis will continue. By focusing on jobs, Obama was treating a symptom of the crash and not the route cause. Think of it this way, if you have a leak in your roof and it wrecks your furniture, you don't replace the furniture before mending the roof. He was using an end as the justification for the mean without considering the idea that the end was uncorrelated to the means in the long term. In layman's terms, he should have focussed on encouraging commerce and promoting commercial borrowing to generate organic jobs growth and stabilise money supply. This, as Heroic Hank and Captain Ben incorrectly concluded, does not involve handing banks free cash.
Secondly, by introducing a broader Medicare package Obama has left the US with another long term debt obligation that will have to be funded from the public purse. Whilst we appreciate the morality of Obama's healthcare bill, his timing could not be worse. Don't spend money when something don't need fixing in the short term, leaving your mark on a country is great but dragging razor blades through it's heart is far more detrimental and the effects are remembered far longer than you are. All of this spending came to a head in the debt ceiling debate that not only made the US look positively incompetent, it highlighted both the political division and financial stress that exists to the whole world.
Obama's most recent move to implement a so called Buffett Tax to pay for a new jobs bill would only cause a repetition of the first issue. Moreover, preaching socialist ideals in a capitalist country is not a good idea. Look were it got Europe and their balance sheets. Equally stupid would be to promote tax cuts as suggested by many of the Republicans. Although we admit, politically, it does become a double edged sword. Money and effort would be far better spent by encouraging businesses to start borrowing with a degree of guarantee for those who are prepared to expand and take on new staff.
Whatever Wall Street may have you think, the banks have a lot of static cash sitting in the Fed accumulating interest, yet they have very little credible businesses that want to borrow from them. The issue falls down to confidence, would you want to borrow if the world was telling you that there are no jobs and stock markets have fallen for the 10th day in a row.
The smart man in the small business owner should view this as an opportunity. Rarely has there ever been a chance to harness credit or staff at such a low cost. He should also be aware of the fact that 20% growth a year is a fallacy and navigate his operations with the view to grow organically without the previous pressures of a credit bubble. This is the message that Washington should be sending to its people instead of the current one that focuses on re-entering the gravy years through a focus on consumption and job stimulus.
Barak, Mitt, Rick, Rick and Herman, whichever of you starts to realise this will be the true champion of the American people.
However, we don't keep our hopes up. Politics has become somewhat like an episode of Jersey Shore in recent months, yet upsettingly not as disassociated from the real world, and it doesn't look set to change. The very fundamentals of democracy have been turned on their head as the political hierarchy ranks the Presidency and Perception far above the importance of the people.
We leave you with a pertinent quote from Economist Thomas Sowell
"It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong."
First published on 10th October 2011
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