Paul Krugman and the New Keynesians

I just had read Paul Krugman’s book – End the Depression Now - for the second time. Everyone regardless of political philosophy should read this book. Even though Paul Krugman has become the top spokesman for Keynesian economics, he writes clearly, succinctly, and intelligently for an economist. Perhaps, Paul Krugman should rewrite Keynes’s book. Unfortunately, the world’s two most famous economists, Maynard Keynes and Karl Marx, are incredibly long-winded writers as every sentence overflows with superfluous words, and sentences stretch across pages.

Paul Krugman is correct in many ways but errs in other ways. The world continues to struggle from the Great Recession that struck the world in 2007. Something seriously happened to the U.S. economy, and many people do not get it. Paul and I get it, and I understand why most people do not get it. Everyone grew up during the prosperous times when the U.S. economy plowed ahead and created millions of jobs while the U.S. military and U.S. businesses dominated the world. If someone wanted to work, the person would simply fill out several job applications and wait for the phone call. Then this person had a job. Then this person could apply for other jobs while working, and gradually transition themselves into better positions.

Nevertheless, something had changed. After the 2007 Great Recession, the U.S. economy has become stuck like a truck spinning its tires in the mud. Jobs had become scarce while the unemployment rate gradually falls towards the 5% rate, which we consider normal. However, many smart people know something had broken in the U.S. economy.

Many politicians and leaders view the falling unemployment rate as a barometer on the economy’s health. However, a falling unemployment rate masks two problems. First, the U.S. government does not count discouraged workers as unemployed. Discouraged workers want to work, but they stopped searching for employment because they believe they can’t find a job in the economy. Second, some people found part-time jobs after being laid off during the 2007 Great Recession. However, some of these people want to work full time and not part time.

What had happened? Something struck the economy like the Ebola virus coursing through a healthy person’s body. Of course, I argue the transition from a manufacturing economy to a service-oriented one had replaced many good-paying, full-time jobs with low-paying, part-time jobs. Then we add an overbearing, all-controlling government that further damaged our economy. Now, we arrive at the first rule - just like the socialists and communists, Keynesians accurately describe the poor’s plight and misfortune.

Rule 1: The Keynesians, Socialists, and Communists can accurately describe the plight of the poor and misfortune in our society.

Paul Krugman correctly assessed Europe’s plight. European leaders have fallen into the austerity trap - governments must increase taxes and reduce government programs. If people picked up an elementary economics textbook, they would discover austerity would be a disastrous policy. During recessions, government should increase government spending and/or reduce taxes because the government injects money into the economy, raising consumers' incomes and spending. Similarly, the government could reduce taxes, allowing taxpayers to keep more income, so they can increase their spending and help expand the economy.

Paul Krugman, however, has missed the point. The European countries never used Keynesian economics correctly, which becomes Rule 2. Governments should use austerity during economic expansions that would slow the economy. Austerity helps create budget surpluses to reduce the government’s debt and strengthens a government’s finances. Then during a crisis or recession, government can boost its spending and lower taxes to expand the economy. Unfortunately, European governments reduced taxes and boosted government spending during the economic expansion, weakening their financial resources. As European governments tried to increase government spending during the 2008 Financial Crisis, investors became leery, pessimistic, and fearful. They stopped investing in Greek, Spanish, and Irish bonds. Investors believed these governments had issued too much debt, and the governments would experience troubles repaying the bonds with interest. We know this became true. Remember the Greek haircut? Euphemism for forcing the bondholders to take a 50% loss on their Greek bonds.

Rule 2: For pure Keynesian economics, government reduces spending or raises taxes during economic booms and boost spending or reduces taxes during recessions. Thus, government strengthens its finances to handle downturns in the economy.

Keynesians are biased towards government spending, which becomes Rule 3. Don’t get me wrong. I understand the concept well. Every economy has four broadly defined sectors: Consumers, businesses, governments, and exports-imports. During a recession, consumers and businesses become fearful and pessimistic about the future. Consumers reduce their spending, buy fewer imports, and boost their savings. As businesses sell fewer products or services, companies lay off some of their labor and reduce their investments. Meanwhile, if the recession had spread to a foreign country, then foreigners buy fewer exports from us. Consequently, our economy takes a huge hit from lack of spending. Consequently, government becomes the only entity that can defy the recession and can boost its spending to overcome society's lower spending.

Rule 3: Keynesians have a bias towards government spending. Nevertheless, government can reduce taxes to expand the economy and raise taxes to slow the economy down.

Many Keynesians discourage businesses, government, and consumers from saving, leading to Rule 4. They must spend all their incomes in the economy to buy goods and services, and keep the economic machine turning. Since everyone becomes fearful and saves more during recessions, people remove money from the economy. Thus, Keynesians are correct if people hide their savings under their mattresses while business and government store their money in vaults. On the other hand, if companies and people deposit their funds into banks, then banks can lend out their funds. Consumers borrow to buy houses, cars, and appliances while companies borrow to invest in buildings, machines, computers, and equipment. This explains why the Asian tigers - Hong Kong, Singapore, Taiwan, and South Korea - grew phenomenally. Asians are phenomenal savers who deposit their savings into banks. Then banks could grant loans to businesses that invest in their economies that fuel their extraordinary economic growth rates.

Rule 4: Keynesians are against businesses, government, and consumers from saving. They must continually spend to prop up the economy.

Here is where Paul and I begin to diverge. Keynesians pick certain periods to show Keynesian economics works, which becomes Rule 5. They always point to a particular time such as the U.S. government preparing the U.S. economy for World War II. The U.S. federal government ramped up spending to build ships, trucks, weapons, and supplies for soldiers. U.S. manufacturing went into overdrive and stomp on the economy’s accelerator. Many young men joined the armed forces while many factories hired women to work in the factories. No question, Keynesian economics had worked.

Rule 5: Keynesians choose their times well to show Keynesian economics works. Then they neglect other times when Keynesian economics had failed.

Everyone forgets Franklin Roosevelt, who started his presidency in 1932. The president boosted government spending during the 1930s by creating numerous alphabet soup agencies and sponsored massive public works projects. Did the U.S. economy recover? No - the U.S. economy had entered a recession in 1937. Of course, the U.S. government also raised taxes, which the government should never do during a recession, and the U.S. government encouraged companies to keep paying high wages to the workers. The high wages ensured the workers retained their purchasing power. Unfortunately, people increase their savings during uncertain times and reduce their spending.

Let’s say the Great Depression was an anomaly. I can find another significant failure of Keynesian economics. Japan entered its two-decade malaise starting in the early 1990s. Japan also used Keynesian economics since the 1990s as the Japanese government amassed a public debt to GDP ratio of 200%. Consequently, the Japanese economic engine continues sputtering and struggling along since the 1990s. What makes Japan unique is the Japanese government bonds are held within Japan, and thus, Japan has little risk of foreigners triggering a financial crisis, which I explain later in this blog.

Returning to our side of the world, the U.S. federal government has dumped trillions of dollars into the economy since the start of the 2008 Financial Crisis, and we have witnessed the weakest recovery ever. Of course, Paul Krugman said, if Keynesian economics does not work, then government must scale up its spending, which becomes Rule 6. Using Paul’s analogy from his book, the broken economy represents a car with a defective battery. The government must only replace the battery to get the car running again. Well, the government has spent $700 billion to bail out the financial institutions and another $831 billion for the American Recovery and Reinvestment Act of 2009. Then the Federal Reserve, our central bank, lent about $2 trillion to bail out the banks. Replacing the battery has become expensive while that damn car still won’t start. The U.S. economy measures about $16 trillion, so if government continues boosting its spending, it will dominate and control our society, similarly to the Soviet Union, where the bureaucrats controlled the entire economy.

Rule 6: Communists and Keynesians only differ in their scale of the government's planning.

I do agree with Paul Krugman – government should never decrease government spending or boost taxes during a recession. Nevertheless, I must add one caveat - government must have strong finances to weather the downturn. In his book, Krugman cites Minsky, an unknown economist. Minsky expounded a simple idea. A company with low debt can expand quickly by taking out bank loans, which we call leveraging. The company continues doing well and keeps expanding while banks keep granting the company more loans. Then a crisis happens, and banks start examining their loans. If banks believe the company has too many loans, the bank cuts the company off, which imposes hardship onto the company. The company begins deleveraging by cutting back on spending and repaying its loans. If a financial crisis strikes the company, then the company may nosedive while the bankers, stockholders, and bondholders panic. Subsequently, the company accelerates towards bankruptcy.

For example, Lehman Brothers bankrupted in October 2008. It began with a leverage ratio of 26 to 1 in 2003 that surged to 39 to 1 in 2006. Consequently, Lehman Brothers borrowed $39 for every $1 it had in equity. Equity measures a company’s financial strength by taking its assets and subtracting its liabilities. Investors want a low leverage ratio because they want to recoup their investments if the company bankrupts. Unfortunately, Lehman Brothers borrowed to buy expensive real estate at the height of the housing bubble.

Did you catch the irony? The U.S. federal government has a leverage ratio too. We know the U.S. government has accumulated $17 trillion dollar debt, but we do not know the government’s equity. Although the U.S. government spends about $3.5 trillion per year, this does not represent equity. We must add all the government’s assets, such as military bases, equipment, government buildings, and other assets and subtract its liabilities. I bet the government's current leverage ratio tilts towards the high side. If a government debt becomes too high, investors will stop buying the government bonds, triggering a financial crisis. Then government must deleverage by paying down its debt and selling off its assets. Unfortunately, the U.S. government holds many assets that it cannot sell, such as military bases, weapons, and so on.

Paul Krugman argues the U.S. government could ramp up its spending that would push the U.S. debt to new records. Although a high debt could trigger a financial crisis, a government does not have to deleverage if it experiences financial trouble. A government could force its central bank to buy government bonds. Thus, the central bank prints money to cover a government budget shortfall. However, printing money leads to inflation and weakens a currency. (The Greek, Irish, Italian, and Spanish governments have no control over the central bank. They only have the power to tax, spend, and borrow. Since investors do not want to buy these government bonds, these governments cannot expand government spending or reduce taxes during a recession.)

Here is where Paul Krugman stumbles in his book, which becomes Rule 7. The U.S. federal government cannot weaken the U.S. dollar by forcing the Federal Reserve to buy U.S. bonds because people around the world hold U.S. dollars to save their purchasing power. If the U.S. government weakens and depreciates the U.S. dollar, people will stop holding U.S. dollars. Then many countries will stop investing in U.S. government securities. For example, China holds roughly $1 trillion in U.S. securities. If the Chinese believes the U.S. government will depreciate the U.S. dollars, then those U.S. government bonds and U.S. dollars plummet in value. Thus, China will dump those dollars and bonds that would trigger a financial crisis. Then the world rushes to unload the U.S. dollars and U.S. government securities, and we Americans will truly experience hard times.

Rule 7: Government cannot debase its currency if the world uses the country’s currency as the world’s transaction currency. Thus, the Eurozone and United States cannot devalue their currencies to jump start exports.

I am not anti-Keynesian, and I do not object if a government builds and expands roads, hospitals, schools, and infrastructure during a recession to create jobs. Nevertheless, the government must possess good finances, which becomes the most important rule – Rule 8.

Rule 8: The politicians have butchered Keynesian economics. Most governments did not raises taxes or reduce government spending during good times, so they could reduce their debts and strengthen their finances. Then governments would have the resources to combat the downturns in the economy.

Has Technology Made Our Society Worse?

People at one time were self-sufficient and made many of their goods at home. They grew vegetables in backyard gardens, and planted fruit and nut trees around their properties. They raised chickens in backyard coops supplying the household with fresh eggs and chicken. If they had enough land, they could raise pigs, goats, horses, and cows. Then people used natural ingredients to prepare their family meals. They pickled and jarred their own vegetables and made their own jams and jellies. Some families brewed their own beers and fermented their own wines. The men fixed and repaired the homes, barns, and mechanical devices while the women sewed their own clothes, blankets, and quilts. If a family over produces a product, they could barter with a neighbor for another.

Then technology happened, which led to large-scale specialization. Businesses sprang up and manufactured products and services, filling the stores' shelves with mass-produced products while they transformed labor into automatons working on the assembly lines. The young people migrated from the farms as they searched for jobs in the cities with greater salaries and acquired specialized skills to work in the factories. Then society began losing its craftsmen, artisans, and know how. The young no longer want to maintain the traditional ways while the old can no longer pass down their trades and skills to the next generation. Both China and United States are losing skills and traditions of the elders as everyone consumes the same mass-produced products and services that fill every stores' shelves.

Being self-sufficient, people need not rely on outsiders for their jobs, incomes, and security. They create their own work at home and isolate themselves from the vagaries of the national economy. Even if a country were suffering from a severe recession or depression, self-sufficient people would lightly feel the economy's problems. They rely on themselves for their income, wealth, and prosperity. Unfortunately, technology has converted self-sufficiency into economic growth as companies grew into monstrosities wreaking damages on our psyches, health, and souls.

Look at our society! Whole industries sprang up to replace self-sufficiency. Unfortunately, people rely on grocery stores, fast food joints, and restaurants to provide processed foods saturated with preservatives, chemicals, and dyes. Many people forgot the art of cooking but they can plop processed foods into a microwave to heat them up quickly. Then some people begin wondering why so many people are stricken with sickness, debilitating diseases, and poor health.

People producing their food would never add chemicals, preservatives, and dyes to their food and feed it to their children and loved ones. Even restaurants that do not add chemicals always dump sugar, oil, fats, and salt to heighten the food's taste. Subsequently, companies and corporations have taken over the family farms and boosted the insanity of technology. The corporations genetically modify vegetables and animals to boost yields. Our political leaders promised genetically modified food would never enter the human food supply, but they lied, of course. When the voters are not looking, the companies and corporations lavish the politicians with kickbacks, bribes, and gifts.

The whole food supply chain feels the insanity of technology. Monsanto genetically modifies corn and soybeans, so farmers can spray Roundup on the weeds and crops to kill the weeds. Remember Roundup is an herbicide that kills plants on contact. Then poultry farms reengineered chickens, so they grow from egg to a fully-grown chicken within a month instead of the usual two months. Sometimes the chickens grow too fast that they keep falling to the ground from their own weight. Finally, farmers raise salmon in ponds and feed them leftover wastes. Farm raised salmon contains little healthy fats while natural ocean salmon brims with healthy fatty acids and nutrients.

Modern production and technology have transformed our society into a throwaway society. Industries and companies sell their products for the lowest prices. People no longer repair clothes, and they quickly throw clothes away after they become faded, torn, old, or out of style. In the good ole days, many electronics and appliances lasted several decades. Currently, electronic gadgets and appliances easily break or quickly become obsolete. People no longer bother to repair their broken appliances. Instead, they toss them into the trash and speed to the nearest store for replacements. Unfortunately, the technicians and repairmen have become a causality of our throwaway society.

Technology causes shifts in our society as some industries rise while others fall. For example, people switched their incandescent light bulbs to the energy-efficient fluorescent ones. Thus, the factories producing the fluorescent lights bulbs expanded and grew while the factories making incandescent fell still, silent, and inactive. Workers who made incandescent light bulbs saw their skills become obsolete and useless as society no longer needs them anymore. Thus, skilled workers must keep updating their skills, or they will perish in our modern society.

Technology has turned full circle as companies have begun competing fiercely. Manufacturing companies and factories continually replace their workers with machines because humans have become too expensive to employ while a machine can stamp out thousands of parts per hour and never demand wage hikes. Then companies try to sell a product or service for the lowest price. Unfortunately, to produce at low costs, companies manufacture clothing, textiles, and electronics in third world countries by paying slave wages to the workers. Accordingly, the developed world has relocated its factories to the developing countries, enslaving them with technology, exterminating their culture, and filling their heads with materialistic needs.

Technology has become synonymous with computers, reducing human contact and intimacy to strokes on a keyboard. People and families enter virtual worlds in the machine as they navigate through artificial worlds or play computer games. They no longer play cards or board games with friends and family. They stopped reading books, newspapers, and magazines. Then the books and magazines gather dust as they sit on the neglected shelves. Thus, young people become smart using technology but they can no longer read and write. Young people listlessly sit down and become lost in their cellphones, ignoring the world around them. Technology has quickly isolated us from our fellow humans and channeled our contacts through cold, impersonal devices.

Businesses over rely on computers and have become a hostage to technology. Businesses use computers to power cash registers, ATM machines, and electronic commerce. Unfortunately, computers fail during blackouts as businesses cannot sell products and services. Then commerce breaks down and grinds to a halt. Of course, people cannot use the internet or cell phones without electricity. They sit in the dark, pouting, wondering why they cannot read their email or access Facebook.

Technology has made our modern society less stable. Self-sufficient people would feel a small impact from downturns in the economy. During the Great Depression, many U.S. families lived on farms and produced their own food. People who have the ability to produce their own food or make their own things do not need to work in the nation's factories. They remain their own bosses in their homes and work near their families.

Unfortunately, our modern society has become flawed. Agriculture comprises a tiny fraction of the U.S. economy. A severe downturn in the economy can be quite disruptive if a large number of people become unemployed. Then people and families would see their incomes plummet, and they would reduce their spending. They are no longer self-sufficient, cannot grow their own food, or produce their own things. When laid off workers stop paying their mortgages, the banks will foreclose and evict them from their homes. As the people become homeless, they are left starving on the streets with no ideas of self-sufficiency. In the rush to join the technological world, the people forgot their roots and how to sustain for themselves without relying on technology.

7 Reasons Why Russia Should Take Over The Crimea

The United States and United Nations continue to intervene with Russia taking over the Crimea. They have imposed sanctions on Russia and demand Russia return the Crimea to the Ukraine. However, Russia has 7 valid reasons to assume control over the Crimea.

Reason 1: Russia and Ukraine transferred the Crimea back and forth over their history. Roughly 50% of Crimea residents identify themselves as Russian. Many residents speak Russian as their primary language and share its culture. Although Ukrainians speak a Slavic language similar to Russian, it is not Russian. Furthermore, some Ukrainians harbor a grudge against the Russians for occupying the Ukraine during the Soviet Union.

Reason 2: Russian government stationed its navy at Sevastopol, Crimea. With the Ukrainian economy sinking into chaos, Russia must protect its naval base. The chaos could spread to the Crimea and the naval base, creating problems for the Russian Black Fleet.

Reason 3: Don't people living in a democracy get to choose which state to belong to? Over 90% of Crimeans voted to leave the Ukraine and join Russia. Of course, the caveat is the world must ensure Russia did not manipulate the vote. On the other hand, the United States have always experienced voting troubles. Illegal aliens vote in elections. In the old days, politicians stuffed the ballot boxes with fraudulent votes after the polling stations closed in the south. On election day in Chicago, the dead rise from their graves and vote at the elections. If the world takes away the people's right to vote in the Crimea, then the politicians dictate policy. Thus, the world's politicians eliminated the Crimeans' right to vote.

Reason 4: The economies of Ukraine and Russia differ. Out of the 15 former states of the Soviet Union, Ukraine made the fewest strives towards a market system while Russia adopted some changes during the 1990s to a market economy. Unfortunately, the Russian government started undoing those changes in the 2000s with President Putin being president for many of those years. Consequently, Russia has a better economy than the Ukraine's. Perhaps the citizens of Crimea want to live in an economy with more markets.

Economists developed measures and rankings to determine how free a country's markets. For example, the Heritage Foundation ranks countries on their economic freedom. The measure includes limited government, efficient regulations, taxation level, business investment freedom, and so on. Nevertheless, the ranking only provides a guide because economists have troubles measuring these things. For example, how do you measure efficient regulations or limited government?

Economic freedom differs from political freedom. United States was always ranked in the top 10 for economic freedom in the past, but we have fallen to the 12th spot in 2014. Government at the federal, state, and local are usurping control and accumulating power. Each year, Americans keep losing their economic freedom, but we still have political freedom. We can choose which idiots to represent us in government. However, the U.S., state, and national governments in the United States restrict us from opening new businesses. They regulate our investments and restrict our property rights. Hence, we continually drop in the rankings for economic freedom.

Reason 5: Heritage Foundation ranked Ukraine as 155 and placed it in the same class with Cuba, Burma, Iran, and North Korea. They ranked Russia a 140. Russia has a tad more freedom than Ukraine even though Heritage Foundation ranked it mostly unfree. Consequently, Crimea could gain a little more economic freedom if it broke away from the Ukraine and joined Russia.

Reason 6: Transparency International compiles the Corruption Perception Index for 177 countries. Economists and analysts have even more problems measuring corruption because corruption entails many forms – bribes, extortion, kickbacks, under the table payments, tax evasion, and so on. In 2013, they ranked Ukraine 144 and Russia at 127. Nevertheless, the United States ties with Uruguay at 19.

Businesses experience trouble growing and thriving in corrupt countries. Regulators and tax inspectors shake down companies for bribes, kickbacks, and extortion payments. Business leaders must form friends and pay bribes to the politicians and bureaucracy leaders. Then the politicians and bureaucrats will help and protect the companies. Consequently, Crimea could lower its corruption by joining Russia.

Many people forget history. Over the United States' history, Americans moved onto Indian lands and stole them. They established farming communities and cities. They also formed a territory government. Once the state had become large enough, they petitioned the U.S. government to join the nation as a state. For example, Puerto Rico, Guam, and U.S. Virgin Islands remain territories of the United States. If the residents vote to join the United States as a state, should Russia and other countries oppose the residents' decision? It is a hypothetical question because it would never happen. Citizens living in a territory receive all the benefits from the U.S. government without paying all the taxes and costs.

Reason 7: U.S. government must have another agenda. U.S. government and the world fear a developing and stronger Russia. Hence, they want to restrict its size and power, so the U.S. government can dictate its policies to the world. The real issue is which country gets to control the world, and the United States does not want to share control with another country. Russia as the Soviet Union was the only country large enough to challenge the United States during the cold war.

The United States and United Nations have imposed sanctions on Russia. These sanctions will push Russia into a recession along with Ukraine and Kazakhstan. Kazakhstan, another former Soviet State, has mineral and petroleum wealth. With more countries entering a recession, the stacked dominoes are tumbling across the world as economies begin crumbling. As the dominoes continue falling, it will bring the recession to the doorsteps of the United States. We, Americans, are experiencing the weakest economic recovery, and a world going into a recession will not help. A world in recession will push us back into an extended recession.

The Dead Economic Recovery

World went into recession after the 2008 Financial Crisis had struck the world. In 2014, news reporters, business analysts, and politicians keep talking about the economic recovery. Where is the recovery? It has been seven years, and the U.S. economy still has not recovered. Unfortunately, everybody forgets history.

I listed the last five U.S. recessions because every recovery has become weaker and weaker.

Name	Time	Peak Unemployment
Early 1980 recessions	January 1980 to July 1980 July 1981 to November 1982	7.8% 10.8%
Early 1990s	July 1990 – March 1991	7.8%
Dot Com Bust	March 2001 – November 2001	6.3%
The Great Recession	December 2007 – June 2009	10%

Starting in the early 1980s, we experienced two recessions back to back. Federal Reserve, our central bank, triggered the first recession. It stomped the breaks on the economy because the economy grew too fast and created inflation. Central bank contracted the money supply to combat the high inflation rates from the 1970s. A contracting money supply removes money from the economy, reducing consumers' spending. Unfortunately, a contracting money supply raises interest rates, and short-term interest rates soared to 20% over night.

We have a theory called Cyclical Asymmetry. A central bank contracting a money supply always slows an economy, and it could trigger a recession. However, a central bank boosting the money supply should spur economic growth as the central bank injects money into the economy. Consumers, businesses, and government spend more money, prodding economic growth. (Interest rates also fall that lets banks lend loans with low interest rates). According to Cyclical Asymmetry, boosting the money supply does not always expand the economy.

Then the Ayatollah Ali Khamenei staged the Iranian Revolution and overthrew the Shah in 1979. New government stopped selling petroleum to the United States, causing petroleum prices to spike. Unfortunately, the U.S. economy relied on cheap, fossil energy to power its economy and factories. Soaring petroleum price triggered the second recession, and the unemployment rate peaked at 10.8% in 1981.

Everyone forgets history especially the politicians and news reporters. The United States government, i.e. CIA, helped overthrow a democratically elected Prime Minister, Mohammad Mosaddegh, in 1953 to support the Shah of Iran. Prime Minister wanted to nationalize its petroleum industry and to keep the petroleum profits for his country. On the other hand, the Shah signed over 40% of its oil fields to U.S. companies after it took power. Perhaps the U.S. should stop trying to help the world. Our interference into foreign countries continues to backfire that creates future problems.

Experts debate whether the 1980s recession was the worst since the Great Depression. Although the 1980s recession had a greater unemployment rate, the 2007 Great Recession lasted much longer. Then the computer industry lit the United States on fire and created high paying jobs as businesses, government, and households invested in computer technology.

The United States entered a recession in 1990. The Federal Reserve tightened the money supply to reduce the inflation rate while Iraq invaded Kuwait, causing the petroleum price to soar to new heights (Similar to the early 1980s).

President Bush senior invaded Iraq and freed Kuwait. Then he withdrew the troops because he feared a long, arduous occupation of Iraq. Unfortunately, President Bush junior had started the decade long occupation of Iraq, costing the U.S. government in trillions of dollars.

U.S. economy entered a recession with unemployment rate peaking at 7.8% in 1990. Recovery had become weaker. As the economy recovered, they called it the jobless recovery. Although the U.S. economy recovered, the U.S. economy did not create new jobs. In the old days, economic recoveries always created jobs.

Then the internet and communications industries ignited the economy in the mid-1990s. Businesses and government adopted e-commerce, designed websites, and expanded communications, creating thousands of new jobs in the process. Many consider 1999 to be the best year for the workers because the United States had the greatest portion of its citizens in the workforce with low unemployment rate. I remember a gallon of gas cost less than a $1.

Then many internet companies bankrupted during Dot Com Bust in 2001. George Soros, one of the world's richest men, asked one question – how do these companies make money? We discovered the answer – they didn't make money. Subsequently, everyone learned about the fraud and illegal activities of Enron and WorldCom.

According to Table 1, we experienced a relatively mild recession with the unemployment rate peaking at 6.3%. This recovery was weaker than the previous recovery. They called it the job-loss recovery – the economy recovered, but employers kept shedding jobs. Did you notice the play on words - the jobless recovery versus the job-loss recovery? Of course, George Bush junior became president in 2000 while his father was president during the last recession.

An economic recovery should create jobs. Some experts claim the U.S. manufacturing never had recovered. Strong U.S. property bubble lifted the whole economy by creating jobs in the banking and construction industries. Then the housing bubble popped in 2007, triggering the Great Recession. Many consider the Great Recession as the most severe recession to hit the U.S. economy since the Great Depression. Although the unemployment rate peaked at 10%, the people are still feeling the recession in 2014. On the other hand, the economy rebounded strongly after the early 1980 recessions.

Remember the theory - Cyclical Asymmetry? Shrinking the money supply always contracts the economy while boosting the money supply may not expand the economy. Federal Reserve dumped trillions into the U.S economy to revive it. The Fed did not release precise details so estimates range between $2 trillion and $8 trillion. It provided emergency loans to banks teetering on bankruptcy. It bought bad mortgages from the banks. Consequently, we have witnessed the weakest recovery ever in the United States.

U.S. government dumped trillions into the U.S. economy. Federal government lent $700 billion to bail out the banks and financial institutions. President Obama signed the American Recovery and Reinvestment Act in 2009 to provide $831 billion for creating jobs. After dumping trillions into the economy, what have we seen – a nonexistent recovery?

When we study the history of the United States in the 19th century, the U.S. experienced a recession or financial panic every ten years. After every crisis, the U.S. economy came back stronger and grew faster. After the last three recessions, the recoveries became weaker as the United States has aged into an old man struggling to get out of bed in the morning.

Did you notice the number of years between recessions? United States experiences a recession every 7 to 10 years. We are in 2014, seven years after the Great Recession. We still have not recovered, but we should expect a new recession to the hit the United States between now and three years. If we never recover from the Great Recession, we will not recover from the next recession that will hit the economy anytime soon. Unfortunately, the United States has no industries to lift the economy out of its doldrums, because we have entered a period of stagnation.

P.S.: Japan entered two decades of weak economic growth after the bubbles in its real estate and stock markets collapsed in the early 1990s. Japanese government and central bank bailed out the banking industry and injected trillions of yen into their economy.

Is the United States Experiencing Institutional Failure?

I returned to the United States in June 2011. Although I earned a PhD, published research, and taught in a variety of universities across the world, I would accept any position in the United States. I will admit old age has caught up with me, and I am getting too old to be lugging heavy suitcases from university to university, from airport to airport, from country to country. Subsequently, I returned to the United States, willing to accept any job, even a position at the bottom rung of the social ladder. Then I noticed and discovered observations about the U.S. economy that have far-reaching consequences. The United States is suffering from institutional failure. Unfortunately, the institutions in the United States have failed us, giving us the eternal gift of a stagnating economy and weak job growth.

I returned to Conway, Arkansas in 2011. Conway is a small, prosperous community approximately 40 miles north of Little Rock. During the summer of 2011, employers advertised roughly 300 to 500 jobs within 25 miles of Conway. However, no one is hiring. Why is this? I thought deeply about this conundrum, and realized the United States has six problems.

Problem 1: Hiring new employees scare employers. Unfortunately, if an employer terminates a new employee, the employee could collect workman’s compensation or unemployment insurance, or even file a lawsuit against a company. During good economic times, another employer may inadvertently hire the bad employee. Thus, the bad employee never files for unemployment or workman's compensation or hires an attorney. After the 2007 Great Recession struck the U.S. job market, a bad employee could be unemployed for a long time. Consequently, the terminated employee has an incentive to retaliate against a former employer. Finally, the President Obama's Health Care plan looms on the horizon. Many companies do not know how their costs will change once the law comes into force. Hence, the employers refuse to hire anyone.

Problem 2: Employers have extraordinarily complex procedures to hire new employees. When I entered the workforce in the late 1980s, everything was much simpler than today. Several times, employers hired me immediately after a successful interview, and I started the next day. Employers rarely check criminal records (difficult to check court records outside the employer’s county before 2000) and drug testing did not exist before the 1990s. Our modern life has become complicated, and consequently, an employer needs months to hire a job applicant. Most employers perform background checks like criminal records, driving records, drug testing, skill-level testing, and my personal favorite, the 80-question personality assessment test. An online university in 2011 viewed my credit record from Transunion after the first interview. I guess if I have a poor credit history would imply I am a terrible teacher. Of course, poor credit implies I need a job because I cannot pay all my bills. I can understand possessing poor credit would pose a problem for handling cash or working at a bank, but to teach? (By the way, I do have good credit, at least at this moment). Thus, these complicated procedures make employers leery to hire new workers. Employers do not want to take a chance on someone. Consequently, institutional failure causes jobs to be available, but employers do not hire.

Problem 3: During my quest for a job search, I noticed employers do not train workers anymore. An employer wants the job applicant's experience and education to match the new job perfectly; otherwise, the job applicant would have no luck. I first saw this when I applied for a data entry position for a truck parts company in 2011. I did data entry for a music company in the late 1990s. However, the interviewer stated these skills are not transferable. The trucking company has a fast-paced environment, and they do not have the time to train me. I noticed this particular job remained vacant for quite a while. I guess this employer could not find the perfect applicant. This example illustrates a key point. If employers do not train new employees, social mobility freezes. How can an employee move up an organization? Instead, employers would poach talent from their competitors. Thus, the employer boosts salaries and benefits to hire employees from its competitors. Unfortunately, as the companies eliminate training, a crisis strikes the employers once skilled workers retire. The retired workers do not pass their training and knowledge to the next generation. Consequently, institutional failure freezes social mobility, and knowledge and skills become lost. Then for the select few with the right skills, their salaries and compensation would continue to soar.

Problem 4: I noticed employers are extremely fussy. As applicants form long queues for every job, the employers shift through all applicant's personal information. If they find one speck of dirt on an applicant's record, they reject the applicant immediately. For example, after an interview with a temp agency in Little Rock, the recruiter stated if anything comes up during a criminal history search, an employer stops looking at the applicant. Unfortunately, this problem has three implications. First, everyone assumes the criminal record is accurate. Thus, the private company correctly entered the information into their database and matched the record to the correct person. Second, many countries around the world do not have large computer databases filled with criminal records. Thus, immigrants to the United States would not worry about past transgressions because employers would never discover an immigrant's criminal history if it happened outside the United States. Finally, our society has tossed out the Christian notion of forgiveness. A criminal history becomes a lifelong shackle that a person can never remove because a criminal record exists forever. Our society will throw good people away, even for minor crimes such as trespassing and curfew violations. Consequently, nearly 65 million Americans possess a criminal record. Even though, these Americans were employed before the 2007 Great Recession, they become unemployable after their employers lay them off. What will these people do to earn a living? They could return to criminal behavior, and become part of the underground economy. Consequently, institutional failure leads to a growing, thriving shadow economy.

Problem 5: After the 2007 Great Recession, employers believe unemployed people have something wrong with them. The longer a person remains unemployed; the employer is less likely to hire him or her. Unfortunately, employers lay off millions of good, hard-working people. Nevertheless, employers resent unemployed people. The employers believe the skills of the chronic unemployed degrade rapidly, and the employers do not want to train them. Consequently, institutional failure leads to a rising class of chronic unemployed as millions of people become unemployable.

Here, I am still unemployed, but somehow I hold onto a glimmer of hope. Then the words from conservative talk show hosts echoed through my mind. If you cannot find a job, then you can create your own job. I live in the freest country in the world whose greatness was constructed on a foundation of capitalism. I remembered the stories how Michael Dell started his company in his dormitory room at the University of Texas. Steve Jobs and Steve Wozniak built the first Apple computer in their parent's garage in California. Then the richest man in the world, Bill Gates, started Microsoft in a rundown hotel in New Mexico after dropping out of Harvard University. Then reality sets in, and I remember this happened over thirty years ago, in a different legal climate. Has our legal climate changed? Does institutional failure penalize the entrepreneurs?

Now I hear stories of self-employed people clashing with different institutions in our society. For example, my sister started a thriving daycare business in her home in Indiana in the late 1990s. After she had complied with the state's numerous regulations, the homeowner's association closed her business down. The association claimed ten additional cars traveling through her neighborhood twice a day, created a nuisance for the neighbors, reducing home values. I experienced another instance while living in Texas. I wanted to pay a mechanic to teach me to change a timing belt on a Honda. Once the Code Enforcement of the City of Bryan discovered the mechanic fixing cars at his home, the inspector threatened to fine him $500 per day if he repaired any more cars. (Although Texas does not have a state income tax, it collects taxes and fines aggressively). Then I read stories how kids who started a lemonade stand found trouble with the city government. The kids need a business license while the state government wants to know and approve all the ingredients in lemonade, which is water, lemon juice, and sugar – the last time I checked. Of course, the same officials become silent when the food industry develops genetically modified animals and plants and dumps preservatives and chemicals into our foods.

Problem 6: I am good with computers, and I thought about starting a computer repair business in my home. However, I know I will clash with some government agency because local governments dislike home-based businesses. Furthermore, I must comply with numerous rules and regulations. One simple, honest mistake can land an inspector at my door as the state demands compensation for my transgression. Then I realize starting my own business may not be a good idea. Consequently, institutional failure hinders the creation of new businesses, although small and medium size businesses drove the economy during the 1980s and 1990s.

My options are severely limited in the United States. What else can I do? I do not want to return to school. I already earned a PhD. Do I need two or more PhDs to become employable in the United States? I do not want public assistance. Although I would enjoy the free time to write blogs and draw pictures, I want to be a productive member of society. The only option remaining was to leave the United States. I had to go where the jobs are, and the jobs are in Asia. I can only dream someday I can return to my homeland, the United States, and settle down in a good community with a good future. Nevertheless, I know Americans must reform their institutions before the American job machine turns on and begins cranking out jobs again. Therefore, I can only wait until this day happens.

The U.S. Unemployment Rate: "Lies, Damned Lies, and Statistics"

The quote from Mark Twain, "Lies, damned lies, and statistics," sums the theme of this blog. Politicians are haunted by one fundamental law of economics; a downturn in an economy leads to an ouster of its political leaders. Hence, our governmental leaders will do anything that is immoral, illegal, or unethical to garner votes for another term in office. Furthermore, the politicians may encourage government agencies to skew, distort, or exaggerate its statistics to appease, mollify, or mislead its citizens, especially the ones who vote. Consequently, this blog examines the U.S. unemployment rate in order to gain insight about the true impact of the 2007 Great Recession.

The first observation of U.S. government statistics is the sheer volume of information, data, and reports a bureaucracy can offer. Each department of the U.S. federal government has a branch that collects, analyzes, and publishes statistics. Then this branch literally publishes hundreds of different statistics with thousands of technical reports. Most people who visit these websites are easily overwhelmed by the information. The Bureau of Labor Statistics is the branch that collects and publishes statistics for the U.S. Department of Labor.

The second observation is the definition of unemployment. The U.S. government defines unemployment (called U3) as a person who is currently not working and actively seeking employment. If a person works one hour per week, he/she is not technically unemployed, although an hour a week cannot support a level of living. If a person wants to work, but the job market is extremely bad, he/she gives up, then that discouraged worker is no longer considered out of work. Consequently, the unemployment rate can decrease if a large number of jobless give up the pursuit for a job. The Bureau of Labor Statistics publishes the labor underutilization statistic (called U6) that includes discouraged workers and part-timers who want to work full time. The (seasonally adjusted) U6 was 15.1% for January 2012.

The third observation is a bureaucracy continuously revises its statistics. Hence the reported numbers are always in flux. For example, the Bureau of Labor Statistics uses telephone surveys to gather unemployment data and examines reports from the states' unemployment offices. Then the statisticians compute the statistic for that month, quarter, or year. Here is the kicker. After a statistic is released to the public, a bureaucracy may boost or reduce this number a few times over the next several months. Why are the numbers constantly revised? Did the statisticians not count all the surveys? Were the states late in reporting their statistics? Hence, government statistics have a degree of arbitrariness as the numbers are continuously revised.

The fourth observation is the statisticians seasonally adjust the numbers for monthly and quarterly data. For instance, the Bureau of Labor Statistics reported the U.S. unemployment rate fell to 8.3% in January 2012. The news reporters blindly reported this number to the masses without any serious analysis or verification. U.S. reporters have regressed into parrots who caw in unison for the government's slogans, sound bites, and propaganda. What does 8.3% really mean? First, this statistic was seasonally adjusted. Statisticians smooth monthly and quarterly statistics; high numbers are reduced while low numbers are increased. The reason is the economic activity is different for every month. January cannot be compared to December because December has more economic activity than January. Once the statistics are seasonally adjusted, then different months or quarters can be compared. The unemployment rate that is not seasonally adjusted was 8.8% for January 2012. Although this number cannot be compared to December, it can be compared to January 2011, which was 9.8%. Similarly, the not seasonally adjusted U6 was 16.2% for January 2012, falling from 17.3% for January 2011.

The fifth observation is the slight upward trend of the unemployment rate. In Figure 1, the annual unemployment rate is plotted between 1947 and 2011. The blue line indicates the jagged oscillations of the unemployment rate. Economists define a recession when the real growth rate of the Gross Domestic Product (GDP) is negative for two consecutive quarters. All recessions since 1947 were drawn with pink boxes on the graph. When examining Figure 1, the Great Recession of 2007 and the recessions of the early 1980s were particularly severe when compared to previous recessions because the unemployment rate soared to 10%. The early 1980s had a quick succession of three recessions. Using statistics to fit the best line through the data yields the red line. Moreover, the examination of Figure 1 shows the impact of the housing bubble during the 2000s. The housing bubble temporarily lowered the unemployment rate below the trend, as the bubble created millions of jobs. Unfortunately, the red line angles upward with a slight slope, indicating over time, the unemployment rate is creeping upward. Thus, the U.S. economy went through structural changes that were not conducive to low unemployment rates. The structural changes were de-industrialization, outsourcing, rise of the service economy, rise of the IT industry, aging population, and growth in government. Consequently, all structural changes impose benefits and costs on society, and they would require a separate blog.

Figure 1:  The U.S. Unemployment Rate between 1947 and 2011

The sixth observation is the structural change in employment. All the statistics were converted to a percentage of the U.S. population to remove the impact of a growing population. In July 1, 1947, the United States had a population of approximately 144 million, which increased to 312 million by July 1, 2011. In Figure 2, the first trend is the shift to more part-time labor. Part-time labor comprised 5.3% of the population in 1968 and gradually rose to 8.8% in 2011. The second trend is the impact of a recession on full-time employment. Every U.S. recession since 1947 was drawn manually onto Figure 2 in pink boxes. A recession always caused the destruction of full-time jobs. The 2007 Great Recession was particular nasty as the percent of full-time workers decreased from a peak of 40.4% in 1999 to 36.1%. This indicates a loss of approximately 13.5 million full-time jobs in 2011. The third trend is the rise of the number of people who dropped out of the labor force. Again, the 2007 Great Recession had a severe impact on the economy. The percent of people not in the labor force was 27.6% in 2011, increasing from a trough of 24.8% in 2000. Approximately, 8.7 million people left the labor force. Many reasons account for the exit from the labor market, and they are discussed in the next paragraph.

Figure 2:  Full time, Part time, and Unemployed

The seventh observation is a little discussed statistic buried within the Bureau of Labor Statistics' website. The statistic is the labor participation rate as a percentage of the population (age 16 and older). This statistic by nature will never equal 100% because several groups of people are not in the labor force. The groups are teenagers (16 to 18 years old), discouraged workers, retired workers, prisoners, committed patients, students who do not work, and soldiers. Illegal immigrants who work may not be reflected in the participation rate because the Census Bureau counted them in the population, but the Bureau of Labor Statistics did not count them in the labor force. In Figure 3, the labor participation rate is graphed between 1947 and 2011. The U.S. recessions were drawn manually onto Figure 3 as pink boxes, and a recession always lowered the labor participation rate. The 2007 Great Recession was particularly gruesome. The labor participation rate fell to 58.4% in 2011 from a peak of 64.4% in 2000. (The Year 2000 was an exceptional year). Roughly, 14.2 million people left the labor force. (The last paragraph indicated 8.7 million workers dropped out of the labor force; government statistics when viewed from different angles usually yields different results!) The real question is where did these people go? Are they discourage workers who gave up the pursuit of a job? Did more people retire? Did more people enter college without working, or the states incarcerate more prisoners?

Figure 3:  Labor Participation Rate between 1947 and 2011

 

One important assumption was made in this blog; the assumption is the Bureau of Labor Statistics is not manipulating the numbers. Although U.S. bureaucracies are not political in nature, the top leaders of the bureaucracies are chosen by the President with confirmation of the Senate. Moreover, a bureaucracy's funding depends on the President and Congress. The President and Congressmen want to be re-elected, and they may put pressure on the bureaucracies to release positive statistics. Consequently, bureaucrats have an incentive to skew the statistics, making it appear the economy is improving especially before an election. The 2012 presidential election is around the corner, and the news is reporting optimistic unemployment statistics, indicating a possible economic recovery. However, if one reads the comments at the end of those rosy unemployment stories, the readers' opinions express disbelief in those numbers. Unfortunately, this blog cannot uncover fraudulent government statistics. Nevertheless, the U.S. government's statistics do indicate the following:

• The 2007 Great Recession was one of the worse recessions to hit the U.S. economy since the Great Depression. 
• Employers are using more part-time labor and fewer full-time labor.  The 2007 Great Recession was particularly harsh on workers with full-time jobs.
• A large number of workers left the labor force.  The million-dollar question is why did these workers go?  Did millions of workers become discourage and give up their search for a job?  Are more workers retiring?  If more Americans are retiring, why are the younger workers not filling these vacancies?