A Handy List of Question for Paul Ryan at his $25,000 Private Portland Lunch

Representative Ryan did not make himself available to reporters when he landed this morning at Portland's private aviation building, but for $500, you can attend his fundraising luncheon at the Governor Hotel today. It will be twice that for a photo op, and $25,000 for a private luncheon. Here's a handy list of questions for you lucky $25,000 ticket holders.
1. Your campaign policy director stated "A Romney-Ryan Administration will restore the funding to Medicare, ensure that no changes are made to the program for those 55 or older, and implement the reforms that they have proposed to strengthen it for future generations." Your health care policy adviser said, "Whatever you think of Obamacare’s cuts to Medicare, the fact is that a Romney administration would repeal them." How do you reconcile that with including those cuts in the House Republican 2013 budged which you authored?
2. Governor Romney has promised that federal spending will be below 20% of GDP by 2016, 4 percent of which will be defense spending. After 2016, federal spending will be capped at 20% of GDP. That will require spending cuts in excess of your budget proposal. By my estimation, that will every other program to be cut by 40% in 2016 and almost 60% in 2022. Do our numbers agree?
3. What kind of health coverage do you have? Would you consider your coverage to be superior to that of your constituents?
4. You look like a healthy guy. What kind of vegetable did you order with your lunch?
Be persistent with the first two.
So far, I haven't found any reliable answers. Enjoy your lunch.

The Other Side of the Job Numbers

Super Pacs have dolled out countless dollars to sway the few fence sitters in this endless presidential election. I have ceased to hear the Pacs. Like Charlie Brown's teacher's voice, both parties have become the "mwah mwah mwah mwah" trombone.

Now and then, a financial story will ascend above the din. Usually, it's a story about which everyone agrees. For instance, the job numbers.

They were bad - even worse than they looked on the surface.

Before we continue, allow me to give you some insight into my interest in security analysis and economics. I'm a math dork. I love math more than I love Republicans, Democrats, Independents, Green Parties, Libertarians, and other parties combined. I love the process of analysis, regardless of where it leads.
After decades of refining a macroeconomic risk model and investing and advising other about their investments, I have found three hypotheses to be very reliable

1. Don't follow the crowd.
2. If something is said often enough, most people will believe it.
3. Follow the money.

We'll start with 2 and 3, since it's Super Pac money that is financing the current endless blather about the jobs report. In 2005, well into the recent housing bubble, Barney Frank insisted that there was no housing bubble. Lots and lots of people signed documents that indebted themselves at ten times their annual income to buy a home because there was no housing bubble. I often wonder whether these were the same people who bought internet stocks in the 1990s when there was no internet stock bubble. Now, big money says the jobs report is bad. Over and over and over again.

As to not following the crowd, you may have heard Warren Buffett say, in his predictably folksy fashion, "Be greedy when others are fearful; be fearful when others are greedy." When everybody was buying and selling houses in the mid 2000s, that was a bad idea. When everybody was loading up on internet stocks, that was a bad idea. Now everyone agrees that the job numbers were bad.  As a personality type, it's easy for me to go against the crowd. And this is one of those time that the data supports it.

What factors contributed to a lack of job growth in the U.S.?

2010

1. First Quarter GDP was +3.9%
2. Second Quarter GDP was +3.8% – Beginning of European Debt Crisis
3. Third Quarter GDP was +2.5%
4. Fourth Quarter GDP was +2.3%

2011

1. First Quarter GDP was +0.4% – Egyptian President steps down, Libyan
2. conflict begins, President Obama ratchets up sanctions on Libya, Oil prices pass $90/barrel, Japanese earthquake/tsunami
3. Second Quarter GDP was +1.3% – Government shutdown narrowly diverted in Debt Limit debate, US Debt Rating lowered
4. Third Quarter GDP was +1.8% – Oil prices below $90/barrel, Debt Limit debate resolved
5. Fourth Quarter GDP was +3.0% – Oil prices again pass $90/barrel

2012

1. First Quarter GDP was +2.0%
2. Second Quarter GDP was 1.7%

The Debt Limit debate was a ridiculous example of Congress shooting the economy in the foot. Luckily, the Fed's QE program has ensured that our borrowing costs for our national debt did not increase because our Congressional representatives are unable to do their job, so that effect did more to make us look foolish than add to our borrowing cost.

Assuming that the European Debt Crisis shaves 1% from GDP growth, and oil prices account for -.2%, the effect of these two crises on 2012 growth total about 1.2%. Adjusting for these issues, 2012 growth would have been just over 3%, which would keep job growth about even with population growth.

This is sub-par for after a recession, but definitely a better picture than the one we see.

 

Second, there is the ubiquitous argument that the decrease in the percentage of unemployed from 8.3% to 8.1% was due to a decline in the labor force. That statement is not consistent with the measure of labor I use, which is its broadest measure. The U-6, published by the Bureau of Labor Statistics, showed a decrease in the percentage of unemployed in August. Even the Economics Editor of "Barron's Magazine" says he's not so sure that there has been a decline in the labor force, saying, "Follow-ups on declines in the rate of joblessness accompanied by the decline in the labor force generally show that the labor force has a tendency to bounce back, while the fall in the unemployment rate has a tendency to confirm."

8.1% unemployment is high. But to look at that number and assume that is it low because it doesn't include people who have dropped out of the workforce, is not supported by the data.

Even if you don't want to take the time to check out the links in this article, think about the wisdom of following the crowd.  Going your own way will shield you from dogma, and lead to unexpected, and hopefully accurate conclusions.

Economic Questions from Marcia Ball

Southern piano rocker Marcia Ball has done what many entertainers do:  Risked her popularity by taking a political position.  After asking her fans to support the President's reelection because of  her support of the Affordable Care Act ("Obamacare")'s coverage of children, she continues talking about politics..

"Call me kooky, but I'm kind of enjoying the dialogue that sprang up over my last political posting, so here's something else to mull over: My question of the day: how is the President supposed to create jobs? Isn't that what businesses do?
Well, maybe they just can't afford to hire anyone else. There's a recession, after all. Most people can't even imagine how the very rich live because 95% of us will never get close to the places where the 1% hang out and the 4% who aren't them but get in are serving them."

Let's take a look at what Marcia is asking.

First, "How is the President supposed to create jobs?  Isn't that what businesses do?"
There are two kinds of employers, Marcia.  One is the private sector, what you refer to as "businesses."  The other is the public sector, or government workers on the national, state and local level.  As of last June, public sector jobs during the Obama Administration have decreased by about 600,000.  By the way, if you put those lost jobs back into the job numbers, the unemployment rate would be about 7.8%, not 8.3%. 
The private sector, on the other hand, has created 780,000 net new jobs during the same period.

So, the answer is that the President has cut jobs, and businesses have created them.

Second, Marcia ponders whether businesses can't afford to hire anyone else.  There's a recession, after all.
Well, there certainly was a recession.  It lasted from December, 2007 through June, 2009.  It may feel like there is still a recession because the average growth in gross domestic product ("GDP") since that time has been 2.35%.  Let's take a look at that level of growth and see if we can explain why it has been slower than after most recessions.  

2009

1. First Quarter GDP was -6.7      
2. Second Quarter GDP was -0.7% - End of 2008/2009 Financial Crisis
3. Third Quarter GDP was +1.7%
4. Fourth Quarter GDP was +3.8%

2010

1. First Quarter GDP was  +3.9%
2. Second Quarter GDP was +3.8% - Beginning of European Debt Crisis
3. Third Quarter GDP was +2.5%
4. Fourth Quarter GDP was +2.3%

2011

1. First Quarter GDP was +0.4% - Egyptian President steps down, Libyan conflict                    begins, President Obama ratchets up sanctions on Libya, Oil prices pass $90/barrel, Japanese earthquake/tsunami
2. Second Quarter GDP was +1.3% - Government shutdown narrowly diverted in Debt Limit debate, US Debt Rating lowered
3. Third Quarter GDP was +1.8% - Oil prices below $90/barrel, Debt Limit debate resolved
4. Fourth Quarter GDP was +3.0% - Oil prices again pass $90/barrel

2012 

1. First Quarter GDP was +2.0%
2. Second Quarter GDP was 1.7%

Assuming that the European Debt Crisis shaves 1% from GDP growth, and oil prices account for -.2%, the effect of these two crises on 2012 growth total 1.2%.  Adjusting for these issues, 2012 growth would have been just over 3%, which would keep job growth about even with population growth. 

This is sub-par for after a recession, but definitely a better picture than the one we see.

Finally, Marcia says, "Maybe they just can't afford to hire anyone else.  Most people can't even imagine how the very rich live because 95% of us will never get close to the places where the 1% hang out and the 4% who aren't them but get in are serving them,"  

Job creation is a function of demand, not wealth.  Cash positions in businesses are at record highs, but hiring is slow because business is not convinced that the economy is growing fast enough to warrant the expense of expanding their staff.  How could the President change this perception?  

One way would be to create a more "business friendly" environment by resisting the urge to solve every problem with new rules.  While the administration boasts that it has passed fewer regulations than Bush, this is a misleading statement.  For instance, one of the regulations was the massive Dodd-Frank bill.  While no one argues the need for financial reform, this enormous bill has some unintended consequences that should be considered.  For example, small banks are unlikely to survive, as their regulatory compliance staff is inadequate to implement such complex reform.  Do we really want to eliminate community banks?  And, with limitations on fees that can be charged for certain services, banks are raising fees and minimum balances for other services.  Do we really want to drive the poor from access to banks to usurious charges made by check cashing services?

Overall, the President has done an above average job with the U.S. economy.  To improve that performance, he'll have to create a more business friendly environment.  That may go a long way toward improving private sector employment.