U.S. Births Down In 2009

CAVEAT: Trapped in a blog time warp - originally posted in May.

Births fell from an all-time high in 2007 of 4,316,233 to 4,131,019 in 2009, a decline of 4 percent. . . . In 2007, there were 69.5 births per 1,000 women ages 15 to 44 compared with 66.7 in 2009. This is referred to by NCHS as the fertility rate, but is also often called the general fertility rate (GFR).



By age, the largest decline was among women ages 20 to 24. Childbearing fell from 106.3 births pr 1,000 women in that group in 2007 to 96.3 in 2009, a 9 percent decline. . . . Fertility among the 25-to-29 age group, the next older, fell by 6 percent. That group, which has had the highest rate in recent years, dropped from 117.5 in 2007 to 110.5 in 2009. The decline was far less, only 2 percent among women in their 30s and even rose among women in their 40s, although latter group has much lower rates. . . .



[F]ertility rates have fallen . . . : 3% for non-Hispanic whites between 2007 and 2009, 4% for non-Hispanic blacks, 9% for Hispanics, 3% for American Indians and Alaskan natives, and 4% for Asian and Pacific islanders.

From here



The likely cause for the slump is the financial crisis and recession that followed. Birth rates are mildly cyclic. The U.S. has one of the highest fertility rates in the developed world, which was hovering at just over the replacement rate in 2007. The slump probably brings the U.S. to a bit below the replacement rate (which is about 2100 children per 1000 women per lifetime).



The shift accentuates the recent trend of fertility rates declining more for lower income, minority, and younger women, while declining less or increasingly among more affluent and older women, in substantial part due to fertility treatments (a trend that has also greatly increased the number of multiple births and parental age related congenital conditions). The last decade or so is the first time in almost a century in which affluent people have more children than less affluent people.



It is also a fit to the fact that the recession has dampened new household formation, and has pushed people into high school and college and out of the labor force.



While teen births are at near record lows, about 40% of all births are to unmarried mothers, including majorities of births to African-American and Native American women.



As an aside, fertility rates in some of the Baltic states are finally starting to recover after a profound post-communist era slump.

READ MORE - U.S. Births Down In 2009

IRS Classifies Businesses As Big Or Small

IRS research data has looked at tax statistics to compare different kinds of businesses to distinguish "small business" from other kinds of businesses.

Overview

Lots of business returns (about 20 million out of 44 million) involve trivial instances of self-employment or income from property that don't amount to a regular business establishment in the traditional sense.

Of the remaining 24,184,000 businesses, about 246,000 business entity returns (and the pass through income of their partners and shareholders) involve big businesses (defined at having income of $10,000,000 or more per year). Less than a third of big businesses by this definition are organized as C corporations. The vast majority of the rest are taxed as partnerships or S corporations (with 6,000 structured as sole proprietorships or individually owned rental income sources). S corporations are more common than C corporations or partnership taxed corporations including LLCs for these entities (although the biggest big businesses are almost exclusively organized as C corporations). The big businesses (other than C corporations) collectively had 1,240,000 owners (although many were owners with only passive business income).

In between are 23,942,000 small businesses. Of these, 4,942,000 have employees and 19,000,000 do not. Moreover, a significant number of 1,760,000 S corporations and 864,000 C corporations with employees (about half of the small businesses with employees) employ only the business owner or members of that business owner's family whose are claimed on the business owners' tax returns (although the exact number was not possible to discern from the data available in this study).

Of course, an entity that files its taxes on Schedule C, Schedule E or with a Form 1065 partnership return could actually be a limited liability companies or limited partnerships (and other data show that a very large portion in fact are limited liability companies or limited partnerships).

Thus, while there are 44,000,000 businesses in the U.S. that file tax returns each year, probably fewer than ten percent of them have non-owner employees.

The 24 million or so enterprises categorized as true businesses have about 20 million owners, of whom about 9.4 million of those owners receive 25% or more of their income from their small business (the "narrow" definition of small business owner).

There are 7,452,000 people who are shareholders or partners in entities taxed as partnerships or S corporations that constitute more than de minimus businesses (excluding spouses where both husband and wife are partners or shareholders in an entity). But, only 5,321,000 of them have active income or losses from a small business, and only 2,305,000 of them have active income or losses from a small business with employees (which in a signficant number of cases simply represents owner-employees of S corporations). The others are either owners of big businesses, rather than small ones, or have only passive income from the enterprise which is an investment rather than a vocation for them.

Most prior tax statistics, due to a lack of data, have greatly overstated the number of business returns that represent small businesses as we conventionally think of them. A great many businesses are vehicles for passive or occassional investors, and a great many small business owners are passive investors.

A significant number of typically closely held business forms typically associated with small businesses are actually "big businesses" with an alternate form of organization for tax purposes. The exclusion of big businesses from statistics related to "small business" based upon entity type, materially reduces the amount of business activity that is fairly characterized as coming from the small business sector and greatly diminishes the extent to which tax increases for high income taxpayers has an impact on small business. About 32% of a broad definition of "small business" income (and 29% of a narrow definition of "small business" income that includes only income from small businesses that makes up 25% or more of a small business owner's total income) is taxed at the 33% or 35% marginal tax rates; while about 86% of the business income of big businesses not structured a C corporations is taxed at those rates.

Big business income of about $220 billion in 2007 made up about a third of the taxable income attributable to non-C corporation businesses significant enough to be classified as businesses (the other two-thirds being "small business income").

The number of business owners who obtain active business income from small businesses signficiant enough to have employees other than the business owners themselves is quite modest, on the order of 3-4 million. In contrast, the typical business return represents self-employment but not a "firm" in the economics sense.

The Details

De Minimus Business Activity

Many business returns involve de minimus business activity or 1099 labor performed for another firm, or incidental rental activity of personal assets, that doesn't really amount to a full fledged business. In this category it found: 12,491,000 sole proprietorships, 5,043,000 Schedule E filers (e.g. rental income), 1,095,000 Schedule F filers (farm income), 797,000 partnerships, 2,000 S corporations and 1,000 C corporations.

Big Business

It also excluded "big businesses" with $10,000,000 or more of income at the enterprise level. This involved 5,000 sole proprietorships, 1,000 Schedule E filers, less than 500 Schedule F filers, 68,000 partnerships, 92,000 S corporations and 75,000 C corporations (about 246,000 big businesses in all).

This left as genuine "small businesses" 10,679,000 sole proprietorships, 4,592,000 Schedule E filers, 1,415,000 Schedule F filers, 2,232,000 partnerships (including entities taxes as partnerships like LLCs), 3,462,000 S corporations, and 1,563 C corporations.

Only a subset of these genuine small businesses had employers: 1,659,000 sole proprietorships, less than 500 Schedule E filers, 126,000 Schedule F filers, 553,000 partnerships, 1,760 S corporations and 864,000 C corporations. The number for S corporations and C corporations probably includes many employee-owners with no other employees who take wages rather than profits for tax reasons.

Partners and S Corporation Shareholders

Partnerships and S corporations partners or shareholders. There are 1,952,000 partners with active business income or losses from small business partnerships and 3,369,000 shareholders with active business income or losses from small businesss corprations. There are 1,855,000 partners with passive business income or losses from small business partnerships and 436,000 shareholders with passive small business income or losses from S coorporations.

There are 452,000 partners and 199,000 S corporation shareholders with active business income or losses from big business partnerships and S corporations. There are 508,000 partners and 66,000 S corporations shareholders with passive business income or losses from big business partnerships and S corporations.

In partnerships that are employers, there are 591,000 partners with active income in small businesses and another 193,000 partners with active income in big businesses. In S corporations that are employers, there are 1,714,000 shareholders with active income in small businesses and 170,000 shareholders with active income in big businesses.

In partnerships that are employers, there are 186,000 partners with passive income in small businesses and another 119,000 partners with passive income in big businesses. In S corporations that are employers, there are 226,000 shareholders with passive income in small businesses and 59,000 shareholders with passive income in big businesses.

READ MORE - IRS Classifies Businesses As Big Or Small

Closely Held Public Companies

The stereotypical publicly held company has few, if any, of the people who provided the company with cash in exchange for equity still on its shareholder rolls, have few shareholders who hold blocks of stock even as big as 5%, would need hundreds or thousands of shareholders to agree simply to secure a majority in interest in a shareholder vote, have a board of directors that is effectively self-perpetuating and owes its allegiance primarily to senior management, and have investors who are mostly operating according to the "Wall Street Rule" of selling shares in companies that are ill-managed rather than trying to reform the company by influence members of its board of directors. Institutional investors in these companies generally choose to provide a rubber stamp to management rather than expressing opinions on management issues, in part, out of fear of the securities law implications of doing so.

The famous separation of ownership and control in this companies is at the heart of the criticism of American corporate governance which is prone to excessively compensating senior executives, providing senior executives with poor incentives that can encourage systemic risk in the economy as a whole, and not holding mediocre management teams accountable for their suboptimal management of their companies.

But, this isn't description isn't a good match to an important subgroup of public companies which I oxymoronically call "Closely Held Public Companies." A new Pennsylvania State University College of Business Administration study entitled "Are Busy Board Detrimental?", looks at the subclass of newly public companies whose IPOs were launched by venture capitalist firms.

These firms, a thousand of which are reviewed, don't fit the stereotype. Almost all of the new investors either directly supplied cash equity to the company in exchange for stock (an average of $72 million each). The average seven board members own or control 33% of the stock of these companies, and the average "busy" board member, defined as serving on three or more board, has an investment of at least $5 million in the company. The typical board has four venture capitalist firm executives (who disproportionately serve on audit and compensation committees and as chairmen of the board), two insider executives who are directors, and one other outside director (who two-thirds of the time serves on no more than one other board and usually serves on that board of directors alone). The board membership was typically determined by an investment bank that took the company public, a venture capital firm, and senior management in a negotiated effort to please IPO investors. Typically, a few dozen shareholders control a majority in interest of the company's shares and even the big investors who do not have directorships know each other personally. The senior management team, rather than being appointed by the board after a talent search, is typically the group of individuals whose efforts as managers grew the business until it could be attractive enough to outside investors to go public. The venture capital firms that own a large share of these newly public firms have a business model that calls for active management of the newly public firms for at least a medium term time frame (ca. 3-5 years at least), in order to continue to grow their hands on, long term investment in active indirect management of the company so it can thrive, as do the employee-owner senior managers who usually expect to spend at least as many more years running the firm that they took public.

While these firms are nominally publicly traded because they have made a public offering of securities and have some small time passive investors, their governance arrangements are more like closely held private companies with significant non-employee investors, than they do like stereotypical publicly held companies. Most importantly, they do not have a meaningful separation of ownership and control.

So, while the study purports to ask if "Busy Boards" are detrimental, the confounding variable in the study is very strong director financial interest in the venture upon which the director serves and generally good corporate governance standards of new VC launched IPOs, avoid the criticisms of busy boards raised with more established firms.

The 95% of the directors of these firms aren't really busy they have day jobs that include being a director, either incident to their role as a venture capital firm executive, or incident to their job as a senior executive of the board's firm, or because they serve on only one board, or because they don't have a day job for some reason. Only 5% or less of the directors of these firms (just 20% have even one such person) are outsiders who aren't VC executives who serve on three or more boards and have a day job as well, and the world does still have a few overachievers left who can somehow handle that burden gracefully, and if they can't, they have six other board members who can pick up the slack.

Thus, busy directors seem like a non-issue in this study mostly because the term was defined in an inappropriate way that disregards the nature of the director's day job, and because the governance positives in these closely held public companies overwhelm any governance negatives that may flow from having busy directors. Not surprisingly, indicators of accountable management, like lower than average CEO pay and higher than average company performance are typical of these newly public companies.

The serious corporate governance problem in the American economy is not with newly public firms that have just completed IPOs, but with firms whose long term investors have sold their shares, whose initial dynamic management team has been replaced by executives chosen in interview rather than exceptional performance building this very business, whose highly financially interested venture capitalist directors and insider directors have been replaced by toadies of the new management team with a weak financial interest in the firm's performance, and whose new institutional investor owners have abdicated a role as active supervisors of the senior management team, in part because corporate and securities law discourages this, and in part because this isn't a part of their business model. Once this stereotypical separation of ownership and control takes hold, pressure on management to refrain from self-dealing and perform or be replaced is gone. The new focus starts to center on providing an unattractive target to hostile takeovers by means unrelated to actual financial performance and on growing the scale of the business without regard to profitability, because scale rather than profitability or management performance, drives the ability to pay senior executive compensation in these firms (for which cash flows are great enough to sustain large executive pay packets even when the company is doing poorly).

Typically, once a firm gets its initial infusion of IPO equity, retained earnings and corporate bond offerings, rather than new equity offerings, are the main sources of new capital for the firm, except at points in the business cycle where the company is performing well and appears to be overvalued in the long run, allowing it to secure a rare major new infusion of equity from the public with a modest number of shares. Since it generally doesn't need shareholders to raise new capital, can get away with not giving shareholders any meaningful role in the appointment of its board of directors or executive compensation, and can discourage hostile takeovers with poison pills and other barriers to changes in control and ownership even when it would make economic sense in the absence of those self-created barriers, these firms can get away with giving shareholders very little and the pressures from above on senior management are far too weak to be optimal.

The most visible symptom of this governance problem is the overcompensation of self-dealing senior executives. But, the deeper issue that matters more to the economy is the opportunity cost associated with lax ownership permitting mediocre executives who always are at the held of some share of big businesses to managing the assets of big business less well than another management team that knew that it would be held accountable for its performance could. Since large, publicly held companies make up the vast majority of economic activity and employment in the United States, even a modest subset of poorly managed big businesses are a critical problem for the health of the American economy as a whole.

The solution is to find ways to well established large publicly held companies to act more like the closely held public companies whose IPOs have just been launched by venture capitalist firms.

* Control needs to be vested more firmly in institutional investors with strong financial incentives to do so, who take the kind of interest in and have the expertise in monitoring and holding accountable the senior management team in performance, compensation and transparency, are capable of the kind of collective ownership action, and invest at least for the medium term in the way that venture capital firms do. The biggest barriers to this are (1) in the proxy rules for nominating director candidates and information about them, and getting this on a ballot sent to all shareholders (the current norm is a Soviet style director's ballot), and (2) in the securities laws that could construed collective shareholder action as some form of securities law violation or other civil wrong.

* Publicly held companies need to have incentives to left shareholders, rather than senior management, decide how to reinvest profits from the firm. Further, the tax and corporate law incentives that favor debt over equity, which increase systemic risk during recessions, need to go, if effective shareholder governance is possible. Securities law plays a role here as well. Equity holders can bring securities fraud suits when stock prices suddenly plunge as a result of the late disclosure of material information about a company. Debt holders can bring securities fraud suits, in general, only when the company defaults, and by then it has usually declared bankruptcy and there is nothing to collect out of in a securities fraud action once the bankruptcy is complete. So securities fraud liability analysis favors debt financing over equity financing.

* Public companies need to have at least a balance between incentives to split up and incentives to merge, in both the tax law and in corporate governance practice (e.g. executive compensation practices) so that companies do not grow big simply for the sake of being big. We need to remove systemic incentives to become too big to fail and to unduly concentrate the market with fewer bigger firms (even when this doesn't mean that a firm has a monopoly or near monopoly in any given product market).

* The law needs to discourage poison pills and other barriers to hostile takeovers that prevent the market from disciplining poorly performing firms. For example, it needs to end the race to the bottom choice of law rules that make management friendly Delaware corporate law the norm on corporate governance issues. It may be most sensible to simply require that all publicly held companies have their governance conducted according to a federal corporate code, rather than state law, with Congress acting pursuant to its commerce clause powers, given the indubitable interstate commerce impacts of federal corporate law, which securities laws have already effectively taken control of in many important respects.

The market is stumbling in a Coasian way towards this end.

* Greater leverage prevents profits from being entirely reinvested in the firm even if it is suboptimal to do so, holds management accountable to minimum performance measures, is easy for investors to monitor and act collectively on behalf of, minimizes the kinds of disclosures that materially impact the value of the assets in light of information asymmetry, and uses principal payments to force borrowing companies to continually renegotiate the terms of their financing in order to continue to operate.

* Going private transactions remove the debt-equity imbalances that face publicly held companies and permit the more functional corporate governance regime of privately held companies to apply.

* Pre-packaged bankruptcy plans and corporate auctions facilities with bankruptcies allow overleveraged companies to survive economic downturns by sacrificing some share of long term subordinated and general bond creditor's investment.

But, the measures cobbled together in the private sector under current law are half measures that still leave big business much less well governed than it should, and successful reform is necessary for the long term prosperity of the American economy.

READ MORE - Closely Held Public Companies

Austerity Plans Hurting Job Growth

It turns out that layoffs of government workers caused by federal, state and local government belt tightening is a major factor in disappointing employment growth. The private sector is creating new jobs, but government cutbacks are taking away a meaningful share of newly created jobs.

READ MORE - Austerity Plans Hurting Job Growth

Where Are The Rich Getting Richer?

Is growing income inequality in the United States a national pheneomena?

The answer is "no", according to a report released back in 2006 entitled “Income Distribution and the Information Technology Bubble”, by James K. Galbraith and Travis Hale at the University of Texas (abstact utip.gov.utexas.edu/abstract.html#UTIP27).

Instead, a handful of IT and financial hot spots are driving almost all of the increaes in income inequality for the United States as a whole.

It is widely recognized that income inequality increased in the 1990’s, but nobody knows quite why. . . .

One says the culprit was declining unionization. Another ties it to immigration and outsourcing. A third theory is that the demand for high-level cognitive skills has increased, while other explanations range from changes in executive compensation to the lack of policy initiatives directed toward the working poor. . . .

Their study used data on average income and population by county available from the Bureau of Economic Analysis, available at bea.gov/bea/regional/reis. . . . their work does not examine inequality among individuals, but rather differences in average income across counties. . . . income inequality was flat in the first half of the 1990’s, then rose sharply in the second half. After 2000, the inequality index declined again.

[Which] counties that contributed the most to the increase in income inequality from 1994 to 2000 [?] . . . the five biggest winners in this period were New York; King County, Wash. (with both Seattle and Redmond); and Santa Clara, San Mateo and San Francisco, Calif., the counties that make up Silicon Valley. The five biggest losers were Los Angeles; Queens; Honolulu; Broward, Fla.; and Cuyahoga, Ohio.

What do the counties in the first list have in common? Their economies were all heavily driven by information technology in the late 90’s. This is true for the rest of the list of winners as well. Harris, Tex. (home to Houston and Enron); Middlesex, Mass. (home to Harvard and M.I.T.); Fairfield, Conn.; Alameda, Calif.; and Westchester, N.Y., were also among the top 10 income gainers in this period.

[H]alf the 80 American companies in the CNET Tech Index are in those top 10 counties. Furthermore, when income inequality decreased after 2000, the income drop in the high-tech counties contributed most to the decline.

New York, interestingly enough, showed large increases in per capita income both during the Internet boom and the Internet winter that followed.

[T]he income gains of the 1990’s associated with the technology bubble not only accrued to a relatively small number of people but also occurred in a relatively small number of geographic areas. . . . what would have happened to the index if just 4 of the 3,100 counties in the United States exhibited average income growth in the technology boom years. The four are Santa Clara, San Mateo, San Francisco (all associated with Silicon Valley) and King County, Wash. (home of Microsoft). . . . If the per capita income in just these four counties had grown at the same rate as the average in the United States, income inequality across counties would have changed little in the late 1990’s. In other words, only four counties drove most of the change across the 3,100 counties.

The resulting narrative is a slight variant of the finance industry's compensation is surging argument, expanded to include the information technology sector as well.

READ MORE - Where Are The Rich Getting Richer?

Bust Hit New Single Family Homes Strongest; Employment Recovery Slow

The Real Estate Bust Was New Single Family Home Investment Dominated

Many components of new real estate investment took a hit in the housing bubble collapse that triggered the financial crisis. But, the dominant component of reduced construction investments has come from new single family homes. This is about 20% of the pre-bust peak right now and still well below late 20th century historical norms. New single family home investment plummeted to far below historical levels in the housing bubble collapse and remains where it fell today.

Other components of construction investments (single family home improvement, multifamily, commercial, etc.) have merely experienced a modest bump in the road and aren't far below pre-financial crisis levels today, although they too have experienced a slump.

The Employment Recession

Meanwhile, while the latest monthly job creation figures weren't horrible, in the bigger picture, the U.S. economy is in a pickle.

The number of jobs lost relative to the pre-recession peak is currently about the same point as it was at the deepest post-WWII recession where it stayed for only a couple of months in 1948. The situation has been that bad in the cuurrent employment recession for about two year and two months.

Jobs lost relative to pre-war jobs has been worse than the five months it spent there in 1957, and the situation has been that bad for about two yearsand four months. The employment recession has been worse than every employment recession since 1990 for two years and eight months already. These are the so called "post-modern" employment recessions which have tended to be more shallow, but longer lasting.

Four months from now, this will be the longest post-Great Depression employment recession in history, surpassing the four year long job slump that followed the tech bust in 2001.

It is almost certain that this employment recession will last much longer than four years. It is very unlikely that employment will recover to pre-financial crisis levels anytime in 2012 either given the trendlines of this employment recession.

Nothing that is going on in the domestic policy agenda or in the global economic situation suggests that the United States will be changing these trendlines dramatically any time soon. The U.S. government and almost all states (and most first world foreign countries) are taking Hoover style austerity measures instead of injecting demand into the economy with Keynsian/New Deal type stimulus efforts. The only remotely political plausible step that the U.S. could take which would provide a government spending boost that could pull the economy out of the jobs recession sooner would be to start some major new war (a solution that I heartily disfavor).

Given the growth in the labor force over three or four years that occurs naturally, the United States will be hard pressed to return to pre-financial crisis employement per population levels until late in 2013 at the earliest, and it could take until 2014 or later, or might never reach pre-financial crisis levels and produce a structural reduction in the amount of people employed in the U.S. relative to its population.

Current trendlines for this employment recession suggest a recover to pre-financial crisis levels sometime around the fall of 2013, about six year after it started.

2012 Election Implications

Naturally, if you are President Obama's campaign manager, this is not good news. Empirical studies of the impact of the economy on voter behavior in the election suggest that the relevant time frame starts around January of the year of the election, i.e. January 2012 in this election, about five months from now. Nobody thinks that the economy will have recovered to pre-financial crisis levels by then in employment, which is the most politically sensitive economic indicator. A double dip recession isn't out of the realm of possibility.

Republicans in the House of Representatives and the newly inked debt limit deal, however, severely restrain his ability to use government spending and employment to change the current trend, or enact major new economic legislation of any kind. They are playing to deny him any victories to campaign upon and their desire to deny him victories so will surely only heighten as the election grows closer.

Obama can try to blame Republicans for inaction, but only if he first makes a dramatic change of course and starts vigorously advocating for a course of action that Republicans refuse to take. Obama can hope that the Republicans nominate someone unelectable whose campaign will self-destruct and alienate the American people, but he has essentialy no say in that process. Republican brinksmanship in the debt limit deal wasn't well played in the court of public opinion. But, counting on Republicans to screw up isn't exactly a pro-active strategy that inspire much confidence.

The optimist narrative says that a Republican resurgence peaked too soon for Republicans to experience any further gains in 2012. The Tea Party gains in the off year 2010 election were a high water mark at which President Obama had already hit bottom and the Republican Party's enthusiasm levels had surged as much as they could. But, in 2012, voters can see from two years of Tea Party efforts to govern in Congress and in state governments where they made inroads, that their style of governing has little to recommend it. Divided government has also denied President Obama any major acts that could rally Republicans and independents against him as health care reform did in the 2010 election. Obama's major legislative steps are now old news, the credibility of efforts to frame him as a threat to gun rights that thrived in 2010 hasn't materialized.

U.S. troops will essentially be out of the Iraq War that President Obama campaigned against and reduced U.S. involvement in dramatically. And, President Obama is already starting to heed bipartisan discontent over the U.S. commitment in Afghanistan and may be able to back down from it without paying a political price for doing so now that Obama bin Laden has been killed on President Obama's watch. The bipartisan debt deal, which included defense budget cuts that President Obama's own new Secretary of Defense Panetta has already started to publicly complain about loudly, also makes it hard for Republicans to campaign on the need for more defense spending.

Republicans are trying to make the limited U.S. military involvement in Libya look bad. But, to do so risks looking like they back Gaddafi over the revolutionaries and the Arab Spring movement generally, but they are likely to be in a stronger position by the time the election comes around than they are now, and are likely to seem less like an Islamist radical political movement than some pundits were worried that the Arab Spring movement might have been at first. In any case, President Obama has already stepped back from an already brief level of central U.S. involvement in that conflict which France and Britain have taken the lead in managing, and may be in a good position to reduce U.S. involvement further before Republicans can form a united and vocal front in opposition to it that becomes part of the national conversation. This operation is unlikely to produce many U.S. casualties, and it gives Obama some way to tell the American people that the vast sums we spend on the defense budget is producing some results somewhere, an argument that pro-defense budget Republican factions will be wary of undermining. Republicans are not natural anti-war activists.

Presidential re-election campaigns are fundamentally referrendums on the incumbent. A Republican Presidential nominee will bear the burden of proof with the American people to show that President Obama needs to be replaced and will have to do so without the enthusiasm gap of 2010. This will be a tall order for anyone that the Republican base, newly infused with Tea Party extremists can feel comfortable supporting.

The Republican primary, while providing free press to the Republican nominee that will help familiarize general election voters with Republican policy frames, is also almost invariably going to remind voters just how extreme some of those candidates are and generate a fear factor that could seep to independents and even moderate Republicans if the ultimate nominee is too extreme. No consensus has started to gel in the GOP nomination race, which still lacks a clear front runner. Since some Republicans in Congress will surely hitch their wagons to more right leaning nominees whose campaigns will crash, burn and discredit those candidacies, the Presidental race prove to be a drag on some Congressional campaigns. Strict GOP adherence to a hard right party line over the last two years will also give Republicans fodder in their campaigns in newly redrawn and unfamiliar Congressional districts.

All in all, 2012 looks like it will be a base v. base grim war of attrition that will be fought without enthusiasm or strong central themes by both parties.

READ MORE - Bust Hit New Single Family Homes Strongest; Employment Recovery Slow

Per Capita Peak Oil Was In 1980?

Is what really matters to global oil prices peak oil? We may be on the brink of this now globally (it has been reached by many individual producers long ago), but it may be in the near to decade or two future depending upon who you talk to if we haven't reached it.

Or, is what really matters per capita peak oil? This arguably happened around 1980, and is only going to reverse if the global population starts growing more slowly than oil output, raising the bar for the oil industry to keep up.

I suspect that the number of people who live in industrialized economies or post-industrial economies is what really matters. Population growth in these economies is generically lower than global population growth rates, but it is growing because this is a function not just of natural increase, but also of economic development which is in two steps forward and one step back fashion gradually spreading to larger and larger parts of the economy.  Since economic development is harder to predict than population growth, the trendline is harder to predict.  Still, both population growth in the existing industrial and post-industrial world as a whole is probably positive for the foreseeable future and economic development is also likely to be more than zero, so oil prices are likely to have more demand pressure in the future as well as more supply pressure in the future.  Hence, the measure of oil demand relative to supply that matters to global oil prices is likely to hit before peak oil does (if it hasn't hit already) and still sets a higher bar for oil produces to meet in terms of new production to keep oil prices moderated.

Equally important to this dynamic, of course, is that cheap oil may make economic development easier and cause the number of nations or subnational areas that are industrialized to grow more rapidly. But, peak oil driven price increases for oil may slow the industrialization phase of economic development. Thus, projecting future oil prices as a result of predictable supply and demand factors has self-interacting components.

The biggest wildcard is breakthough technology.  New oil exploration and extraction technology could provide downward price bumps.  But, the real game changing issue is whether technologies with a big impact on oil consumption take hold. 

In practical terms this means mass conversion from gasoline and diesel powered vehicles to alternative fuel vehicles like electric cars, or dramatic increases in fuel efficiency from developments like plug-in hybrid vehicles and increased public transportation usage (particularly involving bus usage).  Electric and plug-in hybrid vehicles of one sort or another are probably the only way that global oil demand can drop enough to counteract the long term price pressures that oil faces from an increasingly large industrialized world population and stagnating long term oil production as economically extractable supplies are exhausted.  Transportation is the dominant source of oil demand in the industrialized world that otherwise gets its energy from other sources as environmental and price factors have made oil based fuels less attractive for uses where alternative energy sources are technologically viable.  So these technologies have the dominant impact on oil demand per person in the industrialized world.

READ MORE - Per Capita Peak Oil Was In 1980?

The Tax Code's Merger Ratchet Drives Harmful Economic Decisions

Corporate tax law students, but very few other people, spend vast amounts of their time learning how to understand the Internal Revenue Code's corporate reorganization provisions. Being tax law, this task leaves you knee deep in detail and you can lose the forest for the trees. But, in the big picture, the corporate reorganization provisions of the tax code may do more to encourage our economy's tendency to create systemically risky too big to fail businesses that interfere with consumer friendly competition than our antitrust laws do to discourage them.

Simply put, there are lots of relatively easy, safe harbor ways under the tax code to merge a business with predictable, favorable tax consequences. There are "A" reorganizations (statutory mergers), there are "B" reorganizations (stock for stock purchases of companies), there are triangular "B" reorganizations (stock for stock acquisitions by a parent company that merge the acquired company directly into one of its subsidiaries), there are "C" reorganizations (stock for asset purchases of companies), there are triangular "C" reorganizations (stock for asset acquisitions by a parent company that merge the acquired company directly into one of its subsidiaries), and there are acquisitive "D" reorganizations (another flavor of stock for asset purchases of companies). (Reorganizations are usually classified by the lettered subsection of Internal Revenue Code Section 368 that authorize them). There are also some lesser known back door ways to merge companies, such as via a contribution to capital of a sister corporation by its shareholders.

In contrast, obtaining the same kind of favorable tax treatment for divisive reorganizations (also called "D" reorganizations), which can be structured as spin-offs, split-offs, or split-ups, are fraught with tax risk and uncertainty. The IRS and tax lawyers have to pay close attention to regulations that have detailed facts and circumstances driven analysis, and a great deal of audit and pre-approval efforts to making sure that tax code requirements regarding which assets can go in which surviving corporation are met.

In a divisive tax free reorganization, like a tax free merger, nobody leaves either kind of transaction with untaxed cash at closing (although for publicly held companies the difference between stock and cash may not be all that material since anyone who wants to can readily sell their stock for full fair market value at a moment's notice and tax free, hard money margin loans are widely available if the stock is not sold), in an effort to prevent potential leaks in the regime of double taxation of corporate profits that is criticized by big business executives and liberal academics alike under our tax code.

But, our tax code discourages publicly held companies from splitting by with the frequently deal busting risk of unexpected premature taxation of all of a successor company's assets. Divisive reorganizations will often prove unworkable from a tax perspective unless the groundwork for the move is laid years in advance and even then, the freedom of businesses to split themselves up into units that make the most economic sense can be materially limited by the need of lawyers and accountants involved in the deal to control tax risk.

As a result, mergers of publicly held corporations are relatively common place, while divisive reorganizations, like the one announced by Kraft today that breaks its business into an internationally oriented snack food business and a domestically oriented grocery store product business, or the recently announced deal to unwind the merger of Wendy's and Arbys restaurants, are the much more rare and notable exceptions.

This little known bias in the tax code, at the macroeconomic level, gives us too many conglomerates, in which it is hard for stock market price discipline to hold management accountable and which create systemic risk in our economy that flows from too big to fail entities (like AIG), while discouraging the financial markets from crafting firms in a way that disaggregates separate businesses from each other to the full extent that their underlying lack of economic interdependence permits.

The merger bias in the tax code also harms the economy by reducing transparency in financial disclosures. The SEC has exacting rules on financial reporting for publicly held companies, but one of the big shortcomings of those rules, that prevents the financial markets from efficiently allocating capital to profitable businesses, while denying further resources to businesses with poor profits, is that the financial accounting rules do little to require the divisional and line of business breakdowns of corporate profits, losses, assets and liabilities necessary to do the managerial accounting analysis necessary to determine if corporate restructurings make sense.

Instead, the combination of weak subunit reporting requirements from the SEC, corporate reorganization taxation biases against divisive reorganizations, and a double taxation of corporate profits regime that encourage businesses to retain earnings from equity to reinvest in their own company even when the average stock market investor would agree that the funds would be more profitably reinvested in some other segment of the economy, all conspire to increase systemic risk in our economy, reduce transparency in our financial markets, and inefficiently allocate financially investments to business divisions that are suboptimal uses of available capital.

Indeed, the bias towards reinvestment of corporate earnings, coupled with the bias against divisive reorganizations, creates an incentive that is strongest for the least well managed businesses to acquire better run businesses that throw off cash for the primary purpose of obscuring their weak performance and diverting the cash from the successful businesses towards reinvestment in poorly run businesses.



Our economy relies on the threat of hostile takeovers by businesses who can profit by identifying mismanaged companies, buying them, jettisoning the bad management or reversing bad decisions, and improving the bottom line as a result to hold corporate executives accountable and to give them an incentive to manage their companies effectively. But, conglomerates with many units purchases to provide internal access to retained earnings that lack meaningful public disclosure of unit performance that would be available if the divisions were separate publicly held firms, discourage this kind of market discipline, as do management friendly rulings of the Delaware courts that allow publicly held corporations to discourage market efforts to hold them accountable with golden parachutes that international financial experts have widely condemned as encouraging systemic risk by rewarding senior executive mismanagement, and other poison pills to discourage shareholder and financial market identification of and intervention to end mismanagement of big businesses.

In theory, antitrust laws should prevent anticompetitive mergers that harm the public interest, but in practice, they are a toothless tiger than looks impressive but has little practical impact. Most of the harm from a bias towards mergers and against holding separate functional business units accountable flows from the collective effect of little incremental decisions whose public impacts are not obvious. By the time that antitrust regulators can truly prove that the merger of the last few oligarchic firms in an industry will harm competition, the damage has already been done, and nothing gives antitrust authorities the power to limit the formation of conglomerates that don't have monopoly power in any one industry, despite the fact that this was one of the concerns that led to the passage of these laws in the first place.

Collectively, these incentives and corporate and antitrust law flaws have not only negative economic efficiency consequences, but negative consequences for the appropriate distribution of wealth and income in society and the allocation of political power. While economically unreasonably large firms may not necessarily have unreasonable market monopolies in given industries, their sheer size does unreasonably concentrate wealth in a self-dealing economic elite of senior managers and the top professional advisers in investment banks, law firms and accounting firms (for example), and similarly, unreasonably concentrates political power in these unaccountable elites, while providing a means by which businesses have an incentive to fight for the interests of this economic elite as a social class, rather than being disaggregated into the conflicting factions of smaller firms with more particular political interests that the founders envisioned in the Federalist papers that are more easily subjected to the diffuse interests of the majority. In a nutshell, conglomerates encourage logrolling and mutual backscratching not just by politicians themselves but by the monied interests that are developing political coalitions that work to the detriment of the public interest.

Is this a lot to lay at the foot of Internal Revenue Code 368, corporate double taxation, and regulations promulgated by the IRS and SEC? Surely it is. But, the obscure pieces of our regulatory framework conspire to drive the unreasonable concentration of economic power, wealth and income, while simultaneously making our economy less competitive. They may not be flashy, but their day after day, broad systemic impact on the way that decisions are made in the dominant sector of our economy have a cumulative impact that is easily underestimated.

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U.S. Health Insurance Reimbursement Paperwork Expensive

U.S. physicians spend nearly $61,000 more than their Canadian counterparts each year on administrative expenses related to health insurance. . . . The study, published in the August issue of the journal Health Affairs, found that per-physician costs in the U.S. averaged $82,975 annually, while Ontario-based physicians averaged $22,205 -- primarily because Canada's single-payer health care system is simpler.

Canadian physicians follow a single set of rules, but U.S. doctors grapple with different sets of regulations, procedures and forms mandated by each health insurance plan or payer. The bureaucratic burden falls heavily on U.S. nurses and medical practice staff, who spend 20.6 hours per physician per week on administrative duties; their Canadian counterparts spend only 2.5 hours. . . . "It's the nurse time and the clerical time, rather than physician time, that's different." . . . The result is an additional $27 billion spent every year in the U.S. when compared to the costs incurred by physicians in Canada.

From here.

The justification for the heavy bureaucratic burden and rules in the U.S. is "to keep health care costs down" but, there is little evidence tht they actually work as intended to do so (the U.S. has the highest health care costs in the world for less than the best care in the world and a bad cost trendline compared to the rest of the world that is long standing).

There are parts of the system, like U.S. government run single payer for the elderly health care system called Medicare and the Veteran's Administration Hospital systems (also run by the U.S. government), that are quite efficient in terms of administrative costs and cost control and outcomes relative to the private health insurance managed part of the market. But, the nation chose not to do that in the most recent round of health care reform out of an ideological commitment to the private sector provision of this insurance function, contrary to the empirical evidence that government insurance is more efficient and better at cost control and produces better outcomes than a private insurance company managed system in the area of health care.

It is also important to mention what the Canadian system is and is not. Health care providers in Canada, by and large, are not government employees (unlike the British health care system). They have their own businesses just like American health care providers do. But, Canadian private sector health care providers fill out insurance forms for one health insurance company run as a government agency, rather than many private sector health insurance companies.

Canadians have decided that it is important to let the private sector handle the very personal business of deciding who will provide you with health care but that the far less personal business (which most Americans have no choice in anyway) of deciding who will process the health insurance claims to decide if they will be paid is not very important ideologically or practically, given the huge cost savings this approach provides and the better cost controls that it facilitates.

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Charging People To Put Money In Savings Accounts

Bank of New York Mellon Corp. is charging customers for the privilege of allowing them to deposit large sums of their money at the Bank. Charging people to deposit money so that you can charge somebody else to borrow that money from you, and still having people rushing to give you their funds anyway is a sweet deal if you can pull it off.

Panic over sovereign debt security abroad, and low interest rates of Treasuries were cited in the decision by the Bank. Also, the stock market is having one of its periodic freak outs, and it isn't even autumn yet.

Inflation adjusted incomes fell 15.2% in 2009 to a twelve year low.

The federal funds rate will be zero percent until mid-2013 or so, the European Union says the sovereign debt situation is worst that the public realizes, and China and Russia which finance lots of the U.S. national debt have expressed great dissatisfaction with the near brush with default that the U.S. experienced over the last week.

FWIW, I know financial planners who can do better than that with your personal or institutional funds.

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Recovery Still Not Complete

The U.S. GDP is still not back to pre-recession levels after adjusting for inflation. Per capita GDP is even further behind and will take even longer to return to pre-financial crisis levels.

Arpit Gupta notes that incomes fell significantly below consumption about a year and a half before the financial markets collapsed. Borrowing against inflated housing bubble home values postponed the time of reckoning for this excess consumption for a while, but not indefinitely.

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Property Rights In Water Working In Colorado

Colorado Public Radio, today, has an interesting story on the phenomena of "buy and dry" in the state, in which farmers sell their water rights (often for millions of dollars from farms that are marginally productive agriculturally and have no clear successors to farm them) to municipal water systems that need to water to support expanding urban populations.

The practice has virtually ended farming in some rural counties. Initially, there was a concern that simply cutting off water without considering the environmental impact of doing so would lead to swaths of infertile dirts that were a blight on the state and cause rapid economic collapse without warning in rural communities. More recent legislation in Colorado has mandated that the buyers of water rights in buy and dry transactions must establish and fund a thirty year mitigation plan that returns the previously farmed land to a state where it is a sustainable prairie and provides payments in lieu of taxes to the impacted governmental units to reflect the revenue losses that they experience as a result of the lost agricultural economic activity.

On balance, it is an example of property rights, accompanied by reasonable government regulation, protecting the legitimate interests of all involved while putting our arid state's scarce water resources to their highest and best uses.

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An uneven wealth recovery

The wealth gap between whites and minorities widened during the financial crisis, quite the opposite of what many people, including me, had expected. Why?

The financial crisis was preceded by and largely caused by some regional housing bubbles (mostly in states that had mortgages perceived as non-recourse (California and Florida) or housing markets driven by investment from those states (Arizona, Nevada)). Measures of economical fundamentals in the housing market, like inflation adjusted housing prices and price to rent ratios have now returned to pre-bubble levels. So the wealth created by housing appreciation in regional housing bubble markets is gone and mostly likely gone for good. These regions are disproportionately Hispanic (wealth down about 66%) and Asian (wealth down about 50%).

The financial markets, meanwhile, which crashed on the housing bust, have largely recovered, because the financial markets weren't in nearly as much as a bubble as non-financial markets. Those assets are owned disproportionately by whites (wealth down about 16%).

I'm still surprised. While these results make sense for working class to upper middle class families, I'm surprised that the blows suffered by the upper class, who are disproportionately investing in investments like subordinated bonds and investment bank shares that were crushed in the financial crisis and have not recovered, and by stock options, which also seem not to have recovered, somehow weathered the financial crisis with surprisingly little long term harm to their net worth. Perhaps their investments in hedge funds, which did worse than billed but better than almost anything else in the financial markets, helped.

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Economic Inequality In USA At 43 Year High

The gap between the rich and poor, and between the rich and the middle class, is today wider than at any other time in the past four decades. . . . From 1947 to 1968, the U.S. experienced increasing equality in the distribution of incomes. Since 1968, however, inequality has steadily and inexorably grown.

From here.

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The Tax Code and Systemic Risk

Simon Johnson at the New York Times discusses whether tax reform could make the financial system safer, for example, by reducing tax incentives to favor debt over equity which increases leverage in the economy and makes firms more vulnerable to economic downturns as a result. The topic is near and dear to my heart as I presented on May 29, 2009 at the Law and Society Conference in Denver entitled "This Financial Crisis Was Brought To You By The Internal Revenue Code" on essentially the same subject.

Some key points of my paper were these:

1. Aggregate tax rates don't have much influence on economic growth, but incentives to engage in one kind of economic activity rather than another good economic substitute for that kind of activity are extremely influential. For example, historically very specific provisions of the law regarding which kinds of charitable giving are entitled to tax deductions have profound influences on the porportion of taxable gifting made by that means. A wig tax destroyed the wig as a fashion accessory. Tax policy has a strong influence on home ownership levels in mortgage loan to value ratios in Europe and was an important factor in the housing bubble in places like California that lead to the financial crisis.

2. Another important but subtle difference was the tax distinction between obtaining a second mortgages for the non-conventional part of a mortgage loan (i.e. beyond 80% loan to value), and private mortgage insurance. Both protect the first mortgage holder in the same way. But, tax law favored second mortgages over private mortgage insurance during the housing bubble. This was problematic, because the insurance regulation model was much better at regulating systemic downside risk than the mortgage securitization market that governed underwriting of second mortgages.

3. The intense systemic losses that flow from systemic biases towards leverage in the financial sector was illustrated by the history of repeated cycles of mass bank failures during recessions as a result of industry-wide overleverage by investor owned banks until commercial banking was subjected to FDIC regulation, while mutual banks, which gave control to depositors who are a form of lender, effectively transforming them into equity holders, did not experience this frequency of bank failures in economic downturns. Management and ownership downside loss relative to upside gain incentives turn out to be pivotal in the degree of risk that businesses take on in the absence of direct government regulation of capitalization.

4. I also illustrated how a change in government policy in 19th century Japan that changes a system of equity based land finance to a debt financed system of land finance produced a mass wave of foreclosures then.

5. I explored how overleveraging made the housing bubble possible, how that overleveraging was facilitated by non-bank lenders who has strong incentives to in turn leverage their own balance sheets which the FDIC regulation of the commercial banking sector was not there to stifle.

6. The investment banking industry, in turn, poured money into these non-bank lenders making risky decisions in their investing decision because they had turned from an equity financed partner owned structure with a brokerage model to a highly leverage investor owned structure investing on their own accounts, and because they had heads I win, tails you lose incentive stock option and bonus based compensation structures. The shift in the investment banking industry business model was driven in part by the strong tax incentives for debt over equity that drove the investment bankers to seek the deregulatory measures that allowed them to restructure in this fashion.

7. This culminated in every major stand alone investment bank in the United States either going bankrupt or reinventing itself as a regulated commercial bank, in Lehman Brothers, one of the oldest investment banks on Wall Street, which was a key financier of mortgage backed CDOs and credit default swaps, going bankrupt, in the government purchase an 80% stake in the major insurance company AIG, in order to prevent defaults on credit default swaps it issued from destroying the financial sector, and so on. Commercial banks which were barred by the FDIC from acting on tax incentives to overleverage, in contrast, failed at an only slightly elevated rate relatively to other recessions.

8. I explore the fact that one of the reasons that this spread to the real economy with the GM and Chrysler bailouts that followed, was because these firms were vunerable because they were overleveraged. Defined benefit pensions (which look like debt obligations to corporations unlike defined contribution plans) and reliance on bonds rather than stocks for capital were both key factors here.

9. The key culprits in the tax code, in the end were: (1) the corporate tax law debt-equity distinction and incentives, (2) incentive stock option compensation tax incentives that encourage excessive risk taking by public company executives, (3) the home mortgage interest deduction and in particular the detail that it allows deductions up to the full value of the house for second mortagages and vacation homes but not for private mortgage insurance for first mortgage holders who have a greater incentive to be cautious in underwriting.

The take away lessons were that while we have never been successful at preventing recessions from happening, that tax code reform that ends tax subsidies of debt relative to equity and that would encourage executive compensation and entity financing approaches that give decision makers a reason to fear downside losses would lead to a more resiliant, less risk biased economy.

Eliminating the bias that favors debt over equity in combined C corporation and shareholder income taxation has been a darling of academic economists and tax lawyers (for good reason) for decades, particularly after the General Utilities doctrine removed the best tool for circumventing the distinction. Incentive stock options have always been a concern of those worried about unfairly low tax rates for the rich but also have impacts important the systemic risk in the economy on corporate executive decision making by removing downside risk while rewarding upside gain for executives. There is more than one way to reduce the incentive to overleverage residental real estate and not unduly favor buying with a mortgage over leasing a residence, but restraining the incentives where they are doing the most harm, even without total reform of that area of tax law, would have major stablizing economic effects for the nation.

READ MORE - The Tax Code and Systemic Risk

Principal Reductions In Mortgage Modifications Follow Pattern

Banks will sometimes modify mortgages to reduce principal if they are already shown at a discount on their books due to an acquisition from another bank, especially if the mortgages are currently not in default, but not if the write down will produce an accounting loss for the bank.

It seems that Wells and JP Morgan are happy to do principal reductions only on the mortgages they bought at a discount from Wells Fargo and WaMu respectively; Bank of America, meanwhile, which inherited a bunch of these loans when it acquired Countrywide, is not doing principal reductions, and I don’t think it’s a coincidence that the Countrywide loans were bought at very close to par.

The behavioral psychology here is very easy to understand. No bank wants to admit that it wrote idiotic loans, and write down its own assets from par. Meanwhile, it’s much easier to write up an acquired asset, if the amount you reduce the loan is less than the discount you bought the loan for in the first place.

Economically speaking, however, what the banks are doing here does not make sense. Either writing down option-ARM loans makes sense, from a P&L perspective, or it doesn’t. If it does, then the banks should do so on all their toxic loans, not just the ones they bought at a discount. And if it doesn’t, then they shouldn’t be doing so at all.

The truth is, of course, that banks should be doing principal reductions, and they should be doing them on lots of their loans, rather than just the ones they bought cheap. And the fact that they’re already doing this, entirely voluntarily, on some of their loans is the best possible indication that it makes perfect economic sense to do so on all of their loans. Even if doing so might involve admitting that the subprime crisis still isn’t fully over.

The implication is that the financial accounting reform may be a key to responding more rationally to the current and future asset bubbles.

The results also shed doubt on the prevailing assumption that banks act in an economically rational way, which makes reforms, like cramdowns in bankruptcy, that force lenders to act rationally rather than based on the reputational effect of a decision for actors in the organization look attractive.

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Government Spending Stimulates The Economy

Econometric analysis over a wide range of circumstances shows that government spending and investment generally produce somewhat more economic benefits to the economy than the amount of the spending itself (which is called a "multiplier effect"), although the benefits are fairly modest and rarely as much of a full dollar of economic gain in addition to the government spent dollar.

Critics of government spending restraint during bad economic times, of the kind prevailing at the moment, compare this policy to the policies of Herbert Hoover, whose lack of leadership contributed to the Great Depression and compare this approach unfavorably to the Keynesian economic policies of FDR. They note, for example, that weak job growth at the moment is substantially due to government layoffs.

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Distressed Sales Dominate Las Vegas Real Esate Market

In Las Vegas, "47.2% of the sales in June were bank-owned properties, and another 21.6% were short sales." Combined, 68.8% of Las Vegas real estate sales in June were distressed, with sales going forward basically only to the extent that banks decide that they will. Given that a significant percentage of homes for sale in the market at any given time are owned free and clear, the percentage of sales of mortgaged homes for sale that are distressed is much higher.

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Thirty-Four Years Of Stagnant Hourly Incomes

Among two-parent families, median earnings did rise by an inflation-adjusted 23% from 1975 to 2009. But the parents’ combined hours worked increased by 26% during the same period–accounting for most of the income gains.

Via Tyler Cowen.

Demographics other than two parent families (including single parents) in many cases saw hourly income declines. The two parent case also conceals declining income for men matched by rising income for women.

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Jobs Situation Still Dismal

Job losses in this recession remain, by far, greater and longer lasting than in any economic downturn since the Great Depression. While economic data from before the Great Depression aren't as precise, the financial crisis that began in late 2007 is still in the running to be the second worst economic downturn in U.S. history from a jobs perspective. Only one U.S. recession since the Great Depression has had a higher peak unemployment rate, the early '80s recession with a peak of 10.8 percent, but it was a short sharp shock that quickly bounced back by comparison.


In June, the private sector created about 57,000 jobs, about half the number neeed to keep the unemployment rate constant. But, those gains were muted by the loss of 18,000 public sector losses.

The unemployment rate increased from 9.1% to 9.2%, and the participation rate declined to 64.1%. Note: This is the percentage of the working age population in the labor force.

The employment population ratio fell to 58.2%, matching the lowest level during the current employment recession. . . . [a] measure of labor underutilization that includes part time workers and marginally attached workers, increased to 16.2%, the highest level this year.

The BLS revised down April and May payrolls showing 44,000 fewer jobs were created than previously reported.

The average workweek declined slightly to 34.3 hours, . . . "average hourly earnings for all employees on private nonfarm payrolls decreased by 1 cent to $22.99. Over the past 12 months, average hourly earnings have increased by 1.9 percent." . . .

Through the first six months of 2011, the economy has added 757,000 total non-farm jobs or just 126 thousand per month. There have been 945,000 private sector jobs added, or about 158 thousand per month. This is a better pace of payroll job creation than last year, but the economy still has 6.98 million fewer payroll jobs than at the beginning of the 2007 recession.

There are a total of 14.1 million Americans unemployed and 6.3 million have been unemployed for more than 6 months.

Despite the dire situation, nobody in Washington is talking about stimulus and public sector layoffs killed 188,000 jobs in the first half of this year at a time when the economy needs more job creation, not less. The number of people working part-time because they can't find full time jobs and the number of people unemployed for more than six months are at near record highs.

Jobs have been below their peak for 42 months and are nowhere near returning to where they started. The longest previous post-war recession in jobs terms (the decline and recovery 2001 tech bust) created jobs to replace those lost in that recession in 48 months. But, that jobs slump was much more shallow; at its worst point 2% of payroll jobs were lost, while we are still 5% below peak now and we 6.3% below peak at the low point.

NPR noted this morning that GDP has actually been increasing for two years now, but the jobs situation is not catching up. Businesses are hoarding cash instead of investing. Interest rates remain remarkably low, but that isn't spurring more spending and borrowing. The leading economic indicators are negative, suggesting that we might even face a double dip recession.

This is happening at a time when the immigrant population of the United States is shrinking or constant. Inflation remains modest.

Politically, we are about six to eight months from the point at which the state of the economy starts to influence the next Presidential election. More pressingly, the U.S. will break though its debt ceiling by August 2 if corrective action isn't taken, possibly triggering a constitutional crisis or a default of the U.S. national debt that could have catastrophic economic consequences for the nation by driving up the interest rate that Treasury bond holders are willing to accept at a time when U.S. bonds have been a safe haven as many other developed nations are having to restructure or default on their sovereign debts and crisis after crisis looms on the horizon.

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