Saturday, November 26, 2011

So How Bad is This Recession?

I just read something that you might find interesting.  Let me quote a few brief fragments, and  you see if you can guess who said it.  (In some cases I will be quoting just parts of sentences, because including the whole sentence would tell you who the speaker is.)
         “. . . those who are now twenty-five years of age, and who in spite of earnest search have been unable to find a job . . .”
         “. . . one of the most significant facts of this age is the continuous unemployment of millions of good people.”
         “. . . Yale graduates are actually working at jobs which pay [some very low figure] per week.”
         “[someone] recently advertised for a housemaid;  she received thirty applications for the job, and twenty-five of these were girls who had graduated from college.  . ”
         “Our young people may wait until we are ready for them to begin, or they may not; but they will not wait forever.  During the past four jobless years, they have become terribly disillusioned.”
         “. . . a rich land racked and mismanaged, with huge accumulations of goods and wealth, yet with millions of our people deprived and helpless.”
         “We have millions of people with good bodies and minds who can’t get jobs.”
                “. . . move increasingly to an enforced realization that unrestrained selfishness is ruinous to everyone.”         
         So who said all this, and when?   I’m reading from New Frontiers, written in Nineteen Thirty- Four by Henry A. Wallace, who was then Secretary of Agriculture, under Roosevelt. 
            Much has been written about whether the current recession is comparable to the Great Depression of the thirties.  There are differences.  In 1933 the official unemployment rate was 25%; today it’s less than 10%.  But the fact that the same rhetoric written in 1934 fits perfectly to describe the situation today should be a wakeup call  for anyone who doesn’t think we need a radical job creation program.  The only reason we have 10% instead of 25 % is because of Obama’s 700 billion dollar stimulus program.  Everyone knew at the time that to actually get the country out of recession would require about twice that much.  But conservatives in Congress would not even consider spending such an amount, so Obama didn’t even propose it.
             In a way, we are much better off now than in the thirties.  But in a way-- we are much worse off.  The stock market crash of ’29 occurred very early in the Hoover presidency, and Hoover had almost 4 years to fix it by the election of 1932.  But he did almost nothing; so when the election of ’32 approached, unemployment was at 25% and rising.  The public was so disgusted with Republican incompetence that they not only elected a Democratic president—they elected a huge, lop-sided Democratic majority in both houses of Congress.   So Roosevelt had a “rubber stamp” Congress to quickly pass the many radical programs needed to deal with the disaster which he had inherited.  The few Republicans left in Congress were mostly noisy, ignorant obstructionists, just as Republicans in Congress are today.    But they had too few votes to do much obstructing. 
            The Bush market bubble, and the crash which followed it, were caused by the same kind of Republican miss regulation which cause the last depression.  But this time, it was our extreme misfortune that this crash occurred near the end of the second Bush administration, not near the beginning. The election of 2008 occurred well before the real depth of the disaster which Wall Street had caused had become obvious to most voters.   And the inevitable unemployment surge, caused by damage which had already in occurred by the fall of 2008, would still not peak for nearly a year and a half.   
            Even so, the public was disgusted enough with Republican mismanagement to vote into office a Democratic president and a Democratic majority in both houses of Congress.  But that majority was a slim majority.  At no point in Obama’s presidency has he been able to count on having the 60 Senate votes needed to stop a Republican filibuster.   So he and his party have been handcuffed—limited to passing only those things which the Republican leadership will allow them to pass.  And the Republican leadership has made it clear that they desire all of his initiatives to fail. They have been willing to totally sabotage the administration’s efforts to save the country just so that Obama is not re-elected.  They’ve admitted that they are willing to trash their own country for whatever short term political advantage they can gain by doing this.
            Why isn’t sabotaging the country’s interest considered treason?  It would certainly be considered treason in time of war.  Oh, wait a minute—we are at war.  The Republican leadership is betting that they can deliberately screw up the country for four years, and then blame Obama for it in 2012.  And they assume they will get away with it, because their rich friends own and control most major media outlets, and because the Supreme Court has ruled that corporate dollars have an unlimited right of free speech. Will the American people be stupid enough to fall for this farce?  I hope not.  But I’m 72 years old and if the American electorate has any capacity for intelligence, I have not yet had the opportunity to catch them at it.

Thursday, November 17, 2011

Do Family Businesses Make a Profit?

              I am reading Anthropology, Economics, and Choice, by Michael Chibnik, a professor of anthropology at the University of Iowa.   For forty years, Mr. Chibnik has conducted anthropological studies, in both the U.S. and third world societies, trying to analyze economic choices by viewing them from both economic and non-economic perspectives.  He studied how Iowa corn growers in Van Buren County chose whether or not to try no-till farming methods.  And he’s studied how subsistence corn growers in the Peruvian Amazon decide whether or not to participate in the government agricultural loan program.  In both of these studies and many others, he found that most real world decisions generally involve some important element that is beyond simple economic gain or loss.  For example, [my example, not his] if your employer offered you a promotion to a position in another state at a higher wage, you might easily refuse this job for any number of reasons.  There might be economic reasons; such as, you would have to sell your house at a huge loss in today’s market. There might be social reasons; such as, someone has to look after your aging parents, or perhaps you have a special needs child who might not adapt well to a new school situation.  There could be cultural reasons; such as, you come from a family of scientists, but the school system you would be moving into teaches “Creationism.” Could your family really adapt to living in such a culture, and would you even want them to try?  And of course, your reasons for refusing the job could be psychological and personal.  This would be a risk, and perhaps you are uncomfortable with risks. 
            Mr. Chibnik gives the example of how corn farmers in Van Buren County decided whether to try no-till farming.  They considered the variability of yields, the impact of droughts and floods, the change in fuel consumption, and the increased cost of additional herbicide and pesticide use.  But they also worried about the possibility that the increased chemicals used would eventually get into the well water, possibly exposing their families to increased risk for cancer and other diseases. So how would you put a price on that?  Yet they also worried that continued conventional tillage would cause so much topsoil loss that within a generation, there might be no topsoil at all.   Could you put a price on that either? And worst of all, these possible disasters are not risks—they’re uncertainties.  According to Chibnik, a “risk” has a probability that is knowable and calculable.  An “uncertainty” does not.
            Mr. Chibnik explains that economists using “rational expectations” theory actually try to assign a price to such things.   They assign prices to such imponderables because if they did not, it would be impossible to complete their equations. They simply define such choices as “preferences”, i.e. we would “prefer” to have live children—as opposed to having dead ones. We would “prefer” to have farmland that can still feed us—as opposed to having mass starvation.   And how do they assign numerical values to these preferences?  They make a guess.   The main thesis of Mr. Chibnik’s book is that any numerical analysis which includes even one element which is merely an arbitrary guess will produce a final answer that is no more reliable than that guess, which explains why such analyses have not, historically, had much predictive power in real world situations.  He feels that while a careful study of the immediate economic inputs and rewards is still worthwhile, only a careful ethnographic study of the culture and history of the people involved allow us to draw any conclusions about how their decisions are being made.
            He gives us this quote from Duesenberry (1960): “The difference between economics and sociology is very simple.  Economics is all about how people make choices. Sociology is about how they don’t have any choices…”      
            I must warn you; this is the kind of book where you sort through four or five pages of often impenetrable jargon—and then find one paragraph which gives you a wonderful insight.  One of his best insights is his analysis of the choice between running a family business, or working for wages.  Interestingly, the same elements of choice apply for the Peruvian farmer choosing between being a subsistence farmer or wage worker on a plantation, and the Silicon Valley engineer agonizing over whether or not to quit his job and open some high tech family business. 
            In his second chapter, “Choices between Paid and Unpaid Work,” Chibnik quotes Russian scientist A.V. Chayanov whose studies showed the difficulties in using classical economic models to analyze peasant farm situations where money is not used. But even in societies which use money, comparing the paid labor of commercial farm operations to the unpaid labor of family subsistence farms may not always be reasonable.  Chayanov says that on commercial farms where all work is paid for, any increase in labor inputs without a matching increase in income would be disastrous, because profit equals gross income minus material cost and labor cost.  So every new worker has to produce as much as he costs. Family subsistence farms are not tied to such a standard.  Since the labor is unpaid, a decrease in income without a decrease in the number of workers does not result in bankruptcy.  So subsistence farming is more resilient, and less fragile than commercial operations. For this reason, a family operation which is technically unprofitable if the value of labor inputs and production outputs are compared, might still feed a family for generations.
              But assessing the market value of unpaid labor on a family farm, or any family business, is no straightforward matter. On a commercial farm, any worker who cannot yield a standard day’s work is fired—because he has to be fired. But you don’t fire your family.  Chayanov says that many family operations regarded as operating at a loss might actually be considered profitable if the non-standard quality of labor is considered.  And Chibnik points out that the value of the produce grown on subsistence farms should not be reckoned at the wholesale market price derived if these crops were sold, but rather at the retail price of the food which would have to be purchased if these things were not grown.  But even so, it’s likely that most family operations would be considered unprofitable by any classical economic analysis. Of course, the usual method of valuing family labor, the “opportunity cost,” meaning the cost of forgoing the opportunity to sell one’s labor by working “off-farm” for others, may not apply when no such opportunity for off-farm employment is available.  Many a family business, in both the third world and here, has been started simply to provide jobs for family members at a time when they would have otherwise been unemployed and unemployable. But are family businesses really profitable? The acid test of whether a business is profitable, I suspect, would be whether an investor can be found who will pay anything for it. 
            A few years ago, just before the crash, I had a talk with one of my cousins; we’ll call him Pete.   Pete is an engineer who was down-sized from a large corporation during the farm crisis of the 80s.  Not wishing to re-locate to obtain work, he started a small business, producing small, custom items of industrial electrical hardware. He had a number of corporate clients, probably including his former employer.  This production required a lot of work and a variety of skills. But like all members of that branch of the family, he was hard working, competent, and multi-talented.  And like some members of that branch of the family, he liked people and could relate to them effectively.  So he could personally handle the sales, as well as the engineering, drafting, and all aspects of production. His wife, an intelligent and competent woman, managed the office, and the teenage kids delivered the products.
            For many years, his operation produced a middle class income stream that allowed him to pay off a nice house, put the kids through college, and generally continue living in the manner to which he had become accustomed. He did not, during those years, accumulate much in the way of retirement savings. He assumed that as his business grew, this business would in itself be an asset of sufficient size and fungibility to guarantee a secure retirement.
            As he approached his mid-sixties, it occurred to him that it might be time to sell out.  He would not need a lump sum in cash.  If he could find a reliable person with the proper skills, he could accept a reasonable down payment and carry the contract himself.  The income stream from the principal and interest payments would support him for life.   And then a funny thing happened.  There were no buyers—not at any price.  Several people looked at his operation. But when they saw how many hours of labor were needed to produce the income he was getting, they had little interest.  He could easily have sold the physical assets—the building, assuming he actually owned it, the vehicles, and miscellaneous shop equipment—for about what they would bring at an auction. But this trivial sum could not support his retirement.
            His explanation for the lack of buyers was that people are all lazy nowadays. No one wants to work.  I said, “Pete, let’s take a look at this.  If you are trying to sell this operation to an investor, then you have to look at it as an investor would see it.”  I told him that in a recent article by financial columnist Malcolm Berko, Mr. Berko was asked by a reader why he was having so much trouble selling his small, family business. Mr. Berko replied that most family businesses actually operate at a loss, but stay in business because they are subsidized by unpaid or underpaid family labor. And this includes the hours of underpaid labor contributed by the entrepreneur himself.  He said that any potential buyer should consider all labor inputs at market value, that is, the probable labor cost if strangers were hired to perform all tasks.   Even if the buyer plans to supply only his own labor, he should still price that labor at what it’s worth—the market value.  Having done this, the buyer should then subtract this labor figure, along with all other operating costs, from the gross revenue.  What’s left, if anything, is the net profit.  Typically, small businesses sell for about three times the annual net profit.
            “So tell me, Pete,” I asked,  “if an entrepreneur were to hire a part time salesman, who was as effective at selling as you are, and a part time engineer and draftsman, whose engineering and drafting skills were equal to yours, and a fabricator with shop skills comparable to yours, employing him full time and probably many hours of overtime, and also employ a full time office manager as competent as your wife, about what would this cost?” 
            I haven’t seen Pete since then, so I have no idea whether he managed to sell his operation.  Frankly, I doubt it.  I assume he’s still working, and he’s nearly 70. I was disappointed by this outcome. I have always liked Pete, and I think it’s unfair that anyone who worked so long and so competently should have so little security in his old age.  But this is something to consider when becoming self employed. There are many occupations that can support a man well during his working years and still leave him with nothing.  Arthur Miller’s play Death of a Salesman awakened a whole generation to the way Western society uses salesmen and then discards them.  But this same fate awaits most of the self employed. Unfortunately, the Willy Lomans and the Petes of the world aggressively consent to their own entrapment.

Saturday, November 12, 2011

More Job Openings--But Not More Jobs.

   The Associated Press just ran an article which says that Americans employers are now posting more job openings than at anytime in the last three years.  But the article goes on to point out that more "job openings" do not necessarily mean more jobs.  And they cite specific industries where jobs have declined while posted job openings have increased.  How could there be more job postings and fewer jobs?   There was an article in Wall Street Journal last year which explains what is happening.   Many employers continue to run "help wanted" ads when they have no immediate plans to hire anyone.   They do this mainly because they know that someday the economy will switch from being a slack job market to a tight job market---to a market where they will need to add new workers quickly but will have trouble finding them.  And this change could happen overnight.  So they collect a huge file of resumes and continually update it.  Also, having a "help wanted" sign on the front door helps convey the illusion that the firm is healthy and expanding rapidly, when it may actually be on the verge of bankruptcy.
    But doesn't interviewing all those job seekers consume the time of their present employees?   Well, they don't actually interview them.  They just sit them down at a computer terminal and have them enter massive amounts of personal information into the company's proprietary data base. This costs them nothing.  Yet millions of desperate unemployed people spend their last few dollars jumping through hoops to apply for non-existent jobs.
  And what happens to these massive data bases which now contain personal data on thousands of people?   No one has mentioned this yet, but it occurs to me that some of these companies are probably selling this information.

Friday, November 11, 2011

Quote of the Day, Nov 11, 2011

   The difference between economics and sociology is very simple.   Economic is all about how people make choices.  Sociology is why they don't have any choices to make.
               Duesenberry  1960: 233

Saturday, November 5, 2011

The Rebranding of High Fructose Corn Syrup.

            There is an interesting article in Yahoo’s online magazine, Finance, entitled:   “AP Exclusive: Officials slam corn syrup rebranding.    In this Sept 15, 2011 article, Thomas Watkins of the Associated Press reports the AP has learned that the FDA has cautioned the corn industry over the ongoing use of the term “corn sugar” to describe high fructose corn syrup, asking them to stop using the proposed new name before it has received regulatory approval.
            Mr. Watkins’ article goes on to say that “the Corn Refiners Association wants to use ‘corn sugar’ as an alternative name for the widely used liquid sweetener currently labeled as high fructose corn sweetener on most sodas and packaged foods.  They are attempting an image makeover after some scientists linked the product to obesity, diabetes and other problems;   some food companies now tout products that don’t contain the ingredient.”
            The article also mentions an industry attempt to change the name from high fructose corn syrup to just “corn syrup,” which would be confusing because they already sell a product, dextrose, which is called corn syrup.  Regarding this attempted name change, Michael Taylor, the FDA’s deputy commissioner for foods wrote in an internal memo:  “It would be affirmatively misleading to change the name of the ingredient after all this time, especially in light of the controversy surrounding it.”
            So what kind of people may be avoiding products containing high fructose corn syrup?  Probably people like me—people who read labels listing the additives in food products they eat and people who remember media articles reporting deleterious effects associated with these additives. I haven’t knowingly fed my family anything containing high fructose corn syrup for at least a decade. 
            If you want evidence that proves absolutely that high fructose corn syrup is harmful, you probably won’t find it.  Of course,  if you look for evidence that proves absolutely that smoking causes cancer, you won’t find that either. Nothing is ever proven absolutely.   But if you look at the curve showing increasing obesity in the U.S., and the curve showing the increasing use of this chemical, it’s a near perfect match.   The whole obesity epidemic seems to have taken off in the early 1980s, exactly when we ramped up the use of high fructose corn syrup.
            At that time I was actually working on a construction project at a large plant that makes this product. The plant was being remodeled to increase its capacity.   One day the loudspeakers blasted out the announcement that a major soft drink manufacturer had just agreed to switch from using sugar to using high fructose corn syrup. A cheer rose up from the workers.  They all knew that this would mean more overtime and perhaps a secure job for life.  But I think we also felt, in our heart of hearts, that this change away from sugar would also improve the American diet. And I suspect that the corn processors and the soft drink makers believed this as well.  There was a great deal of concern then about the amount of refined sugar in the American diet, and everyone thought that anything would be better than sugar.   But life has a lot of surprises.
            The problem with high fructose corn syrup is not just its calorie content.   The corn processing industry is now trying to argue that sugar is sugar, regardless of what kind of sugar.  But Dr. David Williams, writing in his health newsletter, Alternatives for the Health Conscious Individual, says, “….fructose has a toxicity factor beyond its caloric equivalent.”     He writes: “Fructose is absorbed differently from glucose in the intestinal tract.   Glucose stimulates the release of insulin from the pancreas.  Fructose doesn’t.  Instead of insulin, cells use glut-5 transporter to move fructose into cells. Most cells have only very limited amounts of this transporter, so it [fructose] is primarily cleared by the liver, where it’s easily transformed into either fat or components that eventually increase blood lipids like triglycerides.”
            He reminds us that that the sugar contained in fresh fruit is fructose, and says that our cells can easily process that small amount, but not the massive overload found in a soda.  He says that fructose is “undoubtedly one of the most dangerous items in our food supply”  Dr. Williams says that as of 2000, Americans were consuming 63.8 pounds of fructose per person per year.  He discusses the link to obesity, and also says that “Fructose has been implicated in numerous inflammatory disease processes including eczema, psoriasis, arthritis, gout, ADHD, Alzheimer’s, high blood pressure, type 2 diabetes, fatty liver disease, and autoimmune disease.”   He also writes, “Most people don’t realize that fructose is addictive. Food processors have added fructose to more and more foods knowing it triggers an increase in sales.”
            Most of the information which I quoted from Dr. Williams’ newsletter can be obtained from any number of reliable sources.  I chose to quote Dr. Williams merely because he states it all very clearly and simply.
            In the AP article quoted earlier, Mr. Watkins says that seven U.S. Senators, all from corn growing states, have signed letters to the FDA, urging them to allow the corn industry to use the name “corn syrup,” supposedly to clear up confusion.
            On Sunday, October 30, The Des Moines Register featured a guest editorial, “Disparaging Corn and Our Way of Life,” by Jerry Mohr, a director of the Iowa Corn Growers Association.   He complained that foes blocking the use of the term “corn sugar” to describe high fructose corn syrup are “disparaging corn and our way of life.”    
            Well, I’ve lived in Iowa most of my life and many of my friends grow corn.  And I suspect if it ever came down to a choice between poisoning the food supply and finding another way of life, they’d do the right thing. Mr. Mohr’s article is a masterpiece of disinformation.  He says,
   “The truth is the term ‘corn sugar’ more accurately describes what this ingredient actually is—a sugar made from corn. Ingredient names on food labels should be clear and reflect in no uncertain terms what the ingredient is.  You can’t get much clearer than ‘corn sugar.’  This alternate name will enable consumers to better identify added sugars in the food they purchase and clear up any lingering confusion.” 
            Gosh, I’m sure we all want to clear up confusion.  But tell me this, Mr. Mohr:  If I have concluded that high fructose corn syrup is unhealthy and I don’t want to feed it to my family, just how, by reading labels, can I hope to avoid buying it if you don’t call it high fructose corn syrup anymore?  The fact is--I can’t, as you well know.  And that’s what this name change gimmick is all about.
            If the corn processing industry had wanted to call it “corn sugar” forty years ago, I doubt if anyone would have objected.  But they were delighted to use the term “high fructose corn sweetener” instead.  It gave them a way to distance their product from sugar.  It gave them a way to position their product as something not quite the same as sugar.  And people eagerly bought it for just that reason. We all knew of the harmful effects of consuming too much sugar.   But now, after forty years, the jury is in.  HFCS seems to be worse than sugar in every way, and people are avoiding it.
            About ten years ago, when I first decided to try avoiding high fructose corn syrup, this avoidance was nearly impossible. It was not only found in soft drinks, but jams, jellies, catsup, and anything with added sweetening.  To buy jam made with sugar, I had to buy the French or Swiss brands, though I would have preferred an American product. And I had to drive ninety miles to a coop that sold organic products to find other things free of HFCS. It all was pretty pricey.  Today, nearly every local supermarket has an organic food section that sells processed foods free of HFCS.  I notice that Smucker’s brand now has an organic line of jams and jellies sweetened only with sugar, and  Sierra Mist Natural lemon-lime soda, (a product sold by PEPSICO) proudly claims to be made only with real sugar.  When we have reached the point that Smucker’s can sell  jam on the advertised claim that it is sweetened only with sugar, and PEPSICO can market a soft drink on that same claim, then the handwriting is on the wall.  A large and increasing percent of consumers want to be free of high fructose corn syrup, and will aggressively seek out products that do not contain it. So it is understandable that The Iowa Corn Growers Association is nearly apoplectic on this issue.
            But the important issue here is the way our decisions are being made. Bismarck said that the people are better off not knowing how their sausages or laws are made.  But even Bismarck would be embarrassed by the process by which the American food industry and drug industry are regulated.  It’s regulation by 800 pound gorilla.  Right now, there is a lawsuit in progress challenging the attempt to change the name of HFCS to “corn sugar.”  This is being challenged in court, not by a consumer group, but by the sugar industry.  It’s a battle between the corn industry and the sugar industry. If we consumers win this one, it will because the sugar industry’s 800 pound legal gorillas beat the corn industry’s gorillas.  The consumer’s interest is nowhere in sight.   The consumer’s interest is supposed to be represented by the USDA and the FDA.   But on the rare occasions that either of these agencies attempts to rule for the consumer, some powerful industry group immediately bullies a few senators into bullying the agency into changing it.  Our entire food supply is now saturated with additives of every kind that have been approved over the last several decades.  In every case, the final decision to allow or not allow the proposed additive was based, not on the interest of those would be eating this food, but on the competing interests of powerful industry groups interested in either producing it or keeping it off the market.
            The result is a disaster.  From America, you can travel to any other developed country and find food that tastes better and is less likely to make you sick.  Of course, this superior food costs more.  America has the cheapest food on the planet—but it’s cheap for a reason.   Most additives ever approved were sought because they would lower production or distribution costs, and this cost savings is eventually passed on to the consumer.  So we have the cheapest food on the planet—if you’re brave enough to eat it.

Friday, November 4, 2011

Mitt Romney and the Seven Dwarves

      I once read that a few hundred years ago,  wealthy older women in Gibraltar kept baboons as pets.  It was thought that being seen surrounded by baboons would make them appear more beautiful by comparison. And I can't help but think that the present array of Republican hopefuls is part of a carefully orchestrated plot to make Mitt Romney seem almost sane and reasonable by surrounding him with utter lunatics.   The question occurs, do the lunatics understand that they are being used for this purpose?  Are their candidacies being directed from above, or have they arisen spontaneously from that vast pool of public irresponsibility we call the Republican Party?
    Don't kid yourself.  Republican politics may seem fairly messy at the bottom, but they're always directed from the top. Remember, the Tea Partisans get their money from the Koch brothers.