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Posts by Stephen J Adams, President, AIER

Why Do Americans Feel Economic Anxiety?

Marketplace with Kai Rysdal is one of my favorite radio programs. They reported last week on their Economic Anxiety Index, a survey they conduct with the Edison Institute. The index measures how people feel about their job and financial security. The stories have noted that while the overall economy is improving, people are feeling more anxious about their own economic security.

Fear is an interesting emotion. It can motivate people to take productive steps to protect themselves and others from harm.  It makes performers practice harder before a show, or students to study in advance of an exam.

Fear is especially helpful when coupled with the confidence that comes from knowledge and the ability to respond properly. The adrenaline released by the fear response can increase your speed or strength or awareness. It can save your life.

Fear can also cause you to do things that are bad for you. It can kill you.  You might withdraw from the stock market after a downturn and not return until it’s too late. You might try to swim against a riptide. Or, you might vote to withdraw from the European Union.

I don’t have scientific evidence, but my guess is that the Economic Anxiety Index is actually measuring political anxiety rather than economic anxiety. The endless fighting raging across much of the Middle East, as well as the associated refugee crises and terror attacks in Europe and the U.S., are combining with populist fearmongering by Democrats and Republicans alike. At the same time, Americans are absorbing the impact of being asked to choose between the two least inspiring politicians in recent memory to lead us through these difficult times.

A comparison of surveys of consumer sentiment about the present versus the future show that people are anxious about the near-term future despite their own feelings that current conditions are improving.

CHART_consumer sentiment 3

The chart shows that consumer expectations for the next six months (the blue line) are down from a year ago, and in the most recent month have declined. At the same time, consumer confidence in current conditions (the red line) has been rising pretty steadily for five years. This suggests that the fear about the future is coming from somewhere other than economic conditions.

Policymakers shouldn’t ignore people’s fears, but it is crucial that they get the diagnosis right or the prescription could be disastrous. Pandering to what only appear to be economic concerns could lead to policies that make matters worse.

More importantly, people need to better understand how they control their personal economic lives.  Economic anxiety about job and financial security should cause you to deepen your job skills or improve your family balance sheet, rather than hope some politician will fix things for you. The former is a constructive response to fear; the latter will, at best, lead to disappointment.

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The Opposite of an Employee Benefit

It seems employers are being encouraged to help their young employees spend their money as fast, or even faster, than they earn it.   Some employers are taking the bait.  Some even think it is a benefit to make employees loans, help pay them off, or be better at payday loans than payday lenders.

The Wall Street Journal reports that employers are helping employees pay off student loans or offering lower-interest loans than employees can get from regular commercial lenders.  “If we can help steer folks away from payday loans and high interest loans, it’s worth it,” said an employer who gives employees interest-free lines of credit.

A recent Barrons article, “Two New Employee Benefits Aimed at Millennials,” reports that a “serious problem for the newly graduated – or anyone living paycheck to paycheck—is cash flow.” One solution, according to the author, Theresa W. Carey, is PayActiv, an app that lets employers compete with payday lenders by giving desperate employees access to the cash they’ve earned before the paycheck comes in.

That is about as sensible as taking a shot of alcohol to temper a hangover. The pain may go away for a little while, but more alcohol will be needed to keep it at bay. And for those who can’t control their impulses, it is a formula for disaster.

The real solution to employees living paycheck to paycheck is for them to manage their spending and build their human capital so they can earn more.   As Dr. Robert Walker of Mount Mercy University explains, sustainable financial planning “means balancing your needs and wants with your financial resources, all the while focusing on your long-term objectives.”

If employers are concerned about the financial wellbeing of their employees, they should help them manage their economic lives. They should not help them spend faster.

That is, in fact, the opposite of a benefit.

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Minimum Wage: Can Government Fix the Economy?

The story we’re telling ourselves about this presidential election is that Americans are angry. We aren’t paid enough and housing and health care costs keep going up.  Meanwhile, the rich get richer and the system tilts toward them and away from us.  Somebody ought to do something.

Since people don’t have an obvious target to lash out at, many are taking it out on “establishment” politicians. Hence the rise of Donald Trump and Bernie Sanders.  Meanwhile, a growing number of people support unprecedented hikes in the minimum wage.  New York and California and the City of Seattle have put in motion minimum wage hikes of up to $15 an hour.  If the past is an indicator, more states and cities will soon follow suit.

Many Americans are legitimately dissatisfied with their economic progress.  The tepid recovery has left too many workers unemployed and it has held down wage increases for those with jobs.

Still, do we really think mayors, governors and presidents will solve our economic problems? Neither Trump nor Sanders nor Hillary Clinton can deliver the jobs they promise. The economy just doesn’t work that way.  It doesn’t care who is in the White House or the governor’s mansion.

Perhaps the most troubling manifestation of this popular angst is the minimum wage hike. While it’s painted as a hand up to the working poor, it’s really about raising everyone else’s wages. Research shows, and the politicians know, that most of the benefit of hiking the minimum wage “trickles up” to the much larger number of workers making more than the minimum wage. One possible explanation for this is that as the lowest paying firms raise wages to the new minimum, firms further up the ladder will have to raise wages to be able to compete for workers.

The bigger problem is that raising wages by government fiat can really screw up labor markets. The cost burden falls disproportionately on small- and mid-sized retailers, restaurants, low-skill manufacturers and nonprofit social service agencies with low margins. These business owners already are struggling to cover the rising costs of health insurance, workers’ compensation and regulatory compliance.  They also have to compete with big box retailers, restaurant chains and overseas producers.

The weak economy and strong competition make it hard to pass cost increases on to consumers. If wages rise faster than product prices, many small and mid-sized companies will reduce labor costs by investing in machinery and other labor-saving strategies.  How many new self-service lanes have you seen open up in your local grocery store?

But lost jobs will not be the worst part for low-skilled workers.  Setting a high minimum wage creates a moral hazard for them.  Large numbers of working poor will be conned into thinking they don’t need to build up their human capital to earn a decent living. They will avoid the time and expense of extra training that might help them advance. They will find themselves trapped in low-skill jobs.

If politicians truly wanted to help the working poor there are much more effective strategies. For example, states could institute a refundable earned-income credit for qualified workers.  Or, they could reimburse low-wage workers for the federal payroll taxes they pay.  Approaches like these would send the benefits directly to the working poor, minimize labor market disruptions, reduce overall costs, and distribute those costs across all taxpayers, not just low-profit margin business owners.

But that is the political appeal of these big minimum wage hikes. Who wouldn’t want a pay increase when someone else pays for it?

We just shouldn’t kid ourselves that this is for the working poor.

Blaming politicians for our problems and then looking to them to solve them is not a promising strategy.  The hard fact is the only ones who can improve economic conditions for ordinary Americans are ordinary Americans. Real economic change won’t come from politicians. It will come from employers who help their workers become more productive and competitive. And it will come from ordinary people themselves, doing the hard work of boosting their human capital.

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Don’t Look to Congress to Solve Unemployment Disparities

CongressFed Chairwoman Janet Yellen got it half right yesterday when she answered a question about how the Fed can help reduce disparities in unemployment in the states.

During Dr. Yellen’s testimony before the House Committee on Financial Services, she was questioned by a congressman from Minnesota about what the Fed can do to address the yawning gap between white and black unemployment in Minneapolis.  Unemployment among blacks in Minneapolis was 14 percent in December, while only 2.9 percent for whites.

Dr. Yellen explained that the Fed’s tools to influence employment are too broad to differentiate between white and black workers. She said that education and training were more important, and that this disparity was Congress’ job to address.

Nationally, the disparity was 4.1 percent for whites and 8.8 percent for blacks in the 4th quarter of 2015, according to the U.S. Bureau of Labor Statistics. There is clearly an even bigger problem in Minneapolis, with black unemployment more than 4 times higher than white unemployment.

This is not news to Minnesotans.  The Minnesota Advisory Committee to the U.S. Commission on Civil Rights issued a report in 2011 on the unemployment disparity in the state.  That report followed a similar analysis in 2005.  The 2011 report found:

“While metropolitan areas across the nation are grappling with similar challenges, our Read more

My Hopes for 2016: Back to Business Basics

businessman fireworksHere’s hoping that 2016 brings back an economy that relies more on business fundamentals, and less on the machinations of technocrats in Washington.  With the drama of the first Fed rate hike behind us, perhaps business leaders and investors can focus on the things that make American companies competitive for the long haul.

Here’s hoping that the new frugality that many American households adopted over the last few years lasts a few years more.  Despite the constant drumbeat for more debt-fueled consumer spending, improving Read more

Community and State Colleges Spur Business Innovation

NACCE wonFrom left: AIER President Stephen Adams, Alfred Munoz, Giuliano Melluso, Hussain Ali, Bruce McMordie, Landi Spearman, Saul Allen Barrera.

The list of 2015 winners of the C. Lowell Harriss Student Entrepreneur awards reads like entries in the Inc. 1000, or Fortune’s 100 fastest growing companies. They include a digital technology company, two health products firms, a worker relocation business and physical fitness company. All five were honored by AIER and the National Association of Community College Entrepreneurship in Houston last month.

The C. Lowell Harriss Award demonstrates that important business innovation comes from many places beyond Silicon Valley and the biopharma centers around Boston, San Francisco and San Diego. America’s community and state colleges are increasingly taking on the challenge of helping their students turn entrepreneurial aspirations into real businesses, and it’s paying off.

This year’s first place award went to the owners of MYCO Tea, the first immune stimulant that is created in probiotic form. Founders Alfred Munoz and Guiliano Melluso are students at Indian River State College in Fort Pierce, Florida, where courses in molecular biology, aquaculture and business gave them the foundation for creating their mushroom-based product and building a business around it. They leveraged both business classes and school-based incubation services to launch their business.

Community college-based business plan competitions are also becoming an important proving ground for entrepreneurs. The second place winner and two third-place awardees all used the Newspring Business Plan Competition hosted by Houston Community College to hone their business plans and strategies, make contacts and test ideas., Texas Swim Academy, Destination 4 Relocation, LLC and Grass on the Go are all examples of experienced and knowledgeable individuals who turned their desire to help people into viable, growing businesses, with the help of courses at Houston Community College and their experience in the Newspring Business Plan Competition.

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Creativity and Economic Growth

piano ballroomThe economic benefit of the creative arts has gotten a lot of attention of late.  This issue is almost always couched in terms of jobs and income generated by people induced to spend money to experience, purchase, perform or produce creative art.

Here in the Berkshires, efforts have been underway for some time to quantify the economic return from all the tourists drawn to the region by our museums, theaters and concert venues, and the income and jobs created by creative arts exported beyond the region through art galleries in New York City and sales by local producers of art works to individuals and companies across the globe.

This spring, a debate raged in the Commonwealth of Massachusetts about the value to the state of the nearly $80 million in Read more

Media Should Challenge MIT’s R&D Claims

UncleSamI recently heard a news report on the radio about a new MIT study that finds that the U.S. government is not spending enough on research and development, and it’s putting us at a competitive disadvantage. More detail on this was available from the Wall Street Journal story (“U.S. Is Faulted for Risking Edge in R&D,” Robert McMillan, 4/27/2015). This news comes as Congress is considering the R&D budget.

What both these stories failed to mention is that MIT is a major recipient of government research funds, which may have colored the study findings.

The facts that got journalists’ attention are that federal funding for basic research has dropped from 9.1 percent of total annual federal outlays to just 2.6 percent.

My skepticism caused me to look a little closer at the findings, and I’m glad I did.

First, according to the MIT study, federal outlays on basic research have gone from $16.2 billion in 1968 to $178 billion in the 2015 budget. This seven-fold increase in government spending is characterized as a dangerous reduction in government support, because R&D’s share of total outlays has fallen so sharply.

But is this ratio a relevant metric?

In the years since 1968 the federal budget has seen an enormous shift toward non-discretionary spending (Social Security, Medicare, Food Stamps, etc.). I presume MIT isn’t suggesting we take money from Food Stamp recipients and give it to research scientists.

So wouldn’t the more meaningful comparison be to look at R&D’s share of federal discretionary spending over this period? By this measure, R&D’s share has indeed fallen, but just to 12 percent in 2014 from 18 percent in 1968.

Is it relevant to consider how the composition of the federal research funding has changed?   Maybe special national priorities had boosted R&D spending during the 1960’s and 1970’s.

In fact, another MIT analysis, “66 Years of Sponsored Research” published in the MIT Faculty Newsletter of January 2007, explains that MIT research funding has ebbed and flowed with defense spending. In 1970, Department of Defense was the largest single source of MIT research funding at 28 percent. By 2006, DOD funding had fallen to 15 percent, as the Cold War focus on high tech weapons waned.

Finally, if we are concerned about competitive risks, shouldn’t we look at the entire picture of R&D spending in the U.S. economy? During the time that the federal government commitment was growing by an average annual rate of roughly 15 percent, private sector investments in research and development were exploding. According to the Bureau of Economic Analysis, between 1968 and 2014, gross private investment in intellectual property rose to $647 billion in 2014 from $16 billion in 1968.

Adding this piece, R&D spending in the U.S. has grown faster than the overall economy, rising to 4.5 percent of GDP in 2014 from 3.4 percent in 1968.

My analysis is admittedly simplistic and I’m probably missing some important issues. And there may be a real crisis in R&D funding in the U.S., but lawmakers and taxpayers will be better served by more thorough and objective analyses than are likely to come from institutions with a financial stake in the outcome of the funding debate.

Fed, Heal Thyself

It is breathtaking to read about Federal Reserve Chairwoman Janet Yellen berating Wall Street banks, as reported by Victoria McGrane in today’s Wall Street Journal, “to follow the law and to operate in an ethical manner.”  Ms. Yellen’s speech to the Citizens Budget Commission in New York City is an apparent reference to the various probes of banks’ misdeeds around interest-rate manipulation, tax avoidance and other unnamed sins.

The audacity of Federal Reserve officials Yellen and William Dudley, president of the Federal Reserve Bank of New York, to point fingers at others for ethical and legal lapses is clearly an effort to divert attention from the Federal Reserve’s own failings and their deep disinterest in addressing them seriously.

The problems of regulatory capture at the Fed are now well documented, between a confidential study commissioned by the Fed and recently released tape recordings of Fed agency staff interactions. As reported by Jake Bernstein of Pro Publica, Columbia University professor David Beim found that:

“The most daunting obstacle the New York Fed faced in overseeing the nation’s biggest financial institutions was its own culture. The New York Fed had become too risk-averse and deferential to the banks it supervised. Its examiners feared contradicting bosses, who too often forced their findings into an institutional consensus that watered down much of what they did.”

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