BP and the Worst-Case Scenario

Cass Sunstein is a leading legal scholar and has engaged in a great deal of economic research in behavioral economics.  He is currently the administrator of the White House Office of Information and Regulatory Affairs and the target of right of center groups who oppose President Obama's regulatory reform agenda.  I am more market oriented that Sunstein and disagree with many of his policy recommendations, but I am pleased that he advises the president because he is thoughtful and approaches problems from many angles.  He recently wrote, "Worst-Case Scenarios" which asks how the government should treat low probability, high risk events like the Deepwater Horizon oil spill.  I must confess that I have not yet read the book, but I have listened to his interview about the book on EconTalk with Russ Roberts. 

The main idea is that people are not particularly good at analyzing low probability, high risk events.  In his discussion, he mentions two vice presidents, Cheney and Gore who each pushed expensive responses to these type of events: the September 11 terrorist attacks and anthropogenic global warming.  He treats both issues as having approximately the same approximate probability and cost of inaction.  For the sake of exposition, I will do the same.  Why have we spent much more on terrorism? 
Sunstein offers several reasons.  The most important is the availability of a salient event such as September 11.  It skews our probability judgments making us believe that an unlikely event is much more likely because we have a recent example; we rely on emotions and neglect probability.  Anthropogenic global warming does not have a similar catastrophic event to sell a policy response.  The probability that we ignore probability increases if our outrage is provoked because there is a single face that can be attached to the event.  In the case of September 11, the face was Osama bin Laden, the leader of al-Qaeda; there is no good face to represent global warming. 

According to Sunstein, we should beware of worst-case entrepreneurs, people who fan the flames of fear a salient event might ignite to push policy in a direction they favor.  By "fan the flames" I mean convince us that the probability of an event is much more likely because a salient event is immediately before us.  Overreaction to an unlikely event can be costly and entail its own risks.  The War on Terror has been costly in terms in lost life and budget expenditures. A cap-and-trade system to reduce carbon emissions would likewise be costly.  

An oil spill like the Deepwater Horizon is a low probability event.  Oil companies have drilled in the gulf and other places around the world for years with no comparable event.  Perhaps some, in search of a solution, are neglecting probability and our outrage has been aroused by the sloppy corporate practices of Tony Hayward, the CEO of BP.  We should beware of political entrepreneurs who would oversell the spill as a likely event to sell their programs.  I believe that a moratorium on all drilling in the gulf was an overreaction and I am surprised that it came from a White House taking advice from Sunstein.  A moratorium on new deep water drilling would be reasonable.  I also believe that pushing increased ethanol production through government subsidies is another overreaction.  Increased corn production would cause farmers to substitute corn for other crops and take corn out of the food chain driving up food prices.  It would also lead to new, less productive land being cultivated.  Increased agricultural production entails more use of nitrogen and phosphorus based fertilizers.  These chemicals spill into the water supply causing algae blooms which deplete oxygen and weaken ecosystems lowering animal and plant populations.  Besides, ethanol is simply an expensive alternative to gasoline that cannot complete in markets without taxpayer subsidies.  Rather than pick a new power source, the government would be better advised to increase the tax on gasoline and see how the market responds, but if gasoline is taxed for the pollution it causes, so should ethanol. 
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Consumer Confidence

Economic data continues to show that the economy is slowly recovering from what many are calling the Second Great Contraction or the Great Recession but the news still contains a number of stories suggestive of a double dip recession.  (HT Drudge Report) An AP story posted by CNBC News reports that consumer confidence dropped sharply ("Consumer Confidence Drops In June On Jobs Worries").  The idea behind the survey is that as confidence rises, consumers engage in more commerce and when it falls, in less.  This month's report is disappointing. 

Americans, worried about jobs and the sluggish economic recovery, are having a relapse in confidence, causing a widely watched index to tumble in June and raising concerns about consumer spending in the critical months ahead.

The Conference Board, a private research group based in New York, said Tuesday that its Consumer Confidence Index dropped almost 10 points to 52.9, down from the revised 62.7 in May.

Economists surveyed by Thomson Reuters had been expecting the reading to dip slightly to 62.8. June's reading marked the biggest drop since February, when the index fell 10 points.

The index had risen for three straight months since then.

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Additional Thoughts on BP

When news of the leak at the BP operated Deepwater Horizon broke, many blamed corporate greed as the prime cause of the disaster.  I wrote what I still consider the correct economic response concerning greed: it is a universal constant (see "BP a Bad Corporate Actor?," "Reid on Greed," and "The Oil Spill and the Government).  I also expressed doubt over the government's ability to effectively regulate oil exploration, a doubt that I maintain.  As I continue to read about the accident, I have rethought an initial conclusion. 

First and most importantly, BP does appear to a bad corporate actor, either through incompetence or intentional neglect.  Because BP has always said that they would compensate all legitimate claims, I would tentatively conclude that BP is simply incompetent.  (HT Econbrowser)  The Christian Science Monitor ("Five crucial moves by BP: Did they lead to Gulf oil spill disaster?") list five crucial drilling decisions all made to cut costs that BP made that contributed to the rig failure as determined by the Democrats leadership on the House Energy and Commerce Committee. The steps include

1.  Well design

2.  Insufficient "centralizers"

3.  Failure to run a key test

4.  Improper mud circulation

5.  Failure to secure the wellhead.

James Hamilton at Econbrowser ("More on BP") adds a sixth error, the lack of a standard failsafe device, the acoustic shut-off switch.

If BP is a bad corporate actor rather just the unlucky "victim" of an unforeseeable event then the economic consequences should apply to them and not more efficient corporations.  What type of regulation would punish BP and protect other oil companies, consumers of oil products, and third parties whose livelihoods have been impacted by the spill?  BP's feet should be held to fire to assure that they do pay all legitimate claims through the legal system.  I still believe that further regulation by the federal government would be redundant and perhaps counterproductive.  Elected officials tend to overreact to low probability, high cost events. The government should not decide what constitutes the best practices.  If they do, those practices will be cemented in place in an industry that had previously seen technological advances that have allowed safer drilling at deeper sights.  I would also remove caps on damages.  Although the caps can be exceeded for negligence or misconduct oil companies would have better incentive to internalize societal costs of oil spills if the caps were removed. 
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Joe Barton's Shakedown of the NCAA

At the risk of drawing a piling on penalty for criticizing Joe Barton for his apology to BP for the White House shakedown, Barton was not opposed to a shakedown of the NCAA, threatening legislation to impose a playoff system for college football if the NCAA did not do so itself ("Subcommittee OKs college playoff bill").  To be sure, Barton's shakedown was within the legal system but it was an abuse of power.   Permanent Link
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The Current State of the Housing Market

The Great Recession started with exploding gasoline prices in the summer of 2008 and the financial crisis in the fall of the same year.  Many have argued that falling real estate prices beginning in 2006 acted like water in winter finding previously unseen but serious faults in the financial system then freezing and expanding until some financial institutions found themselves in pieces and others wondered who was next. 

The real estate sector remains of interest as the economy slowly recovers.  Zillow's chief economist, Stan Humphries uses data generated by Zillow to calculated month-on-month and year-on-year annualized and indexed home values (Zillow Blog, "National Home Values Continue to Fall in April; Sales Likely to Dry Up After Tax Credit Expiration").  Although the worst of the decline appears over, prices continue to decline and the market as a whole shows considerable weakness.  Humphries writes

Homes values fell 0.38% nationally from March to April and were down 4.1% from their levels in April 2009 (see Figure 1 for monthly and annualized appreciation). The rate of monthly depreciation has remained fairly steady since January, albeit at rates slightly above October 2009 levels when we recorded the smallest month-over-month decline in recent years (-0.27%).

Home values declined month-over-month in 87 (70%) of the 124 metropolitan statistical areas (MSAs) tracked by Zillow this month, and year-over-year declines (defined as a decline of more than 1%) in home values were recorded in 96 (77%) of the 124 metros.  Foreclosure activity continued to increase nationally with 0.11% of homes in the U.S. being foreclosed in April...

Humphries includes a forecast.

We expect to see pending home sales dry up significantly in the May pending home sales report from the National Association of Realtors.  Existing home sales will continue to stay robust through the end of June, when contracts that were signed by the end of April must close in order for buyers to receive the tax credits.  Expect them to fall off precipitously thereafter as we pay back the demand we’ve pulled into these months.

The National Association of Realtors report on existing home sales found that sales, against expectations, declined (Reuters, "Existing Home Sales Tumble Unexpectedly in May".

Sales of previously owned homes fell unexpectedly in May as delays in processing mortgage applications hampered the closing of contracts benefiting from a popular homebuyer tax credit, an industry group said on Tuesday.

The National Association of Realtors said sales fell 2.2 percent month over month to an annual rate of 5.66 million units from an upwardly revised 5.79 million-unit pace in April.

Analysts polled by Reuters expected May sales to rise 5.5 percent to a 6.12 million-unit pace from the previously reported 5.77 million units in April. Sales were up 19.2 percent compared to May last year.

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Positive and Normative Differences

(HT Drudge Report) Using funds from the American Recovery and Reinvestment Act, the Obama administration is increasing spending on paths for cyclists and walkers by $600.  I believe that the projects will be viewed very differently based on people's normative and positive positions (Telegraph, "Obama administration spends $1.2 billion on cycling and walking initiatives").

If you find positive evidence supporting fiscal stimulus through expanded deficits convincing, the cycling and walking projects seem a good fit.  They will be less costly in terms of spending and time than roads for automobiles so many projects can be funded and completed in a timely fashion, and their funding can be cut dramatically once the economic recovery is better established.  If you normatively believe in a paternalistic government, the project has advantages as well.  The government should wean Americans from the gas guzzling automobile and the exercise will be great for our expanding waistlines.   

If you find the positive evidence supporting fiscal stimulus weak due to expanding national debt or small multipliers, the project is like pouring gasoline on a fire.  Funding for projects, even those with set termination dates, seems to roll on forever.  If you are normatively concerned about the paternalistic influence of government, then you believe federal government has no interest in the driving habits or weight of Americans and their efforts are meddling. Permanent Link
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Blinder on Government and the Economic Recovery

Alan Blinder was a member of the Council of Economic Advisors to President Clinton, a Vice Chairman of the Board of Governors of the Federal Reserve and is a professor of economics at Princeton.  Few economists can match his academic and practical experience.  In "Government to the Economic Rescue," published in the Wall Street Journal, he argues that three policies spanning two administrations are responsible for the economic turnaround.  The policies are the Troubled Asset Relief Program (TARP), otherwise known as the bailout, the stimulus, formally known as the American Recovery and Reinvestment Act, and the "stress tests" of major banks.  While I tend to believe that TARP continued to feed the too-big-to-fail moral hazard, that fiscal multipliers are small, possibly less than one, and that the cost of expanding debt are yet to be felt, his arguments are well reasoned and represent an empirically supportable position.  I picked a few key paragraphs but recommend that students and others interested in the impact of fiscal policy read the entire article.

Let's start with two indisputable facts. First, both the financial system and the economy are in far better shape today than they were in the dark days of January or February 2009. For example, even though unemployment is higher now, it is receding rather than soaring, dropping to 9.7% in May from 9.9% in April. Second, the growth of the U.S. economy over, say, the last 12-18 months beat virtually every forecast made back then. I know, because I stuck my neck out on this page with a forecast viewed as too optimistic in July 2009, and the U.S. economy did better than I predicted.

He argues that government policy was causal in the turnaround.

The first was the much-maligned Troubled Asset Relief Program (TARP), which Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson persuaded Congress to pass on Oct. 3, 2008. TARP must be among the most reviled and misunderstood programs in the history of the republic. Voters are clearly appalled by the idea that their government spent $700 billion bailing out banks.

The only problem is: It didn't. Even if we count insurance giant AIG as a bank, no more than $300 billion ever went to banks. TARP's total disbursements, including the auto bailout, never reached the $400 billion mark. The money went for loans and to purchase preferred stock; it was not "spent." In fact, most of it has already been paid back—with interest and capital gains. When TARP's books are eventually closed, the net cost to the taxpayer will probably be under $100 billion—far under if General Motors ever repays.

Spending perhaps $50 billion of taxpayer money to forestall a financial cataclysm seems like a bargain. Yes, I know it's maddening to hand over even a nickel to bankers who don't deserve it. But doing so was a necessary evil to save the economy. Think of it as collateral damage in a successful war against financial armageddon.

The second landmark was the fiscal stimulus package that President Obama signed into law about four weeks into his presidency. Originally priced at $787 billion, it was later re-estimated by the Congressional Budget Office (CBO) to cost $862 billion. A huge waste of money, say the critics—even though most independent appraisals, including that of the CBO, credit the stimulus with saving or creating two million to three million new jobs...

I come, finally, to the third major landmark: the "stress tests" of 19 big financial institutions (not all of which were banks) conducted by the Federal Reserve and other banking agencies in the spring of 2009. This unheralded but ingenious policy initiative was a riverboat gamble that paid off big.

When the stress tests were announced in February 2009, hardly anyone in the financial markets trusted anyone else—least of all the banks. The nervous markets might have panicked if the Fed had declared the need for bank capital to be either too large ("My God! It's hopeless!") or too small ("My God! It's a government whitewash!"). Instead, the Fed's careful and credible estimates found capital needs that were both realistic and manageable.

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The NCAA's Infractions Findings on USC

As a disclaimer, I am a USC fan and have been for 40 years.  I am not a fan of the NCAA. 

People respond to incentives and college athletics is riddled with perverse incentives which are caused by the NCAA requirement that athletes be amateurs.  The NCAA rules state that

Student-athletes shall be amateurs in an intercollegiate sport, and their participation should be motivated primarily by education and by the physical, mental and social benefits to be derived.  Student participation in intercollegiate athletics is an avocation, and student-athletes should be protected from exploitation by professional and commercial enterprises.

College athletics is a multibillion dollar industry that rivals the NFL, NBA and MLB in revenues.  Unlike the other sports industries, the NCAA is tax exempt because of the amateur status of its athletes.  The NCAA and the universities it represents profit from the low wages and tax exempt status maintained by a strict definition of amateurism.  I believe that it is the desire to protect its tax exempt status and not concern for athletes that motivates their actions and to do this they have brilliantly convinced sports consumers that denying athletes in high profit sports nearly all the gains from their activities is moral.  No other students are denied profit from their education while they are in college.

NCAA rules have a socioeconomic and racial component.  Title IX, an affirmative action law designed to increase women's educational opportunities, has forced universities to better fund women's athletic programs to give female athletes the same educational opportunities as male athletes.  Universities have chosen to fund these programs largely with moneys earned by profitable college sports.  Minority athletes from poor households are over represented in football and basketball, the most profitable sports.  Because their wages are capped, the revenues that would be used to provide wages commensurate with their contribution to the team's profits are used to subsidize predominately non-minority athletes from wealthier households who compete in less profitable sports.  

Reading the findings on Reggie Bush made me feel dirty, not because of his actions or the action of his family, primarily his step-father, but because of the unwarranted intrusion on his family's financial affairs (see the report here).  Apparently, Bush grew up in a family that popular jargon would deem "working poor."  As Bush's star was rising, the family had accumulated credit card debt and was having problems paying rent.  If the NCAA is right, given the paucity of documentation and the credibility of their two primary accusers who are both felons, this is a big if, his step-father and then Bush himself took modest payments based on his future career earnings as an NFL player.  The money borrowed by the family was used to pay rent and credit card bills, and to attend Bush's football games.  The money borrowed by  was used to make a $4,000 down payment to buy 96 Impala valued at $19,000.  Nowhere do the findings show that the NCAA was concerned for the financial strain on Bush and his family created by their rule of amateurism. 

The NCAA has concluded that USC was somehow responsible for knowing that the Bush's parents could not afford their new rental home and that Bush could not afford the Impala.  I believe that a black family can improve their financial well being sufficiently to afford to rent a nicer but still modest home and buy their son a relatively inexpensive car without raising red flags.  The NCAA apparently believes that it is USC's responsibility to monitor the financial activities of all athletes and their families.  As an educator and former student, I am dumbfounded by the statement that, "participation should be motivated primarily by education and by the physical, mental, and social benefits to be derived."  I love learning and always have but I went to college because I thought that it would increase my lifetime earnings.  I teach students who are attempting to do the same.  It is preposterous to force athletes to follow a standard of amateurism that everybody who can avoid that standard does.   

The NCAA rules continue, "student-athletes should be protected from exploitation by professional and commercial enterprises.  According to the Free Dictionary, exploitation is  the "utilization of another person or group for selfish purposes."  The NCAA's rules on amateurism keep the honest agents at arms length until the athlete decides to turn pro, abandoning them to the least honest agents who don't mind dealing in shadows.  Can the NCAA explain how its rules don't exploit high value athletes or how allowing these athletes to tap into future incomes is exploitation?  Perhaps Bush would have been free to enjoy the "physical, mental and social benefits" of football knowing that his family was more financially secure and he was the cause.  The NCAA's outdated definition of amateurism should be on trial and not USC's athletes and not USC. 
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Reynolds on Unemployment and the Economy

Alan Reynolds, a senior fellow with the Cato Institute had a different take on why the recent unemployment data has been interpreted so negatively (Wall Street Journal, "Don't Believe the Double Dippers").  It's the political spin and it comes from both sides of the aisle.

Using all of this statistical trickery to convert a weak job market into an imminent recession has become a bipartisan political strategy. Robert Reich and other big government Democrats play the "double dip" card to peddle more deficit spending on refundable tax credits and transfer payments. Conservative Republicans often become double-dippy for very different reasons—to argue (quite plausibly) that hundreds of billions in "stimulus spending" has proven counterproductive so far, contributed to the debt, and will eventually lead to higher taxes.

Reynolds does an excellent job describing various measures of unemployment (U2, U4, and U6) and the "Job Opening and Turnover Survey."  His interpretation is well worth the read.

In addition to interpreting the employment data, he describes the general economic outlook.  If it were a weather forecast, he would report that the sky is not falling, but the dawn is overcast.    

Those who want to know what is going on must sift through all of this bipartisan gloom to distinguish between (1) agenda-driven dire warnings and (2) the boring reality of a sluggish recovery being partially paralyzed by ominous threats of punitive taxes and onerous regulation.

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Canada and Rising Healthcare Costs

Cost is an important part of the healthcare debate but it often ends by comparing healthcare expenditures as a percentage of GDP in the U.S. to other countries.  Economists are generally more interested in rate of change than the absolute level of an activity.  Claire Sibonney, a Reuters analyst, writes in "Soaring costs force Canada to reassess health model"

Pressured by an aging population and the need to rein in budget deficits, Canada's provinces are taking tough measures to curb healthcare costs, a trend that could erode the principles of the popular state-funded system.

Like the U.S., Canadians are debating how the government, using non-market mechanisms, should limit health care expenditures.

Ontario, Canada's most populous province, kicked off a fierce battle with drug companies and pharmacies when it said earlier this year it would halve generic drug prices and eliminate "incentive fees" to generic drug manufacturers.

British Columbia is replacing block grants to hospitals with fee-for-procedure payments and Quebec has a new flat health tax and a proposal for payments on each medical visit -- an idea that critics say is an illegal user fee.

And a few provinces are also experimenting with private funding for procedures such as hip, knee and cataract surgery.

To repeat oft made arguments ("Rationing Health Care," and "More on Rationing Health Care"), the best way to limit the growth in costs is to rely more heavily on market mechanisms.  Under the current system in the U.S., the insured have no incentive to limit expenditures in much the same way I have no incentive to limit auto pollution when I drive.  The amount of pollution I add or any one individual adds is so small as to be meaningless.  Summed across a large population area, the individual contributions produce a very visible problem.  If I stopped pollution there would be no measurable improvement in air quality.  The government has attempted to deal with auto pollution using command and control techniques like requiring catalytic converters or requiring auto producers to meet fleet fuel efficiency standards.  The command and control mechanisms are less efficient than market mechanisms.  A simple pollution tax (see Mankiw's "The Pigou Club Manifesto" for a full explanation.) added to every gallon of gasoline purchased would be more effective.

Why don't we through our government apply a gasoline tax rather than more expensive command and control regulation?  My guess is that voters could clearly link the tax to their wallets whereas that link is less visible with command and control regulation.  Voters as taxpayers want benefits paid for by others.  

Whereas the environment is a natural commons, healthcare markets are a government built commons, constructed because people want others to pay for their benefits.  If voters had to directly fund healthcare purchases, they would be more careful in ordering those services.  Healthcare providers who currently have little or no incentive to lower cost would find ways to offer better healthcare at a lower cost or lose customers to providers who could. 
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Bernanke and the Fed Forecast Slow Growth

(HT Drudge Report)  Ben Bernanke, in testimony before the House Budget Committee, gave a tentative forecast of economic growth (Jon Hilsenrath, Wall Street Journal, "Bernanke Takes Cautious Tone in Congressional Testimony").

Asked whether a double-dip recession is likely, Mr. Bernanke repeated a reassurance he offered Monday that he doesn’t think so. The Fed is forecasting moderate growth in the 3.5% range, with modest declines in unemployment, and it’s sticking with that forecast. An important transition could be underway for the economy — away from government support and toward private demand, he noted. That’s a formula for continuing expansion.

Growth of 3.5% would be considered good if the economy were at or near full employment, but is considered tepid coming out of a recession. Replace this text with...
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Laffer Forecasts Economic Collapse

Arthus Laffer, for whom the Laffer curve is named, offered a gloomy forecast for the economy in "Tax Hikes and the 2011 Economic Collapse" written for the Wall Street Journal.  He notes that people respond to tax incentives. 

People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

He provides examples of people responding to tax incentives.

According to a 2004 U.S. Treasury report, "high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994."

Just remember what happened to auto sales when the cash for clunkers program ended. Or how about new housing sales when the $8,000 tax credit ended? It isn't rocket surgery, as the Ivy League professor said...

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn't take effect until Jan. 1, 1983. Reagan's delayed tax cuts were the mirror image of President Barack Obama's delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984.

Laffer describes the incentive, a broad range of increasing taxes.

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

And he predicts the impact of the response to increasing taxes.

Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what's going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain't seen nothing yet.

If you tax something you will get less of it. In this case, government at different levels will be taxing economic activity. I wonder how much of the response will be timing of cash flows and how much will be reduced economic activity.
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Today, the BLS released its latest, "Unemployment Insurance Weekly Claims Report."  Seasonally adjusted initial claims decreased 3,000 from the previous week to 459,000, but the four week average of initial claims increased 2,500 to 463,000.  Combined with the decline in unemployment from 9.9% to 9.7% in May, paint a picture consistent with a slow recovery. I thought that I would use the release of the weekly data to update a few graphs.

In three graphs, I compare the four week moving average of initial unemployment rate of the current recession to the three previous recessions.  The data starts six weeks before the beginning of each recession and continues for nearly three years.  The left vertical axis measures the four week moving average of initial unemployment claims and the right vertical axis measures the unemployment rate.  These two measures provide evidence that the current recession is severe in comparison to other recessions over the last thirty years.  The small improvements in the two statistics combined with moderate growth add some hope for further improvement in the economy. 

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Summer Job Market for Teens

(HT Drudge Report)  Joseph Pisani, a CNBC news associate, reports that the job outlook for teens (16-19 year-olds) is bad, the worst in 41 years ("Teens Face Worst Summer Job Market in 41 Years"). 

Employment among 16-to 19-year olds in May grew by just 6,000, the smallest increase since 1969, when teen jobs fell by 14,000, according to government data analyzed by employment firm Challenger, Gray & Christmas. In May 2008 and 2009, teen employment grew by over 110,000.

Given that the unemployment rate for the economy is 9.7%, it is not surprising that the market for low skilled workers is bad as well.  The problems with employment are so severe that college grads and other employees who are normally work at jobs one or two rungs above the skills needed for these entry level low-skill jobs are being pushed down the skill ladder and taking jobs from teens. 

Jobs traditionally given to teens are apparently going to older workers who are willing to take low paying job to make ends meet. Employment among 20- to 24-year-olds grew by 270,000 in May, an unusual spike, considering that employment in the same age group fell by 261,000 in May 2009.

"Also impacting the job market for young adults are the large number of older adults who are willing to accept even a temporary, seasonal position simply to generate some income," said Steven Rothberg, chief executive officer of CollegeRecruiter.com, an online entry-level job-posting site.

"We're seeing experienced candidates taking jobs normally reserved for college grads and college grads taking jobs normally reserved for college students," said Rothberg.

The poor state of the economy is the major explanation for high unemployment, but the ill timed increase in the minimum wage may also explain part of the increase.  The minimum wage is a price floor.  Employers may pay more but not less than the minimum.  It is binding if it forces employers to pay a wage above the equilibrium wage in their market.  Under this circumstances, the supply of low skilled jobs falls while the demand for employment rises.  Beginning in the summer of 2007, the minimum wage by legislative mandate increased $.70 per hour for three consecutive years.  The teenage unemployment rate began at 15.9% in May 2007, and increased every year thereafter reaching 26.4% this May.   
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