Thursday, June 30, 2016

Temporary Workers - The Canary in the American Employment Picture

The job report for the month of May 2016 showed the poorest performance since September 2010, creating a measly 38,000 jobs as shown on this graph from FRED:

The month-over-month increase suggests that the jobs market is in far worse shape than analysts expected.  That said, there is another employment metric that looks even worse as shown on this graph from FRED:

While, at first glance, the growth in the number of temporary workers may appear to be quite healthy, in fact, the pattern that is developing would suggest otherwise.

Let's look at the pattern that occurred just before the 2001 recession:

Notice that the number of temporary workers hired levelled off  and began to decline Now, about 12 months before the 2001 recession officially took hold.

Now, let's look at the pattern that occurred just before the 2008 recession:

Again, we see that the number of temporary workers hired levelled off and began to decline nearly 24 months before the Great Recession officially took hold.

Now, let's look at the pattern that is currently developing:

Since October 2015, the number of temporary workers hired has levelled off and has begun to decline, dropping from a peak of 2.944 million in December 2015 to its current level of 2.88 million (May 2016), a loss of 64,000 temporary jobs.  This is very similar to the early stages of the patterns that developed prior to the 2001 and 2008 recessions.  When we put all of this data together and add a dose of common sense, we can see that the hiring of temporary workers acts as a leading indicator, telling us where the economy is headed.  This is largely because, when companies see that the economy (at least from their perspective) is starting to look weak, the first workers to be eliminated are temporary workers.  Let's look at two key  factors that are influencing current temporary worker hiring practices:

Other than the anomaly in July 2014, new orders have been dropping since the second quarter of 2014.

Corporate profits have been dropping since the third quarter of 2014 and have been stagnant since the fourth quarter of 2011.

Janet Yellen's recent speech at the World Affairs Council of Philadelphia contained the following comment on the "muddy" job data for May 2016:

"I will turn to this past Friday's labor market report in a moment, but let me begin with some background: The economy added 2.7 million jobs last year, an average of about 230,000 a month. In the first three months of this year, payrolls were growing only modestly slower, at a little less than a 200,000 monthly pace. The unemployment rate had fallen to 5 percent, down from a peak of 10 percent in 2009. In addition, the Bureau of Labor Statistics' measure of the job openings rate was at a record high in March, and the quits rate--the share of employees voluntarily leaving their jobs--has moved up and in March stood close to its pre-recession levels.  The increase in the quits rate is a sign that workers are feeling more confident about the job market and are likely receiving more job offers.

So the overall labor market situation has been quite positive. In that context, this past Friday's labor market report was disappointing. Payroll gains were reported to have been much smaller in April and May than earlier in the year, averaging only about 80,000 per month.  And while the unemployment rate was reported to have fallen further in May, that decline occurred not because more people had jobs but because fewer people reported that they were actively seeking work. A broader measure of labor market slack that includes workers marginally attached to the workforce and those working part-time who would prefer full-time work was unchanged. An encouraging aspect of the report, however, was that average hourly earnings for all employees in the nonfarm private sector increased 2-1/2 percent over the past 12 months--a bit faster than in recent years and a welcome indication that wage growth may finally be picking up.

Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive. For example, the number of people filing new claims for unemployment insurance--which can be a good early indicator of changes in labor market conditions--remains quite low, and the public's perceptions of the health of the labor market, as reported in various consumer surveys, remain positive. That said, the monthly labor market report is an important economic indicator, and so we will need to watch labor market developments carefully." (my bold)

Ben Bernanke and the  rest of the FOMC totally missed predicting the impending Great Recession, expecting that there would be a soft landing as a result of the imploding housing market.  The current Fed Chair also totally missed on her prediction as shown in this excerpt from the December 2006 FOMC meeting:

"In summary, I continue to view a soft landing with moderating inflation as my best-guess forecast, conditional on maintaining the current stance of policy."

I have said it before and I'll say it again; central bankers never see recessions coming.  Why would we expect the Federal Reserve to perform any differently now, particularly in light of the obvious weaknesses in the American job market?  Apparently, common sense is simply not that common when it comes to central banking.

Friday, June 24, 2016

IRS Tax Compliance - A Costly Business

Updated September 2017

For millions of American individuals and businesses, the IRS tax code is becoming increasingly complex, largely because of its massive size.  Federal tax law has grown from 400 pages in 1913 to a staggering 73,954 pages in 2013 as shown on this diagram from Wolters Kluwer, CCH:

As you can see, over the past two decades alone, the tax code has risen from 40,500 pages in 1995 to its current level of 73,954 pages, an increase of 82.6 percent.  Interestingly as well, the federal tax code stood at 409,000 words in 1955 and has expanded to its current 2.4 million words, almost six times as long as it was sixty years ago.  That said, the Congressionally-passed tax statutes are only part of the tax paperwork mountain; if one includes the words that clarify how the U.S. tax code actually works, the number of words increases to 7.7 million.  When tax-related case law is included, it adds an additional 60,000 pages.

An analysis by the Tax Foundation shows us the high cost of the massive U.S. tax code to the American economy.  Obviously, the complexity of the tax code has real costs for both American households and businesses.  The Office of Information and Regulatory Affairs estimates that Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in the 2016 tax year.  This is equivalent to 4.3 million workers doing nothing but tax return paperwork with 2.6 billion hours being affiliated with individual income tax returns and 2.8 billion hours being affiliated with business income tax returns.

Here is a table showing the estimated hourly and compliance costs of IRS paperwork in 2016:

The authors of the study used two different hourly compensation costs:

1.) for large business forms and complex forms including estates, an hourly compensation cost of $52.05 was used for professional and related workers.

2.) for all other forms, an hourly compensation cost of $37.28 was used since it is the average compensation for all full-time private sector workers.

In total, the 8.906 billion hours spent to ensure tax compliance are estimated to cost $409,241,340,626.  This is greater than the gross economic product of 36 states.

There is a high cost for businesses who want to stay on the right side of the IRS.  The cost of business compliance stands at $147 billion or 36 percent of the total.  Businesses that become S corporations to avoid the additional taxation that is applied to C corporations have total compliance costs of $46 billion annually.  It costs individuals who wish to keep the IRS happy $99 billion annually.  When you think clearly about this, particularly in the case of businesses, spending on tax code compliance means that spending on other items like capital goods and hiring more employees is reduced.  As the tax code has become more complex, businesses have had to set aside more and more of their profits to ensure that the multitude of tax forms that must be filled out annually are filled out correctly, particularly given the rapid evolution of the tax code.

A 2008 study by the Taxpayer Advocate Service for the 2006 tax year showed that if tax compliance were an industry, it would be one of the largest in the United States.  That study showed that it took an average of 26.4 hours for an individual to complete their tax return and other reporting documents.  Corporations required 193.77 hours for the corporation income tax return (Form 1120) and other types of returns and information reporting documents required a widely varying number of hours as shown here:

Obviously, the complexity of the IRS tax code has passed the point of reason.  When it takes highly paid tax professionals to ensure that taxpayers are compliant with every aspect of the tax code, there is something wrong with the tax system.  Oddly enough, even though politicians often campaign on simplifying the tax code, reality shows that this is one promise that has never been kept.

Thursday, June 23, 2016

Hillary Clinton on the Trans-Pacific Partnership

Updated July 27, 2016

Let's open this posting by looking at what President Obama had to say about the Trans-Pacific Partnership (TPP):

Furthermore, here's what Hillary Clinton has said about the TPP deal when she was Secretary of State:

Let's look at some of her pro-TPP comments in more detail when she was serving as Secretary of State:

1.) January 18, 2013 - When speaking with Japanese Foreign Minister Fumio Kishida after their meeting in Washington, she commented that:

"We also discussed the Trans-Pacific Partnership and we shared perspectives on Japan's possible participation, because we think this holds out great economic opportunities to all participating nations."

2.) November 29, 2012 - When speaking to the Foreign Policy Group's "Transformational Trends 2013" Forum, she commented that:

"Last year I laid out America’s economic statecraft agenda in a series of speeches in Washington, Hong Kong, San Francisco, and New York. Since then, we’ve accelerated the process of updating our foreign policy priorities to take economics more into account. And that includes emphasizing the Asia Pacific region and elevating economics in relations with other regions, like in Latin America, for example, the destination for 40 percent of U.S. exports. We have ratified free trade agreements with Colombia and Panama. We are welcoming more of our neighbors, including Canada and Mexico, into the Trans-Pacific Partnership process. And we think it’s imperative that we continue to build an economic relationship that covers the entire hemisphere for the future."

3.) November 15, 2012 - When speaking at Techport Australia held in Adelaide, she commented that:

"So it's fair to say that our economies are entwined, and we need to keep upping our game both bilaterally and with partners across the region through agreements like the Trans-Pacific Partnership or TPP. Australia is a critical partner. This TPP sets the gold standard in trade agreements to open free, transparent, fair trade, the kind of environment that has the rule of law and a level playing field. And when negotiated, this agreement will cover 40 percent of the world's total trade and build in strong protections for workers and the environment.

That's key, because we know from experience, and of course research proves it, that respecting workers' rights leads to positive long-term economic outcomes, better jobs with higher wages and safer working conditions. And including everybody in that, those who have been previously left out of the formal economy will help build a strong middle class, not only here in Australia or in our country, but across Asia.  And that will be good for us."

4.) September 8, 2012 - When speaking at the APEC CEO Summit in Vladivostok, Russia, she commented that:

"Turning to the second line of action, the United States has made a major push to pursue trade agreements with partners across the Asia-Pacific that open markets and reduce barriers. Our landmark deal with South Korea could increase exports of American goods by more than $10 billion and grow South Korea’s economy by 6 percent. In addition to lowering tariffs, the agreement also includes improvements on intellectual property protection and enforcement, fair labor practices, environmental protection, regulatory due process.

That’s also true of the Trans-Pacific Partnership, a new far-reaching regional trade agreement that will bring together at least 11 economies, developed and developing alike, into a single Pacific trading community. It will lower trade barriers while raising standards, creating more and better growth. And this agreement will set a new precedent by covering emerging trade issues such as the competitive impact of state-owned enterprises, the connectivity of regional supply chains, and opportunities for more small- and-medium-sized businesses that are truly the engine of economic growth and employment everywhere."

5.) July 13, 2012 - When speaking at the Lower Mekong Initiative Women's Gender Equality and Empowerment Dialogue, she commented that:

"We've also made workers rights a centerpiece of a new far-reaching trade agreement called the Trans-Pacific Partnership. We are working with Vietnam, Malaysia, Australia, Canada, Mexico, and others in these negotiations."

6.) July 10, 2012 - When speaking at the American Chamber of Commerce Reception held in Hanoi, Vietnam, she commented that:

"Domestic and international businesses alike continue to face rules that restrict their activities, and that, in turn, deters investment and slows growth. So we are encouraging the Government of Vietnam to keep on the path of economic and administrative reform to open its markets to greater private investment. And through the Trans-Pacific Partnership, we're working with Vietnam and seven other nations to lower trade barriers throughout the region, as we ensure the highest standards for labor, environmental, and intellectual property protections. Vietnam was an early entrant to the TPP, and we're hoping we can finalize the agreement this year. And the economic analysis is that of all the countries that will be participating -- Australia, Canada, Mexico, others -- of all the countries participating in the TPP, Vietnam stands to benefit the most. So we're hoping to really see this agreement finalized and then watch it take off."

There's not a negative word anywhere when it comes to Hillary Clinton touting the Trans-Pacific Partnership.

Interestingly and in relatively sharp contrast, here's what she had to say once the deal was reached and she had declared her candidacy for Democratic Presidential nominee:

All of a sudden, Ms. Clinton has developed "worries" about the Trans-Pacific Partnership.  Can we say flip flop?  Can we say doing whatever it takes to scrounge for a few more votes?

For comparison's sake, here's what Senator Bernie Sanders had to say about the Trans-Pacific Partnership:

There's absolutely no question about where Mr. Sanders stands on the TPP, is there?

Looking back in time, here's what Hillary Clinton's husband had to say about the big trade deal of his time, the admission of China into the World Trade Organization in 2000:

Despite touting it as a significant benefit for America workers, here's what happened to manufacturing jobs in the United States after Permanent Normal Trade Relations with China were established:

Within seven years, over 3.4 million well-paying, permanent domestic manufacturing jobs had magically disappeared from the American economy.

At the very least, you'd think that one Clinton could learn from the other about the colossal failure of international trade deals, wouldn't you?


Here is a screen capture from the Washington Post showing how even Hillary's followers are unsure of her stance on TPP: