AN ECONOMIC TOUR OF THE ENGLISH COUNTRYSIDE, STARRING DOWNTON ABBEY – ACT II

That is the thing about nature; there is so much of it. ~ Violet Crawley, Dowager Countess of Grantham

My first part of this tour (see here) recounted the centuries-old business model of the owners of England's countryside – landed-gentry like Lord Grantham of Downton Abbey – that was challenged by changing economics of the early 20th century. These changes had been building for a considerable time. Four (4) sets of events in the 19th and 20th centuries conspired to destabilize the steady world of the British aristocracy, including Lord Grantham.

First, Parliament passed the Corn Laws in 1815 that protected English and Irish farmers with significant tariffs on less expensive, imported grains, and thus raised the domestic price of bread and other agricultural products. Riots occurred in London and other cities after the laws' passage. The Corn Laws helped agricultural interests – that were squarely based on the landed gentry, including Lord Grantham's forebears – and who had reaped large financial benefit from an increase in land prices and agricultural products due to the Napoleonic Wars (1803-1815). But the emerging merchant/industrial class in England was strongly opposed to the Corn Laws because these laws kept the price of grain and bread high that in turn required wages to rise, so workers could afford necessities like bread.

After several decades of the Corn Laws and with the Industrial Revolution in full bloom in England, the balance of political power began to shift and these laws were repealed in 1846. The new "industrial elite class" had arisen. Grain imports into England from the US and other nations rapidly increased after repeal. England imported 2% of its grain in the 1830s, 24% in the 1860s. As a consequence, the British price of grain decreased by more than 30%. Britain's domestic grain producers (including most estate-based farms) could not compete with growers in Indiana, Illinois and elsewhere. By 1885, more than one million acres of domestic corn were withdrawn from production in England. Farm income for estates like Downton Abbey (DA) dropped greatly.

Lord Grantham does not seem to define his estate as acres of land subdivided into farms that produced foodstuffs. He mostly saw it as people whom he and his ancestors have taken care of forever. One doesn't dislodge trustworthy tenants simply to stay in business by dismissing them. In this sense, he obdurately went against the grain of modern agriculture. Furthermore, new, more efficient agriculture was (and continues to be) more capital-intensive – which requires more investment – something that Lord Grantham doesn't seem to have any talent at obtaining. Even if he could, he is not one to substitute cold capital for his honorable, loyal labor.

Second, the Panic of 1873 that included a stock market crash and a financial crisis added to the economic misery of investors (the landed gentry) in England and beyond. This bank panic created a deep recession and considerable poverty throughout Europe (and also the US) that reduced demand for agricultural products and other goods and services for at least 6 years. Both workers' and producers' incomes dropped as a consequence. This economic calamity, called the Long Depression, very likely added to DA's fiscal and personal woes.

Third, just as change in international trade patterns and macroeconomics were adversely influencing British estates' income stream, new residential technologies were emerging. Specifically, the telephone, central heating and electricity, not to mention the automobile, were altering what "comfortable living" entailed the late 19th and early 20th centuries. Abbeys, castles and manors built before the late 19th century – like Downton Abbey – required expensive alterations to incorporate these new standards of modern living. Just when Lord Grantham's wallet was less full, he had to pay a lot to keep up with the Lord Joneses.

Finally, there's World War 1, the "Great War". This 4-year conflict began in 1914 and killed about 15 million soldiers and civilians, including over 700,000 British soldiers. No one was spared its devastating effects, as we have already seen in DA. Beyond the horrific deaths and injuries, WW1 transformed the social order in Britain. The influence and power of the landed gentry were reduced. Not only were lords, prospective heirs and downstairs staff of the estates harmed and killed, but large numbers of those who provided service to the manors and abbeys never returned even if they survived the war. Instead, they cast their fates to new lives working in the cities.

Thus, by the 1920s the economics of many British country estates like DA had been inexorably altered. Very few were roaring at all; many were teetering on unstable fiscal ground. They needed an influx of income and capital as their traditional business model had been forever fractured.

After conducting contents auctions to raise funds, numerous estates were demolished. Indigent lords, like the 9th Duke of Marlborough (the first cousin of Winston Churchill), cast a wider eye and married wealthy American heiresses to finance and save their life style. In the TV show, Lady Mary's foreboding, nouveau riche marriage would have had a similar remunerative purpose; praise be for small emotional favors that it wasn't consummated. Fortunately, Matthew's unexpected inheritance from a far-away, forgotten uncle served the same, much-needed compensatory objective for DA.

With this backdrop, what will happen to DA in its 4th season? Will Tom take up the "modernist" scepter that Matthew held as necessary to insure DA's financial security? Will Tom thus consolidate the farms, dismiss many cottagers and ox-herds and watch Lady Edith operate one of the new tractors? Will Lord Grantham lie down across his driveway (but only after Mr Carlson has hurriedly placed a drop-cloth underneath him) to stop the dastardly tractors? Will Shirley MacClaine reappear having a change of fiscal heart and save the abbey with her foreign largesse? Does Lord Grantham head to London for a much-needed executive MBA at the London School of Economics? Will he pass the courses? And/or will the grieving Lady Mary toss aside her damp hankies and get her fingernails a bit dirty to revive her portion of the great, green English countryside as her dearly-departed husband championed? Tune in and find out starting on January 5. Onward to the past...

AN ECONOMIC TOUR OF THE ENGLISH COUNTRYSIDE, STARRING DOWNTON ABBEY

Home wasn't built in a day. ~ Jane Sherwood Ace

Ah, the English countryside, I guess there's nothing really like it. Many Americans have gotten to know this form of greenery because of Downton Abbey, the successful BBC TV show that will commence its 4th season in the US 3 weeks from today.

I've been fascinated with the show not only because of the story and personalities, but because of the times in which it takes place – before and after the First World War. For the "great English country houses" the late 19th and early 20th century was a period of significant economic change and challenge.

Here's my 2-act tour of the life and times of English country houses (aka, estates), and the people who lived in them, like Downton Abbey, from an economic vantage point.

Act I starts with the house itself. Its name, Downton Abbey, implies that at one time in the distant past it was an abbey – a religious monastery, convent or priory. Henry VIII's Dissolution of the Monasteries in the early 16th century disbanded such Catholic land-holdings and appropriated their income and assets. As you may remember from a long-ago history class, he did this after Parliament made him the Supreme Head of the Church of England in 1534, thus separating the English church from the Catholic church and Papal authority. Many of these ecclesiastical properties were provided to friends of the King and converted into private homes. Downton Abbey may have been one of these places.

In real life, TV's Downton Abbey is actually Highclere Castle which is part of a 1,000 acre estate in the north-central part of Hampshire, in southern England. According to Lady Carnarvon, the mistress of the home, Highclere Castle has probably 200 or 300 rooms, 50 to 80 bedrooms and costs $1.5 million a year to maintain. She's also mentioned that if you know exactly how many rooms are in your home, you probably don't have a large house. Love the British, don't you?  

The underlying economics of Downton Abbey (DA) is historically founded on feudalism first begun in ancient times (probably by the 9th Century). This system continued for centuries in Europe and what is now the UK. Like other landed gentry, DA's Lord Grantham owned all the estate's land, including its villages and towns; a relatively small portion was his demesne. By the turn of the 11th century, an agricultural estate – which referred to virtually all estates in England since about 90% of the population lived and worked on the land at the time (the same percentage that lived on the land in the 18th and early 19th centuries) – depended on slave labor (aka, indentured servants and farmers).

In a very real sense, the landed gentry depended on slavery - for centuries. Estates were built around the authority of the lord of the manor/estate.^[1] The Old English word "Weallas", or Welshman, was one of the English words for slave. The indentured farmers provided a portion of their produce as payment in kind and/or of their time to the lord. In return for these payments, the indentured, common folk received room and board from the lord. These indentured people included: the cottager, someone who farmed at least 5 acres of the lord's land, and paid for this by working for his lord every Monday in the year, as well as for 3 days a week in August, as the harvest approached; the shepherd, who could use 12 nights' dung (the invaluable natural fertilizer) at Christmas and also could keep the milk of his flock for the first 7 days after the equinox; and the ox-herd (the man who operated the ox that powered the plow – probably the most important person working the land), if he had his own cow he could pasture it with his lord's oxen and cows.

In more recent times such people have been called "tenant farmers." In 19th century England 90% of the land was tenanted; by the mid-20th century 60% remained tenanted.[2]

This formidable agriculturally-based economic system began to splinter in the late 18th and 19th centuries, when the Industrial Revolution was structurally altering England and subsequently the world. This revolution changed English (and most other western nations') agriculture, not just industry. My blog, The Agricultural Revolution, discuses how this revolution actually facilitated the Industrial Revolution. The movement of agricultural workers (aka, peasants) off the farms into the cities - and new factories - wasn't necessarily a disaster for agricultural estates or their owners because of increased farm productivity. Productivity gains were realized through mechanization. These benefits more than made up for the reduction in the mostly low-skilled agricultural work force.

By the early 20th century - when we are viewing DA - the technical scale of agricultural production had significantly grown. Smaller farms, presumably like those at DA, were increasingly inefficient, mainly due to their size and inability or unwillingness to utilize modern methods. In my mind, this is the principal source of tension between Lord Grantham and Matthew (RIP). Matthew knew that farms based on centuries-old tenancies and techniques that had existed at DA seemingly forever were no longer going to work because the farms were not large enough to support WWI-era agricultural methods and technology, like the then-new internal combustion engine tractor and its yield-improving accouterments.

Revenue that Lord Grantham received from the townspeople – probably a portion of each merchant's sales – was not likely to be sufficient to make up for the fiscal challenges he faced from his farms. Retail sales in England, including DA, were indirectly and adversely affected by the Bank Panic of 1907. This panic was principally a US calamity, due in no small part to the 1906 San Francisco earthquake. But the Bank of England had to raise its interest rates, partly in response to English insurance companies paying out so much to US policyholders, which landed financial blows to the British economy. Lastly, the British government began to change its fiscal policies to focus on generating more tax revenues from the considerable wealth accumulated in estates like DA. Taxes steadily increased during the 20th century and included land, income and probate taxes as well as death duties. Given his situation, it is likely that Lord Grantham would feel in complete accord with George Harrison's final lyric in Taxman, "And you're working for no one but me."

Coming soon, Act II will delve into events during the 19th and 20th centuries that further undermined the foundations of the tried-and-true British upper class, including Lord Grantham and Downton Abbey. No wonder he has such an enduring dour expression.

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[1] See The Year 1000, What Life Was Like at the Turn of the First Millennium, Robert Lacey and Danny Danziger; Little, Brown & Co.,1999.

[2] According to the recently-published Global Slavery Index, 4,200 people remain in modern slavery in the UK today.

OUR MISSING MACROECONOMIC POLICY

Fiscal policy is not just, or even principally, the purview of the president. ~ Carly Fiorina

 

Appropriate fiscal policy has been missing-in-inaction (MII) since 2009. Every Econ101 student learns there are two complementary, federal macroeconomic policies – monetary and fiscal policy – that the government uses (ideally) to keep our nation's economy in "just-right" balance (not too much unemployment, not too much inflation). Monetary policy concerns changing the nation's money supply mostly by altering interest rates. Fiscal policy involves changing government spending and taxes through Congressional legislation.

All political eyes were focused last week on monetary side of macro policy. Fiscal policy remained the unspoken elephant in policy-makers' rooms, as it has for all too long. Why monetary policy? Because Janet Yellen was talking.

It was interesting to hear Ms Yellen testify before the Senate Banking Committee. She is expected to be the next Chairwoman of the Federal Reserve Bank (the first time that title has been used at the Fed). But before she receives the monetary scepter as this nation's (and the world's) primo central banker – and be in charge of US monetary policy – she needs to be confirmed by the Senate. Hence her testimony.

During her tenure on the Federal Reserve Board –as vice-Chair for the past 3 years and President of the San Francisco Federal Reserve Bank from 2004-10 – she has generally supported Fed's and Ben Bernanke's innovative, expansionary and controversial monetary policy called quantitative easing (QE). She has been correct in her support. Most recently, QE has involved buying $85 billion per month of long-term Treasury bonds and other financial assets to stimulate the economy. As a result of QE and other financial activities, the Fed now has more than $3.59 trillion of financial securities' assets on its balance sheet. Before the 2007 recession, the Fed held between $700 and $800 billion of Treasury note assets on its balance sheet.

Several senators questioned her testimony and implicitly her qualifications. Two of them, Senator Bob Corker (R-TN) and Senator Sherrod Brown (D-OH) characterized the Fed's QE-based monetary policy as “an elitist policy” and “a sort of trickle-down economics," respectively. They said monetary policy only helps the well-to-do Americans who participate in the (now rising) stock market rather than middle-class folks whose finances are far more precarious and puny. They have a point.

But politicians like Sen. Corker deserve gold medals for extreme hypocrisy and ironic blindness. The idea that a Republican Senator was berating Ms Yellen of implementing "elitist policy" would almost be humorous except for the huge harm Republican politicians like Sen. Corker have loaded onto working Americans during the past 4 years – because of their caustic, elitist policies. Recent examples include opposing increases in Federal (and state) minimum wages, drastically reducing funding for the food stamp (SNAP) and low-income food and nutrition (WIC) programs and opposing increased infrastructure spending. Such policies are terribly hurtful snap judgments.

If these senators want non-elitist, non-trickle-down economic policies, they themselves can create them – they're called fiscal policies. Republican and Democratic congress folk should wake up from their stupor and pass a fiscal stimulus bill, based on fiscal policies that have worked in the past.

Instead, after taking the Congressional hypocritical oath ("do no harm to those who pay for my re-elections"), Congress continues to sit on its thumbs and criticizes prospective monetary policy-makers like Ms Yellen for not doing what Congress itself (and President Obama) should be doing. Successful expansionary fiscal policy would offer much more broad-based economic benefits that come from directly increasing employment, putting more money in the wallets of middle- and working-class people and providing necessary support to folks who can't afford food, care and/or housing.

Why does fiscal policy remain MII? Why doesn't Congress authorize expansionary economic policy? Have its members forgotten what fiscal responsibilities they have? Not likely; it's because many of its members are too duplicitous and ideological to do what's needed for the public at large. They remain falsely fearful of non-existent inflation from ever-moderating deficits.

Ms Yellen was too demure in not forcefully stating to the Banking Committee that the Fed – soon to be her Fed – cannot by itself pull the US out of its continuing economic malaise with only its monetary efforts. Congress must re-activate its fiscal authority by passing substantive expansionary fiscal policy legislation. This means lowering taxes for the 97%, increasing government expenditures to improve infrastructure like roads, bridges and the internet, providing more employment-training funding, especially for the long-term unemployed, and increasing SNAP and WIC budgets. Senators Corker and Brown can rest assured these fiscal expenditures will not be elitist or trickle-down policies.

We would have all benefited from hearing Ms Yellen clearly describe the elephant in room and tell Congress to get on its fiscal stick and start doing its part to revitalize the economy, rather than berating the Fed for not doing Congress' job.

WATER, WATER EVERYWHERE, NOR ANY DROP TO DRINK

When the well is dry, we learn the worth of water. ~ Ben Franklin


The Earth has 1,386,000,000 cubic kilometers (km3) of total water resource, counting all the oceans, lakes, rivers, aquifers, glaciers, icecaps and icebergs. But the world's freshwater glass is less than half-full and becoming increasingly scarce. Scarcity of freshwater isn't a new thing. Throughout history, civilizations have fallen due to lack of water and droughts. These include ancient Egyptian, Hittite, Mycenaean civilizations more than 3,200 years ago that irreparably suffered from a 150-year drought beginning in 1250 BC, and the Anasazi people in the American Southwest during the 12th century AD. "Water security" is now a growing concern in many places.

The importance of water for all life forms on Earth cannot be overstated. Without water, especially freshwater for creatures like us who don't live in the seas, there can be no life on the Earth. Humans can stay alive for only 3 to 5 days without water. It is the basis of Leonardo da Vinci's apt observation, "Water is the driving force of all nature." This truism is  reflected in Samuel Taylor Coleridge's fluid words from his Rime of the Ancient Mariner:

Water, water, every where,

And all the boards did shrink;

Water, water, every where,

Nor any drop to drink.

"Nor any drop to drink" references that only 2.5% of all water on the Earth (total water) is freshwater. Of that, glaciers and ice caps account for 1.7% of total water; fresh ground water accounts for 0.75% of total water. Fresh river and lake water accounts for 0.0009% of total water. There are 34.6 million km3 of fresh water on our planet, which seems like a lot, but.

There are 2 reasons for the growing scarcity of freshwater. First, human population continues to increase. More than 7.1 billion humans now live on the Earth, every one of whom requires daily potable water to survive. The world’s population has doubled in the last 40 years; its use of fresh water has quadrupled.

Second, every human not only needs water, he/she also needs food stay alive. Agriculture consumes more freshwater than any other single use. Irrigation of cropland, first used by Sumerian farmers more than 7,500 years ago, is how agriculture uses water, often lots of it. In the proverbial average year, the UN's Food & Agriculture Organization believes 1,000 m3 of water per inhabitant is considered as a minimum to sustain life and ensure agricultural production in countries with climates that require irrigation for agriculture. According to David Suzuki, an environmental advocate, more than one billion people lack adequate access to clean water.

In the US, irrigation accounts for 37% of all freshwater withdrawals, the single largest use. That's 67% of all US groundwater withdrawals and 28% of all surface water withdrawals. California is the largest consumer of irrigation water in the nation, representing 19% of all US irrigation use. Within California, irrigation accounts for 73% of the State's total freshwater usage.

The world's freshwater resources are not distributed evenly. Nine "water-rich" nations account for 60% of world's natural freshwater resources (listed in order of their internal freshwater resources, biggest first): Canada, Brazil, Peru, Columbia, Russia, Indonesia, US, China and India. At the other end of the world's water glass, 33 countries depend on other nations for over 50% of their renewable freshwater resources, including; Argentina, Egypt, Israel, the Netherlands, Pakistan, Syria and Viet Nam.

Asia, which has 60% of the world's population, has 28% of its freshwater resources. Africa, with 15% of the world's population, has 9% of its freshwater resources. By contrast, the Americas (North, Central and South) are relatively awash in water with 13% of world population and 45% of its water. A fair amount of North America's water lies frozen in Alaska's and Canada's far north (although now melting more and more into the Arctic sea).

Consumption of water also varies significantly by nation. India withdraws the most water for its use than any other country (761 km3/yr), followed by China (579 km3/yr) and the US (482 km3/yr). The ordering of water withdrawal/consumption by nation is much different when considering per capita usage.

On a per capita basis, the world's largest water user is Turkmenistan (4,762 m3/p/yr); who'd of guessed? Turkmenistan is a central Asian nation of 5 million people. It uses 98% of its total freshwater for irrigation, mostly thirsty cotton plants – it is the world's 9^th largest cotton producer. The US' per capita water usage is ranked 10^th highest (1,518 m3/p/yr).

Throughout recorded history, nations that can afford it have sponsored massive and costly water projects that have brought freshwater from afar to its citizens. The Romans famously built aqueducts. In the arid West, Americans built canals, aqueducts and captured entire rivers for drinking and irrigation water – Los Angeles' controversial expropriation that drained the Owens Valley's water in the early 20^th century (at a cost of more than $557M in current dollars). Subsequently, LA managed to get a substantial portion –about 50% – of its water needs from the Colorado River that allowed the parched LA basin to dramatically grow. Other water-grabs by semi-desert Southern California include 2 aqueducts begun in the 1960s that start in the San Joaquin-Sacramento River delta near the San Francisco Bay and transport water southward for 700 miles.

Like California, China's water dilemma is mostly founded on geography but also behavior. Eighty percent of China’s water is in the south, principally the Yangzi River basin. Half the people and two-thirds of the farmland are in the north, including the Yellow River basin. Beijing has the sort of water scarcity usually associated with Saudi Arabia: just 100 m3 per person a year is locally available. The water table under Beijing has dropped by nearly 1,000 feet since the 1970s. Because of massive, unchecked industrial pollution, only 50% the water sources in Chinese cities are now safe to drink. More than 70% the groundwater in the north China plain is unfit for any human contact, even for washing.

To remedy this calamity China has wholly focused on increasing available water supplies for its dry northeastern region, where Beijing lies. Thus, the nation has been busy constructing dams (including the world's largest, the Three Gorge Dam) and a gigantic series of engineered waterways – called the South-North Water Diversion Project – that will link the Yangzi River with the Yellow River and transport water over 1,800 miles northward. Will these hugely expensive efforts work? At least 600 million parched people hope so.

More generally, what alternatives should we consider to slack our growing thirst? Aside from offering alms to Lono and Chaac (the Hawaiian and Mayan gods of rain, respectively), there are 3 related actions that should be carried out. The first 2 focus on reducing demand for water, one via technology, the second through our tried-and-true economic stand-by, prices. The last action addresses increasing the supply of water.  

1.       Improve the water-efficiency of agricultural irrigation, and industrial and residential usage (in that order of importance);

2.       Raise the price of water, especially for non-residential consumption; and

3.       Continue searching for new freshwater resources.

Improving water efficiency (also called water productivity) is necessary to "stretch" existing water resources. Efficiency can include process improvements that use less water as well as improved recycling and treat water methods so it can be used again "downstream." Industry and agriculture account for 87% of total water use in the US. For agriculture it means getting rid of traditional, water-inefficient irrigation methods such as flooding and high-pressure (e.g., center-pivot) spraying methods. Instead, crop irrigation needs to use much more efficient low-pressure (e.g., drip) systems. Such changes can save 25 to 50% of water used for crop irrigation.

Why haven't industrial and agricultural water users already adopted these efficiency options? Because the cost of using water is nonsensically low, so new water-efficient techniques and technologies aren't cost-effective. Thus, these users stick with the water-wasting status quo. This leads to the next action.

The second action is founded on Ben Franklin's quote given at the beginning of this blog. Our collective well isn't yet completely dry, but as water volumes from aquifers, lakes and rivers are reduced, users and policy-makers need to recognize the value of water now all too often exceeds its price. The price of water, especially for non-residential users, should increase, probably substantially.

With few exceptions, water is distributed in the US (and beyond) by public agencies – the US Bureau of Reclamation and local water boards, irrigation districts and municipal utilities. These agencies have pricing authority for virtually all water sold to the public. For most of their history these agencies practically gave away the public's water to users. Reflecting the unstated but adhered-to motto of the Bureau of Reclamation – "economics be dammed" – the Bureau was compelled by the 1926 Omnibus Adjustment Act to set water prices according to the then mostly dry dirt-poor farmers' "ability to pay," not the actual cost of providing the water. Electricity sales revenues from the Bureau's multitude of hydroelectric dams were used to substantially subsidize water prices. Many irrigating farmers – meaning virtually all farmers in Arizona, Utah, Idaho and California – have benefited enormously.

In recent years a small but growing number of these agencies have revised their give-away policies, moving from being quite benthic, to raising water's price to better reflect its worth. More agencies should to do this. Freshwater remains a seriously under-priced resource. With higher water prices, first for non-residential customers, users will have real incentive to install technologies that employ this precious resource more efficiently and effectively.

Finally, efforts should continue to search for new water resources. Just like oil and natural gas companies devote money, time and effort to discovering more reserves, so too should governments look for "new" water. And I don't mean building more dams or lassoing glaciers. I mean discovering new aquifers, like recently happened in Kenya. It was announced in September that the just-located Lotikipi Basin Aquifer in northern Kenya may hold 250 billion m3 of water. This and several other aquifers were discovered in Kenya using satellite and drilling technologies. Hopefully, these techniques can add supply in other drought-prone areas of Africa and beyond.

With some luck, these demand- and supply-side actions will provide more vital drops of water for us to drink. We need every one of them.

MEDIA MISINFORMATION: Yahoo News' announcement of the Social Security cost of living adjustment

A study of macroeconomics usually reveals that the best time to buy anything is last year. ~ Marty Allen

On Oct 13^th my home webpage displayed a headline, "Bad News for Social Security Recipients." Intrigued, I clicked on it to learn what terrible circumstances we Social Security recipients might be facing.

The story covered the impending announcement from the Dept of Labor – delayed by the Republican-inspired shutdown – of what the 2014 cost-of-living adjustment (COLA) will be for people receiving Social Security and disability benefits. A whole lot of people receive either Social Security benefits or disability benefits that use this COLA – 71 million citizens (a bit less than 1 person in 4 in the US), ranging from retirees, survivors and disabled veterans to poor people who get Supplemental Security Income.

The expected 2014 COLA will be around 1.5%, which for the average Social Security beneficiary amounts to $17 per month. This COLA will be the lowest in years; only 6 times since the COLA was implemented 38 years ago has it been below 2%.

Way long ago, I used to write story headlines at my college newspaper. To label this below-normal level of COLA as "bad news" deserves an "F."[1] Calling a low COLA "bad news" implies that a higher COLA would be good news for affected citizens. This is untrue. Higher COLAs come from higher inflation, which reduces people's real income. Perhaps the headline-writer would rather have an uncola, or be living in Argentina, where consumer prices have risen a whopping 7 times as much as the US this year – 10.55%. This imprudent headline adds a mistaken sense that not only is Social Security an entitlement, but somehow a high-COLA is as well. This is economic nonsense.

The Social Security COLA represents changes in national prices, not prices in a specific location for a particular person or family. This COLA tracks the yearly change of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the months of July, August and September. If the COLA is low, it means consumer prices haven't increased much. This lack of inflation is good news for everyone who buys consumer goods and services.

Unfortunately, the headline-writer, like too many other people, does not understand what the COLA actually represents. This inability to distinguish between individual and national price changes is illustrated by the following comment to the Yahoo News article by someone called dvlsh11.

"I don't know how they can say 'prices haven't gone up,' gas is over 3 bucks per gallon, food prices seem to steadily rise, companies are saying things like laundry soap is 'concentrated so you use less' when you don't really use less they just give you less and charge the same amount as before. After rent/mortage most ppl's biggest bill are their utlity bills."  

Dear dvish11, get a grip: "they" haven't said prices haven't gone up. They have said prices have gone up a small amount – by about 1.5% – based on actual price changes. The COLA measures prices, not individual consumer behavior like over-using "concentrated" soap. National food prices have increased 1.6% in the past year; energy prices have declined 0.3% in the past year.

This low COLA means the Federal Reserve's monetary policy has successfully (and single-handedly) kept inflation in check (that's very good news) and offered a modicum of economic growth (OK news). Because of truculent Republicans, the US now conducts no appropriate fiscal policy whatsoever. So it is impossible to initiate a much-needed increase in government expenditures to remedy the lingering effects of the recession. Instead, government expenditures have decreased, further contributing to the economy's doldrums.

The Social Security COLA reasonably characterizes the average yearly change in national consumer prices. But there is a COLA war of sorts being waged among economists and affected parties. Some believe this COLA actually over-states the price changes that Social Security recipients face. In fact President Obama has mentioned he might be amenable to using a variation of the Social Security COLA based on "chained" prices, as a more accurate index [2], in return for more tax revenue. Unsurprisingly, groups like the AARP and labor unions are much opposed to chained price indices. I believe using a chained Social Security COLA could be one mechanism to accomplish a minor reduction in Social Security costs.

However, having a low Social Security COLA for 2014 – no matter what form – is good news for consumers of all ages.

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[1] The story itself doesn't make any misguided statements about the low COLA; it's quite factual. The headline-writer, however, should be sent to a remedial economics course.

[2] A chained price index more quickly adjusts prices to reflect consumer behavior when people substitute purchases of a cheaper good for another due to price increases of a substitute. A chained index thus could reduce the expenses connected with future Social Security COLAs.

FUTURE BURGER-FLIPPERS – A SMILING FACE OF FLESH OR PLASTIC?

"Raising the minimum wage tends to be more popular with the general public than economists." – Christina Romer

It's rarely a good time to be a low-skilled worker. Right now, here in the land of the evaporating American Dream, it's a downright terrible time.

Low-wage, low-skill workers are at the bottom of the proverbial 99% heap of us. Who are low-wage workers? The roughly 21 million workers who earn between the minimum wage and $10 an hour are largely young, lesser educated and without children. Low-wage workers represent 13.5% of the US laborforce.

In September, the Census Bureau reported that real (inflation-adjusted) median household income in 2012 was $51,017. Unlike previous years, this income level didn't fall from 2011 (a small help), but it's no higher than it was 30 years ago and 9% lower that it was in 1999 (a larger problem). The bleakest part of this Census report was that since the economy began recovering from the Great Recession in 2009, 95% of the economic gains have gone to the richest 1% of people. The bottom 75% of income-earners (roughly, families who earn less than $89,000/yr) are making considerably less than they had been, due to higher unemployment and stagnated wages.

In other words, economic inequality is still very much alive and growing in the US and making low-wage workers' lives that much more challenging. The US Gini Index[1] in 2010 was 46.9%. In 1990, it was 42.8%. Most recently, the US Gini Index was ranked 89 nations below (meaning more unequal than) Sweden's which was 23.0% and the world's lowest.  

What can be done about this? Economists are of several minds with regard to possible solutions^[2].

President Obama proposed in February that the Federal minimum wage be increased to $9/hr (by the end of 2015) and tying it to the cost-of-living. For liberal economists the minimum wage should have been raised some time ago, but better late than never. The current Federal minimum wage is $7.25/hr and has been unchanged since 2009. Consumer prices have increased 8.4% since 2009.

A higher minimum wage level would increase the income of low-skilled, entry-level workers who hold minimum-wage jobs. The current Federal minimum wage's annualized income is $15,080. The 2013 federal poverty level for a single person is $11,490/yr for a family of 2 people, it is $15,510.

The chart below characterizes these workers by age, education and employment. As you can see, 57% of low-wage workers have a high-school degree or less; just 3 types of employers account for two-thirds of all low-wage workers in the US.

In July and August, the Service Employees International Union (SEIU) organized a series of one-day "strikes" in numerous cities at hundreds of fast-food restaurants (there are no unionized fast-food restaurants) to call attention to the plight of low-wage workers, especially burger-flippers and service staff at fast-food emporiums. Many fast-food employees work part-time. An example includes Terrance, a man who earns $9.30/hr after working for eight years at a Burger King, plus $7.40/hr at his second part-time job at Pizza Hut. The SEIU action sought a new minimum wage for fast-food workers of $15/hr, which would be a 107% increase above the Federal minimum wage. The SEIU estimates there are 200,000 fast-food restaurants in the US. The current median pay for fast-food workers is $8.94/hr, according to the National Employment Law Project.

OK, with this discussion about burgers and fast-food, it's time for a one-question quiz: which city in our great nation has the highest concentration of fast-food restaurants? See this footnote for the answer.[3]

Would raising the minimum wage be an effective remedy for the real dilemma facing low-skill workers, including burger-flippers? It's possible, but unlikely to have much effect for 3 reasons.

First, the federal minimum wage isn't going to change. Unsurprisingly, the Congress hasn't considered or acted on the President's proposal. It has much bigger burgers to fry. Republicans, perhaps following their affiliated economists, traditionally have serious problems with any increase in minimum wage. Conservative, "market-driven" economists state that a higher minimum wage will result in workers either losing their jobs or, as businesses adjust, hiring fewer, higher-cost, low-skill workers.

Unless you're Rip Van Winkle, you're all too aware the Republicans control the House of Representatives, so any House bill to raise the minimum wage is dead before arrival. And from their decidedly other-worldly perspective, the extreme Republicans (ExReps) who now seem to rule the House despite their small numbers (talk about minority rule), are more focused on drastically cutting funding for food stamps, defunding the entire Federal government (by not passing a "clean" authorization bill by October 1^st) and not raising the public debt limit.

Because the ExReps will do nothing to change the Federal minimum wage, state and local authorities are acting. Eighteen states and the District of Columbia have higher minimum wages than $7.25/hr. California Governor Jerry Brown just signed a bill to raise the CA minimum wage to $10/hr by 2016; that would be the highest State minimum wage in the nation. In June, the City of Berkeley began considering the establishment of a city "living wage" modeled on San Francisco's living wage that is now $10.55/hr, the highest in the US. Being Berkeley, it's not if the City Council passes such a rule, but when.

States have revised their minimum wage laws, but it's a piecemeal action that can only help low-wage workers living in those jurisdictions. Localities, like Berkeley, can do the same thing on a more micro scale. A potential consequence is that if the minimum wage increase is large enough (California's change represents a 25% increase over several years), firms in those areas may decide to lay off now-higher cost workers or not hire as many in the future. Or firms can hire workers in other locations not subject to the new wage. Some businesses have long complained that doing business in California is more expensive than other states. A new, higher CA minimum wage will exacerbate this. Employers like hotels, restaurants and retail sales – who employ a disproportionate number of low-wage workers – may be more incented to hire in areas that aren't subject to the higher wage requirements.

Second, unemployment still remains a significant concern for workers, especially young, low-skilled workers. Teenage unemployment is now 22.7%, more than 3 times as high as current overall unemployment of 7.3%. Youth unemployment (16-24 year olds) is 16.3%; unemployment for 25-35 year olds is 25.8%. These unemployment rates have been lowered marginally over the past year, not because more young people have found jobs, but rather because people have dropped out of the labor market and are no longer actively looking for work. This withdrawal from the labor market is reflected in the labor force participation rate (LPR). For youth, the LPR is now a depressing 60.5%; the LPR for all workers over 16 is a grim 63.2%, the lowest rate since 1978.

From a market perspective, this combination of historically above-normal unemployment rates and historically below-normal labor force participation rates means there are many low-skill workers who are potentially available now for employment who aren't working at all (or as much as they want). Unlike more competitive labor markets for skilled- and highly-skilled-employees, low-skilled labor is not in short supply. The world's supply of low-skilled workers is rapidly growing, even in the US.

 Although burger-flippers need to know how to operate several restaurant appliances, and service employees need to know how to operate a cash register and interact properly with customers, these skills are not rocket science. Restaurants' training efforts easily cover these job requirements. Low-skill labor's wages are dwindling in large part because low-skill labor is widely available and quite substitutable with other, unemployed workers. It's a buyer's market.

Beyond burger-flippers and in this age of globalization, low-skill wages for manufacturing ultimately aren't set in Oakland any more than in Milwaukee or Little Rock, they're influenced by international forces. [See my "Maddie and the Machine" blog.] There are a lot of Bangladeshis who are willing to work for a lot less than $7.25/hr. [The current minimum wage in Bangladesh is $38 a month, which is $0.24/hr.]

Thus, there isn't any strong market force pushing US low-skill wages upward. These current labor market conditions make it unlikely that the SEIU's goal of having burger-flippers receive $15/hr will be met. But what if burger-flippers were to earn$10 or even $15/hr; what might happen?

This question leads to the last reason for questioning how much effect a higher minimum wage might now have for low-wage workers. This reason is more strategic and involves technological substitution of capital (in the form of new machines) for labor. It is a centuries-old, continuing process that made an indelible, irreversible mark during the Industrial Revolution.[4]

For much of our history, the US was labor-poor. That is, although the nation enjoyed impressive natural resources, labor was relatively scarce. One can easily argue that seminal technological inventions like the cotton gin (1793) and mechanical reaper (1834) were introduced to improve labor productivity, given that workers were relatively scarce. New technologies like these and many others eventually reduced the need for many low-skilled laborers in many industries. Over time manufacturing, agriculture and other business activities became less labor-intensive and more capital-intensive. Fortunately, technological change, combined with robust economic growth, also created other opportunities for displaced workers. That's not today's situation; GDP grew less than 2% this year.

During the past 20 years, textile and apparel manufacturers in the US have suffered enormously as markets were lost to lower-cost foreign producers – due in part to far cheaper foreign labor costs, those Bangladeshis, for example. Since 1990, US apparel manufacturers have lost 81% of their capacity and 85% of their jobs. However, a few US textile-apparel manufacturers now have made a come-back – by employing far more technology (e.g., capital and machines) and far fewer workers. Like other industries, modern manufacturing has become much more capital-intensive, thereby requiring higher-skilled workers.

If the recent labor actions at fast-food establishments were to surprisingly succeed in significantly raising wages, I wonder that after a few years, well-capitalized employers (in 2012, MacDonald's Corp had $27.5 billion revenues; Burger King had $1.97 billion in revenues) would start using robots instead of higher-cost human beings in their restaurants. Big Macs and Whoppers could be made and served by ever-smiling McDrobots that don't need to get paid.

Do fast-food consumers want low prices or are they willing to pay more to keep receiving their orders from real humans whose wages may be increased by government fiat? In the realm of 99 cent meals, price probably dominates. It wouldn't surprise me if fast-food firms have explored automated possibilities. Such capital-based automation would echo similar strategies that have already been implemented by many firms like automobile, mobile phone, computer and steel manufacturers to name just a few.

So what are low-skilled workers to do? These workers' living needs are increasingly unattainable with their minimum-wage earnings. Raising the minimum wage by statute at a time of elevated unemployment seems warranted but may not be effective. Should federal and state governments improve and broaden their worker training programs to better prepare these low-skill people for productive, remunerative jobs? Yes. Training/re-training programs could help, but don't always have strong performance records. Should more money be spent on vocationally-oriented education? Yes. However, more federally-funded programs for training and education is going to happen no sooner than when the federal minimum wage is raised. That is to say, not until the House gets a Democratic majority. Don't hold your breath.

I believe the most fruitful way to help low-skill workers is to get the US economy growing again emphasizing labor-intensive infrastructure investment and more equitably sharing the benefits of such increased investment. The ExReps are unlikely to buy into the equitable sharing part of this. But if they somehow step out of their twilight-zone reverie for a moment – admittedly a very long shot – perhaps when Ted's not Cruzing on Green Eggs and Ham, they might belatedly see the wisdom of enacting much-needed fiscal stimulus aimed at middle-class, low-skill workers that would benefit their constituents and the rest of us. Otherwise, we may be buying our future burgers from a smiley-faced McDrobot automaton.

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[1] The Gini Index measures income distribution inequality, where a higher percentage represents more inequality. A completely unequal income distribution would be represented as a Gini Index of 100% (all income would be earned by 1 individual). Thus, a lower Gini Index is considered generally better because it indicates less income inequality.

[2] Being of "several minds" isn't an uncommon condition for economists and prompted George Bernard Shaw to note, “If all economists were laid end to end, they would not reach a conclusion."

[3] And the envelope please: it's Las Vegas. Five points if you guessed correctly.

[4] There was no definitive start date for the Industrial Revolution; many historians suggest it began in the late-18^th Century. A Farewell to Alms by Gregory Clark offers a fascinating, insightful assessment of this revolution's economic and social causes and effects.