Pensions in California Go Wild...

Pensions incentivize people to stay employed with companies for the long haul.  Pensions avoid relocation loss in efficiencies.  But what happens when pensions lead to the destruction of entire cities?

Steven Greenhut writes a piece about the current status of Stockton and its near bankruptcy run due largely to the heavy amounts of money due to government pension plans.  In the article, Greenhut states that there are 94 people who are currently receiving over $100,000 a year in their pension plan in Stockton.  That number is double the amount of a relatively similar sized city in California.  There are also 15,000 total Californians receiving $100,000+ pension plans, which take away a big question mark to where government money could be better off spent.

Now, this is all within Greenhut’s opinion.  It is true that these people who are receiving these luxurious pension plans have worked hard and deserve a solid foundation heading into retirement; however, the problem exists when we see the state of the economy.  It would seem logical that these numbers would be adjusted when times have changed in order to benefit the entire economy.  Instead, California is stuck with a few wealthy government retirees and tons of troubled civilians in the rest of the state.  Balance within the economy is the crux to a successful state, and unfortunately, this isn’t benefiting anyone in the long run.

While it seems largely unfair to strip retired government officials from their golden parachutes (to some degree), our government should be reevaluating the way that pension plans are structured in the future.  If we are giving the same rates that have been offered in the past, we will never be able to dig ourselves out of this crisis in the future.  Yes, creating flexibility in pension plans would be violating the exact reasoning the plans themselves are typically established, but in times of uncertainty, it is difficult not to readjust. 

Take for example quantitative easing.  If we hadn’t been able to print more money to try and stimulate our economy, the United States would have crashed and burned so hard that we would still remain in a recession.  

There is always a need to reevaluate situations and adjust to the surrounding environment.  Sometimes this occurs at huge costs, but as long as the benefits are higher, especially for the long run, we must be willing to sacrifice for the greater good of the country.       

Reference:

1. Greenhut, Steven. “If Stockton is Broke, Then Why Isn’t San Diego?” Bloomberg. http://www.bloomberg.com/news/2012-03-02/if-stockton-is-broke-then-why-isn-t-san-diego-steven-greenhut.html

China Manufacturing Growing... Yet the GDP Slows

After writing quite a bit over the past few weeks about US manufacturing and the current boost of growth, I figured to see how our great rival of the eastern hemisphere was fairing in the same industry.  Bloomberg reported last week that China had received an increase in manufacturing for the third straight month.  This comes at the same exact time as US manufacturing has taken a sharp rise over the same time.

However, there is a problem that seems to be following both China and the US.  Both countries saw a decrease in growth in GDP this past quarter.  This could be a sign that the economy, at least for the US, is not quite at the level we have been expecting since quarter 3's promising numbers.  China is still growing at an 8.9% rate, far above the United States, but economists believe that the market is likely to slow down even further.  Economists predict the first quarter growth rate should be around 8.6% in China.

I predict that China is going to continue to grow throughout 2011, however, at a far slower rate than expected. With the rising wages in China, companies are always looking to find ways to save on wages and move to places with the technology capable of doing business at the lowest cost.  With these wages comes more growth in human capital, which China has needed to transcend past the agricultural and more rural development that harbored much of the GDP in the past.

What should be interesting is seeing  how China reacts to the lowered growth in GDP.  Like the United States, I don't believe that the manufacturing is going to play a huge role in the growth of the Chinese economy.  But they do send some shocks through the markets and offer consumers faith to invest in the market.  I don't believe that China and many of the eastern Asian countries have experienced the intense recession that the rest of the world has dealt with.  This may become a problem, as the closely woven global economy seems to leave no prisoners as nations begin to fall.

References:

1. "China Manufacturing Improves for 3rd Month". Bloomberg News.

The Times Brought Back for Uncle Sam

 The American economy is on the rise, but a question that has loomed is how long can we hold onto this success?  Well, one way we can attempt to find these answers is to look at the damage that has already occurred to our economy (and others).  The Economist reported on data and created the Proust Index, a measurement that factor in real wages and unemployment, financial asset and property prices, and household wealth.  The Proust Index shows how much time has been lost in economic growth, and the results were not good.  America holds the third worst position, facing 10 years of lost time.  In the stock market itself, the S&P 500 hasn’t seen the levels currently since 2008, and the growth on average since the 1990’s is minimal.  The article states that Greek stocks were actually worth more in 1992 than today.  Yikes.

The data provided by the Economist show that the value in people’s houses would be equivalent to those in 2001.  With these numbers, what hope do we have to believe that we are truly climbing out of the Great Recession?

One perk can be seen in the growth rate the stock market has experienced over the past year.  In the past, there have been some devastating hits to American and other stock markets.  The Economist has provided a graph to show the amount of time until recovery for 3 recessions, including our current predicament.     

As one may be able to see, stocks are looking better than previous scenarios; however, this comparison shows that we may not necessarily be out of the woods quite yet.  The market is quite unpredictable, and the trends in the past show that even though there were promising climbs at points in recovery, the effect of the business cycle (or attempts to prevent lowered growth) may push the stock market down into a longer period of recovery.

                                                                                                                                               

I believe that America has a lot of things going for it right now; however, I still find a lack of stability in the long run for our country.  While we may be able to reach the peak from 2007 in the S&P 500, we may find ourselves quickly dip down soon after.  When recessions hit countries, the amount of damage economic growth becomes a number that is nearly impossible to catch up to, and truly paints an image of the economy turning back the clocks to redo the mistakes made along the way.

Reference:

“The Proust Index”. The Economist. http://www.economist.com/node/21548255

Handling Hidden Costs

As we live our lives, there are tendencies to overlook the costs of our actions.  In the blog “Unsettling Economics”, the discussion of hidden costs in society is mentioned, and made me think about the costs we overlook in everyday life.

In the post, the example used was a murder by a war veteran claiming trauma.  The point made is that the costs of war didn’t account for the effects seen in this scenario.

Hidden costs in everyday life I feel many people overlook include grocery shopping.  Suppose you are looking to go to the store, and there are three choices: the local market across the street, the Albertsons 10 minutes away, and the Costco 25 minutes away.  You realize that the prices of goods at the places get cheaper as you go further from your home, but there are actually some hidden costs you and others likely forget to factor into the decision making process.  For the Albertsons and Costco, going to either of the two locations for a discounted gallon of milk and some pasta may not be worth the costs (including gas and valuable time) of getting to the store.  Furthermore, Costco puts a barrier to enter the store, and the costs must be factored in for each time one attends the bulk store.

So what do we do to attempt to counter the hidden costs? We try to buy more to make the trip more valuable.  But in doing so, Albertsons and Costco get what they want from you.  While you may not have fallen for the hidden costs that typically shape the initial journey to the market, you have exceeded to purchase products that may not have been necessary.  Instead of buying the milk and pasta, you purchase Oreos, beer, and some plastic cups.  Hidden costs surround us everywhere we turn, and if one is not careful we will fall into the same trap over and over again.

On the macroeconomic level, a hidden cost that can be pointed out and not necessarily accounted for until it is too late comes when forecasting models.  Because of the art of using ARMA, specifically trying to accurately forecast data via historical figures, the attempts to rely heavily on historical data can be overlooked.  The costs, while in the previous example were merely a few dollars, could result in heavy swings among the economy as a whole.  The recognition of the harm in improper forecasts is important for economists in order to build faith among Americans and to bring stability to the economy.

The article, while short, really opens the mind up to the hidden costs we forget about every day.  So take some time to think of something that you may overlook, and really ask yourself what we could be doing to accurately choose the right decisions, where the costs never exceed the benefits.

References:

1. “Class, Pschology, and Capitalism”. Unsettling Economics.

Social Norms and the Effect on Forecasting

Perception always plays a large part in how people interact with one another.  The damage or gains those perceptions or the norms developed by society play an interesting part in today’s economy.  Understanding Society writes about the layers that people place on society, and how any stereotype will affect the perception (and potentially the outcome) of the act by another person. 

The concept is simple enough.  For my behavioral economics course, I have been reading Predictably Irrational, by Dan Ariely, which discusses the tricky nature of social norms.  People build these standards that would otherwise be unheard of; however, we have programmed ourselves to believe that the certain activities are true. 

An example would be connecting the bail out of Ireland in 2010 to Angela Merkel’s statements prior to the bail out.  Merkel, the Chancellor of Germany, spoke out to the EU and investors that Ireland (who at the time was struggling economically) was going to fail if Germany and the rest of the EU didn’t bail them out.  As predicted, the Irish economy collapsed.  But was the reason because of the actual instability of the economy or the perception of the economy?

Economists post bail-out believe that the perception of a bail out was enough to push investors over the edge.  Calculations made and data show that Ireland was easily self-sustainable for at least 6 months, but was unable to recover when investors wanted out.  Combined with the words from a powerful figure, the situation is merely a reaction from an action.  Is this good for our society?  In this case, it is easy to say no.

But when we look at the situation from the other side, the recent growth in the US economy could be attributed to big talk from large access points.  Certainly hearing Clint Eastwood tell one that the US is fighting back would help convince Americans that the US economy is on the rise, and numerous reports by CNN and Bloomberg supporting job growth and unemployment decrease can convince investors that it is time to invest in the US once again.  I find that the presentation to the public on these matters is really the crux to the short term growth.

Remember that most economists and America were convinced the housing bubble wasn’t a bubble, and the effects of overinvesting in the economy.  One can be certain that the market itself can certainly be disguised by the perception and layers that society presents at a domestic and global level.

References:

1. Ariely, Dan. “The Costs of Social Norms”. Predictably Irrational. 
2. “Social Subjectives”. Understanding Society. http://understandingsociety.blogspot.com/2012/02/social-subjectivities.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Understandingsociety+%28UnderstandingSociety%29

Part 1 of 3: Big Steps to Baby Steps for Greece's Economy

Greece is finally making progress.  After two days of rioters (around 15,000) protesting the current stance in Greece, austerity has been planned in the first of three steps to a second bailout in three years.  CNN has reported that Greece will now move forward to avoid a 14.5B Euro bond default due in March.  As of now, the total amount of debt is 130B Euro.  Prime Minister Lucas Papademos believes the austerity package will push Greece out of its problems.  However, this comes at the cost of potentially 15,000 state worker's jobs, lowered budget, and a 22% reduction in wages.

With the second bailout in the last few years, many question whether Greece should jump ship and leave the Euro.  Chief Global Economist Erik F. Nielsen reports the dangers that would follow Greece if they try to leave the Eurozone.  Nielsen believes that in the short run the EU will be harmed, however, can overcome the loss in the long run.  Greece is a different story.  He believes they will struggle to recover in both scenarios, and the short run will cause a further drop in Greece's economy. 

For the EU, short run struggles would make sense if Greece chose to leave.  With countries (including Germany) putting tons of credit to support Greece bonds and investments, the picture of not getting paid back would create shocks throughout Europe and the global economy.

It should be interesting to follow up on the next two parts of the bailout process. Greece may almost come out of the woods, but with Italy, Portugal, and Spain experiencing economic woes, we likely haven't seen the end of the Eurozone crisis.

References:

1. Stoukas, Tom. “Rioters Burn Buildings as Greek Parliament Votes on Cuts”. Bloomberg. http://www.bloomberg.com/news/2012-02-11/papademos-appeals-to-greeks-on-eve-of-vote-as-party-leaders-back-austerity.html
2. Rooney, Ben. “Greek Parliament Approves Austerity Package”. CNN Money. http://money.cnn.com/2012/02/10/markets/greece_vote/index.htm

Don't Run Out of the Tunnel Yet...It's Still Halftime

Super Bowl Sunday is a holiday in America, and with that, comes tons of presents thrown our way: new commercials!  While many of the commercials were silly, or played off the most recent trends in pop culture to date, other commercials attempted a more serious edge.  The one that caught America’s and my own eyes in particular was the Chrysler “It’s Halftime America”, featuring Clint Eastwood.  The commercial is commentated by Eastwood to tell the same tale of Detroit’s struggles through the Great Recession, and how Detroit along with all of America is ready to push forward and “play the second half” (a.k.a. bring the economy back to what it should be).  Check it out:  

As I watched this commercial, I believed the greatness of the marketing that Chrysler has managed to capture in recent years during Super Bowls, but as a budding economist, I am skeptical of the tale Eastwood speaks.

Let’s first look applaud the tremendous decrease in the unemployment rate in the Detroit Region.  As you can see below, the unemployment rate once reached as high as 16.6% in July 2009, and now stands around 9.6% (Bloomberg).  The numbers are truly incredible, and for that, I will state I never imagined Detroit would return to a level hovering around the average national unemployment rate.

                            

All seems to be heading in the right direction, but could the drop in the unemployment rate in Detroit and surrounding areas be too good to be true?

But a bigger question needs to be asked: what caused the improvement in the Detroit economy?  Well, surely we can look at whom else but Chrysler, the company responsible for such a powerful ad at America’s largest sporting event.  What the commercial proclaims is that Detroit is now up and running thanks to the power of manufacturing in the Motor City.  After looking at the statistics over recent months, I was hardly impressed by the standards being set by the large corporation.

The manufacturing employment has certainly gone up in the past year, but the growth rate just doesn’t seem to reach the acclaimed values Chrysler holds for the Motor City.  

While we can see from FRED that the manufacturing employment in the Detroit area has increased since the plummet over the past decade, the growth level is nowhere near what it should be to see a significant effect that could turn Detroit into the once booming metropolis.  In fact, I would argue that Detroit will never get to this point again.   

What I mainly want to point out was the data found in the US Census Bureau last March.  Over the past decade, 25% of Detroit’s population left the Motor City.  At 713,777, the population was the lowest since the 1910 census (CNN).  As stated above, the peak of unemployment in Detroit occurred around July 2009.  Since then, there has been a consistent drop in the unemployment rate. 

After seeing the marginal growth in manufacturing employment, I believe the main cause for the drop in unemployment is heavily skewed by people moving away from Detroit, especially in the last couple years, and a high amount of people who dropped out of the unemployment rate candidacy. 

The city of Detroit has been in an uphill battle for over a decade.  Due to poor job growth, the dying manufacturing industry, and many poor policy decisions (that can be discussed on another day), Detroit is still beaten up and bruised far beyond a multi-million commercial can explain. 

Perhaps Clint Eastwood has me pinned.  I haven’t seen the Motor City that he knows and sees.  But the truth is that the growth just isn’t there for Detroit and the manufacturing industry in America.  The bounce back, while noticeable, isn’t showing signs to bring the once flourishing economy back to the Motor City. 

For those ready to see some touchdowns scored in the second half of the game this year, please don’t be too disappointed, Madonna and Cee-Lo are still lip-synching on stage.

References:

1. “Chrysler Super Bowl Commercial”. http://www.youtube.com/watch?v=tFAiqxm1FDA
2. “Detroit Loses a Staggering 25% of its Population in a Decade”. CNN. http://articles.cnn.com/2011-03-22/us/michigan.detroit.population_1_census-figures-mayor-dave-bing-undercounting?_s=PM:US
3. “Eastwood Heralds Detroit’s Revival in Chrysler Super Bowl Ad”. Bloomberg. http://www.businessweek.com/news/2012-02-06/eastwood-heralds-detroit-s-revival-in-chrysler-super-bowl-ad.html
4. Manufacturing Employment in Detoit-Warren-Livonia, MI. FRED. http://research.stlouisfed.org/fred2/series/DETR826MFGN
5. Unemployment Rate in Detroit-Warren-Livonia, MI. FRED. http://research.stlouisfed.org/fred2/series/DETR826URN

Should the City of Indianapolis Keep Peyton Manning?

The Indianapolis Colts organization forever changed in the 1998 NFL draft when the team selected Peyton Manning as the number 1 overall pick.  The organization, though, wouldn’t be the only party affected by Manning.  The city of Indianapolis would experience a huge boost in their economy and the overall perception of the city itself. 

As of today, the GM Jim Irsay has strongly hinted towards not resigning the Hall of Famer due to age and injuries over the past 2 years.  While this may seem like the wise decision for the team’s win percentage, what will occur to the economy that has built up since the success of the colts as an organization?

Bloomberg Sports has reported the current status of the Manning-Irsay conflict, and that nothing is set in stone with where Manning will be playing next time in September.  But what’s most interesting to look at is the effect that a football organization can have on a city in the United States.  The primary key to this organization over the past decade has been Peyton Manning.  Manning, who brought a Super Bowl championship to Indianapolis in 2008.  This influenced the NFL to host the 2012 Super Bowl in Indianapolis thanks to the mass consumer interest developed in the surrounding region.

Below is a table that can support the influence of the success that Peyton Manning has brought the Colts organization.  Because of the success, NFL officials chose Indianapolis as a location unique to many of the previous locations.  Over the past 20 years, there has been a trend to locate the Super Bowl in a desirable place to not only play football, but to vacation.  Only 2 (including 2 coming in the future) locations have been located in the Northern portion of the United States.  Why may this be?  Weather certainly has a great deal in choosing the playing field; but the real key is the fact that the NFL wants the Super Bowl to be at a location where anybody, regardless of team loyalty, would want to visit to have a great time.  Indianapolis breaks the traditional mold.  While the venue is located in a dome, the city is about to experience great revenue for the desired interest in fans who are willing to make a trip to not only the Super Bowl, but for the aesthetics of Indianapolis itself.

 

What effects does hosting a Super Bowl have on a city? College of the Holy Cross did research on the topic, and were able to find that the economic impact created by the Super Bowl has minor positive effects, if not affected.  However, there is no proof against the Super Bowl creating economic shrinkage.  In my opinion, this backs my sports marketing background, in which the NFL in itself is less successful than many think.  But the implications of bringing in approximately $500 million of revenues into the city thanks to the Super Bowl are a good short term exposure. 

I would say that the chances that the Super Bowl comes back to Indianapolis will be far in the future.  The organization is going to undergo a complete overhaul if they get rid of Manning.  My belief is to stick by their quarterback through and through, the one who brought the team to glory.  The one who brought economic value to the organization, and partial responsibility for the current state of Indianapolis.

References:

1. "List of Super Bowl Champions". Wikipedia.  http://en.wikipedia.org/wiki/List_of_Super_Bowl_champions
2. Levinson, Mason. "Peyton Manning's Neck Surgeon Clears NFL Return as Colts Say Not So Fast". Bloomberg.  http://www.bloomberg.com/news/2012-02-03/peyton-manning-s-neck-surgeon-clears-nfl-return-as-colts-say-not-so-fast.html
3. Matheson, Victor A. "Economics of the Super Bowl". College of the Holy Cross.  http://college.holycross.edu/RePEc/hcx/Matheson_SuperBowl09.pdf