GAS MATH

The Republican contenders for president, Newt Gingrich in particular, have been attacking President Obama for not doing enough to bring down oil prices. This sounds great on the campaign trail, but it doesn’t have much to do with economic reality.

Current world oil consumption is 80 million barrels per day. The US consumes 21 million barrels per day, or approximately 25% of world consumption. Current projections are that world consumption will increase to 100 million barrels per day in the next decade, but that US consumption will remain the same or may decline slightly, so we will consume “only” 20% of world consumption. (Just to put things in perspective, the US population is approximately 5% of world population.)

Current US oil production is 9.5 million barrels per day. (We export 1.9 million barrels per day, but that is largely refined products, not crude oil.) We have to import 13.5 million barrels of crude per day to make up the net difference. (At $100 per barrel, that comes out to 1.35 billion dollars every day that flows out of our country – just to buy oil.)

Approximately 60% of the price of gasoline is entirely controlled by the world market price for oil. A barrel of oil is 42 gallons. If oil costs $100 per barrel, that translates to $2.38 per gallon just to buy the oil. (Crude doesn’t all cost the same. I checked today and West Texas Intermediate Crude was selling for $106 per barrel. North Sea Brent was selling for $123 per barrel. At $106 per barrel, that means the gasoline costs $2.52 per gallon just to buy the crude oil. At $123 per barrel, it costs $2.93 just to buy the crude.)

The remaining 40% of the price of gasoline basically consists of transportation costs, refining costs, state and local taxes, advertising and other corporate expenses, and corporate profits.

Transportation costs include the cost of transporting crude oil to the refinery and the cost of transporting gasoline from the refinery to the gas pump. Obviously, transporting crude oil from the Middle East to US refineries costs more than transporting crude oil from west Texas to Port Arthur, Texas. But, and pay attention here, by far the largest single source of US oil imports is Canada, not the Middle East. Mexico and Saudi Arabia are in a near tie for second. (Nigeria and Venezuela round out the top five.) The largest sources of US oil imports are our next door neighbors here in North America, not “countries that hate us” in the Middle East.

Refining costs depend primarily on the quality of the crude and where the crude is located in the ground. Oil shale is much more costly to refine than the benchmark “light, sweet crude” that comes from the Middle East or “intermediate crude” from Texas. (Less impurities, lower sulphur content, etc.) Oil that comes out of a well deep under ground and deep under water is far more expensive to produce and transport to a refinery than oil that is near the surface on land.

Taxes can be as much as 68 cents per gallon. For instance, state taxes are currently as high as 49.6 cents in Connecticut and as low as 8 cents in Alaska. The current federal tax rate is 18.4 cents per gallon.

I’m not sure why oil companies see the need to advertise so much. I buy my “gas” at Shell because I drive a large diesel truck and in Texas, Shell stations sell diesel. There is a Shell on the way to my office (and on my way home). I have no particular love for Shell, this is just a practical reality for me. Advertising by oil companies has no effect on where I buy my fuel, but they advertise (extensively) nonetheless. I know a lot of people who buy fuel on the same basis. (Decent price, near home.)

Don’t discount corporate profits. I am very much a believer in corporate profits. I own my own law firm. My profit is my paycheck, so the higher the profit, the higher my paycheck. BUT the oil companies make billions of dollars in profits which they pay out to their shareholders. The reality is those billion of dollars cost you at the pump.

 

The reason gas prices have spiked recently is claimed to be because of (1) disruptions in supply from the Middle East and (2) future uncertainty in the Middle East. The first reason appears to be largely a perception rather than reality. Oil supplies from the Middle East have seen no significant recent reductions. (Germany and France have indicated that they will stop buying oil from Iran, but they will buy it somewhere else and China will buy more oil from Iran. Oil is oil. It doesn’t come with a “Made in Iran” label.) The second reason is pure speculation and appears to be the real source of the recent increase in gas prices. (IF the US or Israel attacks Iran, it MIGHT interrupt the flow of oil from Iran, which is a significant but not a huge contributor to the world supply.) What has happened recently is that the price of oil has increased although the cost of oil is essentially unchanged.

Many of the Republicans have advocated a “drill, baby, drill” policy to increase oil production. Sounds good, but the amount of oil produced will be incremental and it won’t reach the pumps any time soon. Assume we approved drilling in the Arctic National Wildlife Refuge tomorrow. This is really, truly in the middle of nowhere. Hundreds of miles from the nearest roads. Which are only driveable in the winter, when they are frozen. (The rest of the year it’s too swampy to haul a rig across.) After you haul in the rig, you still have to build a small pipeline to get the oil from the well to the big pipeline. And you have to do it for each well. North of the Arctic Circle. Could somebody kindly explain to me how that is going to reduce the price of gasoline to $2.50 by the end of 2013? (Newt’s promise, although lately, he has been blaming Presidebt Obama because gas costs mor the $2 per gallon.

By the way, the number of operating rigs in the US is currently approximately 2,000. That is the highest number since – guess when – 1985. (When Ronald Reagan was president.) If “drill, baby, drill” is the plan, we are already implementing that plan. Also, by the way, the world rig count is about 3,750, also the highest number since 1985. The reason is simple – higher crude prices justify higher production costs. It has nothing to do with who is president – Reagan or Obama. (Or Gingrich, or……….)

Some Republicans have also criticized President Obama for delaying approval of the Keystone Pipeline which would run 2147 miles from the oil sands in Canada to refineries on the Gulf Coast of Texas. (I say “some” Republicans because Republican landowners in Nebraska are adamantly opposed to the pipeline. For them, it is a property rights issue.) Estimated time to completion (minimum) is three years. Reality is probably longer.

Republicans also advocate increasing offshore drilling both in the Gulf of Mexico and off the coast of California. California opposes this, by the way. (Whatever happened to state’s rights?) Drilling offshore also takes time. Once the government issues the leases, the oil companies have to evaluate the leases through seismic testing, then haul in the deepwater rigs, then drill, then build a pipeline to shore. (Unless they are going to haul it in tankers.) All of this takes time. (Like several years.)

The other issue is that none of these sources by themselves will result in a significant increase in world oil supply. Each of these sources will increase world supply by less than 1% when they come online. With that said, 1/2% here and 1/4% there and 1/6% over there, and we might increase world oil production by maybe 10%. 10% is definitely something to think about, but remember, world oil consumption is expected to increase 25 % (from 80 million barrels to 100 million barrels) in the next decade. The US simply cannot become oil independent by increasing production. We would have to increase production by 150% over current levels. There just isn’t that much untapped production out there. The cheap oil has all been discovered and has been produced or is in production. (Texas, the shallow Gulf of Mexico, the Middle East, Nigeria.) Future “new” sources of oil production will be in deep waters offshore, north of the Arctic Circle (Alaska, Canada, Siberia) or in “developing” countries with unstable political systems. (Nigeria is the poster child.)

So what can the president (not just President Obama, but any president) do to lower gas prices in the short run? He could ask for a temporary decrease in state and federal fuel taxes until the market price for crude drops. But Congress (and the states) would have to approve any such decrease and the House has opposed the temporary “tax holiday” for payroll taxes, so a tax holiday for gas taxes seems unlikely. The states are all facing budget shortfalls, so they are also unlikely to agree to a decrease in tax revenues. The second thing the president could do is release the oil stored in the Strategic Petroleum Reserve. That sounds good, but the Strategic Petroleum Reserve contains 30 million barrels of oil. 30 million barrels of oil sounds like a lot, but the US consumes 21 million barrels per day, so 30 million barrels is 1 ½ days worth of US consumption. (It doesn’t work like that. They might release 500,000 barrels per day, but that would only reduce our imports to 13 million barrels per day and it would only last 60 days.)

In the long run, the president can raise the CAFÉ standards for autos manufactured in the US. “CAFÉ” stands for Corporate Average Fuel Economy. President Obama has already raised the CAFÉ standards, by more than any other president ever. He also imposed “truth in advertising.” Until he changed the rules, the CAFÉ standards did not include trucks which typically get lower gas mileage, so “corporate average” stood for “corporate average, but not for all the stuff we make.” Big business always claims raising the CAFÉ standards will cost jobs, but since President Obama announced higher CAFE standards, GM posted its biggest profit ever in its history. (This is what we call a “disconnect.”) Raising the CAFÉ standards will do nothing to increase the supply of oil, but will decrease the demand for oil. The long term effect will be to reduce US oil consumption and imports, but world consumption will continue to increase, so gasoline prices will no doubt continue to rise, as well.

The real problem is that the US has never had any real energy policy in my lifetime. (Other than use as much as you want, whenever you want.) “Drill, baby, drill” is a slogan on a bumper sticker, not an energy policy. The Strategic Petroleum Reserve is a good idea, but it needs to be 300 million barrels, not 30 million. (300 million barrels is still less than a 15 day supply.) $2.50 gasoline is a campaign promise that will not happen. This is not the fault of the Republicans or the Democrats. Both parties have failed miserably on this issue. (Crude prices would have to drop to about $70 per barrel. Not likely given current and projected consumption.)

The truth is that the responsibility for this mess falls on the American people, because WE have not required our elected representatives to act on this vitally important issue. So what can WE do? There are several things Americans can do to decrease our dependence on foreign oil. None of them will be fun. Some of them will require actual “sacrifice.”

First, and by far the single biggest thing we can do, is drive more fuel efficient vehicles. The increasing number of hybrid vehicles is a good start. Electric cars (for people with shorter commutes) will also help. Higher CAFÉ standards (which phase in over time) will make a significant dent. But we also need to accept the fact that we don’t all “need” a Hummer or a Tahoe or an F-350. I understand that you need to haul kids to sports and groceries from the store and golf clubs to the country club, but a Jetta wagon will actually haul all of that stuff, and at double (or more) the mpg. We also need to get over the ego aspect of car ownership. It’s a car. It’s a means of transportation. You need it to get from point A to point B safely and on time. (If you need a car to prove your self worth, there is something wrong with your self worth.)

T. Boone Pickens, a Texas oil man, has been advocating for years that we switch from oil to natural gas where possible. He argues that natural gas is abundant here, so we don’t have to import it. We have huge reserves. The consensus is that the US has a 100 year plus supply. And natural gas prices are at a ten year low. The problem is making the transition. We don’t have the infrastructure to switch in any kind of a hurry, but Mr. Pickens has an answer for that, too. He suggests that we convert large fleet vehicles that get terrible mileage to natural gas. This includes 18 wheelers, school buses, and city buses. (Most of these vehicles run on diesel and get maybe 5 miles per gallon.) They are relatively easy and inexpensive to covert to natural gas. The infrastructure burden is less, because the school buses and city buses go back to a “bus barn” every night, so they could put in the fueling stations at the bus barns. 18 wheelers generally fuel at truck stops, not at neighborhood gas stations, so building the fueling capacity is manageable. The reality is that it will take time and there may have to be tax credits to “encourage” the transition, but it would result in a major decrease in oil consumption over a relatively short period of time. And it wouldn’t hurt our balance of trade, either. Remember, we spend $1,350,000,000 every day to import crude oil. (That’s almost $500 billion per year.) Not only does that number drop, but more of the money stays here. We would have to drill more gas wells. We would have to build pipelines to get the gas to a distribution facility. We would have to build new fueling stations.

In the interest of full disclosure, I drive a Ford F-350. I “need” a big truck because I own a ranch and I have to be able to haul a trailer, or fence posts, or….. I also own 11 kayaks (I teach lessons), and they won’t fit in the trunk of my Nissan Altima. (Which my son drives.) BUT, and this is significant, I typically drive less than 10 miles per day. It is three miles one way from my office to my house. The grocery store and Lowe’s are a slight detour, and I make an effort to stop on the way home from work. My truck gets terrible gas mileage (14 mpg), but if I only drive seven miles per day, that’s half a gallon in a typical day, or $2.

By the way, the cost of gasoline in most of Europe is $10 per gallon or more so most of the cars over there get closer to 50 mpg.

Michael Baumer

Republican double standard?

Two issues have come up recently in Washington that raise soem interesting questions.

Recess appointments

At the end of 2011, President Obama made several “recess appointments”, including to the new Consumer Financial Protection Bureau and the National Labor Relations Board. Republicans immediately went into attack mode, decrying the president’s use of recess appointments to avoid congressional approval. In the interest of fairness, let’s review how other presidents have used those appointments. Ronald Reagan made an average of 30 recess appointments each year, George H.W. Bush made 19 per year, George W. Bush made 21 per year, Bill Clinton made 17 per year, and president Obama made 9 per year. So,……… if we are going to criticize presidents for making recess appointments, let’s not forget that recent Republican presidents have used recess appointments far more than Democrats.

The real problem isn’t the use of recess appointments, it’s that Congress won’t give the president(s) an up or down vote on their nominees. (The National Labor Relations Board is supposed to have five members, but because the Senate wouldn’t give President Obama’s nominees a vote, it actually only had two members. They need three members to have a quorum so they can’t do anything with only two members. How long is this supposed to go on?) Rarely is the issue whether or not the nominee is qualified. Typically, the “issue” is that the nominee’s politics don’t match those of enough of the senators who have to “consent” to their appointment. Until senators of both parties are prepared to give nominees a fair vote based on their qualifications and not on their political affiliations, we will continue to have gridlock (and recess appointments) in Washington.  (The Republicans can complain all they want about President Obama using recess appointments all they want, but they do it, too.  Just saying.)

Virginia primary lawsuit

Rick Perry has filed a lawsuit in federal district court demanding that the State of Virginia place his name on the ballot for the Virginia primary on March 6, notwithstanding his failure to comply with Virginia state law, which is fairly onerous. Newt Gingrich, Rick Santorum, and John Huntsman have all intervened in that lawsuit seeking the same relief. Mitt Romney and Ron Paul are not part of the lawsuit, for the simple reason that they did manage to comply with Virginia law and their names are already on the ballot. Apparently it may be difficult to comply with the law, but it is not impossible.

The double standard here is that Republicans blather endlessly about “state’s rights” and that the federal government shouldn’t interfere in state law issues, which is certainly a legitimate position. The problem is that they advocate state’s rights until they decide a state is treating them unfairly, then they run as fast as they can to a federal court to make the state behave. I’m from Texas and we were our own country before joining the U.S., so we have a very strong sense of state’s rights. With that said, people need to take a position and live with it. If you truly believe that the federal government should butt out of state law questions, you don’t get to run to the feds when you don’t agree with the state.

Michael Baumer

<p align=”justify”><a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a></p>

What did we learn from the Iowa caucuses?

The results are Romney and Santorum tied at 25% each with Ron Paul in a close third at 22%. Gingrich finishes 4th with 13%, Perry 5th at 9%, Bachman 6th at 5% and Huntsman last at 1%. Bachman is now gone. Perry was almost gone, but now he is almost back. Romney is touting his “win”, but he only beat Santorum by 8 votes. (And actually got 6 votes less than he did in 2008.)

FYI, Romney spent $49 for each vote, Santorum spent less than $1 per vote. Also, FYI, the voter turnout for the caucuses was about 122,250. On a pretty day with no snow. (The weather can be a major issue in turnout for the Iowa caucuses.) The turnout in 2008 was about 120,000. On a cold, windy day. The fact that the Republicans could not turn out a higher number of voters on a pretty day with a fairly uniform “We have to make sure Barack Obama is a one term president” message might suggest something.

What’s next? New Hampshire. Romney wins new Hampshire hands down with around 50% of the vote. The big question in New Hampshire is who finishes second and third and do they get a real chunk of the vote. Romney gets 50% of the vote. The other 5 candidates split the other 50%. Does any one of them get 20% or 30%, or do they all get about 10% each? Paul fades fast. All of his focus and organization and limited money were in Iowa. (And he’s a nut. Abolish the IRS. Really? How does the federal government function without tax revenue?) Santorum is/was the Republican flavor of the week. And has no money. (Although his finish in Iowa may help in the short term.) And as Republican voters get to know him, they might not like him any more than they liked Bachman, Perry, or Gingrich once they were under the microscope. Huntsman (who is probably the smartest/most qualified Republican candidate, not that Republicans vote for smart people) basically skipped Iowa, but he will get less than 10% in New Hampshire. I don’t expect a breakout candidate in New Hampshire. If anybody other than Romney gets 15%, that will be a major “victory.”

South Carolina is next. Perry and Gingrich will both do well in South Carolina, assuming they are still around. (Gingrich in particular. Perry has lots of money. Gingrich does not.) Because they are both Southern boys, I have assumed they would stick around at least until after South Carolina because they might do well there. As long as Romney doesn’t absolutely crash and burn, he does okay. At this point, South Carolina looks like essentially a three way tie between Romney, Perry and Gingrich.

Florida is next. I see Florida as the toss up. In large part, the issue might be who is still left standing. (After New Hampshire and South Carolina.) I predict Romney wins Florida. Santorum could do well in Florida. Perry, Gingrich and Paul are way down the list.

Nevada is next. Romney wins Nevada hands down. Huntsman, Perry and Gingrich fight for a distant second. (Assuming they are still around.) If Romney isn’t the Republican candidate after South Carolina, he will be after Nevada.

But can any Republican candidate beat Barack Obama in November, 2012? Let me suggest that the fight in the Republican party helps Barack Obama in two ways. First, all of the Republicans attacking each other does some amount of damage, both to the individual candidates and to the party label. Second, the Republicans are spending a LOT of money fighting each other. Barack Obama is raising lots of money which he will be sitting on when the general election rolls around.

Chevron is Losing Money!?!?!?!

Chevron has been running a series of adds lately on the Sunday morning news and business shows in a transparent (at least to me) attempt to bolster their public image. One such add starts with an ostensibly (I would suggest obviously) blue collar guy saying “The oil companies make huge profits. Where does it go?” Then a pretty young lady comes on and says “Every penny and more went into bringing energy to the world.” (These are exact quotes. I played it more than a couple of times to make sure.) Sounds great – Chevron invests LOTS of money to bring energy to the world. But it isn’t exactly true. The guy is asking about “profits.” The girl says “every penny and more” goes into energy production. Really? Every penny of profit “and more” goes into energy production? That would mean that Chevron actually operates at a loss and does not make any profit. But that is not the case. Chevron and the other big four US oil companies are currently making HUGE profits. In part due to the artificially high cost of oil (due to speculation) and in part due to generous tax incentives provided to the oil industry. (Tax breaks that Congress voted to preserve even in these times of financial austerity.) And Chevron is paying dividends to shareholders – money they would not have if they were spending “every penny and more” to produce energy.

Like I said, sounds good – but does Chevron really think all of us are stupid enough to beleive it?

GOD BLESS DONALD TRUMP

Donald Trump recently claimed that he had accomplished what no one else had managed to do: force President Obama to release the long form of his birth certificate. The fact that this actually accomplished absolutely nothing (since only morons are unwilling to accept the established fact that Barack Obama was born in Hawaii) is beside the point. (Even John Boehner, who I have very little respect for, managed to take the high road on this one. When asked about the whole “birther” issue, he replied: “If the state of Hawaii says he was born there, that’s good enough for me.” Good for you, John Boehner.)

Donald Trump did actually manage to accomplish something no one else has been able to accomplish. Actually two things. First, Donald Trump established beyond any doubt that he is unfit to be president. (We all knew it, but he managed to prove it all on his own.) Once President Obama released the birth certificate, Donald Trump stated he would have to “review” the certificate to make sure of something unspecified. (Apparently, Donald Trump is also an expert on Hawaiian birth certificates, in addition to his many other talents.)

But to make it even more certain he is a moron, Donald Trump promptly criticized President Obama for not “doing something” about the situation in Libya to keep oil prices down. He didn’t specify what President Obama should have done or what events in Libya had to do with oil prices, if anything. Oil prices are high because of speculators in the oil market, not because of events in Libya. Events in Libya are an excuse for the speculation, not an explanation for high oil prices. Libya produces about 1% of the oil on the world market. Norway sells more oil than Libya. Should President Obama do something about the situation in Norway, too? What, exactly should he do, Donald, about the situation in Libya? (Or Norway?) Please be specific. I am confused. Perhaps I am simple. I need elucidation. (Sorry for using big words, Donald.)

Donald Trump also managed to prove how venal he is by his subsequent announcement that he is not running for president. His stated explanation was that he as not prepared to leave the private sector. So much for public service. All of his real estate holdings could be placed in a blind trust. (He doesn’t actually manage his real estate holdings – people who can do math do that for him.) Donald Trump declined to run for president because he would have had to give up Celebrity Apprentice to be president. Celebrity Apprentice or President of the United States. At least we know where public service falls in Donald Trump’s list of priorities.

Michael Baumer

<p align=”justify”><a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a></p>

State Budgets and Skyrocketing Unemployment

 

Every state in the U.S. is currently experiencing dramatic budget shortfalls. Unlike the federal government which can run budget deficits and/or print money (both of which the feds are doing on a massive scale), the states have to balance their budgets. (They can borrow money, but not like the feds.)

 

Because of the economic collapse in America, most of the states have seen significant decreases in tax revenue. If property values fall, so does property tax collections. If people buy less stuff, sales tax collections fall. If people are earning less, income tax collections fall. Another problem is that states have traditionally looked to the feds for funding for a lot of programs and the cities and counties have looked to the states. (43% of Medicaid funding administered by the states comes from Washington. The Department of Transportation doesn’t build roads – they send money to the states who hire private companies.) Because of the huge budget problems in Washington, there is far less federal money to give to the states and far less money for the states to give to cities and counties. (The new Republican leadership in the House campaigned on a vow to cut domestic spending by $100 billion this year alone. They are now scaling that back, explaining that we are mid-way through the budget year, but next year they really mean it.)

 

Last year, the states were able to use federal stimulus dollars totaling $135 billion to plug their budget loopholes. That money is gone and there isn’t any more coming.

 

One of the results of all of this will me huge increases in layoffs at every level of state, county, and local government, and related entities, like school districts. For instance, the Austin Independent School District (AISD) where I live has announced that they are going to layoff 530 employees, including teachers. The part they neglect to mention is that they are further reducing staff by attrition. (People retire or quit because a family member took a job somewhere else.) If somebody who is not essential leaves, they simply do not replace them. There is no number there, but add another 1,000 or so. And here’s the scary part – multiply that by almost every major school district in the country and what does it add up to?

 

According to the Center on Budget and Policy Priorities, 44 states are facing a combined budget shortfall of $125,000,000,000. (That’s billion.) That doesn’t take into account the under-funding of state, local, county and teacher pensions. Some of the state pension funds could run out of money in the next ten years. (I recently spoke to someone who works in state government here in Austin who tells me that the state is looking at eliminating 40,000 employees.)

 

In January, the “official” unemployment rate dropped to 9%. Many pundits took ths as a sign that the employment situation is improving. After all, 9% is lower than 9.4%. (The December number.) The problem is that the only reason the number dropped to 9% is because so many unemployed people’s unemployment benefits ran out and when that happens, we stop counting them. Its not like they got jobs or disappeared. They are still out there and still unemployed. When all the soon to be unemployed government employees get added to the unemployment rolls, the percentage will spike back up, but it will still be artificially low. And all of these unemployed people don’t buy as much stuff, so don’t expect the economy to start roaring ahead anytime soon. (Consumer spending is up, but that is due in large part to the fact that so many people are behind on their mortgages. 8 million and growing. If you don’t pay your mortgage, all of a sudden you have more money to spend on other stuff. Unfortunately, that can’t go on forever. But hat is the subject of another post for another day.)

 

Michael Baumer

<p align=”justify”><a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a></p>

ADP Blows the December Jobs Estimate

On January 4, ADP Employer Services announced that the US economy added 297,000 jobs in December. Most economists had estimated 100,000 jobs were added. The US Bureau of Labor Statistics will announce the “official” number on January 7. (Which is almost always revised about a month later.)

As consumer spending accounts for about 70% of the US economy, any significant increase in jobs is a positive sign that the economy is improving.

So, did the US really add 297,000 jobs in December? The answer is absolutely not. Best guess is that the US added about half that many jobs in December and the December numbers can always be misleading. How many of the December jobs were retail sales positions that will only last through Christmas? If you are looking for work, even a temporary job is better than no job, but to suggest that temporary seasonal jobs are evidence that the economy is improving is nonsense.

And remember, we need to add 120,000 jobs every month just to keep up with population growth.

Michael Baumer

 

<p align=”justify”><a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a></p>

The Obama/Republican Tax Deal

What are the key features of the tax deal?

-     The Bush tax cuts will be extended for two years. (Until the next elections in Fall, 2012. When we will get to do it all over again.)

-     The tax cuts will include everybody, including the top 2% of all Americans. (The Democrats wanted to extend the cuts for everybody but the top 2%. In true patriotic fashion, the Republicans in the Senate threatened to not allow any legislation come to the floor for a vote until the tax issue was resolved and they made it clear we had to protect the top 2% along with everybody else.)

-     Investment tax credits will be extended for certain socially responsible investments (i.e., solar energy, biofuels, etc.)

-     The employee’s share of the Social Security tax will be cut by 2% for 2011. For the typical working American, this will mean about $100 per month in additional disposable income. (The theory is that if we give somebody a check for $1500 they are more likely to save it, but if we trickle it out over the year they are more likely to spend it, thereby stimulating the economy.) The employer’s share – the part I pay for my employees – stays the same. (Where is my tax cut?) (Not to mention we keep hearing that Social Security is going to be in trouble in the next 10 years. If we are already going to need more money, why are we cutting what goes in now?)

-     Unemployment benefits will be extended by up to 13 months. (The “up to” is because not everybody qualifies. If you are in a state with low unemployment, you may not get the extension. The theory is that if unemployment is low, you should be able to find a job.)

-     The cost of all this? Between lost tax revenues and paying for the unemployment extension, about $1 trillion, in round numbers. (The lowest number I have heard is $850 billion, but what’s a spare $150 billion between us friends?)

One of the true ironies here is all the huffing and puffing and blathering the Republicans were doing before the November, 2010 elections where they kept telling everybody they stood for fiscal conservatism and by gosh and by golly, if they got elected, they were going to rein in Obama and the Democrats and their socialist agenda. I remember hearing a lot of “no new spending that isn’t paid for.” Except, of course, tax cuts and unemployment benefits. (The Republicans argue that the tax cuts aren’t “new spending.” Valid point. Intellectually dishonest, but a valid point.) And aren’t unemployment benefits “socialist”? (At least under the Republican definition of “redistributing wealth.”) The fact that they are popular and at least to some extent necessary doesn’t negate the fact that somebody else has to pay for it. (Redistributing.) And tax cuts for the wealthy and tax incentives for businesses, the stock of which are usually held by wealthy people, means that somebody else has to pay the taxes they would have paid. (Redistributing.)

Of course, the big joke is that nobody is paying for all of this. At least not yet. Our kids and grandkids will get to pay for it someday, but for now, the minions of big business who populate Washington and Wall Street are throwing a party and writing hot checks to cover the cost. The problem is writing hot checks only works for so long and then the consequences tend to be kind of nasty.

 Michael Baumer

 

<p align=”justify”><a href=”http://baumerlaw.com”>Law Office of Michael Baumer</a></p>

The Employment Numbers are Worse than You Think

Where are we? There are currently 15,000,000 unemployed workers in the U.S. Approximately 9,000,000 of them are receiving unemployment benefits, either from the states or the feds. (Many of them are about to lose their benefits, unless Congress passes the Obama/Republican tax bill, which will extend benefits for many unemployed people by another 13 months.)

 

We need to add 120,000 jobs per month just to keep up with population growth. Assuming we can add another 100,000 jobs per month on top of that (which hasn’t happened since 2006), it will take over 7 years to get back to “just” 5% unemployment. (This assumes that you accept the “official” unemployment rate of 10%. The real number is over 15%.) If we “only” add 170,000 jobs per month, it will take 15 years to get back to 5% unemployment. Where are all of these jobs going to come from?

 

The short answer is they aren’t going to materialize in any great numbers any time soon. For the last decade, most of the job growth in the U.S was based on the housing/construction industries. (And their kissing cousins, the mortgage lending and securitization industries.) Unfortunately, most of the job growth was the result of stupid fiscal and monetary policies which encouraged everyone to build, buy, and finance ever bigger houses and ever more junk to fill them. The end result was a credit bubble which generated a housing bubble which was unsustainable. We are now facing the economic reality that “build it and they will come” doesn’t work. (Am I the only one who remembers the S&L crash of the mid-1980’s? Remember all of the “see-through” office buildings? Same song, second verse.) Housing prices will correct to historical norms. (They always do. That’s why they call them historical norms.) And oh by the way, we aren’t there yet. Housing prices still need to fall another 10% or so. (More or less, depending on where you are in the country.)

 

With all of the houses that have been foreclosed on and will be foreclosed on and because lenders have actually re-imposed some semblance of minimal mortgage qualification (and because so many people are unemployed), the demand for new housing will be depressed for several years. The demand for all of the “stuff” that goes with buying a house will be depressed, as well. Those jobs aren’t coming back in any great numbers any time soon.

 

In addition, manufacturing jobs are still leaving the U.S. and will continue to do so. Face it. We can’t compete with China (and Vietnam and ……) on labor costs. Unless it is something that requires truly skilled labor, those jobs are leaving and they aren’t coming back. Even the skilled jobs aren’t going to pay as well as they used to. The deal the autoworkers cut with the big automakers provides for two pay tiers – one for the old timers and a different lower one for the new hires.

 

Where will the job growth come from? There has been a recent increase in private hires for construction, but part of this is state and local government construction projects being paid in whole or in part with federal stimulus dollars so those aren’t really “private” industry jobs. And there isn’t any more stimulus money coming. (At least not yet.) Unfortunately, one of the long term employment trends is that more and more of the new jobs being created are in the “service” industry, including retail, medical, and hospitality. The harsh reality is that those jobs are typically low paying and frequently provide no benefits like health insurance and retirement. I guess a crummy job is better than no job, but those folks aren’t going to be buying houses any time soon.

 

Another problem is that the unemployment numbers for some groups are substantially higher than for the country as a whole. Unemployment numbers for young black men are over 25% and even higher in some places. Unemployment numbers for recent college graduates are high (and getting higher) because no one needs them. (And college graduates are graduating with higher student loan debt loads. How are they going to pay those loans back with no job? Even if they get a job, will they make enough to pay back the loans and buy a house? More and more twenty-somethings are living with their parents.)

 

The U.S. is seeing a fundamental shift in the in the labor market. Things are changing, and not for the better for most Americans. Most of Western Europe has a semi-permanent underclass of un- and under-employed people, and their unemployment rates hover around 10%. Americans generally see 5% unemployment as “normal” or “acceptable.” We are going to have to accept the harsh reality that an unemployment rate of 5% is unrealistic, at least for the next decade (or so) and that the vast majority of Americans are going to be making less (at least in inflation adjusted terms) for several years to come. Merry Christmas.

 

Michael Baumer

 

 

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The “improved” March employment numbers actually suck

There are a lot of Wall Street types, and D.C. types, and talking heads out there who are claiming that we have “turned the corner” on the employment/unemployment problem in America. These people are smoking crack. We had a good month in March for new hiring, but those numbers are artificial. There were a large number of construction jobs added, but only because of bad weather in February which caused a reduction in construction jobs. The US Bureau of the Census has started hiring temporary workers to go door to door to count all of the people who didn’t bother to send in the form. (FYI, if you send in the form, it only costs 44 cents to count you. If they have to come to your house, it costs about $60. Send in the form already.) The census will result in about one million jobs, but they are temporary jobs and they don’t “produce” anything. And with the huge budget deficits, we still have to find a way to pay those temp workers.

 

Unemployment has dropped slightly and we are actually adding jobs instead of shedding them. That sounds like good news. Except we are adding population at the rate of 211,000 people every month. And we only added 162,000 jobs in March, so we are still adding people faster than we are adding jobs. And March was the best month in a long time. According to the US Bureau of Labor Statistics, there are 6.2 people for every job opening, The average workweek is 34 hours. There are a large number of employers who are instituting furloughs to reduce hours worked. (I guess 34 hours per week is better then laid off.)

As we head into the summer budget sessions for the cities and states, more and more of them will be faced with hard choices which will include hiring freezes, furloughs, and layoffs. San Francisco and Los Angeles have already announced significant cutbacks. San Francisco has laid off 15,000 employees and Los Angeles has announced plans to close all non-essential offices two days per week. The State of California has announced plans to significantly reduce its prison population. Many states have already announced similar plans to cut prison expenses (Typically, by early release of prisoners who are perceived to pose the least risk.) Many states have also announced plans to cut education spending, including laying off teachers and staff. Many districts have announced plans to close smaller schools to consolidate operations. Infrastructure projects that are not being paid for with federal stimulus dollars are being put on hold.

The federal government is also cutting back on support for the real estate market. No more tax credits for first time home buyers. No more government purchases of home mortgages. Those programs were designed to support the housing/real estate/construction industries. Like it or not, interest rates are going to have to start going up. Maybe not much. Maybe not real soon. But it is going to happen. Then what happens to the real estate market? If interest rates go up, refinancing stops. If interest rates go up, you can’t afford as much house because the payment will be higher. If the government isn’t out there propping up the market, loans will be harder to qualify for, which means less people will qualify for mortgages and many of the people who do qualify will qualify for a smaller amount which means they have to buy a cheaper house.

Since the current recession started, the U.S. has shed over eight million jobs. It is going to take years (I predict more than five) to get back to same employment levels as 2006 and in the meantime, we will have added twelve million additional people, most of whom will want jobs. If we turned a corner, its into a very bad neighborhood.

 

Michael Baumer

 

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by Michael Baumer