This post is meant to be a companion piece to my previous post, particularly in regards to why it is that the economy has lost so much of its growth potential.
The second chart shows the labor force participation rate (i.e., the ratio of those working to the working age population).
To me, the interpretation of these charts is obvious: when the government pays you more for not working, you get fewer people working. Fewer people working means a smaller economy, and that goes a long way to explaining why it is that the current outlook for future economic growth is grim, as I explained in my previous post.
Corollary: As government spending consumes a greater portion of economic output, economic growth becomes weaker.
Like most things, there is too much and too little.
ReplyDeleteThe challenge is striking the right balance and getting it perfect.
Typo:
ReplyDeleteFrom: Thanks to government edits
To: Thanks to government edicts
Bob Wright
Scott,
ReplyDeleteDo you know or have a link to the ages of people included in:
the ratio of those working to the working age population
i.e. What is the age group of "the working age population?"
Thanks. Great post.
Bob Wright
bob: I don't know offhand, but I assume it's people 16-65. If I find out for sure, I'll "circle back"
ReplyDeleteThanks for the edit!
Andrew: Good point. I'd argue that we are not in the "right balance" zone at present. We've got too much government spending, too much regulation, too much censorship, too much taxes, too many bureacrats, and too much wokeness.
ReplyDelete"To me, the interpretation of these charts is obvious: when the government pays you more for not working, you get fewer people working."
ReplyDeleteIt seems you are putting the cart before the horse.
Government pays you when you are no longer working. That is, unemployment rises (and the LFPR falls) before the transfer payments begin.
I thought that was obvious and common knowledge.
Also, your first chart shows a steady rise over several decades. Your second chart shows a camel-shaped hump peaking in the middle of the chart. In fact, from 1970 to 1999, both transfer payments rose while the LFPR also rose. This kills your argument that an increase in transfer payments leads to a decline in people working.
"To me, the interpretation of these charts is obvious: when the government pays you more for not working, you get fewer people working. Fewer people working means a smaller economy, and that goes a long way to explaining why it is that the current outlook for future economic growth is grim"
ReplyDeleteI'm gonna file that under ideological thinking/intpretation of data.
The economy would be a lot smaller if the govt didnt give these people any cash, then a lot more businesses would suffer.....cause they spend the cash somewhere dont they ???
No jobs and no money means people starve, less innovative, creative, more stressed or revert to criminal activity. How does that help the economy in the long run ??
Isn't it better to have some social welfare system in place to hold people over as a bridge, until the pandemic eases ?? In fact paying people to stay home eases the pandemic.
Sometimes you have to free yourself from just purely economic thinking. Treating PEOPLE as units of labour (really friggin ridicolous, when you think about it) in servitude to some seeemingly higher oder economic variable.
Transfer payments= social welfare payments. From ~1930-1965 economic (social/political) events caused an "agreement by the majority of citizens". Poverty caused by financial events (depression), and evolution of the economy to industrial structure made for social security, medicare, etc. Elderly segment used to be the highest fraction in poverty. Because of these programs, now it's younger segments.
ReplyDeleteSome welfare is probably just a reality of modern societies (maybe the best of a list of bad choices).
What does not want to be faced is a corollary to "paying people not to work". When a human being is forced into a reality that their own initiative can not provide a level of self-support (i.e. their labor really is not valuable and well compensated), you destroy a necessary part of their humanity. Too much welfare is evil.
Globalizing the labor market explains the largest part of this. It's evident in all of the "developed" economies.
Scott,
ReplyDeleteThanks for the charts- always interesting and informative. However, aren't social security and Medicare payments the largest share of all transfer payments? I have been paying social security and Medicare taxes for 40 years and therefore believe I'm entitled to those benefits when I retire. Reasonable minds can differ on the issue of whether there should be means testing for such benefits, but I don't think these payments can explain the drop off in work rates and GDP since the recipients should be retired. It seems to me the gradual retirement of baby boomers over the past 10 years is the biggest reason GDP growth has fallen from its long term average.
In addition to the gradual increase of retired baby boomers in the labor force, like me, is a multi-decade trend -- a declining percentage of 25 to 54 year-old males in the labor force.
ReplyDeleteSome explanations I've read are more disabled workers, more workers pretending to be disabled, more drug abuse and homelessness, more men in prison, and more male "house husbands" taking care of children at home. Alternatives to work are disability payments, medicaid, unemployment compensation,and crime.
"more workers pretending to be disabled, more drug abuse and homelessness, more men in prison,"
ReplyDelete= symptoms of "destroyed humanity".
" When a human being is forced into a reality that their own initiative can not provide a level of self-support (i.e. their labor really is not valuable and well compensated), you destroy a necessary part of their humanity. "
The US macroeconomic policy goals should be to keep labor markets tight, and property markets loose.
ReplyDeleteStop taxing labor income.
Unzoning and taxing property makes more sense.
Second order effects? With so many dependent on the government for more than what it's set up for (infrastructure, laws, law enforcement, etc.) it sets up two camps - one dependent on government, the other that wants to do stuff without government interference. Vastly oversimplified, but still somewhat valid. Big government - and gaming the system (redistricting) - could be a cause of political divisions.
ReplyDeleteThanks for your posts!
CIRCLE BACK!!!
ReplyDeleteLOL
Its all unsustainable, and its all unconstitutional.
And the coup continues.
Buckle up
America is going to regret ALL of this unlawlessness and election fraud.
Its coming.
Hey Johnny, are you gonna bitch and moan for the next four years? Grow up and move on.
ReplyDeleteThanks for another good post, Scott.
ReplyDeletewkevinw- "When a human being is forced into a reality that their own initiative can not provide a level of self-support (i.e. their labor really is not valuable and well compensated), you destroy a necessary part of their humanity."
What's the source of that quote? It echoes my thoughts when reading this post. It's more about the destruction of people than it is economics charts. I would argue that transfer payments create men without confidence. Women don't want to marry unconfident men. Marriage is a crucial foundation of civilization.
Scott, you appear to be reasoning from your conclusion to the data, rather than the other way around. Not only does the long term data lead to different conclusions than you draw from the short term data (which suggests that conclusions drawn from the short term data are not universal), but employers laid off millions of people in a very short time. 15M in March. Many of them appear to be having a hard time trying to find work again, rather than purposefully enjoying siestas. Retail employment is almost back to where it was before March, but that's less true of other jobs.
ReplyDeleteThere is no doubt that incentives work, but there is also no doubt that there are many other variables at play. UBI experiments suggest that most people prefer to work, regardless of modest transfer payments (i.e. excluding lottery wins and such).
Steve...yes. I will always bitch & moan about lawlessness, election fraud and bad policy. If everyone bitched and moaned about them, they wouldn’t occur.
ReplyDeleteMeanwhile, the virus is magically going away after Orange Man removed, and SUDDENLY...DEM Governors are allowing their states to open. Trump’s economic momentum and the “re-open” dynamic continues to mask all the problems listed above. For now.
YTD:
Value up 10.6% vs Growth up 6%
Small caps up 16.3% vs Large up 4.7%
High beta up 11.2% vs Low Vol up 1%
The only FAANG stock beating the S&P 500 is Google.
China stocks are screaming as Joe continues to earn his payoff.
FORWARD!!
All hail Emperor Xi
Go long Communism and Censorship. Short Liberty & Free Speech.
Twitter at all time highs.
JDB: You have to love Trump's talent in picking lawyers- Cohen, Giuliani, Powell and now Castor. Of all Trump's more suspect claims over the last several months, I do think he could make a pretty good claim for malpractice against these fools.
ReplyDeleteHave not watched a single minute of “impeachment” farce, but heard that the lawyer on day one was horrible.
ReplyDeleteSince it isn’t an actual trial, but just political theater, don’t know why he needs a lawyer.
They should go ahead and vote, and acquit.
He won’t be “impeached” no matter what DEMs say. Its just a vote.
I've grown tired of the frantic hysteria from DC. I've discovered that if I don't pay attention to it, the world looks a lot more sane.
ReplyDeleteCould it be our Elites are emotionally unstable? Nah. Can't be. They've got prestigious degrees and appear on each other's TV shows. They must be super-duper smart.
Very interesting analysis and I think it is rather correct. There are certain limitations since taxation has changed dramatically over the past 50 years. My father who started working in the late 1960s (in Canada) told me that his income tax on his first paycheque was less than 10% of his total income.
ReplyDeleteHe stopped working in 2010 where his disposable income rose dramatically (from his first job) but his tax burden (Federal and Provincial) was 50.5% of gross income. However, the economy, during these 40 years changed dramatically as the services provided by governments (in Canada with socialized medicine in particular). I cannot speak for the USA!
All I am saying is that (a) I think you are right, but (b) the correlation is not as strong as you think because Social Security, Medicare, and Medicaid are included in these statics (I suspect).
Feel free to prove me wrong
Correlation / Causation issue here. Lots more to this participation rate change I suspect such as impacts from globalization, opioids, great recession overhang, etc.
ReplyDeleteThe conclusion might be correct but it cannot be seen from these charts (would be interested to see more data):
ReplyDelete1. The are European countries (Sweden, Norway, Netherlands, Switzerland, ...) with significantly higher transfer payments while the labor participation rate is at least as high as the USA.
2. Rwanda, Tanzania, Zimbabwe, Ethiopia, etc. have considerably higher labor participation rates... Here SG's conclusion would be spot on.
There are multiple causes for a specific labor participation rate as we are all aware. In the USA one of the reasons the LPR somewhat peaked where it did (after rising fast with women participation in the work force) is due to Globalization and supply being moved abroad while at the same time local demand partially, yet significantly, being exported abroad.