Economics & Finance

The Wage and Hour Division: We Can Help Prolong the Recession

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Since approximately day two of his administration, President Obama has boasted about what he has done since “day one.” Actually, day one was  relatively harmless. It was only a half day, and Obama spent it delivering another vapid speech, having a long lunch, and reviewing a boring parade. But on day ten, January 29, 2009, he began his project of giving employers additional reasons not to hire American workers. On that day he proudly signed the Lilly Ledbetter Fair Pay  Act, which allows employees more time to sue employers for alleged pay discrimination.

And from that beginning, the project of exacerbating unemployment and prolonging the recession has been carried out on a broad front of initiatives. The government has borrowed capital and diverted it to less productive uses under the guise of stimuli. Complex new mandates and penalties regarding employee health insurance have been imposed on employers. Further uncertainty has been created by  thousands of pages of impending financial legislation and rules and by the possibilities that new energy taxes will be imposed and that President Bush’s tax cuts will soon expire.

The Department of Labor’s Wage and Hour Division (WHD) has pitched in and done its part. Under the direction of Deputy Administrator Nancy J. Leppink, a stereotypically narrow and humorless bureaucrat, the WHD has taken an adversarial approach to employers. The  WHD has hired 250 field investigators to police employers and expects to hire 90 more with funds allocated in the Department of Labor’s fiscal year 2011 budget.   At a “stakeholder forum” in May, Leppink said she couldn’t understand why the WHD should, as it had in the past, give a break to employers who come forward and acknowledge past violations.

In March the WHD announced that it was ending its longstanding practice of issuing opinion letters responding to  questions  from employers about how labor laws apply to their situations. The questions frequently concerned whether a type of job would be classified as  exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). Rather than responding in opinion letters to employers’ questions about their specific situations, the WHD now issues “administrator interpretations” setting forth general interpretations of laws and regulations. The WHD claims that issuing administrator interpretations instead of opinion letters “will be a much more efficient and productive use of resources,” but so far it has only issued three of them.

While the WHD has ended its service of providing employers with opinions on the classification of their employees, it is preparing to issue regulations requiring employers to render opinions on that subject to the WHD. Next month  a notice of proposed rulemaking is expected to be issued on  rules  under which”[a]ny employers that seek to exclude workers from the FLSA’s coverage will be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to WHD enforcement personnel who might request it.”   This shift is consistent with the adversarial objective the WHD acknowledged in its Congressional Budget Justification: “WHD’s regulatory initiatives will be undertaken with an objective of determining where there are opportunities to shift the burden of compliance to the employer. . . .”

And so the businesses that  the administration would like to induce into hiring people become the enemy if they do. On the bright side, however,  the WHD has adopted a cheerful new slogan, “We Can Help.” They surely can, but if only they wouldn’t.

Lack of New IPOs and Impact on Performance

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If you read typical finance articles out in popular media you commonly see facts and figures about how US stocks outperform other investment classes over “the long term”.  As I do my own research I tend to see threads leading back to the premise that US stocks are entering a new environment going forward and past results are going to be less and less relevant in predicting future performance.  One of the reasons for this is the fact that the United States has ceased to be a dominant player in launching new public companies, and in fact is now mostly an also-ran when compared to Chinese markets or even Brazil as of late.

The Agricultural Bank of China is about to come out as an Initial Public Offering next week that will be one of the largest IPOs of all time.  Per this article:

Hong Kong and China have dominated the global IPO market. That dominance will only increase when Agricultural Bank of China starts publicly trading next week.  In 2009, Hong Kong was the world’s largest IPO market, with companies raising a combined $32 billion in capital, according to Dealogic, a data-tracking firm. This year, China is on track to assume the mantle, with $31.7 billion raised by early July.

The Wall Street Journal had a recent article titled “How to Fix the IPO Market” by Jason Zweig.  I didn’t agree with their analysis or recommendations but the article did have a lot of useful facts and figures that illuminate the changes in the public markets in the United States, such as the following:

Ten years ago, around 9,100 companies filed annual proxy statements with the Securities and Exchange Commission. Last year, roughly 6,450 did; so far in 2010, only about 4,100 have, estimates Wharton Research Data Services.  In two-thirds of the years from 1960 through 1996, the number of initial public offerings exceeded the number of stocks that dropped out. Since then, however, there have been more deaths than births among stocks every year: 7,725 stocks have disappeared over that period, while just 4,299 new ones have arisen to replace them, according to Wharton.

What is happening is that existing companies are swallowing up smaller companies and other ones went bust during the market tumult.  New companies, however, haven’t joined them.  Recently there was a bit of a hoopla about an IPO for Tesla Motors, which raised $266M.  However, prospects for the car maker are cloudy and the stock has declined below its offering price since then.  If Tesla, a loss making niche enterprise, is the future of our growth companies, we are in trouble.

The reason that this matters is that the entire “stocks outperform over the long run” is based on data from a few markets that haven’t suffered major disruptions (war, occupation) which pretty much brings you down to US and UK market data, mostly US data.  And this data was based on a continuous growth in companies launched through IPOs with a growing market for companies; today the market for US based companies is small and much of the new and larger IPOs are happening overseas.

There is nothing wrong with overseas markets growing; it is just that the US markets seemed to have stopped, and investor money (both US and foreign based) is going where the IPOs are.  While we do not see the “full” effect of this trend, because many large multinationals are still US based and doing well, we will see it in the future as the newer companies don’t fill in the gaps and come through the ranks at some point in the future.

This doesn’t mean that I am saying that US markets will go up or go down as a result of this; I am just saying that the long term data was based on a premise that new companies would grow to replace the old (“creative destruction”) but in fact the new companies aren’t coming up in the footsteps. Perhaps stocks are best in the “long run” in aggregate across all markets but it may not be US based stocks if we just have aging companies and the young, growth companies are nurtured elsewhere.

Cross Posted at LITGM and Trust Funds for Kids

Missed Arbitrage Opportunity

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I just went to a play. They were selling peanut M&Ms for $2 at the concession table in the theater lobby. But then it turned out you could get the same M&Ms for a buck from the vending machines near the washroom. I could have cleaned up.

Are Things Looking Up?

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Krugman is a contrary indicator. The combination of this column and the fact that Intrade now shows Republicans as having >50% odds to take over the House in 2010, gives hope. Political gridlock would be great for the economy.

Mini-Book Review — Ridley — The Rational Optimist

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Ridley, Matt, The Rational Optimist: How Prosperity Evolves, Harper Collins, New York, 2010. 438 pp.

Matt Ridley is a well-known British science writer who, in recent years, has specialized in writing books for the general public on new research in biology … evolutionary biology, genomics, plus a biography of Francis Crick, co-discoverer of DNA.

For well over a decade I’ve enjoyed his books and been very impressed with the quality of his writing, so “on spec” I put a library hold on Ridley’s latest without paying much attention to what it was about. That decision turned out to be a wonderful piece of serendipity. I’ve been reading about European “trading republics” (ancient and modern) for a few years, and trying to assemble an amateur theory about how economic dynamism and technological innovation follow, or are reinforced by, republican values. Whether Athens, Rome, Venice, Genoa, Antwerp, Amsterdam, London, Liverpool, Glasgow, Boston, or New York and Montreal, trade under republican regimes creates massive relative wealth and huge leaps in human knowledge and standards of living.

Now Matt Ridley looks at the innate human capacity for “exchange” … and how that unique capacity affected the course of prehistory, the introduction of agriculture and “civilization,” and more latterly, the shape of the industrial revolution and the modern world. Underlying the politics of republicanism, and individual freedom, we can see the human appetite for exchange creates persistent economic advantage. Trade flows from comparative advantage, in the words of David Ricardo, and comparative advantage relentlessly rewards more specialized use of the natural environment … from the labor of humans carrying sea shells inland for trade 80,000 years ago, to the labor of domesticated horse and sheep and dogs largely for human benefit, to the use of vast quantities of ancient vegetable matter (in the form of petrochemicals), to extend the efforts of humans out of all proportion. Our species is most prosperous when most specialized, when most dependent on the differentiated talents of thousands of others. We now can live lives like the Sun King, without a retinue of thousands.

In this book I have tried to build on both Adam Smith and Charles Darwin: to interpret human society as the product of a long history of what the philosopher Dan Dennett calls ‘bubble-up’ evolution through natural selection among cultural rather than genetic variations, and as an emergent order generated by an invisible hand of individual transactions, not the product of a top-down determinism. I have tried to show that, just as sex made biological evolution cumulative, so exchange made cultural evolution cumulative and intelligence collective, and that there is therefore an inexorable tide in the affairs of men and women discernible beneath the chaos of their actions. A flood tide, not an ebb tide. p. 350

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