Author Archives: Emily Attar

Revised Post 5: Michigan’s Unemployment Rate: An Inadequate Measure

Thesis:  In Michigan, changes in the labor force due to outward migration cause the state unemployment rate to be an inadequate measure for the state’s economic health.

 

News of an improved, post-recession economy tends to surround decreased state unemployment rates. The unemployment rate is calculated by dividing the number of people employed by the number of people working and actively seeking work (also known as the labor force). While one hopes that the unemployment rate goes down as a result of increasing the numerator, sometimes changes in the denominator are at fault for the changing rate. More precisely, we often assume that employment is increasing rather than the labor force decreasing. In Michigan, changes in the labor force due to outward migration cause the state unemployment rate to be an inadequate measure for the state’s economic health.

During the recession, Michigan was known for having one of the highest unemployment rates. As it has decreased, reporters and government officials have been quick to point out the “improved economy.” Although some celebrate, MLive.com makes a good point in saying that this is not necessarily as exciting as we would think. The article states in reference to March 2015, “The number of unemployed in the state fell by 14,000 people but total employment only grew by 2,000. That means there was a 12,000 person labor force reduction in March.” 12,000 people either decided to stop looking for jobs or move elsewhere to find jobs. In the case of Michigan, the latter seems more likely.

Looking into outward migration, MLive.com talks about how college graduates are currently migrating out of state at the fastest rate since 2010. Young, educated people are being lured away from Michigan after graduation. When they are in Michigan we count them as being a part of the labor force. As they get jobs elsewhere, the unemployment rate will decrease because their movement lowers the state’s labor force. Confirming the high outward migration in Michigan is the yearly study done by moving company United Van Lines. The company ranks the top 5 inbound and outbound migrating states and according to their 2012 study, “Michigan fell to the No. 6 from the No. 4 spot it held in 2011. Previously it had claimed the top outbound spot every year from 2006-2009.” Given this long line of outward movement, it is safe to say that this is likely the factor affecting Michigan’s unemployment rate most. Though Michigan’s employment seems to be increasing, it is not doing so nearly as quickly as the unemployment rate leads us to believe.

 

Disney and Wearable Technology

Thesis: The reality is that elsewhere, wearable payment implementation would come at a high cost and the lack of information security associated with it may cause its demise among consumers.

 

Surprising as it is, the future of payment technology has rooted itself in the wide world of Disney. Wearable technology has become heavily embedded in Orlando Florida’s DisneyWorld. As a frontrunner in this huge business opportunity, Disney has successfully implemented the use of their “MagicBands” within the controlled environment of the parks. The MagicBands are plastic wristbands that function as a guest’s room key, park pass and most importantly: credit card. With the swish of a wrist (literally) at any cash register on the premise, you type in a pin and complete your purchase. It is truly an innovation and a wonder why such technology was born in a place like DisneyWorld. The reality is that elsewhere, wearable payment implementation would come at a high cost and the lack of information security associated with it may cause its demise among consumers.

When credit cards came into the picture, businesses needed card readers and with debit cards they needed pin-pads. Wearable payments would require businesses to implement yet another piece of technology to all of their points of purchase. In an article by Fastcompany, the author states that the development of MagicBands totaled at about 1 billion dollars and the implementation added another 80 million dollars. A new payment system such as this would be an expensive endeavor on the business side. Credit card companies seeking to do this on a larger scale would have to either purchase the technology from Disney or buddy up with a technology firm. For example, American Express is working with JawBone trying to add the wearable payment option to Jawbone’s new smart band, the Up4, according to the Wall Street Journal. The duo has been attempting to make this project real, even covering the security problem of losing the wristband by having a phone application that allows you to disable the purchasing aspect immediately. There was however, no mention of how to integrate wearable payments into the retail world meaning that they may still have a long way to go before success.

In the larger scheme of this wearable technology, the amount of consumer information such a device provides could potentially alarm consumers enough to disrupt the market. Although mobile devices, credit cards, and social media allow companies to gain some levels of consumer information, the sharing is not as ubiquitous as it would be with wearable cards. In Disney as this Wired article states, “The MagicBand contains sensors that let guests swipe onto rides and allow Disney to pinpoint their location…They might know when you’ve waited too long in line and email you a coupon for free ice cream.” This type of capability, the fact that Disney can track you and utilize this seems friendly on a theme park scale but out in the world this would be quite an obtrusive venture. Companies would have information and abilities to tell where you were whether you knew it or not. Also, since this industry is new the regulation for personal information would likely take time to sort out. There are a lot of unknowns with this venture, which is what makes the outcome so questionable. Only time will tell.

The Problem with State Unemployment Rates

Thesis:

State unemployment rates are not an adequate, overarching measure for economic health, we should be focusing more on nationwide unemployment.

 

People tend to base a lot of their opinions concerning the state economy’s job health on unemployment rate. Local governments work to decrease the unemployment rate and changes in said rate make headlining news regularly. The unemployment rate is calculated by dividing the number of people employed by the labor force. Labor force includes people in the economy who are working or actively trying to find work. While one hopes that the unemployment rate goes down as a result of increasing the numerator, sometimes changes in the denominator are at fault for the changing rate. State unemployment rates are not an adequate, overarching measure for economic health, we should be focusing more on nationwide unemployment.

Since the recession, Michigan’s unemployment rate has been in the spotlight. Known for having an extremely high rate during the times of recession, there is much excitement as it slowly decreases. Although some celebrate, MLive.com makes a good point in saying that this is not necessarily as exciting as we would think. They point out how the recent decrease in unemployment has more to do with change in the labor force than it does with people becoming employed. The article states, “The number of unemployed in the state fell by 14,000 people but total employment only grew by 2,000. That means there was a 12,000 person labor force reduction in March.” 12,000 people either decided to stop looking for jobs or move elsewhere to find jobs. The latter seems more likely as people often need to work in order to live.

A local Michigan news service, the Macomb Daily, reports on how 37% of residents in a 2014 Gallup poll said they would move to another state if given the chance. Reasons people gave for moving were to find a better job, or have a higher quality of life. That is a large amount of people who would move out of the state willingly. Top that will people who do not have any other choice but to move for work and there is a pretty convincing argument that the denominator of the unemployment rate equation has been the part changing. Moving to another state in search of a job removes them from Michigan’s labor force. So with this decreased unemployment rate, Michigan looks like it is doing well. In reality, people are dropping out of the labor force and employment is not increasing nearly as quickly as it should be.

Cigarette Taxing

Thesis:

Rather than assuming the government is to blame for the smuggling of cigarettes, I believe that they are simply still in the process of working out the kinks in the excise taxing system.

As a society, we have clearly established that cigarette smoking is bad for you. Despite the many health problems directly and indirectly associated with this highly addictive hobby, a lot of people still participate. In attempts to curb the desire to smoke, certain places have attempted to utilize excise taxes. Excise taxes are an indirect means of taxing a particular product at the point of sale. New York City has been a front-runner in this charging a large enough tax to make each pack of cigarettes over $12. An effect of this is increased cigarette smuggling into New York City which some attribute to be a negative symptom of the taxes. Rather than assuming the government is to blame for the smuggling of cigarettes, I believe that they are simply still in the process of working out the kinks in the excise taxing system.

Beginning this analysis was an opinion article on WSJ titled, “A Laffer Curve For Smokes.” The author criticizes the excise taxing of cigarettes saying, “Politicians never learn. Of the 32 state tobacco tax increases that went into effect between 2009 and 2013, only three met or exceeded revenue projections according to industry data.” Although this is a large amount of unmet projections, projections are by nature a guestimate. The fact that the marks have not been met does not mean there has not been any difference made. The industry data that this article refers to states, “New York City saw an almost 50 percent decline in cigarettes tax-paid sales volume.” The decline that this data is addressing could be because a decline instance of smoking has occurred in addition to the smuggling that is discussed. Instead of saying politicians never learn, it is important to see the broader scope that this is not an issue that will be fixed overnight.

Further, the Laffer Curve that is addressed in the title is not addressed in the article itself. A Laffer Curve shows a relationship between tax rates and government revenue. The general idea according to Jamaica-gleaner.com is that it shows how you increase tax rates only to a certain point. The author demonstrates that the government has gone beyond the Laffer curve yet I do not think he is giving lawmakers enough credit. It takes time to find the optimal tax amount that will both hinder consumers from hurting their health yet raise tax revenue for those who do. Like with any model, this is not an exact science and finding the equilibrium may be taking longer than expected. Smuggling is an issue that should be addressed but it is not completely at the fault of the government’s tax agenda.

Spotify’s Place in the Music Streaming Industry

Thesis:

In Spotify’s efforts to expand, I believe they will not be as successful as predicted for reasons of competition and debt to VC companies.

New companies in search of VC funding must prove themselves before they can succeed as a publicly traded company. The end goal is usually acquisition or going public but the process of growth must be a carefully thought out schema. Spotify is currently a 9 year old company securing VC funding as they figure out where their company is headed. They have emerged in the market as key player in the music streaming business competing with companies like 8tracks and Pandora. By providing a unique, Facebook-connected means of listening to music, they have been successful in the creation of both an advertisement filled and an ad-free version of their program. In Spotify’s efforts to expand, I believe they will not be as successful as predicted for reasons of competition and debt to VC companies.

Competition wise, Spotify’s main concerns are currently Pandora and 8trakcs. Unfortunately, as the potential in this market becomes bigger, including all music listeners with internet access, holding their share of customers may be difficult. As with any business model that begins with free subscription, people will be hesitant to continue when the services become monetized. Spotify faced this when they began to charge for advertisement free and cell phone streaming of their music. Competitors are on the prowl and other options await the large market of consumers. Youtube for example has allowed free music playing with the newly added option of continuous playlists. Additionally, Apple is working on rolling out their new streaming services. A problem particularly with Apple is how big they are in this mobile phone and music industry. As an article by Yahoo states, “There are endless things Apple can do…because it controls the device and the operation system and everything on it. You could suddenly find this music service on the front screen of your phone.” Ease of use is a big factor in this game of music streaming and while it is a large enough market to share with multiple players, the best and most convenient man will likely come out on top.

While Spotify holds it’s ground, saying it can handle the competition with more funding, the realism of this statement seems questionable. An article by WSJ talks about how highly Spotify is currently valued. Goldman Sachs and Abu Dhabi have committed to funding Spotify despite its money-losing model. Paying 70% of revenue to rights holders does not sound very promising for profits in the future but that will depend on how much market share they can maintain. It will be an interesting year seeing if they rise to occasion and go public or dwindle below new competitors.

Internet Experts

Thesis: When those who are less experienced enter the investment market as certifiable Internet experts, their success will be limited and hindered by their lack of extensive knowledge.

With the increased ability to Google at any moment, we assume that we can become experts on anything at any time. You can learn skills, watch “How-to” videos, learn a little or learn a lot. Copious sources of content on the Internet await us. The effectiveness of this technique is up for grabs, especially when people are trying to learn about their finances. Investment and stocks for example are something people spend their entire lives working to understand. When those who are less experienced enter the investment market as certifiable Internet experts, their success will be limited and hindered by their lack of extensive knowledge.

Delving into this idea of perceived Internet intelligence, the Wall Street Journal writes about new research that addresses this issue. Researchers conducted nine experiments and found, “The cognitive effects of ‘being in search mode’ on the internet may be so powerful that people still feel smarter, even when their online searches reveal nothing.” The simple act of using a search engine, they find, gives people confidence whether they find useful information or not. This is a powerful find considering that so many people utilize search engines on a daily basis. Searching something a couple times may lead you to thinking you know more than you do.

Relating this back to investing, there is no definitive way to assess whether false knowledge is affecting peoples’ investment decisions. In speculation however, we can say that it may play a role in some of the trends that we are seeing. For example, WSJ has an article about how people are trapping themselves and incurring losses by investing in individual stocks. While most advisors suggest no more than 5% in individual stocks per portfolio, people are investing in individual stocks on their own. The article states, “Investors could be easily dazzled by the current stars of the stock market and tempted to ditch boring index funds for a piece of the action.” If an investor thinks they see a hot opportunity in their own personal research, it’s tempting to jump on it. As we have learned in class however, the amount of risky investments we take is something that should be more carefully calculated. By taking matters into their own hands, people investing put themselves at more risk for loss. If that is something they can incur, there is no problem in this baseline of knowledge, it can be seen as a hobby like gambling. If people are using their limited knowledge to control important funds that they rely on, we run into difficulty.

Revised Post 4: Saving is Good!

Thesis:

Rather than seeing it as a shift in consumer beliefs, critics look to rationalize this phenomenon as a short-term economic foible. I believe these trends are merely a sign that more people in the economy, including the millennials, are understanding that saving is important.

 

As a person in the “Millennial” generation, I am well aware of the incompetent stigma that surrounds me. There is this assumption that the young people in our society lack common awareness concerning money and real life. This is relevant right now as we look at how the increased United States savings rate is being perceived. As Millennials are increasing their stake in the workforce and the “real world”, their presence may be impacting the perceptions of those trying to explain the savings increase. Rather than seeing it as a shift in consumer beliefs, critics look to rationalize this phenomenon as a short-term economic foible. I believe these trends are merely a sign that more people in the economy, including the millennials, are understanding that saving is important.

In explaining the higher savings rate, there have been several attempts to debunk the notion that this is a permanent increase. The Wall Street Journal, for example, suggests the weather as a large factor in this behavior. While I’m sure the snowy whirlwind has inhibited people from going out and spending their money, I found this amusing that the writers are basing a sizable lack of consumer spending on season change.

An additional explanation, given by the Washington Post, was based on the recession. They say, “It’s the hangover from the financial crisis and Great Recession. Consumers are spending less and saving more to protect themselves against future economic shocks.” This statement, while probable, seems to be several years too late. Looking at this graph from the FRED, we see trends in personal savings in dollars.

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After the great recession in 2008, savings is steadily increasing all the way to a peak in late 2012. In my opinion, if the Great Recession hangover was apparent in the savings rate, this is where it would be most reflected. The savings rate now, not nearly as high as the savings rate was in the past, could reflect people saving for good measure.

In the search for articles that say consumers are saving more for their own welfare, the results are not plentiful. One article by Forbes does address this though stating, “Some often overlooked traits of the millennial generation include a heightened importance placed on savings and health relative to older generations.” Forbes actually acknowledges a behavioral change regarding savings among the younger generation. They also recognize the overlooked nature of this. In examining the future of our economy, the changing beliefs of upcoming generations need to be more heavily considered in analysis. I think that by accepting the possibility of higher consumer savings for a while will help future analysis of the investment decisions, consumer spending and the economy as a whole.

Wage Growth

Thesis: If the Fed’s monetary policy is going to be successful and if we want to see our economy moving forward, I believe more attention should be paid to this issue of wage growth.

 

With employment bouncing back, it seems reasonable to expect that wages should be following suit. What we have seen with the decreased unemployment rates however is an unusually low wage growth. At the lower end of the wage spectrum, there have been efforts to increase their well-being through the push of higher minimum wages. Walmart and now Mcdonalds are some of the few who have committed with improving the wages of people who are struggling to get by. This is great news for aiding the wage gap issues yet it has yet to make a large difference in the overall health of economic wage growth. If the Fed’s monetary policy is going to be successful and if we want to see our economy moving forward, I believe more attention should be paid to this issue of wage growth.

Going into what the Fed must consider in their upcoming interest rate decision, wage growth is one of these important input factors. An article by WSJ states, “Indeed, to be consistent with the Fed’s 2% inflation target, wages would need to be increasing by 3% to 4%.” Looking at the graph below provided by stateofworkingamerica.org, we can see where the US is at compared to the 3-4% goal.

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Since the near 2% drop in 2009, the wage growth rate has staggered around 2% to where it was most recently in February of 2015 at 2%. Wage growth is half as strong as it should be according to WSJ. For people who are living comfortably at this time, the wage growth or lack thereof may not be too big of a deal. Conversely, those who have been stretched thin financially over the past five years will likely feel effects of increased inflation and interest rates.

Agreeing with the importance of wage growth, the New York Times writes, “Rising rates in the near term would lock in high unemployment among minorities and wage stagnation.” They point out the difficulty in making the interest rate decision at this time of low wage growth. The results could hinder the growth of wages to where they’re essentially stuck for a given time. This would be counterintuitive if the Fed’s interests are in moving the economy forward together. Whether wage growth becomes something that ultimately delays the hike seems to be unknown at this time but with the Fed pushing forward the date for the change, it is possible they are taking the wage growth issue seriously.

Saving is Good!

Thesis:Contrary to popular belief, I think that we should be promoting not criticizing consumer savings due to the benefit of later investment as well as so citizens have a strong financial base to fall back on.

 

 

In the national accounting model of the economy, Y= C+I +G +NX, Paul Krugman tells us to assume that ultimately, investment equals savings. The money that we save will have direct impact on the investment that we see in our economy. While this explanation is based on a model with fixed parameters, it does help us draw conclusions about the effects of changing savings and investment in the actual economy. As consumer savings has been increasing the past couple of months, people have stigmatized this a bad thing. Contrary to popular belief, I think that we should be promoting not criticizing consumer savings due to the benefit of later investment as well as so citizens have a strong financial base to fall back on.

One proponent of consumers not saving was the author of a WSJ article entitled “Consumers Should Emerge from Hibernation.” The author discusses how for the past several months, consumers have increased their savings rate using weather as one explanation while saying that in it should correct by the end of winter. The question is, whether or not the savings rate needs correction. This increased savings leads to increased investment later and why would this be seen as a bad thing? Even if consumption suffers currently, it’s not permanent nor does it indicate an unhealthy economy. Rather, it simply a shift in consumer beliefs about where they should keep their money.

An additional explanation that was given by the Washington Post was based on the recession. They say, “It’s the hangover from the financial crisis and Great Recession. Consumers are spending less and saving more to protect themselves against future economic shocks.” This statement seems to be several years too late. Looking at this graph from the FRED, we see trends in personal savings in dollars.

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After the great recession in 2008, savings is steadily increasing all the way to a peak in late 2012. In my opinion, if the Great Recession hangover was apparent in the savings rate, this is where it would be most reflected. The case now, where the levels are not nearly as high as in the past, could just be that people are saving purely out of general precaution. Seeing the effects of the Great Recession could be enough to make people realize that having a strong savings is important. Although there could be a variety of explanations for this phenomenon, I believe that these trends are merely a sign that more people may be seeing that saving is good.

The Oil Price Decline

Thesis: Although this current downward trend may be an annoyance to the US oil market, I believe it is a natural trend and that recovery is on the horizon.

 

From a consumer standpoint, the decline in oil prices has been great. Cheaper gas has been an unexpected and newfound luxury. From the economic end, this has had some negative effects on pricing within the US oil market. Texas and Oklahoma-based oil companies had to make adjustments once the prices of crude oil dropped in late 2014. Job stability was a concern as well as the ability of domestic oil companies to keep up with companies outside the US. The following graphs from FRED show the yearly prices of Western Texas Intermediate crude oil where it is traded in Cushing, Oklahoma.

 

 

 

Looking at the five year graph, the drop we are facing now seems sharp and intense. Stepping back twenty years however, we can see that WTI oil prices traditionally move up and down. Aside from the gradual rise, a similar drop occurred during the recession in 2008. Post-2008, a fairly quick recovery occurs alongside an upward trend lasting about five years. Although this current downward trend may be an annoyance to the US oil market, I believe it is a natural trend and that recovery is on the horizon.

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To begin my reasoning, US oil companies have been making an effort to keep up with the giant oil tycoons in the Middle East. Even in these times of decline, according to Vox.com, “They’re adopting new techniques and technologies like ‘pad drilling,’ which allows them to drill more wells with fewer rigs. Add it all up and oil output per rig has risen 30%” Not only is efficiency increasing but also these companies are being fairly environmentally friendly by decreasing the amount of ecologically disruptive rigs built. Having an innovative edge shows that at the core, these companies have not taken the price hits as permanent.

In addition to improved technology, we are currently in a position to be exporting oil to Asia. Prior to this oil price decline, Asia was more likely to import Brent oil, which reflects about two thirds of the world’s traded oil. As for our smaller Western Texas Intermediate market, as stated by Wall Street Journal, “The current price environment has created opportunities for U.S condensate, or light oil, to be exported to Asia.” This opportunity shows the US companies are not only able to support the US but also take advantage of pricing between Asia. While times seem tough from an initial employment and price perspective, there are reasons to believe this decline may end up helping the market economically.