Think of it this way. There are three major kinds of employers: the public sector, the private sector, and the “private” sector. That last is the one that’s been growing:
This morning’s jobs report shows that the economy’s subsidized private sector (industries like health care services that receive big government subsidies) is back as a major source of new hiring. If a stronger but sustainable U.S. recovery depends on reinvigorating industries not heavily dependent on government largesse, then this hiring out-performance by the subsidized private sector is a bearish indicator.
More encouragingly, manufacturing gained 25,000 jobs in December, and the November figure was revised from a 7,000 loss to a 5,000 gain.
The subsidized private sector created 65,000 net new jobs in December. This means that preliminary figures for hiring improvement last month for the real private sector (where output and employment levels stem overwhelmingly from market forces), totaled 103,000, not the 168,000 reported by the Bureau of Labor Statistics. As a result, government-supported private sector jobs fueled 38.69 percent of all total nonfarm job growth in December – way up from the downwardly revised figure of 12.33 percent in November. (All data are seasonally adjusted.)
The real private sector generated 66.45 percent of all net new nonfarm jobs in December – .lower than an 88.36 percent figure for November that itself was revised down slightly.
Subsidized private sector job creation in December, therefore, mirrored its hiring record throughout the current economic recovery. Since the recession technically ended in June, 2009, these industries have generated fully 38.43 percent of total employment gains in the nonfarm sector (the Bureau of Labor Statistics’ U.S. jobs universe).
Such subsidized private sector job creation represents major out-performance, since these industries’ share of total nonfarm employment was only 15.32 percent in December.
If that’s a sustainable pattern, then the Soviet economy should be the strongest in the world. The problem with what Dr. Tonelson, quoted above, is calling the “subsidized private sector” and what I’m calling the “private” sector is that the subsidies are distortionary. Not only do the amounts of the subsidies make those enterprises look stronger than they actually are but if the subsidies are large enough and go on for long enough those enterprises attract private investment they would not otherwise attract. Everybody loves a sure thing. That’s a substantial drag on investment in the non-subsidized economy.
If, in addition, the enterprises that are being subsidized are characterized by a relatively small number of very highly compensated workers and a much larger number of poorly compensated workers, like, say, the healthcare sector, increased employment in that sector drives income inequality. Lose-lose!
Unless, the subsidized sectors would not be employing the “right number” of people without the subsidies. Of course, nobody really knows what the “right number” is, and as you point out there are considerable incentives to make the numbers that are hired bigger than the “right number”. Add on that politicians will also do this to curry support to your reason for having too many people working in the “private” sector.
“Not only do the amounts of the subsidies make those enterprises look stronger than they actually are but if the subsidies are large enough and go on for long enough those enterprises attract private investment they would not otherwise attract.”
First, a preamble: I’ve been beating the drum for years now here that as a relatively small business investor we have a pretty good clue what is on the business owner’s mind. I’ve been pooh-poo’d about it, but enough time has passed that you can see job growth is pathetic. Uncertainty lives. An opinion eventually becomes an empirical finding. And I see no reason to expect something to emerge out of the woodwork to change things. In fact, uncertainty is becoming mainstream and often cited. And as Dave notes – God help us when the natural business cycle hits us after anemic “recovery.”
As for the quote. This is absolutely spot on. I’m in the investment business. All you need to do is look at the price multiples paid for med device companies and pro services companies. People see the gravy train. steve won’t want to acknowledge that, but the data don’t lie. And ObamaCare is just doubling down………..
The margins are high for the services Drew cites, and for pharma as well. On the Medicare side, I can sort of see this since Medicare is not allowed to have competitive bidding on some things, and is required to pay for things like drugs, even when they are known to be more expensive than more effective alternatives. However, private insurers also pay for these high margins, usually paying even more. I dont think there is an easy unifying explanation for this phenomenon.
” Uncertainty lives. An opinion eventually becomes an empirical finding”
I have argued that we have a balance sheet recession abetted by depressed construction. We also have structural UE as those not working go longer and longer w/o work. I think there are numbers to support this, which I like better than opinions. (I am sure there is some uncertainty, especially about sales.)
Steve
I’m in New York trying to start a small business even as we speak. So, some notes from reality:
None of what you’re on about matters to me in the slightest. I don’t care about Obamacare or tax rates or the bond market. Here’s what matters: will publishers give me enough to cover my nut? Will the profit be worth my time? How much ego will I invest? How does it play against my primary venture? How much of a pain in the ass will it be to hire an editor and recruit writers? Do I have to cut publishers in for a piece of sub-rights? What would that piece be? Do I want to take covers in-house? And most important: Is this going to be fun or a drag?
I have an intuition that questions just like that are what real small business entrepreneurs think about. I don’t think it has dick-all to do with macroeconomics or Obama or any of that.
I think it’s a guy looking at a whole host of factors, some obvious, others subterranean, and wondering whether it’s going to be fun. And I further suspect that the single greatest source of intimidation has to do with THe Apple/McDonalds syndrome. In a mature market the exploitable openings are few and far berween
It depends on what parts, if any, of the new 2013 economic changes effects your business and profit margins.
My husband was at a housing industry meeting of residential income property owners. It was packed. One of the major items of discussion was the 3.8% new tax generated by the ACA. Printed material was passed around explaining it’s impact and how to deal with it.
“Small’ businesses of 50+ full time employees would also find relevance in some of the new laws effecting health care coverage.
It all depends on where you are on the sliding scale of business. If you’re selling pencils on the boardwalk, then it probably is of no concern. The same might go if one is exploring or inking some kind of new publishing venture.
steve
I was actually referring to M&A purchase transaction multiples, which tend to correlate to margins.
In any event, its easy to discount “opinions” in favor of the exalted “numbers” but you quickly become beholden to ivory tower types and the problematic nature of their studies. (Let’s all recall that economists have predicted 10 out of the last 4 recessions) I prefer – and as a participant – the real world.
Uncertainty goes far beyond demand (sales.) A widget manufacturer has a headache by time he/she gets to work thinking about raw material input costs, energy costs, labor costs …….
The current political regime has an incoherent but clearly anti-business energy policy. Nobody knows what ObamaCare will really cost the employer. The regulatory book grows by leaps and bounds. Obama is either clueless or mendacious. In any event, no one is spending investment dollars, unless they are in a peculiar industry segment.
Would you expand right now to make widgets? I doubt it. Would you expand because you are in a subsidized industry? I bet you would. The medical practice I deal with is. Construction everywhere……
We are currently thinking about upgrading our housing situation in Naples, FL. Its a hoot. Every broker in sight will tell you the market is propelling forward and better go now…or else…….. The truth is, the shadow inventory overhang is slowly bleeding in. We have seen developments where 10% are short sales or forclosures, and a third of properties are for sale. And I’m talking $500K to $2MM. Heh.
The market is a vipers den. I never tell a selling agent what I do for a living. I come in with a two day old beard, and a hayseed approach. Aw, shucks, just a farm boy from Indiana. Its amazing what you hear……..
*facepalm*
*double facepalm*
Michael
You are making my point. You are a singular entity. A talented singular entity. A rock star. A movie star. You can materially and economically pull along perhaps a dozen or so people.
Widget makers have a hundred, 300 hundred, 500 hundred employees. (This is our range) All I talk about effects us and our thinking dramatically. Now multiply by the simply hundreds of thousands of mid-sized widget makers out there. We’re not in Tiburon with your gorgeous view anymore, Dorothy. We are in backwater Iowa, or Michigan, or Ohio, or Tennessee. And if these people are fucked, they are absolutely fucked. I don’t want to see these people fucked. They are good people.
So the hoi poloi in California or New York or Florida can don their limo gear and pontificate on the latest liberal fantasy of the day, but in Waterloo, Iowa there is a family wondering if the stupid little part their factory makes for some contraption will be around in two years. Their well being depends on it, and Obama and his ilk are making that very problematic.
From where I stand, thats the very definition of evil.
Not only that Michael, but sure initially you wonder, “Will this cover my nut?” But then Obamacare, tax rates change, and the bond market moves and no, what the publishers agreed too no longer covers your nut. Then what? Well, you might be able to stick it out and see if things get better….or not.
As for macroeconomics…your laundry list of things you mention are all microeconomic. Many of them are what economists often refer to as opportunity costs.
The truth is, the shadow inventory overhang is slowly bleeding in.
You’re an informed man. Drew. That statement is very true.