US Treasury securities and dollars less attractive

The big news out of the Federal Reserve today was, of course, the new website design! Weirdos.

Having cut its funds rate target to a mere 4.75%. Consequences? Multi-fold:

The Fed now has a third problem to deal with: They have become Wall Street’s bitch. They may find that’s a difficult condition to wriggle out from…

From the Big Picture – an assessment with which I’d be hard-pressed to disagree.

Wall street loved it. The Dow is already back at 13,750 and I’m sure our financial pages will be loaded with talk of the Magic 14,000 again, in no time. Meanwhile, behind the music:

The Australian and New Zealand dollars rose the most in almost a month after the U.S. cut its benchmark interest rate by a half-percentage point, boosting the appeal of the South Pacific nations’ higher-yielding assets.

The Federal Reserve cut its rate to 4.75 percent in a bid to protect the U.S. from sinking into a recession sparked by fallout from the country’s worst housing slump in 16 years. The currencies reached the highest in at least five weeks as investors were attracted to Australia’s 6.5 percent overnight cash rate and New Zealand’s 8.25 percent cost of borrowing.

…

The Fed rate cut also buoyed the currencies versus the yen as it gave investors confidence to resume carry trades, Gordon said. Both rose the most in almost a month against the currency of Japan, where the central bank today will keep its main refinancing rate at 0.5 percent, the lowest of major economies, according to a survey of economists by Bloomberg.

…

The improvement in market sentiment will probably encourage investors to “own risk again,” said Brendan Marsh, senior currency trader at Bank of New Zealand Ltd. in Wellington. The New Zealand dollar may rise to 73 cents today, he said.

Carry trades are borrowing in low-interest countries and lending in higher-interest countries, pocketing the difference. This is as we’ve discussed all along – capital moving to other currencies; simultaneously willingness to lend to the US goes down, due to the yield and, second, willingness to lend to the US goes down, because the US dollar is depreciating.

Someone will need to explain to me how “owning risk” (trans: speculating on currency with borrowed money) works out as a good thing (this returns us, again, to the point about moral hazard, Other People’s Money and the Fed being Wall Street’s bitch).

Now is also a good time for gold, it seems.

The Financial Times is carrying a story about declining inflationary pressure, thanks to, well, a slowing economy. However, that is still ex-food and ex-fuel – both of which they say are weakening, also. If they are, I haven’t seen any sign of it. As detailed yesterday, and more-or-less on an ongoing basis, there’s really no reason to expect food and fuel prices to be pressured downwards:

• Oil (OPEC’s minor concession notwithstanding) is in ever tighter markets – irrespective of something like the US economy. Oil extraction and exports are basically in decline, but foreign demand is increasing.
• Also grains (the EU’s “set-aside” concession notwithstanding) is in ever tighter markets – irrespective of something like the US economy. Crop yields are still down, at least until next year. Again, foreign demand is as strong as ever, also.
• Thanks to the rate cut, the US dollar is down (still, faster, continuing – take your pick), which will mean increased fuel, import-food prices inside the US (even if the prices of food and fuel held steady.

I could just be a miserable, pessimistic bastard. At the moment, though, even CNN agrees with me, worryingly enough.

Criminally rich: all the money in the world

I guess I’m taking a break from our macro-economy, today. Today’s International Herald Tribune has a story about rich criminals:

The rich should be a law-abiding lot if the theory that crime has its roots in poverty has any credence. And on the whole it appears they are–or at least can afford the lawyers to keep it looking that way. Of the more than 1,200 wealthy individuals that have appeared on Forbes’s annual list of the 400 richest Americans over the past quarter century at least 13 have been convicted of serious crimes or jailed.

They include some well-known names: Wall Street’s, Ivan Boesky and Michael Milkin from the Gordon Gecko junk bond era, the silver-speculating Hunt brothers, media diva Martha Stewart and the late Leona Hemsley, the hotelier.

Three other Forbes 400 listers were convicted but later pardoned – commodities financiers Pincus Green and Marc Rich and industrialist Armand Hammer. Two more were charged but acquitted – gangster Meyer Lansky and oil magnate T. Cullen Davis.

So that makes 16 of 1,200 convicted (pardons don’t count), a Rich People crime rate of 1.333%.

Wandering over to disastercenter.com, I can find comparable numbers for other crimes in the US, in 2005 – something the IHT didn’t do (because, after all, of what value is context, in statistics?):

We see our Rich folk are in fact committing crimes at lower rates than the broader population (Property and Larceny, I figure, are the closest).

This, by the by, has involved me using only 2005 data for comparison, but 25 years of data for Rich People – hardly fair, and drastically inflating the representation of Rich Crime among Rich People (simply discounted, their rate ought to be something like 0.053% (dividing by 25, to make it one year) to 0.444% (dividing by 3, to clear 400 from 1,200)).

Done.

I shouldn’t bother, really. The fact that this writer (Paul Maidment from Forbes.com) uses his half-statistic to criticise criminal (and welfare, and social) theory, and theorists, with lines like:

Criminologists today frame crime in terms of relative poverty. As Karl Marx said, “A house can be large or small; as long as the surrounding houses are equally small, it satisfies all social demands. But if a palace rises beside the little house, the little house shrinks into a hut.”

Should really disqualify the article from serious consideration of any kind (seriously, WTF? “As Karl Marx said”? That made no bloody sense).

The Rich should not, Mr. Maidment, “be a law-abiding lot”. They should commit crimes – or, more importantly, be convicted for crimes, at a lower rate than any group not as rich. Which is precisely what we observe.

Is hairdressing less skilled than motor mechanics? It doesn’t matter, actually

Today’s Guardian disapoints.

More than 90% of hairdressing apprentices are female; 99% in the motor trade are male. The gender imbalance has always existed, but there is growing concern about the how trainees are treated by their employers. The Equal Opportunities Commission says that, on average, male apprentices earn £40 a week more than their female counterparts.

A study carried out in 2005 for the Department for Education and Skills showed hairdressing apprentices earned an average of £86 a week, while those in the motor industry earned £116 per week, and those in engineering and construction around £140. The statistics revealed a general rule: the more female trainees an industry had, the less they were paid.

For a start that last sentence is just wrong, on so many levels. I’m not disputing the correlation, but I am disputing the fact that it means anything, at all. That is not a rule, that is a half-assed observation. The article is about wage differentials in college apprenticeships (in this case, mechancs, engineering, hairdressing):

Hollie, who has been working for more than a year, earns the £80 a week minimum, while Melanie earns £116. Yet Ashley Smith, who works in a commercial bodyshop in Ipswich and is downstairs today in the college’s motor vehicle body-repair workshop, takes home more than £200 in a good week.

The hairdressers put as many hours on their two-year level 2 NVQ courses as the motor-industry apprentices, and they will leave with equivalent qualifications. So is it fair that some of the boys are earning twice what they are?

Melanie thinks not. “I definitely think our skills are equivalent to theirs, but we don’t get paid as much. We do three hours of practical work in here each week, then we spend four or five hours on theory. People say hairdressers are dumb, but the key skills we have to learn are quite detailed.”

Sadly, this fundamentally mis-understands basic economic principles.

Economic discrimination proceeds thus: two individuals are paid different wages for the same job, when they differ according to a dimension not relevant to their marginal product of labour – i.e. gender, when gender is not important (teaching, for example). This is the bad discrimination. Anything else is discrimination of the job, not the worker.

This is an important difference. The part that the Guardian is getting fundamentally wrong is this: it doesn’t matter how much training each sectored-worker (mechanic or hairdresser) gets, or how many skills they build. As long as a hairdresser’s skills cannot be used immediately to fix cars, there will be no equalisation between the two sectors.

Here’s why. Well, first, skills and training just don’t count. That does not determine your wage. It determines wage differences in the same sector for any given job, but only if it increases your productivity – not just because you went to the effort.

Each worker, that a firm hires, contributes more to total ouput (we will assume not to have maximised that part of the equation). We call this the Marginal Product of Labour. Hire one extra person, and total output Y changes by a given amount. The firm then sells that extra amount, along with everything else, so

• One extra hairdresser means X₁ extra hair-cuts
• One extra mechanic means X₂ extra cars repaired

Notice that the time and effort they put into learning their craft is not relevant. So, question: what is the value to the firm (i.e. in the marketplace) of hairdressers and mechanics?

It is the Marginal Product of Labour multiplied by the Price – the Marginal Revenue Product of Labour. The Marginal Revenue Product of Labour is the marginal contribution each extra worker makes to the revenue of the firm. In a market in which firms are competing for labour that will equal their wage (Price equals Marginal Cost, as usual).

So what determines the Price of hairdressers and the Price of mechanics? The marginal value in the marketplace of hairdressers and mechanics (so P₁X₁, compared to P₂X₂ – it is differences in the P_is and in the X_is that matter); it is not determined by the hours they spent in college, or the technicality of their skills. Hence if the skills of hairdressers could be used to fix cars, their wages would calibrate: if hairdressers were paid less than mechanics, they’d leave hairdressing to become a mechanic; the influx of hairdressers would also shift the supply of mechanics out, lowering their price in the market for Mechanic Labour. That, however, isn’t the case.

Following this: perhaps the low wages will lead to a decline in hairdresser-numbers. This will shrink their supply, leading to an increase in Price (i.e. wages). All of this means the market for these different types of labour are doing exactly what they’re supposed to be doing, according to economic principles.

I do realise that this is Education Guardian, not Economics Guardian, but it is still the Guardian. They do still have economics writers in the building.

‘Fair’ and ‘Unfair’

There are two other issues, here. The first is to do with welfare. If the UK government is trying somehow to get school-leavers into higher social classes (sorry: Social Class is a labour-related definition, capturing skills and education. I’m not being an asshole), then perhaps it needs to kick in for hairdresser apprenticeships, to make them more remunerative. Then there will still be a disparity in their wages (which more hairdressing apprentices, following higher rewards, will probably worsen), when working, compared to mechanics but, as we’ve just determined, that is not an issue.

If there is an imbalance in supply of the two, why are there not more girls apprenticed as mechanics? Ah, that is a relevant question. As we saw in the first quote, more than 90% of hairdressing apprentices are female; 99% in the motor trade are male.

The Confederation of British Industry is also concerned that young women may be discouraged from applying for better-paid jobs because of poor careers advice. Its policy adviser for education and skills, Louise Morgan, cites research by the Engineering Employers’ Federation, showing just 17% of young people were given information at school about apprenticeships.

With this I am deeply sympathetic, having suffered a truly shit careers advisor when I was in high school. However, and again, that statistic 17% is meaningless. Maybe only 17% need information about apprenticeships. What makes information about apprenticeships so great (at my school our advisor talked about nothing else – of little use to those of us who did go to University and had to work it all out for ourselves)?

Again, from the Guardian:

“Often girls are being forced down the route of traditional subjects by advisers who don’t know about the opportunities out there,” Morgan says. “Employers have a role, too, to invest in skills and to make sure people feel valued financially. We need to transform how society thinks about these things.”

And again, not relevant. For a start, an editor should have removed the word “forced”. I managed not to be forced to go to TAFE, even though that’s all I was told about in high school. In any event that is not industrial relations policy, that is education policy (to be fair this is Education Guardian – but they’re dealing with industrial relations, and I think my point is that they should avoid doing so).

Second, no: Employers do not have a responsibility to make sure people feel valued financially. Employers have a responsibility to pay wages up to Marginal Revenue Product of Labour. Now, suppose they don’t: then other employers will, meaning they will get better labour, because labour will compete for their (higher paying) jobs. Eventually the discriminating firm will decline. If we’re too impatient for that, that again is industrial relations policy, but of a different sort. Moreover it still does not have economic implications for the wage disparity between sectors.

Stephen Gardner, director of apprenticeships at the Learning and Skills Council, agrees. “There are two issues here. One is that females are being paid less within the same sectors, and that is something we need to challenge with employers. That isn’t on at all. But I think there’s also a fundamental problem, which is that young people aren’t always told what they’re likely to earn in each different sector. So they don’t have the information they need.”

See, now his first point is relevant. However it was not addressed anywhere, here, and he does not provide any numbers, nor does he specify whether he’s talking about workers or apprentices (my guess is the former). We’ve just yet to see a comparison of anything but different types of apples and oranges.

The problem appears, at worst, to be that too few advisors are carefully explaining to these kids, from day one, how the labour market works. That some jobs will earn more, that some jobs will earn less, what those jobs are what those jobs entail. At worst it seems there is asymmetric information that is happening to benefit males disproportionately – but this is a coincidence.

Personally I’d love to see hairdressers paid more than mechanics. I have no hair but I hate cars. Give me a few million fewer cars and many thousands fewer people required to keep them poisoning my air and running over my fellow pedestrians. We can all walk peacefully together to the local hair salon.

This is my final fit, my final bellyache:

…the government’s attempts to expand the scheme will bring little comfort to Anna (not her real name) from Oxford. She discovered, after starting her apprenticeship in hairdressing, that her boyfriend, an apprentice plumber, was earning twice as much as she was. Just before the £80 minimum was introduced, she was taking home £75 a week and her boyfriend £150. Now that both are qualified, the pay gap between them has narrowed, with Anna earning around £250 a week and her boyfriend getting a little over £300.

“We worked the same hours, and we were both doing a valid trade qualification, so why shouldn’t we be paid the same?” she asks. “I’m happy working in hairdressing, but why shouldn’t women be paid what men are paid? I don’t think it’s fair.”

My advice to the government: squeeze a Principles of Economics class into your college courses. Especially the journalism ones.