In case you missed it: the January unemployment number came in at 9.0%, which is a decrease of 0.4% from December’s 9.4%.  But the other interesting statistic in January was the net number of new jobs: 36,000.

Now, if 36,000 new jobs can lower the unemployment rate from 9.4% to 9.0%, then 810,000 jobs should eliminate unemployment altogether.  And conversely, a loss of 8,190,000 jobs would make everyone in the US unemployed.  Put another way, it suggests there are a total of 9,000,000 eligible workers in the United States.

But here’s the problem: there are something like 140 million employed people in the US.  And if that’s the case, then it should take closer to 560,000 jobs to swing the unemployment rate by 0.4%.

So how do we reconcile these numbers?

The answer lies in the way the government determines the unemployment rate.  Each month, the government interviews approximately 60,000 households, representing about 110,000 people from around the country, to determine their employment status.  If a member of the household is not employed, or is employed only part time, the interviewer asks whether they have been looking for a job in the past month.

If someone has stopped looking for work, or is unable to look for work, they are categorized as “marginally attached to the workforce,” possibly as a discouraged worker.  But curiously, discouraged workers–people who have given up looking for work–are not considered unemployed.  So if enough people are unable to find a job for a long enough period of time, and stop looking until the economy improves, they drop off the government’s radar.

Frankly, this is a dumb way to determine the unemployment rate.

Imagine this example: In a town of 1,000 adults, 800 are working, and 200 have lost their jobs with a recent factory closure.  Suddenly the unemployment rate is 20%.  Because the town is small, there is not a lot of new job growth.  After a few weeks, half of the laid off workers realize they will not find a new job until another company moves to town, so they begin to change their plans.  They move in with relatives, help around the family store, help raise younger children, take some evening classes, or just sit around with their friends.  According to the government, the number of potential workers in the town has now decreased from 1,000 to 900.  Of that 900, 800 have jobs, and 100 do not.  So now the unemployment rate is 11%

This type of statistic makes it seem as though things have improved.  But in fact, the situation in the town is pretty dire.  Looking at a trend (20% unemployment previously, now reduced to 11%), we might think there is decent job growth and a healthy economy in this town.  But in reality, things are very bleak, and our statistics are misleading us.

So what happened in January 2011?  The number of adults who are not in the workforce (i.e. they are neither employed, nor unemployed) was 85.5 million–an increase of over 2 million people since January 2010, and an increase of 300,000 since December 2010.  In fact, the number of people not in the workforce increased by 167,000 people more than the underlying working-age population growth from January 2010 to January 2011!  In other words, working-age, qualified adults are shifting their plans and waiting out the recession.

So while it’s true that a small number of new jobs were created, what’s more significant is the number of people who are no longer counted.  And every single one of those people who are no longer being counted is, in fact, unemployed.  The fact that they are not counted in some government statistic doesn’t mean they aren’t members of our communities–it just means our statistics are wrong.

I’ve used FreeConference.com for years. They provide a great service–scheduling and hosting conference calls.  It’s easy to use, and 100% free. But recently I’ve been asking myself: How exactly do they make money?

I’ve become so accustomed to free services through the internet, that I tend not to think about them much. Most are either advertising-supported, or they try to upsell you on premium services. But I noticed that FreeConference.com has very little advertising, and never seems to be trying to sell me additional services. So that left me wondering: how exactly do they make money?

Fortunately, my friend had led a company in a related space. So he was happy to explain.

Enter the Government

When the US Government broke up the old Ma Bell, they needed to ensure that various networks would be compatible. Nobody wanted a bunch of private networks that couldn’t talk to each other. So they instituted a set of connection tariffs.

It works like this: if you are an AT&T long-distance customer, and you call someone who uses Sprint for their local service, AT&T must pay Sprint a “termination fee” for carrying part of the call. Likewise, when a Sprint long-distance customer calls a local AT&T customer, Sprint pays a fee to AT&T.  These termination fees typically range from $0.01 per minute to more than $0.10 per minute. For customers in rural areas, where the cost of serving the customer is high, the payments can easily be in the $0.03 to $0.04 per minute range.

So what does this have to do with Free Conferencing?

FreeConference.com realized that if they could devise a business that accepted incoming calls to rural areas, but had no outgoing calls, then they would receive the termination fees from all of these incoming calls.

So they set up conference call servers in rural areas and started giving out those numbers to people who wanted to set up a free conference call.  They also registered as a local telephone company (an “independent local exchange carrier,” or ILEC), or cut deals with the local telephone company to split the termination fees.

So now when customers call in for a conference call, FreeConference.com makes money from each caller’s termination fees.

Simple, huh?

Only one problem: the big long-distance companies like AT&T don’t like it. You see, they wanted to sell the same service, and charge something like $1 per minute, per line. So having a competitor who was effectively free really bugged them.

So they started by blocking calls to the numbers. Then they tried charging their customers extra for calling those numbers. But the FCC ruled clearly that AT&T and others cannot block calls to valid phone numbers, and cannot charge a differential rate to a US-based phone number.

So they sued FreeConference.com (and a bunch of other companies with similar business models) to try to recover the fees. And they tried to claim it was a misuse of the original idea of termination fees.

Well, perhaps it was. Then again, AT&T isn’t required to charge me for their business taxes, but they do so anyway (check your bill!).

Meanwhile, I love the ability to easily schedule and use free, business-class conference calling. And I plan to continue using it.

At the same time, government wages and benefits have dramatically increased.

Why is this significant?  Because all government payments come from taxes, which are ultimately derived from productivity in the private sector.  So as the private sector shrinks relative to the public sector, the burden on the private sector increases, and the overall stability and sustainability of the system decreases.

Of course, individuals who receive paychecks from the government pay income taxes, just as private sector employees do. So to an individual it may appear as though the distinction of government or private pay in unimportant. But that is an illusion. At the end of the day, 100% of government-based pay has to come from somewhere, and the only place it can come from is taxes. The only method the government has to increase its payroll is to increase taxes.  (Even borrowing money just means increasing taxes later.)

By contrast, private company pay comes out of private earnings. A company can increase its earnings by becoming more efficient, producing more products, producing higher-margin products, expanding into new markets, etc.  And every dollar a private company generates creates more than a dollar of value in the economy.

Why is this?  Economics 101: someone was willing to voluntarily pay that dollar for some good or service.  That means, to that individual, the good or service was worth more than the dollar, and to the manufacturer of the good or service, the dollar was worth more than the manufacturing materials and effort.  So both sides benefited from the exchange.

By contrast, virtually nobody believes they are receiving more benefit for their taxes than what they pay.  If they did, they would voluntarily pay more taxes (to increase the benefit).  You may think taxpayers should value the benefits higher, but empirically they do not.  Hence, to the taxed individual, taxation is actually a destruction of value.  (Measuring the value created through the use of the taxed revenue is difficult, and reconciling any potential value creation to the government beneficiary against the destruction of value to the taxed individual has been proven to be impossible.)

So what does this all mean?

Private wages can effectively increase forever–limited only by the creativity and toil of people in the private sector.  But government wages can only increase as a function of increased taxes, which in turn depend upon those private wages.  So when private wages decrease, and public payments increase, the system can quickly become unstable.

Economist David Henderson of the Hoover Institution at Stanford University explains it nicely:

People are paid for being rather than for producing.

Which sounds great if you’re the one being paid.  But not so much if you’re the one doing the paying.

“Banks that received federal assistance during the financial crisis reduced lending more aggressively and gave bigger pay raises to employees than institutions that didn’t get aid.”

Using federal bank data, they compared 940 banks in the Troubled Asset Relief Program (TARP) and 7,400 banks outside it.  That’s a pretty thorough study.

Here are some of their published findings:

Lending fell
TARP banks: Outstanding loans to businesses and individuals fell 9.1% for the 12 months ending Sept. 30, 2009,
Non-TARP banks: Outstanding loans dropped 6.2% in the same timeframe.

Employee pay rose
TARP banks: Average pay rose 9.4% in the program’s first year.
Non-TARP banks: Salaries increased 1.8%.

Cost-cutting limited
Banks in TARP cut costs less than those outside the program.
TARP banks: Increased branches by 2.7%
Non-TARP banks: Decreased branches by 1.2%.

Essentially, what this says is that the banks that the federal government bailed out showed worse behavior than the banks that were not bailed out.  And by worse behavior, I mean worse according to the very metrics the government and policy makers care about and were trying to improve by bailing out those banks in the first place.

Check out the full article at:

http://www.usatoday.com/money/industries/banking/2010-04-21-tarp-banks_N.htm

This is the growth of the Monetary Base, as reported by the Federal Reserve Bank of St. Louis. As you can see, the money supply has grown steadily over the years. But in the past 18 months it has more than doubled.

What are the implications of this?

The title refers to the creation of the US Federal Reserve Bank, which took place at a then-secret meeting in 1910 (later confirmed by the participants), at a resort on Jekyll Island, just off the coast of Georgia.

Most of us grew up thinking of the Federal Reserve as a quasi-government organization that helps stabilize our money supply. How it does that is often a bit of a mystery, although it involves interest rates, and possibly reserve requirements. And it isn’t always clear what the relationship is between the Federal Reserve and the US government.

Griffin argues that, in point of fact, the Federal Reserve is a private cartel created by the banks, with the sole purpose of maximizing bank profits. Inherent in its design are the seeds of periodic financial disaster (and inevitable, eventual collapse), which result in a massive transfer of wealth from depositors and taxpayers to bank executives. This is not an accident; it is the way the system is designed.

While this may seem an extreme view, Griffin’s evidence is undisputed, his logic is sound, and his arguments are highly convincing.  Much of the banking system which is ordinarily difficult to understand becomes extremely clear and transparent when viewed through this lens.

The energy business (more specifically the oil industry) can be split into two main areas: Upstream and Downstream. The Upstream business acquires “crude” oil (the raw material removed from the ground), while the Downstream business takes the crude oil and “refines” it, turning it into a finished product that end users want to purchase, and sells it to them.

Upstream

The Upstream business deals with finding and acquiring oil from the earth.  These are the “wildcatters” who use geological sciences, predictive modeling, and other means to find underground locations where there is likely to be a lot of oil.  Often, that oil is in an area of the world that is difficult to get to, either for political or engineering reasons, or both. It may be in an area that has a lot of political unrest, or a corrupt government, or simply a government that is hostile to the energy industry. Or it may be very difficult to access, such as deep underneath an ocean plate.

The Upstream business unit must make financial arrangements to get legal access to the underground oil, then must acquire the necessary equipment to access the oil, and finally must actually drill for and extract that oil. These are huge capital-intensive operations that can often cost many tens of billions of dollars.  And unfortunately, the lead time is so long to get the rights to drill, as well as to line up the equipment, that by the time they are able to drill, the market price of the oil they intend to extract may be too low to justify actually removing the oil.

Then there is the uncertainty they face about the type and quality of the oil they will extract.  Since some oil is easier to process than other (depending upon contaminant, for example), and some oil produces more of the more desirable and expensive final products,

However, once they have extracted the oil, the Upstream business can sell it on the open market for the going rate, which fluctuates daily.

These can often be highly profitable businesses, but they are subject to a lot of market risk, since the global market price of oil is often unknown when the businesses need to make key expenditure decisions.  The key to this business is the ability to find the best sources of oil, manage risk, and time your operations so that the market price of crude oil is as high as possible when you are ready to sell it on the market (typically right after you’ve extracted it).

Downstream

The Downstream business acquires oil on the open market from someone who has already extracted it. They know what quality oil they are getting, and what they can make from it (different grades of gasoline, jet fuel, diesel, kerosene, etc). Their job is to refine the oil into a variety of finished products, package it up, ship it to its destination, and market and sell it.

These businesses are highly competitive, and require extremely careful operational efficiency.  They are typically not as profitable as the Upstream businesses, but the business is often more steady and predictable than the Upstream businesses are.

Companies

There are a handful of “supermajors” or “big oil” companies who have both significant Upstream and Downstream operations. These include ExxonMobil, Chevron, BP, ConocoPhillips, Royal Dutch Shell, and Total, SA.

There are also many Upstream-only companies, such as Occidental, XTO, Anadarko, and so on.

There are also a handful of regional Downstream-only companies. However, the downstream market has largely consolidated, with most of the well-known brands belonging to one of the major integrated energy companies.

Under this program, people will receive $3,500 to $4,500 when they trade in a car and buy a new car that gets better gas mileage than their trade-in did. That covers approximately 500,000 new cars.

If you are thinking of purchasing a new car, this may be a nice additional incentive.

Of course, the skeptic in me notes the irony that the Federal Government is working to boost demand of an industry in which it now has a major financial stake. (Where are the $500 rebates for trading in an older computer, or television, for a newer model that uses less power?)

There seems to be no end to the efforts to rescue dead business models and dying industries.

www.nytimes.com/interactive/2009/07/02/business/economy/20090705-cycles-graphic.html

This graphs plots the relative amount of industrial output against the change in industrial output over a running 6-month period. As you move through the 9 images, you can see how various recessions have progressed.

It’s a neat visual, and shows some interesting patterns, but doesn’t provide much fundamental insight.