What about everyone who isn't a W2 employee?

Does the unemployment number tell enough of the story?

The Federal Reserve seems to be fixated on the unemployment number as well as the inflation number of late.  The statements from the fed all fall along the lines of we need higher unemployment to curb inflation.  The implication is that low unemployment and people working is a bad thing.  And, it likely does result in wage inflation as employers compete for employees.  However, I don’t think this is a bad thing – except for employers, particularly ones that believe employees should basically work for free or, worse, pay employers to allow them to work there (that’s really a thing).  A great organization has a more symbiotic relationship with its team than that. No, low unemployment is good.  That means there are opportunities for people. Opportunities create a great society.

However, the unemployment rate doesn’t tell the entire story.  The assumption is that work is binary.  People go to work for a company. They get a paycheck. They are employed.  When the paycheck stops, they are unemployed.  There is, however, a huge sector of the economy, perhaps as much as 30% or more, that doesn’t fall within those definitions.  These are your small business owners, your independent contractors and large swaths of certain industries.  When the economy falters, these people often don’t become unemployed in a literal sense and definitely not in any way that shows up in government statistics. 

They don’t have the option of filing unemployment claims.  They don’t show up in the statistics.  They may even still be working.

How is that bad, you ask?

They may still be working but they are working less and making less.  So, they aren’t unemployed but income is down 20% or 30% or more.  Often, there is no cushion to absorb a 20% decline in income. They sell 2 houses this year instead of 10 or complete 20 projects of a smaller size rather than the 25 from prior years. 

But, these types of numbers don’t show up very well places.  You can see macro numbers about real estate transactions or housing starts or permits but this independent economy is far more pervasive than those numbers provide.

So, while the fed is focused on the official unemployment numbers and making sure more people with formal jobs lose them, there is significant collateral damage in the non W2 job sector as people earn less as their sales decline.  I see this first hand in the construction business.  As this sector of the economy struggles, it will affect the economy on the whole.

By moving rates as fast as the fed has, they haven’t given enough time to assess the impact to the entire economy.  Many indicators are lagging in nature but the indicator that isn’t measured very well, underemployment in general and in the independent sector in particular, is showing plenty of stress right now.  The fed members need to get out of the office and into the economy and talk to people.  Data is great but it only tells part of the story and where the economy is concerned, you need the entire story.

Does the Fed have any idea how the real world works?

2% isn’t realistic.

I think most of us in the business community already know the answer to this but to make it more clear, NO, the fed folks apparently don’t understand how people in the real world work.  We have underqualified federal reserve leadership who lack some basic understanding of how people operate.

Seriously folks.  The economy is too hot. Employment is too strong.  Does a coach ever tell a runner the morning of the Olympic final, you ran too fast in the prelims. You need to slow it down.  Don’t win by such a large margin. Hey, don’t even win at all.  That’s not what we run the race for.  Again, the answer is no.  The goal is to run the fastest you can and win.  There is no other goal.

The stated goal of 2% inflation is not realistic. Here is why.  Inflation ran low (there was even talk of deflation. Anyone remember that?) because interest rates were low.  Interest rates were low because the economy blew a gasket.  Then housing prices went bonkers as everyone freaked out post pandemic and moved and overpaid because rates were low and the payments worked.  Housing makes up a large part of the inflation metrics and this (along with price increases everywhere else) pushed up the inflation numbers. 

Not good.  This created a large affordability gap between earnings and the cost of housing, primarily.  The real issue is this gap, not really inflation.  The goal should be close the gap. This can happen by bringing down housing prices or bringing up wages or some combination.  The problem is that housing prices will remain sticky due to the low mortgage rates in 90% of these loans, the cost of land and new builds and the unwillingness of sellers to take a loss.  So, the only real solution is for wages to rise. 

For wages to rise, we need unemployment to remain low. This will keep pressure on wages pushing them up, inflating the wage base to meet the new housing cost base.  So, we don’t need 2% inflation. And we definitely do not need high unemployment. 

High unemployment will simply serve to hold wages down.  Low wages will drag home prices a bit but not really enough to close the gap.  A strong economy drives transactions.  A bad economy ices transactions.

Now, if you have really high unemployment, then people can’t make the mortgage payments, houses get turned back to the lender because there are no buyers at a price where it makes sense for the seller to not give it back to the lender. Then, you have 2008 all over again.

So, stop trying to get inflation to a ridiculous number and let’s shoot for stability.  Get the rates down a couple of points and let’s give it 2 or 3 years and things will get back into balance. Stability, stability, stability.

We need fed leadership focused on stability instead of 2% inflation at all costs. 2% inflation with a broken economy isn’t worth it.

Are Pensions Bad?

Are Pensions Bad?
Pensions are generally looked at as a good thing and a bit of a relic of a bygone era. Not many people get them any longer, but that is considered to be a loss, not a benefit.  However, many people do get social security (indeed, most everyone at some point) and that is simply another form of a pension.  Should we pine for the days of the pension?

So, why would a pension be a bad thing?  It’s not.  Well, not totally.  A stream of income in retirement until you move on to the next life certainly isn’t a bad thing.  However, it does have some broader negative consequences that very likely played a part in the establishment of pensions in the first place.

A pension is, at some level, a clever way to both be an attractive employer by taking care of your employees and helping to ensure your employees are less likely to build up generational wealth that will allow their future generations to join the capital class.  You can pass property, a 401k, an IRA, a bank account, etc. on to your heirs.  But, you can not pass along a pension stream or social security (except to your spouse or ex spouse).  Those die out when you die out.  So, having a large social security payment isn’t worth a whole lot.  It doesn’t build your capital base.

Historically, many large companies were controlled by one person or a family who was clearly part of the upper class.  By creating a pension system, it allowed the company and family or person to essentially control the capital that generates the income for the pension without allowing capital to truly change hands.   Maintaining control of the capital allowed them to maintain control of society and their place in it.
Many things have changed today.   Employees often have the opportunity to participate in some of the economic wealth and build generational wealth.  New companies and industries with new players form in an instant and intellectual capital is rewarded like never before.  However, it is important to take note of how enhanced economics were likely used in the past to keep people in their place. Suppression isn’t the only way to maintain class distinctions.  We still have vestiges of this with our social security system and, to a degree, the 401k industrial complex.  Again, not a bad thing, but that is not building wealth through generations.

The important thing to keep in mind is that the broader system is still not set up for you to truly build wealth.  We don’t have pensions or cradle to grave employment but you still have to constantly recognize and work towards creating wealth for you and your future generations.    Or, get a trust fund.  Those people that seem like they started the race ahead of you?  They did.
Build assets that generate income and those can list through the generations.