Missing The Forest For The Trees

by: Steven Hansen

Summary

One of the hazards in being intelligent is that at times one misses the big picture in solving problems.

One example is the issue of demographics - and its effect on the employment participation rate.

Just view the participation rate of the prime age working segment which removes demographics.

There is truth in the old adage that many cannot see the forest for the trees. I have seen financiers and engineers faced with a problem, pull out a calculator, and puke out analysis with solutions, missing the big picture.

In some ways - Bosch, Audi, Porsche and VW are faced with the results of this dilemma with their diesel engine emissions. Did they consider what actions could be taken if their little subterfuge with gaming emissions testing was discovered (not to mention these corporations were working against public good which is nasty).

Engineering is constantly faced with dilemmas. Too stiff, it breaks. Too soft, it bends. Governing factors rotate as conditions change. The governing factors many times have solutions which cause failure when other governing factors dominate. Sometimes solutions become so complex that they violate KISS (keep it simple stupid), but when you cheat on a complex solution and are caught, you are up sh@t creek because usually no implementable alternate solution exists.

The Federal Reserve and other "economic" wizards believe the low employment participation rate is mostly due to demographics - in fact they pull out their calculators to "prove" it. Here is the "latest proof".

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Nothing seems to be wrong with the calculations (I did not validate but they seem in the ballpark). People are living longer, and this will push down the participation rate because the over 65 demographic has the lowest participation rate of what is considered working age population. To visualize what is happening to the USA population, here is an animation from calculatedriskblog.com.

U.S. Births per Year



What is the point of participation rates? It is to measure employment slack. Riddle me this - if demographics are causing lower participation, then what is wrong with the participation rate of the prime working age population which is not affected directly by demographics?

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There is too much employment slack. Too many are drinking the spiked Koolaid of the BLS's unrealistic 5.0% unemployment rate. No thinking person believes these metrics accurately portray employment slack - only economists do.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.