On job openings and job availability

Paul Krugman is a tireless writer. That's the good part. The bad part (you knew this was coming) is that...well, he can also be a tiresome writer.

Consider this: A Rising Natural Rate. Here, he is commenting on some analysis by the SF Fed trying to estimate some measure of the "natural" rate of unemployment. Fine, nothing wrong with this. But then he slips this in:

Right now, there are very few job openings relative to the number of unemployed:

 

So there’s no question that right now, the demand side is what is constraining unemployment.

Ya got that? Paulo says that thar's no question bout it. Thar's deficient demand out in them thar hills. An y'all see that l'il ol' dyergram up thar? Well...that thar jus' goes ta prove it. Lessen' yer blind, that is. Lessen' yer sum evil laysay fare type.
 
Well, I hate to break it to those who demand and consume this brand of religion, but there might just be some question about it. Shhhh...what I am about to say is super secret...economists aren't really sure what's going on. I mean, think about it. If we knew what was going on, there would be no need for economic research. You know...research...that activity that brings so much joy to you know who (The Joy of Research).

But I don't want to be too hard on Paulo. Evidently, he has an agenda to push and he pushes it from a particular philosophical perspective. I can respect that. What I don't like is the constant allusion to certainty--the lack of humility in what we know--the notion that the data "speaks for itself." These are the tactics used by politicians, not academics. This is what I find so tiresome in his otherwise fine writing.

But maybe I should cut him some slack. Evidently, it must be some sort of Nash best-reply to fluff up one's feathers this way and show no sign of weakness. There is always some right-wing nut job out there waiting to pounce, to tear apart, and to misrepresent anything that might be construed as capitulation on his part. He knows this. I know this. Now we all know this. So let's set it aside and take a closer look at that data.

The chart above appears to be drawn from the Job Openings and Labor Turnover Survey (JOLTS). This is a great data set, but it has its limitations.

The question I'd like to ask is whether it really is the case that there are more unemployed workers than available jobs. According to JOLTS, the answer is yes. But this does not mean it is so in the economy.

It could be the case that many, perhaps even most, job openings are not advertised (hence not picked up by JOLTS). There are, evidently, a lot of farm jobs available that Americans refuse to work at (see: Despite Economy, Americans Don't Want Farm Work). Many unadvertised jobs are poor-paying jobs. Everybody knows they're out there. If you need a quick (and legitimate) buck, you send your application to McDonald's. There are arguably millions of these low-skill low-pay jobs around. Jobs are not scarce. (What is scarce are good jobs that are well-matched with the characteristics of all those available to work.)

The JOLTS data itself provides some evidence that many job openings are not measured. In particular, take a look at this:

So there's no question that right now, the supply side is what is constraining unemployment.

Cyclical asymmetry in the unemployment rate

Economists have known for a long time that there is a cyclical asymmetry in the unemployment rate. In a recession, the unemployment rate tends to spike up quickly and sharply. During an economic expansion, the unemployment rate tends to decline only gradually. Consider the following data, for example:

The shaded regions roughly depict the periods over which the unemployment fell from peak to trough. As you can see, what the U.S. is experiencing right now looks a lot like what Canada experienced in the early 1990s. Evidently, it takes time to rebuild the employment stock after a shock. And the bigger the shock, the longer it seems to take. 

Is gold a good store of value?

I know I'm asking for trouble here. Goodness, simply mention the yellow stuff and people go crazy. In an earlier post, I asked Is Gold Money? I answered "no." To all those who were deeply wounded by this answer, I am truly sorry. But the answer is still "no."

Of course, the answer depends in part on how "money" is defined. There are legal definitions, like "lawful tender" and "legal tender" (they are distinct). There are operational definitions, like M1 and M2. But the definition I used was an economic one. Money is an object that "circulates widely as a means of payment." In the U.S. today, cash fits this description. So do the electronic digits sitting in your chequing account (so M1 fits).

But gold, in whatever form it takes, does not fit this description. Unlike government cash and bank digits verifiable by debit card, there is no standardized easily recognizable gold unit circulating widely as a payment instrument in the U.S. today. If you were to try to pay your groceries with gold coins, they might accept them, but at a huge discount. This discount reflects the illiquidity of gold. Gold is not money.

This is not to say that one should therefore not own gold. Even if gold is not money now, it may be one day in the future. And even if it is never money, it may still constitute a good store of value. Certainly, gold appears to be a better store of value than, say, the USD. The price of gold, measured in units of USD, has been rising over time. The purchasing power of the USD has been falling over time (inflation).  So gold is a better store of value than the USD.

But so what? Who in their right mind stores value by tucking USD under their pillow? Cash is easily transformed into an interest-bearing asset, like a government or corporate bond. Or one could purchase a wide basket of equities, like the S&P500. The question I want to ask here is whether gold is a better store of value than one of these competing storage devices.

In what follows, I choose the S&P500 total return index (assumes that dividends are re-invested). The experiment is as follows. I am going to take four years: 1970, 1980, 1990, and 2000. For each of these years, I am going to imagine investing $1 in gold and $1 in the stock market. Then I'm going to track how well these two investments store value from the starting date to the present.

Returns since 2000

If you had invested $1 in gold in 2000, you would now be up almost 500%. In contrast, your investment in the S&P500 would have returned virtually zero. Gold appears to have an excellent store of value over the last decade.

Gold is frequently touted as a superior inflation hedge. Yet, the US inflation rate over the last decade was not very high. Nevertheless, gold kicked a$$, so to speak. Good for gold. Good for gold bugs.

Returns since 1990

Whoa, this looks a little different, don't it? If you had invested $1 in gold 20 years ago, you would have gone 15 years with negative to zero returns. A late sample rally makes your return look a little better, but over this longer sample period, the S&P500 kicks gold's a$$. But maybe we just have to look at a longer time horizon...

Returns since 1980

Oh, gosh. That didn't work, did it? In fact, over 30 years, the relative return on gold looks absolutely horrible. Well, at least the return looks more stable, if that's any consolation.

Return since 1970

Alright, we knew things had to get better for gold--and they did. The 1970s, a high-inflation episode, was a terrible decade for stocks and a very good one for gold. And it is the memory of this decade that remains burned in a gold bug's brain.

And it's a good lesson to have burned into one's brain. It probably justifies holding some gold in a diversified portfolio of wealth. Can't help but note, however, that even allowing for the disaster that was the 70s, the stock market still outperformed gold in the long-run. Something to keep in mind.

Time to short treasuries?

U.S. Treasuries over the last two years have served as sort of a safe-haven for investors (something that still has gold bugs scratching their heads).  But with the worst of the financial crisis over, and growing evidence of U.S. and world economic expansion, there is good reason to believe that long-term real interest rates are likely on the way up (reflecting the increasing world demand for investment).

Ceteris paribus, higher real rates also imply higher nominal rates. That's bad news for treasuries. And though the Fed has promised to keep inflation in check (around 2% per annum), the market might have different ideas concerning the Fed's willingness and/or ability to deliver on its promise. Market expectations of inflation appear to have risen lately. Via the Fisher relation, one would expect this to put further upward pressure on nominal interest rates. Again, this is bad news for treasuries.

Note that I am not personally making any forecast about where interest rates are likely to go in the future. All I want to say is that IF you believe nominal interest rates are likely to continue their way upward, you may want to play this by shorting U.S. treasuries. And an easy way to do this is to go long on the Proshares Ultrashort 20+ Treasury ETF; see recent performance below (on Canadian exchanges, try ticker symbol HTD).

What could go wrong with this trade? Well, the fact remains that U.S. treasuries are likely to retain their role as a safe-haven instrument, at least for the near future. So, surprise events in sovereign debt markets, for example, may very well make TBT tumble again. And then there's the Middle East...what could possibly go wrong there?

Is gold money?

You've seen the advertisements on TV. They come in two forms:

[1] We will buy your gold!!!
[2] We will sell you gold !!!

Ad type [1] argues that with gold prices at an all time high, now is a good time to cash out of your inventory of gold (jewelry, coins, etc.). All you have to do is put your gold in an envelope and mail it to them; they will mail you back cash. They promise to reverse the transaction if you are not happy.

Ad type [2] argues that with gold prices going higher, now is a good time to turn your cash into gold. This type of ad typically stresses the virtue of gold as money, something that will retain its value even as the world comes to an end.

Maybe the rational-agent hypothesis is indeed taking things a step too far.

Let us settle on a (loose) definition of money. Let me say that money is an object that circulates widely as a means of payment. This is to say, money is liquid; it is not discounted (severely, at least) in quid-pro-quo trades. Something like that.

In today's world, gold (whatever form it may take) is not liquid. Try paying for your morning coffee with bullion and be prepare to be astounded at the discount you are offered (on your gold, not the coffee!).

In ad type [1], people are trying to buy your gold...that is, buy it with cash (money). This ad appeals to people who want cash now. They want to buy things, now. So, if gold is money, why don't they just use the gold to buy the things they want now? Answer: gold is not money.

In ad type [2], people are trying to buy your money...that is, buy it with gold. If gold is in fact money, why would they want to sell it for paper? This ad appeals to people who want to make provisions for the end of the world. When society collapses, no one will want to hold fiat money; but everyone will hunger for gold.

These people are delusional. Think of  Mad Max. People will hunger for food, water, and fuel -- not gold. Which is to say, not only is gold not money in a disaster scenario -- it is not even wealth!

I wonder whether the people who fall for ad type [2] ever ask themselves why these prognosticators of future financial turmoil appear so willing to buy their paper money for gold? Yep, they must be mighty fine folks to be willing to dispose of their gold supplies in exchange for your fiat paper.

So there you have my little rant of the day. But I am snowed in. And maybe watching too much TV (CNBC -- First in Business Worldwide).

PS. Subsequently came across this related link: Is Gold Money?

AIG Repays the Fed

New York Fed Ends AIG Assistance with Full Repayment
For release at 12:25 p.m. EST on January 14, 2011

NEW YORK – The Federal Reserve Bank of New York (“New York Fed”) today announced the termination of its assistance to American International Group, Inc. (“AIG”) and the full repayment of its loans to AIG as a result of the closing of the recapitalization that was announced on September 30, 2010. As of today, AIG will no longer have any outstanding obligations to the New York Fed.

Today’s closing represents a substantial step toward achieving the Federal Reserve’s dual goals of stabilizing AIG and ensuring its repayment of government assistance. It reflects the significant progress AIG has made in reducing the scope, risk and complexity of its operations and stabilizing its operating results. The accelerated repayment of the New York Fed frees up collateral that will enable the company to access private debt markets, an essential step toward facilitating the U.S. Department of the Treasury’s future sale of the common stock it owns.

"This concludes an important effort by the Federal Reserve to stabilize the financial system in order to protect the U.S. economy" said William C. Dudley, President of the New York Fed.

With today’s closing of the recapitalization, the New York Fed’s revolving credit facility has been fully repaid, including interest and fees, and its commitment to lend any further funds has been terminated ahead of the credit facility’s scheduled expiration in September 2013.

In addition, the New York Fed has been paid in full for its preferred interests in the AIA and ALICO special purpose vehicles. A portion of those interests has been redeemed with proceeds from AIG’s sale of ALICO to MetLife, Inc. The remaining interests have been purchased by AIG through a draw on the Treasury Department’s Series F preferred stock commitment and transferred to the Treasury Department.

The closing of AIG’s recapitalization also marks the termination of the AIG Credit Facility Trust, which was established to hold an approximately 79 percent controlling equity interest in AIG for the sole benefit of the U.S. Treasury, the general fund of the U.S. government. The Trust’s equity interest in AIG is being exchanged for common stock of AIG and transferred to the Treasury.

“We are grateful to Jill M. Considine, Chester B. Feldberg, Peter A. Langerman, and Douglas L. Foshee for their invaluable contributions and commitment to the execution of their responsibilities as Trustees,” Mr. Dudley added.

About the Federal Reserve’s actions related to AIG

In September 2008, the Board of Governors of the Federal Reserve System authorized the New York Fed to provide AIG with an emergency loan of up to $85 billion to prevent its disorderly collapse, which could have had catastrophic consequences to the U.S. economy during the most damaging financial crisis in 70 years. The assistance provided by the Federal Reserve was restructured over time, and was supplemented in November 2008 and April 2009 by additional financial assistance from the Treasury Department under the Troubled Asset Relief Program.

As part of the November 2008 restructuring of the government’s assistance to AIG, two special purpose vehicles, Maiden Lane II LLC and Maiden Lane III LLC, were created with loans from the New York Fed to purchase various mortgage-related securities in order to address AIG’s capital and liquidity strains. The loans extended by the New York Fed to the Maiden Lane II and III facilities remain outstanding and are being repaid from the assets in those facilities. The fair values of the portfolios well exceed the balances of those loans.

The Great Canadian Slump: Can it Happen in the U.S.?

The large decline in U.S. employment has had me reminiscing about Canada's similar experience in the early 1990s. I remember Pierre Fortin's presidential address to the Canadian Economic Association in 1996, entitled The Great Canadian Slump. Fortin seems to place much of the blame for this episode on the Bank of Canada; a claim hotly contested by Chuck Freedman and Tiff Maclem of the BoC here. I see that Stephen Gordon of WCI was reflecting on this episode in Canadian economic history as well; see here.

Let's begin by looking at employment-population (E/P) ratios. Population for Canada is 15+; for the U.S., it is 16+ civilian, noninstitutional (sample period 1976:1 - 2010:3).

The two series are similar up until about 1990. Then the recession hit. And it hit much harder and longer for Canada.

In 1990, E/P dropped by less than 2 percentage points in the U.S.; and dropped by about 4 percentage points in Canada. Now take a look at 2008; it is exactly the opposite. Canadians, apparently, don't need a world financial crisis to generate crisis-like employment slumps. In fact, the financial crisis appears to have had relatively little impact on Canada (that is, relative to the U.S., and relative to Canada in 1990).

One thing that might be of interest (or concern) for Americans is the length of Canada's employment slump. The E/P ratio essentially flat lined for about 5 or 6 years; and did not attain its pre-recession peak of 62% until well into the next decade.

Let me normalize real per capita GDP and the E/P ratio each to 100 in 1990:1. Here is what Canada's output and employment history looks like for the 1990s:

Now, that's what I call a jobless recovery!

It's interesting to look at other measures of labor market activity too. The next graph shows the participation rates (labor force divided by adult population):

Part rates are similar until 1990, and then exhibit almost a mirror image. Note that the U.S. participation rate shows some evidence of secular decline since reaching its peak. The next graph plots unemployment rates (unemployment divided by labor force):

The large gap in cross-country unemployment rates that emerged in the early 1980s and persisted for two decades elicited a fair amount of hand-wringing and a collective gnashing-of-teeth in Canada. To see what people were talking about, have a look here.

The main point I want to convey here for Americans is that the prospect of a prolonged jobless recovery, with persistently high unemployment rates, is not outside the realm of possibility. Such an episode has occurred in the recent past and, moreover, it occurred in an economy that is more similar to the U.S. than perhaps any other (in particular, Canada is not Japan).

This does not, of course, mean that a jobless recovery is inevitable. But I do think it might be worth exploring what parallels (if any) exist between these two episodes, and to see what might be learned from it. Will keep you posted, but in the meantime, feel free to share your thoughts.