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.

Irrational exuberance over the balanced budget multiplier

Christmas time is the most magical time of the year. A time to believe in elves, talking reindeer, snowmen running amok, and...for some economists, the Keynesian cross.

The Keynesian cross. We (the economics profession) like to etch it deeply into the minds of fresh undergraduates, one cohort after another, year after year. Is it any surprise that for most educated laypeople, this is the only macroeconomic language they understand?

And here is a Christmas gift--from Professor Robert J. Shiller--to those of us who have been primed since youth to be receptive to this sort of message: Stimulus, Without More Debt. The argument for why a tax-financed increase in government spending will work is summarized as follows:

The reasoning is very simple: On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.

In other words, the Keynesian cross (formal exposition available here). Econ 101 in action, kids!

So what, pray tell, is your beef with this, Mr. Grinch?

First, it's not that I have anything against the Keynesian cross, per se. I can appreciate the basic idea it is trying to convey. And it's just a simple model, after all--it seems silly to hold a personal grudge against an inanimate object. What I am against is in placing it (or any other economic theory, for that matter) on an exalted alter. Models should not, in my view, be worshipped in this manner. And while I'm on the subject of religion, I'm also against beginning an argument with a preordained conclusion (in this case, that more stimulus will certainly be needed, because unemployment is high).

Having said this, I think that the Keynesian cross is a delightfully perverted object. It can be (and has been) used to support almost any type of government appropriation. In fact, I feel like writing a letter myself to this end.

Dear Congressman:
The economy is in dire need of help. It needs to be stimulated. I am willing to stimulate it, with your help.
To this end, I ask that you appropriate a sum of $X from my fellow citizens and divert this money to me.
As this money does not belong to me, I promise to spend it...to return it to my fellow citizens, so to speak. Of course, I will make them work for it...given the clear want of work in our present economic climate. The income so earned in exchange for their idleness will undoubtedly be spent--adding income to the pockets of everyone. No one will even notice the initial appropriation, as all of the money borrowed will be returned in the manner just described.   
Signed (your name); noble servant of society.

Now, try to imagine everyone writing this letter and that Congress acts accordingly. I hope you can see as well as I how nothing but good can come of this. Whatever the ailment, the cure, evidently, is to increase spending. Indeed, to force people to spend if they refuse on their own. When the Keynesian cross is your hammer, every macroeconomic problem nail looks like deficient demand. 

Second, it's not that I don't believe that an increase in G will lead to an increase in Y. There is evidence that it can. Heck, even standard neoclassical theory says it can. Whether it does or not in a given set of circumstances is a different matter. And even if it does, it is not entirely clear that increasing Y in this manner is socially desirable. It may be. Or not. It depends on a lot of things. I do not view the proposition as self-evident and beyond critical examination. In contrast, according to Shiller:

But the balanced-budget multiplier is simpler to judge: If the government spends the money directly on goods and services, that activity goes directly into national income. And with a balanced budget, there is no clear reason to expect further repercussions. People have jobs again: end of story.

(Don't you love it when you are granted license to stop thinking? End of story, indeed.)

Third, its not that I'm against increasing (components of) G. Public works projects of the sort mentioned by Shiller (building highways and improving our schools) were advocated by sensible economists long before Keynes (as evidence of this, note that public works were implemented in the Depression well before publication of the General Theory). What I have a problem with is in using some silly theory to support the notion, for example, that taxes should be raised to finance a large public capital expenditure. Shiller has been rightly celebrated for his work in the theory of finance, and on asset price bubbles in particular. But is this not a rather odd stand to take for a professor of finance?

Now, I'm no expert in finance myself, so maybe I should be careful in what I'm about to say. But it seems to me that a large capital expenditure should be financed with debt. The debt service could be supported by toll revenue (on bridges and roads) and user fees in general, backed by the Treasury, if needed. The use of tax finance advocated by Shiller in his balanced-budget exercise implicitly assumes (among other things) lump-sum taxes. For some thought experiments, the assumption of lump-sum taxes is innocuous enough. But this is not one of those cases. Taxes are distortionary and to the extent that they are needed to support public spending, they should be spread out over time. This is a standard principle of public finance (I think).

Maybe Shiller believes in this standard principle, but views it as politically infeasible (given the current appetite for debt reduction). Possibly. But if so, I would rather have expected a rousing defense of these standard principles. Americans are not necessarily against debt; they are against wasteful spending.  Given that America has an infrastructure (crumbling as it may be be) should be taken as evidence, I think, that people are generally willing to support worthy public enterprises--where worthiness is judged by a project-by-project cost-benefit analysis.

And speaking of standard principles, what ever happened to the quaint idea of evaluating the merit of public capital expenditure on a net present value basis, instead of some magic-multiplier concept? There is probably a good NPV case to be made for implementing such projects in a recession, even in the absence of positive externalities. Indeed, if what we read about America's "crumbling infrastructure" is true, these projects should have been started several years ago. Perhaps they were not because the economy was at that time judged to be "overheating." After all, the same Keynesian cross logic suggests decreasing G during a boom (crumbling infrastructure be damned). D'oh!...dang Keynesian cross.