The Ron Paul Thing

I've taken down my post entitled "Ron Paul's Money Illusion" because it seems to have provoked mindless rage rather than thoughtful debate.

A part of this is my fault for saying that, while I respected many of the Congressman's libertarian ideals, I thought that he could be more circumspect at times. Well, I didn't exactly use this language, if you know what I mean. And for that, I want to apologize to the Congressman and all of his ardent supporters.

Having said this, I stand by the substantive point that I was trying to make. That column, however, was written too hastily. So I think I'll rewrite it, this time a little more carefully, and with a little less colorful language (and maybe a little more data).

A good weekend to all.
DA

Jobs Go Unfilled Despite High Unemployment

Came across this interesting article today: Jobs Go Unfilled Despite High Unemployment. Here is the opening snippet:

For the 15 million Americans who can’t find jobs the labor market is like an awful game of musical chairs. There are many more players than there are available seats.

Yet at Extend Health, a Medicare health insurance exchange firm in Salt Lake City, the problem is just the opposite—a growing number of chairs to fill and not enough people with the skills to fit the jobs. “It seems like an oxymoron in this environment that you can somehow be challenged to find great workers,” CEO Bryce Williams admits, almost sheepishly.

Extend Health’s call center workers help retirees navigate the process of signing up for commercial Medicare Advantage and drug coverage plans. For this fall’s Medicare Enrollment season, the firm will need close a thousand workers. The ideal candidate is over 40, with a background of financial services in order to qualify for insurance licensing.

“They need to be able to pass the state of Utah exam, which is not easy, “he explains. “They need to have a background in comparing the financial metrics of trying to help someone compare and analyze and give great advice.”

Williams has hire a recruiter, plans to roll out billboards along Interstate-15 in Utah, and is now looking at establishing a new call center out of state where the firm can find more people to train and hire.

“We like being in Utah but at a certain point you max out on the total pool of people that you can tap," Williams says. “So, we're going to have to look at other states.” Part of Williams’ problem is that his business is in a sector that’s facing a skills gap.

A Tight Labor Market For Skilled Jobs

Overall labor demand softened in February, but online ads for computer science jobs were up more than 15 percent from January, according to The Conference Board Help Wanted Online Data Series (HWOL).

While there are more than twenty-five job seekers for every open position in fields like construction, in technology, health and science-related jobs the exact inverse is true.

For computer science jobs and skilled health care practitioners, there were just over three ads for every job seeker in February. For life sciences jobs like medical science researchers and chemists, the ratio was 2 to 1.

"It’s the equivalent of a seller’s market in real estate,” says Jeanne Shu, HWOL Project Coordinator. While those occupations are seeing a lot of growth, employers are scrambling to find available qualified workers.

“If they can't find the right person with the right skill set they'll hold out longer for them."

I figure that there's something more than "deficient demand" going on here. But maybe that's just me...

Update: March 13, 2011

Some more interesting anecdotal evidence here: Factories having trouble finding workers.
(I thank Mike Ward for the link.)

U.S. Inflation and Inflation Expectations

Here are a couple of slides, courtesy of my colleague Kevin Kleisen. The first depicts recent U.S. inflation, both core and headline.

So, following a rather sharp decline in the headline CPI rate, we see an even sharper increase more recently. The core measure, however, remains relatively low and stable.

This next graph depicts a variety of market-based measures of inflation expectations. You may recall that the Fed was recently concerned that inflation expectations were drifting too low (relative to the implicitly desired target or around 2%). Inflation expectations now appear to have converged to pre-crisis levels. One could make a legitimate case that to the extent this was a part of the goal for QE2, the policy was a success.

Of course, the fear that many people have is that inflation may somehow get out of control. It is a legitimate concern and one that ranks high on the list of FOMC members.

And then there are a host of other concerns, like the ones outlined here by Pimco Managing Director Bill Gross: Economy May Reverse Course When Fed Buying Ends. I especially like this quote:

"Who will buy Treasuries when the Fed doesn't?" he asked. "I don't know."

I'm sure Mr. Gross is a smart guy. But statements like that just make him sound a tad foolish.

Think about it. A USD is the equivalent of a zero-interest-bearing small denomination Treasury bill. So when the Fed is purchasing longer dated Treasuries, what is it doing? It is selling zero-interest bills for (slightly) positive-interest bills. Would a deceleration in this asset-swap activity really have the dramatic effect Gross suggests? (He is suggesting a sharp spike in Treasury yields). I doubt it. In fact, the implied tightening is likely to keep a lid on inflation expectations and hence keep nominal interest rates low (via the Fisher effect).

But we shall see...

Ed Leamer on Deflation Dread Disorder

The always entertaining Ed Leamer here on Deflation Dread Disorder (The CPI is Falling!).

(let me know if the link does not work for you).

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 this a puzzle? Not if you believe we've experienced a Humpty Dumpty moment; but it is if you believe in Deflated Balloons; see here.

Yah...see that protracted decline in the Canadian unemployment rate from 1992 to 2008? That was because of deficient demand. Demand was clearly deficient for almost 20 years. Shoulda increased G more, I guess.

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.