Our great, horrible, indifferent labor market

The Great:

The 4-week moving average of layoffs came out today at 287,750.  Total civilian employment in September was 146,600,000.  The ratio of the two, i.e. the chance of being laid [off---ouch that might have been my most embarrassing mistake ever] during a given week if you had a job, was below 2 in 1000.  That’s only happened once before in all of American history–April 2000.  (We don’t have data going all the way back, but the ratio was considerably higher in the booming 1960s, and I’m confident layoffs were much more common in earlier decades for which we don’t have data.  (“Gilded Age” bosses could lay off workers whenever they wanted.) And it seems very likely that we will soon break the April 2000 record, maybe this month.

Update: a bit higher than 2 in 1000 because not all layoffs put in unemployment claims.

The Horrible:

Total employment has barely budged in 7 years, while the employment population ratio has plunged much lower.  We are even seeing a lower employment/population ratio in the key 25-54 demographic, compared to seven years ago.  The U-6 unemployment rate is a very high 11.8%

The Indifferent:

The unemployment rate (U-3) is 5.9%, slightly above the Fed’s 5.6% estimate for the natural rate.

Thanks President Obama, you’ve given us a European labor market.  Workers with good jobs need not fear layoffs; the rest will have to be satisfied with part time work or unemployment.

Of course I’m half joking about Obama.  But just how good is his economic record?  The Washington Examiner has an article that quotes me.

The newest talking point of President Obama and his supporters, such as Paul Krugman, is that we are doing better at job creation than other developed countries.  I don’t think we are doing as well as Australia/New Zealand/Canada/Britain, but it’s surely true overall for one very obvious reason.  The eurozone.

Let’s examine that Obama/Krugman claim more closely.  Everyone seems to agree that since 2010 the US has done considerably more austerity than the eurozone.  No debate there.  And the huge divergence between the US and the eurozone has occurred since 2011.  The initial recession and initial recovery were quite similar in the US and eurozone.

The GOP Congress did exactly the opposite of what Obama wanted on austerity, and the result was that we grew dramatically faster than the eurozone.  That’s Obama’s success?  The big difference was of course monetary policy.  Obama’s comparing us to a region ruled by a central bank that is more incompetent that the central banks of the 1930s (Krugman has some graphs on that point.)

So yes, we are doing better than the eurozone.  Does Obama deserve credit for the fact that our monetary policy was less incompetent than the ECB?  That doesn’t even pass the laugh test.  Even Obama supporter Matt Yglesias says he’s been horrible on monetary policy.  He left multiple seats empty, when he had 60 votes in the Senate in 2009.  He’s doing the same today.  He never appointed a single person to the board who favored the sort of expansionary monetary policy that I favor, that Yglesias favors, that DeLong favors, that Krugman favors, that Christina Romer favors, and that any progressive with half of brain favors.  He almost picked bubblephobe Summers to head the Fed, and had to be stopped by a storm of protest that began here and then spread through the progressive blogosphere.  (Yes, some progressives always opposed him for other reasons; I’m talking about his monetary policy views.)

President Obama may or may not be a good President.  I think he’s been above average on foreign policy.  I’m willing to concede the Obamacare (which I opposed as a missed opportunity) did some good things like the Cadillac tax on health plans and helping the uninsured.  I think the financial reform was a missed chance, but others disagree. I’m disappointed with his record on drugs and civil liberties.

But there can’t be any serious question about the fact that he did NOTHING effective to help the economy.  The US recovery is less than the old trend rate of growth.  Has that ever happened before?  The Fed’s been less inept than the ECB—that’s all.

And the supply-side?  Even his supporters would admit he did nothing there.  They might disagree with the view that a heavy dose of extra regulation, higher MTRs, and no Keystone pipeline slowed the recovery.  But no one claims those actions sped up the recovery.  And the fracking boom (“drill baby drill”) fell on his lap.

Just a few months ago Obama called for an “emergency” unemployment benefit of up to 73 weeks, much longer than during the President Clinton recovery, all because the labor market was doing so poorly nearly 6 years after he was elected.  And now a few months later they are touting their success in creating jobs—unbelievable.

It will be interesting to see how many liberals agree with him.

HT:  TravisV

A perplexing survey confirms all my priors

In the past I’ve pointed to New Hampshire as a sort of neoliberal model.  No income taxes, no sales taxes, very high levels of income, and less inequality than almost all other states. Indeed they have the richest poor of any state.  Even adjusting for ethnicity it does well, easily outpacing other mostly white states.  Now the OECD has come out with regional rankings of “well-being” measured “holistically.” In other words, just the sort of ranking liberals love.  And New Hampshire comes in number one in the US, at 77.6/90.  I don’t know how it ranks at the global level, but it seems to score above all other countries, but below certain regions like Canberra.

Speaking of Canberra, Australia seems to be number one among countries, at 76.5/90. (I’m not quite sure because I saw no totals, and quickly did math in my head.)  It’s one of my favorite countries, with just about the lowest level of government spending of any developed country (outside East Asia.) Small government may not produce high living standards, but sure it doesn’t prevent them.

The second highest state was Minnesota (76.2/90), which of course has a large Scandinavian population. Many progressive commenters tell me that the Nordic system is better than the American system because they have less inequality.  But Minnesota does much better than Sweden 68.7/90.)  Let’s be honest; Swedes are likely to do pretty well under any reasonable democratic system, and third world immigrants to Sweden don’t do very well at all.

So all my priors were confirmed.  Most bloggers would stop there.  But then I started digging into the data.  What does “civic engagement” mean?  I would expect ultra-democratic and ultra-decentralized Switzerland to easily lead the world.  Instead they scored 1.1 out of 10.  Turkey scores 8.8.  Perhaps credit is given to the “engagement” of Kurdish rebels.  I don’t think I’ve been to a cleaner country that Switzerland, which scores only 3.5 out of 10 on the environment. Austria only gets a 3.3.  In contrast, spotlessly clean Istanbul gets a 3.9, and Mexico an astounding 5.3.  Is this like golf, where a low score is better?

In other words, I have no idea what the OECD did to come up with these numbers. But since they confirm my priors I should probably just collect my chips and go home. 

Men with two feet on the ground

[Everyone:  Here's where we are on the NGDP project.  I anticipate it will take about a week to determine the best way of transferring funds to New Zealand, and whether they are tax deductible in the US. We are considering 6 contracts per quarter instead of 5.  The 6th would be a linear contract with a payout proportional to the percentage change between the first NGDP announcement (30 days after the quarter ends), and the level of one year NGDP earlier, as estimated on the very same day (thus using identical methods when changes like adding R&D to GDP have occurred.)  We are moving away from a focus on interest rate-bearing margin accounts, and toward ideas of reducing transactions costs, and/or perhaps a subsidy for winners. International money transfers to traders can be costly, are there any newer systems that are ideal?]

Nick Rowe recently pointed out that it’s not at all clear that we would even know how to recognize a central bank that was paying for government spending by printing money.  I can already anticipate some of the objections from practical men, those who earn a living in the real world. These are what Nick calls “people of the concrete steppes.”  They believe actions speak louder than words. They are scornful of all this talk of “confidence fairies,” expectations, guidance, signaling, etc., by pointy-headed intellectuals like Nick and me, working in our ivory towers.

OK, but here’s something else that all practical men of the world believe; helicopter drops “work.” Not that they necessarily create real GDP growth, but they at least create inflation.  Practical people are bored by endless debates over fiscal vs. monetary policy.  ”Look you people; just get on with the job of doing a combined fiscal/monetary expansion, everyone agrees that that will work. No one doubts that if you drop a trillion dollars out of a helicopter it will create inflation.”

There is just one problem with this practical view of the world.  It’s wrong.  Not possibly wrong. Not probably wrong.  It is certainly wrong.  And we know it is wrong because Japan did drop a trillion dollars out of a helicopter and it didn’t work.  They did an almost unbelievably large money-financed fiscal expansion over the past 20 years, and got DEFLATION, something any sane economist in 1994 would have said was impossible in a modern fiat money regime with a growing money supply and big fiscal deficits.  

Japan has increased its national debt to over 240% of GDP, and even about 140% in net terms (still among the largest in the developed world.)  And while doing so they increased their monetary base enormously.  For most of the period they weren’t even paying IOR, this was truly “printing money” to pay the government’s bills (or at least looked like it.)  You want “concrete steppes?”  The paved over much of the beautiful Japanese countryside with unneeded roads, and bridges to nowhere.  Larry Summers’ dream.  The reason they got deflation is that while the people of the concrete steppes think it’s easy to tell when a government has paid for spending by printing money, it’s actually very hard.

The “tell” here showing that the Japanese government was not permanently increasing the money supply to pay for spending occurred in 2006, a relatively good year in the otherwise bleak two decades.  Inflation had risen to zero and real GDP growth had been OK for about 4 years.   The BOJ (wrongly) feared inflation, and thus began raising rates.  With higher interest rates the bloated monetary base could cause high inflation.  So at the same time the BOJ reduced the monetary base by 20%.  Japanese investors understood that the BOJ would not allow inflation.  The money supply increase had been temporary.  What looked like “concrete steppes” were actually massive fiscal stimulus accompanied by temporary currency injections.  The fiscal stimulus was real, but it’s monetary policy that drives NGDP.  And temporary monetary injections are not effective.

So all you practical men of the world who believe in concrete steppes, I ask you the following question.  Which cherished belief are you going to give up?

1.  Concrete steeps are what matters, not expectations fairies.

2.  Huge helicopter drops will always create inflation.

PS.  Perhaps I was unfair to Nick when I lumped him in with me as a pointy-headed intellectual. He does know how to fix cars.  And even I’ve spent many thousands of hours doing construction, which is more than many Boston economists.

Why is it so expensive to create an NGDP futures market?

When Eric Crampton first suggested the idea of creating an NGDP futures market in New Zealand, I was intrigued.  It would be outside the oppressive regulatory regime of the SEC.  When Robert Quigley-McBride said it could be set up for $1500, I was pleasantly surprised.  I might be able to raise those funds from readers.  Hell, I could pay that myself, except my wife would probably (quite reasonably) ask why I had to do so, when I’d already devoted six years to this project, mostly unpaid.  So I didn’t ask her.

Then Robert said it would cost an extra $30,000 to set up the accounting infrastructure to handle all the interest-bearing margin accounts, if we adopted my complete proposal.  When I read that I thought to myself “fat chance of raising that kind of money.”  And in fact we did not raise $31,500, we raised more than twice that sum, in less than 2 days.  Approaching $70,000.  And without even asking for small donations. I’m stunned.  (Special thanks to Ken Duda and Gabe Newell for huge donations, but the others were also very generous.)

But as all good philosophers know, every success just creates new problems.  Now I started to worry about liquidity.  There is no NGDP futures market in the US, precisely because there is very little demand for NGDP futures contracts.  And this market would be in New Zealand.  Who would trade?  My initial proposal in academic papers was to have the Fed run the market, and the interest rate on margin accounts would be raised high enough to assure liquidity.  The Fed could easily afford to do that for a market with several $100 million in margin accounts.  But this current proposal would merely pay market rates (now quite low); the funding would be to set up the complex accounting system. The more money we raised, the more guilty I felt about the prospect of wasting the money of idealistic donors.

I have some ideas on how the trading volume concern can be addressed, which I will present below.  But I am also looking for your ideas.  Before rushing in, however, try to remember two things:

1.  Don’t look at the donations thus far as a big pot of money to spend.  I am determined to do this as cheaply as possible, given that we can be confident of succeeding.  I am determined to rethink the plan in such a way as to come in well under the promised donations thus far, so I can present the donors with a plan that has a high likelihood of success, and also tell them we only need X% of their promised donations.  Where X is well under 100.

2.  This is not a normal futures market, and hence normal rules don’t apply.  Normal futures markets are trying to meet customer demand for hedging and speculation.  There is little such demand for NGDP futures.  We are trying for a demonstration project showing that it would be possible to create a public good that is highly useful in policy analysis, by leveraging the “wisdom of crowds.”  So don’t rush in and tell me it must be done “this way” because pork bellies are traded this way.

I’ll get the ball rolling, but in the end this isn’t just my project.  You must also convince both the experts at iPredict and the donors that your proposal is feasible.  So even if you convince me it may not happen.  Here’s one thought I have:

Robert told me that a direct subsidy might be much cheaper to administer than a complex set of interest-bearing margin accounts.  Other accounts at iPredict do not earn interest.  So perhaps we could do something like the following:

Let’s suppose our budget ends up being $41,500.  The $1500 sets up the market, and $40,000 is used to subsidize trading.

Instead of investing margin account money, let’s think of direct subsidies to traders.  We could plan on a 5 year horizon for the project (then raise extra funds later if we are successful.)  That’s 20 quarters of operation to fund.  In that case we can afford a $2,000 subsidy each quarter.

One way of doing the subsidy is to have each winning contract equally share the $2000.  That would guarantee some trading, as if only one person bought contracts they would be guaranteed to win the entire $2000!  Overall I’m strongly interested in a subsidy scheme that does not allow for a complete failure of the market.

Say what you will about Paul Krugman, he’s a genius at intuition.  He once remarked  (I’m over-simplifying) that all of economics boils down to two jokes:

1.  That can’t be a $100 bill, someone would have picked it up already (the EMH)

2.  No one goes there anymore, it’s too crowded.  (S&D)

My plan is a subsidy not a price, so it sort of reverses #2.  ”Lots of people buy NGDP futures, as the market is so uncrowded that they have a good chance of winning the subsidy.”  Of course that’s nonsense, but it’s a way of thinking about why my proposal would be a sort of foolproof plan for insuring at least some trading.  Low volume is hard to conceive as an equilibrium outcome. That’s what I’m aiming for.

Some commenters prefer a plan with a contract linked to the specific future NGDP, not just a range of values.  I like that better too, as it provides precise point estimates.  But iPredict found that people much prefer to trade things like win/loss in elections, rather than vote share.  Again, we need volume for success.  Vote share contracts are boring because the vote share rarely diverges more than a couple percent from public opinion polls.  Then I thought about tying the contract price to the growth rate of NGDP, which is more volatile than the NGDP level.  But the starting point can undergo revisions, which makes the growth rate more ambiguous.  So we didn’t end up there, but I suppose the contract price could be the percentage difference between the actual initial announcement of NGDP, and the estimate of 4 quarter previous NGDP on the very same day (if we were dealing with a one year contract.)  It’s something to at least consider.

Other proposals would subsidize the market maker to assure more liquidity, but I worry that while it’s a good idea, that might still not overcome a lack of interest in US NGDP (outside the US). Recall the goal is to derive a public good—the public’s expectations of US NGDP growth, even if they have no interest in trading without a subsidy.  Did I mention that volume is the problem?

Because I did not ask small contributors to help out, I am going to ask my non-American readers to give this market a shot, if only for the fun of it.  It will be set up to be either a zero or positive sum game; what casino offers those odds?  American readers can recommend this to their foreign friends and colleagues.  Eventually I will also ask other bloggers to point out the value of the experiment, if it succeeds.

We are also working on issues of how best to deliver the donor funds to NZ, hopefully in a way that earns a tax deduction.

I suppose it’s slightly embarrassing to be rethinking things this late in the game, but I’ve never much cared about losing face, and do care a lot about getting this done right.

And finally, on a personal note, the last few days have been very gratifying.  A few hours after the initial post I had not gotten any donations, then for another hour only one.  I flashed back to my Cub scout days where I only sold one box of cookies, because I was too shy to approach people. I’ve never been good at asking people to do me favors, and would have been a horrible salesman. “You actually don’t need these encyclopedias, to be honest it’s all on Wikipedia.”  The wonderful thing about the anonymity of the internet is that it allows a loser like me to actually have some small moments of success.  The downside is that it also allows me to be somewhat more of a jerk than I am when actually meeting people face to face.

Thank you

[I added comments on the economy below, if you first read this earlier today]

We have received a number of very generous offers for the NGDP futures market proposal (or prediction market, if that term is more accurate.)  Below I will list the names of those who did not ask to be anonymous.  Note that this list will certainly grow over the course of the day, as I got several more offers overnight but have not yet heard whether they are OK with their name being listed. Here they are in order of emails received:

Hugh Edmundson

Thomas Colthurst

Kenneth Duda

Christopher Wahl

Marcus Nunes

Dustin Irwin

Justin Irving

Lawrence Indyk

Nicholas Johnson

Clare Zempel

Gabe Newell

Thomas Oechsle

Johannes Fritz

Scott Snyder

Anonymous (2)

This process is more complicated than I envisioned, so now I am asking people who have already contributed to just sit tight for a few days until we see where we are in terms of the fundraising total.  For instance, I will speak to a charity this afternoon.  If they decide to participate I need to ask whether our donors can contribute through them to get a tax deduction.  Another complication is our two very different goals, $1500 to get it started and $30,000 more for a deeper market with interest earned on margin accounts.  At the end of the process I want to provide all donors full information about the total money raised, and the specific things we can do with that total, before any check is written, especially if the total is not precisely $31,500.  (The $1500 was almost immediately surpassed.)

When the fundraising is complete I’ll have another list with the amounts donated listed as well.

Since I am new to fundraising I prefer to move slowly and get feedback, to insure everything is being done correctly.

PS.  Don’t be discouraged that only 11 offers have been received so far.  My post mentioned first going for large donors, and only then going the small donor (Kickstarter) route if necessary. All the offers have been quite generous.

PPS.  My initial read on the jobs number is that there’s not much for the stock market not to like:

1.  Strong jobs growth, plus unemployment falls to 5.9%

2.  Very large upward revisions of previous two months.

3.  More hours worked per week (when combined with jobs growth it implies lots more total hours worked.)

4.  Wages flat, and 2% year over year, vs. 2.2% forecasted.   That means we are still in a cyclical recovery, still overcoming the sticky wage problem as rising NGDP combined with slow wage growth restores jobs.

Exit?  There is nothing to “exit.”  Money has been tight, not easy.  Even with current policy we are undershooting the Fed’s own targets.  Why would they want to tighten?

Oh yeah, money FEELS easy.  And Fed officials don’t like that queasy feeling of “ultra easy money.”  But the 317,000 people who just got jobs (including revisions in this total) don’t like the queasy feeling of being unemployed.

Update:  I noticed that the labor force participation ratio fell to 62.7%, the lowest rate since February 1978.  Folks, it’s not coming back.  In less than a year the recession will completely end and we will get a normal unemployment rate (about 5%).  Jobs will be available, and those people simply aren’t coming back.  They are early boomer retirements (perhaps discouraged by the previous job market), disabled (perhaps partly discouraged by the job market in previous years) and young people staying in school longer, or choosing to work less (as is true in affluent towns like my own Newton, Massachusetts.)  It pains me to say this but it’s pretty clear they aren’t coming back—the job market is good enough where the LFPR rate should not still be falling, if it really were nothing more than discouraged workers sitting there ready to plunge in again when things got a bit better.

Weekly hours was 34.6, the first time in 43 consecutive months that it was outside the 34.3 to 34.5 range.

We’ve been watching to see whether ending extended UI benefits affected employment.  The household survey shows 2,014,000 jobs in the past nine months vs. 1,193,000 in the previous 9 months.  Impressive growth.  But the more accurate payroll data shows 2,040,000 vs. 1,713,000 million in the previous 9 months.  Growth, but inconclusive.  Not enough to change my prior belief for the past 5 years that extended UI raised unemployment modestly, perhaps 1/2 percentage point.

I’m asked a lot about falling inflation expectations.  At this point it looks like an aggregate supply thing—falling commodity prices.  But we need to watch it closely, to look for confirmation in other markets like stocks.  And of course this uncertainty just shows that we need a new futures market in . . . can you guess?