Risk-Return Cluelessness*

Male employment is more volatile than female. Men get paid more.

Duh!

This is a classic risk-return trade-off.

Yet the legacy media is painting this as some sort of bizarre social contract in need of reform.

Here’s the normally lucid Financial Times; I’ll start with the fact in the article:

Men have lost almost 80 per cent of the 5.1m jobs that have gone in the US since the recession started …

Then we get this:

This is a dramatic reversal of the trend over the past few years, where the rates of male and female unemployment barely differed, at about 5 per cent. …

So … what they’re saying is that when we’re at full employment just about everyone has a job.

It also means that women could soon overtake men as the majority of the US labour force.

Gee … my guess is that this will be true until it isn’t any more.

Back to facts:

Men have been disproportionately hurt because they dominate those industries that have been crushed: nine in every 10 construction workers are male, as are seven in every 10 manufacturing workers. These two sectors alone have lost almost 2.5m jobs. Women, in contrast, tend to hold more cyclically stable jobs and make up 75 per cent of the most insulated sectors of all: education and healthcare.

“It shields them a little bit and softens the blow,” said Francine Blau, a labour market economist at Cornell University.

Francine Blau is an excellent economist, but the reporter seems to have missed the point that there is a trade-off here:

The widening gap between male and female joblessness means many US families are solely reliant on the income the woman brings in. Since women earn on average 20 per cent less than men, that is putting extra strain on many households.

So … let me get this right … households have sorted themselves so that they can choose a volatile high compensation job and a less-volatile lower compensation job. Sounds like portfolio diversification applied to permanent income to me.

* I cross-posted this from my non-class blog. It’s a bit too specific for this class, but it’s good exposure to the sort of nonsense you should be able to filter through in the media.

Now I Remember

There was a point I was trying to make in Friday’s discussion of policy that I couldn’t remember.

Here it is.

We were discussing generalities about recessions, policy responses, political parties, and the political spectrum.

In Principles of Macroeconomics, I talk quite a bit about how Keynesian theory suggests that we should raise spending and cut taxes during contractions, and cut spending and raise taxes during expansions.

I also talk about how the problem with that in systems with elections is that elected officials only seem to be good at the raising spending and cutting taxes part.

This means they are pretty much always pursuing expansionary fiscal policy.

The metaphor I use for this is that they are “caffeinating” the economy.

Pundits and politicians make a big deal about the different nuances in policies, but for my part, a lot of this amounts to arguing about whether you’re better off taking your No-Doz with Red Bull or a pail of your favorite cola.

Obviously, I’m being irreverent, but it’s worthwhile applying the metaphor to the events of the last 8 months. The primary criticism leveled at the Bush administration and the Greenspan Fed was that they stimulated the economy with too much spending (directed to the wrong places) and too low interest rates. The response of the Obama administration and the Democratically controlled Congress has been to spend more money, and to push liquidity on to financial institutions in the hope that they’ll lower interest rates and lend more.

If that doesn’t sound like substituting Coke for Red Bull, I don’t know what does.

Cool State Unemployment Map

Great interactive map in a piece from the online version of an April 18th issue of The Wall Street Journal entitled “Jobless Rate Climbs in 46 States, With California at 11.2%”.

Technorati Tags: unemployment,rate,state

Recession Dashboard

Russell Investments Economic Recovery Dashboard shows:

• All leading indicators pointing towards recovery (in the future)
• All lagging indicators pointing away from recover (in the past)

A trough, perhaps?

Hat tip to A Random Walk.

Technorati Tags: leading,lagging,indicator,recession,trough

Is This Just Another Oil Price Recession?

Everyone wants to think that this recession is “special”.

What if it isn’t? How do we justify all of our panic and bizarre policies this go round if this recession is pretty much like all the others.

Consider this post by James Hamilton* of Econbrowser.

What he does is take us back to 2007 III, and forecast GDP out into the future. If you don’t know anything about the price of oil in the future, you’d forecast the economy to go up. But … if you include information about the huge run-up in oil prices … you’d predict a recession that matches up with ours fairly well.

This doesn’t constitute a proof, but it lends a lot of credence to the idea that we’re not seeing anything unusual at all, given that oil prices quadrupled in the space of a few years.

* Hamilton is on a lot of folks “medium-list” for a Nobel Prize. He was the first to put together a model in which business cycle turning points were unpredictable. This doesn’t make that a fact; but the usual assertion of non-economists that “someone should have predicted this” is vacuous unless it can be compared to a situation in which no can predict turning points. Once we had that in hand (after 1989) it became pretty obvious to macroeconomists that it would be really hard to dismiss the idea that they can’t be predicted at all.

China Is Trapped

Paul Krugman in the April 3 issue of The New York Times:

… Just the other day, it seems, China’s leaders woke up and realized that they had a problem. …

… They are, apparently, worried about the fact that around 70 percent of those assets are dollar-denominated, so any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency …

But there’s both less and more here than meets the eye. … there’s nothing to keep China from diversifying its reserves away from the dollar … nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes.

Again, this is a story we’ve seen before.

In the 80’s we were worried about Japanese money flooding into the U.S., buying investments everywhere.

That was a very bad sign for Japan: it indicated they didn’t have anything decent to spend the money on at home. The Japanese got burned when our financial system couldn’t continues to supply viable assets for them to buy after the savings and loan system failed.

It' seems like China is in the same spot now.

Greed vs. Stupidity

David Brooks April 2nd column from The New York Times entitled “Greed and Stupidity” outlines the two competing viewpoints on what’s wrong with the economy.

The greed argument goes like this:

… The U.S. financial crisis is a bigger version of the crises that have afflicted emerging-market nations for decades. An oligarchy takes control of the nation. The oligarchs get carried away and build an empire on mountains of debt. The whole thing comes crashing down. Johnson’s remedy is clear. Smash the oligarchy. Nationalize the banks. Sell them off in medium-size pieces. Revise antitrust laws so they can’t get back together. Find ways to limit executive compensation. Permanently reduce the size and power of Wall Street.

The stupidity narrative goes like this:

… The primary problem is … that overconfident bankers didn’t know what they were doing. …

… You’d think that with thousands of ideas flowing at light speed around the world, you’d get a diversity of viewpoints and expectations that would balance one another out. Instead, global communications seem to have led people in the financial subculture to adopt homogenous viewpoints. They made the same one-way bets at the same time.

… What’s new about this crisis, he writes, is the central role of “opacity and pseudo-objectivity.” …

The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We’d just be trading the hubris of Wall Street for the hubris of Washington. The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

Pick your poison, I suppose.

To me, your preference between these says a lot about your worldview and your politics.

I would say professional economists are currently divided about 50/50 on this.

Having said that, we’ve been down this road before and the greed narrative doesn’t tend to hold water through the passage of time. For example, everyone blamed greed for the dot-com meltdown of 7-9 years ago, but all the new technology we’ve gotten indicates that we were right to be greedy, but that we were stupid about where we were placing our bets.