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Archive for January, 2010

(This is a slightly edited version of a piece that appeared yesterday over at e21.)

As policymakers ponder whether and how they might be able to do more to encourage job creation, they should keep in mind that the monthly payroll job figures [e.g., -85,000 in December] are the net result of literally millions of hiring and firing decisions each month. In addition to the well-known payroll data, the Bureau of Labor Statistics also provides information about the monthly pace of hiring, firing, etc. Those data, known as the Job Openings and Labor Turnover Survey or JOLTS, allow us to track the overall dynamism of U.S. labor markets and the relative balance of gross job gains and losses.

As shown in the following chart, the total number of new hires each month tracks fairly closely over time with the number of people who separate (either voluntarily or involuntarily) from their jobs:

As you would expect, new hires were higher than separations in the middle of the decade when employment was growing. Since the start of the recession, however, separations have outstripped hires by a wide margin.

As the chart shows, overall labor market activity has plummeted over the past two years. New hiring has fallen by more than 1 million workers per month. Employers hired more than 5 million new workers each month back in 2007, but have recently been hiring only slightly more than 4 million. Separations show a similar pattern, as about 1 million fewer workers are leaving their jobs each month than did before the recession.

The decline in separations may seem surprising at first, but is easily understood when separations are divided into layoffs and discharges (i.e., involuntary separations) and quits (i.e., voluntary separations):

As you would expect, layoffs and discharges increased sharply during the recession. During the depths of the financial crisis in late 2008 and early 2009, an average of more than 2.5 million workers lost their jobs each month. The pace of layoffs has since slowed—about 2.1 million workers lost their jobs in November—but remains above levels consistent with growing employment.

Quits, meanwhile, have fallen off a cliff. An average of 1.8 million workers left their jobs voluntarily each month during 2009, about 40 percent lower than the 3.0 million pace a few years ago. In short, many fewer workers are finding opportunities to move to better jobs.

The JOLTS data suggest that the pace of quits may be one of the best signs of a healthy labor market. The uptick in November—to the highest level in ten months—is thus welcome and something to keep an eye on in coming months.

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Yesterday, Treasury released a comprehensive report on the disposition of TARP warrants through 12/31/2009. It’s a font of fascinating information–at least for fellow TARP warrant aficionados.

Treasury apparently did quite well when it negotiated with banks that wanted to repurchase their TARP warrants. I am still a fan of auctions, but you have to give Treasury credit–they did defend taxpayer interests in the negotiations.

Treasury drove an especially hard bargain with Goldman Sachs. As shown in the following chart from the report, Goldman ended up paying much more than any of the estimates that Treasury considered:

The green line is what Goldman actually paid: $1.1 billion. The yellow lines are Goldman’s earlier bids ($600 million and $900 million). The black bars are the range of estimates from three different modeling efforts. Bottom line: Goldman overpaid.

The report has similar graphs for the other 33 firms that have repurchased their warrants; some of them paid at the upper end of the black bars, but none overshot like Goldman.

Disclosure: I have no investments in Goldman Sachs (or any TARP recipients).

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Inspired by the popularity of Greg Mankiw’s Pigou Club, which favors using taxes (or auctioned permits) to address pollution problems, the Committee for a Responsible Federal Budget has created its own: the “Announcement Effect Club.”

To become a member, you need to endorse the idea that it would help the U.S. economy if our elected leaders could develop a credible plan to bring our deficits and skyrocketing debt under control. In CRFB’s phrasing:

While aggressive debt reduction in the short term might imperil the fragile recovery, the announcement of future deficit reduction can actually strengthen it.

I’m happy to be a member (based on this post last October).

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Key Readings on America’s Fiscal Plight

It remains to be seen whether our elected leaders have much enthusiasm for dealing with America’s troubling fiscal trajectory. But the policy commentariat has embraced the issue with relish.

If you have a few hours (or days) to ponder these issues, let me recommend the following:

  • Train Wreck: A Conference on America’s Looming Fiscal Crisis, held last Friday at the USC Law School. Conference papers addressed a host of issues, including the need to pay attention to tax expenditures, the burden of state pensions, the potential for catastrophic budget failure, and the arithmetic impossibility of solving our budget woes by raising income taxes on the highest earners. I had an unusual role in the conference, presenting a paper by Joyce Manchester and Jonathan Schwabish of the Congressional Budget Office about the role of health spending in our long-term budget challenges. I didn’t play any role in preparing the paper, but was happy to present the findings when neither of the authors could attend. My presentation is near the end of the afternoon session (video here). Bottom line? Our fiscal trajectory is unsustainable thanks to population aging and rising health spending.
  • Choosing the Nation’s Fiscal Future, released last week by the National Research Council and the National Academy of Public Administration. Weighing in at a hefty 360 pages (including appendices), this report provides a comprehensive overview of our budget challenges. More important, it then lays out strategies for addressing them. And it makes very clear the most important decisions we face: how big a government do we want and how should it balance the interests of older and younger generations?
  • Red Ink Rising: A Call to Action to Stem the Mounting Federal Debt, released last month by the Pew-Peterson Commission on Budget Reform. This report  reviews our fiscal prospects and makes six big picture recommendations: (1) Commit immediately to stabilize the debt at 60 percent of GDP by 2018; (2) Develop a specific and credible debt stabilization package in 2010; (3) Begin to phase in policy changes in 2012; (4) Review progress annually and implement an enforcement regime to stay on track; (5) Stabilize the debt by 2018; and (6) Continue to reduce the debt as a share of the economy over the longer term. This framework strikes me as reasonable, although one can always debate the exact numbers (e.g., would 60% in 2018 be that much better than 60% in 2020?).
  • The Right Target: Stabilize the Federal Debt, released last week by the Center on Budget and Policy Priorities. Another excellent overview of the budget challenge, this report agrees with the Pew-Peterson report in many qualitative ways, but disagrees on tempo: “Pew-Peterson Commission endorses sounds ideas but overly ambitious target.” The authors would like to see deficits reduced to 3% of GDP or lower by 2019. (A goal that OMB Director Peter Orszag has also mentioned.)
  • A Path to Balance: A Strategy for Realigning the Federal Budget, released last month by the Center for American Progress. This report takes a slightly different approach from the others, focusing on achieving primary budget balance (i.e., balancing revenues with spending excluding interest payments) rather than a debt-to-GDP target. Those concepts are closely related in analytic terms (each of the reports explains why), but as Stan Collender over at Capital Gains and Games notes, the concept of achieving primary budget balance may be a better talking point than stabilizing the debt-to-GDP ratio. Because CAP has close ties to the Obama Administration, Stan also suggests that its budget thoughts may offer a “sneak peek” about what to expect in the President’s upcoming budget.

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The Federal Reserve system is doing its part to cut the budget deficit (at least for now). Treasury will receive $46.1 billion of profits from the Federal Reserve profits for fiscal 2009. That’s about a third higher than the amount remitted for 2008.

According to the Fed’s news release this morning, the following items drove profits:

$46.1 billion in earnings on securities acquired through open market operations (U.S. Treasury securities, government-sponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities) [Profits on traditional open market operations plus the new credit easing operations]

$5.5 billion in net earnings from consolidated limited liability companies (LLCs), which were created in response to the financial crisis [Profits on the Maiden Lane partnerships etc.]

$2.9 billion in earnings on loans extended to depository institutions, primary dealers, and others [Profits on the new loan facilities]

[$2.6 billion in] net earnings from currency swap arrangements, which have been established with 14 central banks, and investments denominated in foreign currencies

Additional net earnings of $1.5 billion were derived primarily from fees of $0.7 billion for the provision of priced services to depository institutions

Those $58.6 in gross earnings were slightly offset by the following expenses:

[$3.4 billion for] operating expenses of the twelve Reserve Banks, net of amounts reimbursed by the U.S. Treasury and other entities for services the Reserve Banks provided as fiscal agents

[$2.2 billion in] interest paid to depository institutions on reserve balances [As noted previously, the Fed's still-new ability to pay interest on reserves is a big deal for monetary policy; this is the cost side]

[$0.9 billion in] Board expenditures, including the cost of new currency

The resulting $52.1 billion in new profits were then distributed as follows: $46.1 billion to the Treasury, $1.4 billion as dividends to member banks, and $4.6 billion retained to “equate surplus with paid-in capital.”

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Treasury is Issuing More TIPS

As noted by the Wall Street Journal this morning (“U.S., in Nod to Creditors, Is Adding TIPS Issues“), Treasury is issuing more Treasury Inflation-Protected Securities (TIPS). Today’s auction involves $10 billion 10-year notes; one estimate suggest that total TIPS issuance this year will be $80-85 billion. Still small compared to our nation’s overall borrowing needs (somewhere in the $1 trillion range, not including rolling over existing debt), but a real boost to the TIPS world.

As I discussed in two earlier posts (here and here), many observers have recommended that Treasury increase TIPS issuance. The WSJ piece emphasizes one particular set of advocates: our creditors who are beginning to worry about inflation:

TIPS, which account for less than 10% of the $7 trillion Treasury market, offer investors a way to hedge against inflation as their value rises along with the increase in consumer prices. The fixed returns on nominal Treasurys, in contrast, can be eroded over time by inflation, which especially affects long-term bonds.

The small size of the market for inflation-protected securities means many large investors who want to be able to sell easily still prefer other ways to hedge against inflation risk, such as commodities.

But in the past year, China and other large foreign investors have become vocal about their concerns that the large U.S. fiscal deficits and the Federal Reserve’s ultra-loose monetary policy will lead to a spike in inflation. That would hurt the value of their large holdings of nominal Treasurys.

U.S. officials reassured China in late July that the Treasury remained committed to its TIPS program and would take investors’ views into account when drawing up its issuance plans. That pledge was seen as a commitment to increasing TIPS sales.

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On Thursday, New York Times columnist Nicholas Kristof had a wonderful piece about Costa Rica, home of “The Happiest People“) (ht Catie).

Kristof reports that Costa Ricans are the happiest people in the world, at least according to three broad surveys. Why? Kristof offers the following hypothesis:

What sets Costa Rica apart is its remarkable decision in 1949 to dissolve its armed forces and invest instead in education. Increased schooling created a more stable society, less prone to the conflicts that have raged elsewhere in Central America. Education also boosted the economy, enabling the country to become a major exporter of computer chips and improving English-language skills so as to attract American eco-tourists.

I’m not antimilitary. But the evidence is strong that education is often a far better investment than artillery.

In Costa Rica, rising education levels also fostered impressive gender equality so that it ranks higher than the United States in the World Economic Forum gender gap index. This allows Costa Rica to use its female population more productively than is true in most of the region. Likewise, education nurtured improvements in health care, with life expectancy now about the same as in the United States — a bit longer in some data sets, a bit shorter in others.

I like this hypothesis, but being an empirical guy, I should note another possibility: maybe one of the keys to happiness is whatever allowed Costa Rica to eliminate its military in the first place?

Over the holidays, I did some field research (aka vacation) in Costa Rica and am happy to report that the area we visited (the Guanacaste province) is indeed lovely. I won’t torment you with my travelogue here–my wife and I have another blog for that–but here are a couple photos of the local fauna:

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