The Ambrosini Critique

Here’s the per capita GDP for the G8 countries (relative to the USA):

You can take two lessons from this chart.
1) Japan hasn’t had bad monetary policy relative to, say, the continental European countries
or
2) Monetary policy just doesn’t matter in the long-run

Also, the more you stare at these real GDP per capita charts, the more you think the 1980s in Japan was an outlier (aka bubble).

There seems to be a disconnect between how economists (and Fed economists in particular) use this term and how bloggers (and left bloggers in particular) use it.

Some definitions:
“The unemployment resulting from wage rigidity and job rationing is sometimes called structural unemployment.” — Mankiw’s intermediate text

“Frictional unemployment [w.a. where the only other kind of unemployment they mention is cyclical unemployment] is the unemployment that exists when the economy is at full employment.” — Dornbusch, Fischer and Startz

“The part of unemployment associated with the institutional features of an economy, including hiring and firing costs and the structure of the unemployment compensation system.” — Jones’ intermediate text

There may be confusion about this term because there seems to be such a multitude of definitions (wikipedia’s definition talks about skill mismatch). I like Jones’ definition the best, but the point I want to make is that the lefty bloggers are reading more into these definitions than necessary.

There’s no reason to think the relationships between “wage rigidity”, “full employment”, “institutions” or “skill mismatch” and unemployment are constant over the business cycle. You can make good arguments that the mechanisms producing these relationships are responsive to overall conditions in the economy (I won’t). And… and!… estimates of structural unemployment suggest that it is time-varying: higher during recessions and lower during booms (anyone have a good cite for an estimate of time-varying NAIRU?).

When the Fed folks say structural unemployment is high right now (e.g. Altig or Kocherlakota), they’re not saying its permanently high. They’re not trying to pull an inception making us feel like permanent high unemployment is ok. They’re observing momentarily high structural unemployment that fits in a pattern consistent with historic experience.

Its a great mystery (if you assume asset return volatility is all that matters) why investors don’t hold more stocks. Sharar Pitaru at the neat new investment tool Plantly, says:

Yes, in general our rationale might lead to a greater investment in bonds then the ‘80/20 rule’ calls for.

I’d suggest that the 80/20 rule (and other ‘rules of thumb’ like it) carry hidden dangers to investors, despite how neatly they may organize things in our minds. The danger stems from the inability of such over-simplified rules to account for the human factor:

The rational for an 80/20 portfolio is that it is destined to fluctuate widely with the market, yet it is also predicted to provide good returns in the long run. Therefore it suggests that investing in 80% stocks makes sense for the long term. Notice that this rational works only if we really keep our money intact for the duration of the investment. But how many of us really do?

Unfortunately, in reality, investors have many external and internal reasons to break an investment when the market goes sour. For example, many investors ‘broke’ their 80% stock investment earlier then planned for because they were scared of losing it all. Other investors just had an emergency (like losing their job) and needed the money sooner then expected – smack in the middle of the crisis. In both cases, these investors missed the general tendency of the markets to bounce back and provide positive returns for the long run. If either of these investors understood the risks involved in breaking the investment sooner, they might have not chosen the 80/20 portfolio to begin with.

My second gripe with the 80/20 rule is that it reflects the tendency to consider all bonds as safe and all stocks as having the same level of risk. In reality this is not the case. I’d suggest that other types of mixes are also viable – even for long term investments – depending on the specific bonds and stocks that are being used.

Back to Plantly – our diversification rational is to create an investment plan that aims towards your chosen target return while reducing its risk as much as possible. And yes, sometimes this calls for a greater investment in bonds as you’ve noticed – but this only works with the right kind of bonds, when mixed with the right kinds of stocks.

(emphasis added)

Investors want to have investments that pay off when their marginal utility is low high. This is a bitch to model and measure (poor, poor economists that *have* to spend their careers obsessing about this problem), but its a pretty easy thing to believe.

Here.

Here’s all the Jolts data (minus job openings):

These are not seasonally adjusted so that’s why you get the inverted-U shape every year for the hiring and quits series and the inclined saw shape for firings. Still, you can see something happened the last two or three years. Firings (the pink line) spiked in early 2009 but several months before that quits (blue) and hirings (green) declined by about 20 to 30% each. Here’s a close-up of the most recent period:

A couple things that strike me about these graphs:
1. Firings had a one month spike in January 2009 (a month with a high number of firings to begin with) but the series has stayed about where it usually is (maybe 10% higher if you ignore the recent dip). The story of this recession isn’t of people losing their jobs.
2. Looking at the dramatic decrease in hirings, the story of the recession is that people aren’t finding new jobs.
3. However, because there’s much, much fewer people quitting their jobs the job market isn’t as tight as it could be.

One of the things I do in my dissertation is treat changing jobs as an investment decision. When a worker quits their old job and looks for a new one (maybe not in that order), they are forgoing human capital that made them productive at their old job and they’re investing in new human capital to make them productive in their new job. One possibility — given the JOLTS evidence and thinking of job switching as investment activity — is that like employers who are holding back on new invests (and thus holding back on hiring), workers are holding off on making new investments as well.

I’m not sure about the implications for aggregate demand, but I’m pretty sure this is bad for growth prospects.