TOPICS IN POLITICAL ECONOMY

WHY THE FED IS FLOUNDERING

“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.”  Federal Reserve Chairman Ben Bernanke, August 26, 2011

 Here we go again. A majority of the high priests of monetary policy (e.g. members of the Federal Reserve's Open Market Committee) voted to institute "Operation Twist" at their most recent meeting.

This follows their efforts to stimulate growth and bring down unemployment by pumping $600 billion into the economy under the "QE2" program by purchasing U.S. Treasury securities. With little to show for that project, the Fed will now try to reduce long-term interest rates and increase slightly short-term rates by selling shorter term bonds and buying longer term ones.

If you want an insider's technical critique of this maneuver, read today's remarks by Dallas Federal Reserve Bank President Richard Fisher, who voted against Operation Twist. 

However, Fisher also makes several more important points. First, he suggests the Fed does not really know what it is doing. He does this by passing along a wry Norwegian aphorism:

Theory is when you understand everything, but nothing works.

Practice is when everything works, but nobody understands why.

[Here], theory and practice are united, so nothing works and nobody understands why.

Secondly, Fisher stressed that further monetary accommodation, of whatever form, "will represent nothing more than pushing on a string" until Congress and the Executive get their act together on spending, taxes and the deficit.

The Fed is floundering because it is trying to do too much.  In the process of doing so it has managed to simultaneously raise Congressional hopes about what it can do and stir up a hornet's nest of political critics.  Despite his message at the opening of this blog regarding the Fed's limited powers in the current situation, Chairman Bernanke still feels impelled to do "something."

A stronger Fed Chairman would put substantially more heat under the bottoms of Congressional leaders of both parties and the White House to dispel the vast amount of regulatory and fiscal policy uncertainty created by the politicians. That is Washington's real damper on the private sector's willingness to spend and invest.

JOBS LOOKING FOR WORKERS: ADDENDUM

Further to my last blog:

In the September 10th issue of The Economist, there is an article on Muncie, Indiana's employment situation. The current jobless rate in the area is 10%. 

A new locomotive factory in town, a subsidiary of Caterpillar, has been trying to hire 70 skilled welders. The local community college is offering three-week courses in the special techniques needed for the company's engines.  Just 30 people have taken the course so far.  (Web sites indicate skilled welders should make about $30,000 a year before benefits.)

This seems like yet another case where the combination of extended unemployment benefits and a dysfunctional higher education system are contributing to high levels of the officially unemployed.

JOBS LOOKING FOR WORKERS

Although the current economic recovery is well over two years old, it has been plagued by continuing high unemployment rates, particularly among the long-term unemployed.  What are some of the factors at work here?

The continuing extension of eligibility for unemployment benefits. The maximum period to receive benefits is now 99 weeks, up from the normal 26 week limit. President Obama has urged Congress to renew this extension when it expires at the end of the year.

Nearly all studies of the impact of unemployment benefits find that they tend to increase the amount of time individuals are counted as unemployed.  This includes work by Obama's just-nominated candidate for Chairman of the Council of Economic Advisers, Alan Krueger.  (Good luck with your recommendations, Alan.)

One generally-accepted estimate of the program's impact is that it adds about 1/2% to the unemployment rate, currently at 9.1%. But it clearly adds considerably more to the number of long-term unemployed, which we are told is the most important aspect of the problem.  So much for well-grounded public policy from the Obama Administration in this area.

A substantial number of jobs are going unfilled because not enough people have the skills required. The number of unfilled job openings in July, according to the Bureau of Labor Statistics, was 3.1 million, a two million increase from the recession low of July 2009.  Many of these are well-paid blue collar jobs in manufacturing, a sector erroneously presumed to be flat on its back.

Take a look at three recent articles in Pennsylvania newspapers, the Pittsburgh Post Gazette, the Lancaster Intelligence-Journal, and the Meadville Tribune. The stories are nearly identical.

In Meadville, a roundtable of manufacturers told U.S. Department of Education officials that their problem wasn't a lack of capital or customers - it was lack of people with the right skills.  Over 100 highly paid jobs were open in the local job market for people with the right skill set (typically math and basic computer smarts) and work-friendly attitudes.

In the Post-Gazette story, tool and die maker Oberg Industries is looking for 50 machinists, lathe and grinder operators, quality inspectors and toolmakers.  Given their order backlog, they see the need for 70 additional workers over the next two years. 

These firms are willing to teach just-hired workers the more technical aspects of their jobs. But only so long as they "want to learn, are willing to show up for work every day, are drug-free, and are willing to work hard,"  as Rob Smith, owner of Acutec Precision Machining Inc. put it to the Meadville Tribune. How many of the long-term unemployed do you think can meet those tests?

Shrink the Dinosaurs.  These stories also highlight the mismatch between what society is investing in higher education and what is required by employers. Clearly, what is needed are fewer four-year college programs and a greater emphasis on rigorous "technical" education at both the high school and community college levels. The German approach to education comes to mind. 

We don't need heavily-indebted communications majors who can't write, sports marketing graduates who can't find a job and multi-million dollar collegiate athletic programs that can't pay their way.  For further analysis, details and references on this equally large issue, click on the "Education" category of this blog to read my four-part series of posts on "Too Big to Fail: The Academic Establishment."

The politicians' urge to keep extending unemployment benefits emphasizes again that Pogo still has the final word in dealing with poor public policy:  "We have met the enemy and it is us."