TOPICS IN POLITICAL ECONOMY

JOBS LOOKING FOR WORKERS, CONT.

Caterpillar, one of the world's largest machinery manufacturers, with 59,000 employees in the U.S. alone, is building five new plants in the United States.  Their biggest problem? Not enough qualified workers.

CEO Doug Oberhelman is not shy about pointing fingers.  In a September CBS TV interview, he stated flatly, "our education system has failed all of us." 

At about the same time, Oberhelman spelled out for a Chicago business newspaper the details, as relayed by Thomas Friedman in the New York Times, as they are affecting Caterpillar:  

"We cannot find hourly production people, and, for that matter, many technical, engineering service technicians, and even welders, and it is hurting our manufacturing base in the United States . . . we have to retrain every person we hire."

Perhaps the most important retraining initiative would be to focus on those 300,000 counselors in high school systems around the country who advise graduating seniors on what their next steps should be. At the moment, collectively, they are doing a terrible job.  Call your high school principal or school board representative.

WHAT DO "OCCUPY WALL STREET" AND THE TEA PARTY HAVE IN COMMON?

Don't be misled by the presence of graying, leftwing professional protesters among "Occupy Wall Street" demonstrators, whether they are in New York, Pittsburgh, or San Francisco. 

There is sufficient discontent today with "The System" amongst enough disparate sectors and age groups in American society to encourage active participation in anti-establishment demonstrations, whether organized by Tea Party or Occupy Wall Street (OWS) types. How many common "drivers" are there behind the energy of both movements?

I count four:

1. Evil Bankers. The first, widely-shared driver is antipathy towards big banks. They are considered to have precipitated the financial crisis of 2008-2009 and the taxpayer-funded bailouts that followed. And they are reviled because their senior managers continue to enjoy hefty compensation - even when they are fired, as was the case with two high-level Bank of America executives last week, who are taking home over $5 million apiece on the way out.

In addition to this indictment, clearly shared by most Tea Party and OWS types, is a much older (but seldom articulated) criticism of bankers: charging interest is immoral and usurious. All major religions have enacted at some point strictures against charging interest (still not permitted in Islam). The concept that interest payments are "unearned income" to the lender is at the root of such thinking. Making money from money does not, in this mode of thinking, add value. Assembling automobiles or building houses does.  (In Dante's "Divine Comedy" the usurers consigned to a very unpleasant inner circle in Hell.)

In short, if you haven't taken (and passed) "Money and Banking 101," the big banks and their senior officers are an obvious target on which to take out your frustrations.

2. CEO Compensation.  Both Tea Party and OWS types tend to attack large corporations.  Here, again, hefty pay is the prime target, although entrepreneurs, like Bill Gates and the late Steve Jobs, are usually exempt.  The chief targets tend to be members of The Business Roundtable - for the most part, bureaucratic leaders of long-lived, well-established firms whose board compensation committees almost always find their CEOs are "above average". Just like the children in Lake Wobegon, Minnesota.

In 2010, according to a Hay Group study for The Wall Street Journal, CEOs at the largest corporations enjoyed compensation increases averaging 11%, bringing average pay to $9.3 million. Perhaps more important politically is CEO pay relative to their workers.  By some measures, this ratio has soared from 42 times the average worker's pay in 1980 to 343 times in 2010. 

It is hard to see a disparity of this magnitude - or even half that - as politically sustainable indefinitely. "History," as one sage has observed, "is a series of reactions against the law of compound interest." Perhaps the Tea Party and Occupy Wall Street movements are part of an emerging series. 

3. Education, Debt and Shattered Expectations. The ever-increasing cost of higher education and the debt burden that accompanies it, along with difficulties in finding that first job, are clearly sending a lot of younger people - and their parents - to both movements' rallies.  Twenty-somethings may be more prominent at OWS venues, but they are found at Tea Party events, too.

The higher education establishment has been extremely successful, up to this point, in brainwashing most politicians and much of the populace that you can't succeed without a college degree. (See my four-part series earlier this year entitled "Too Big to Fail: The Academic Establishment.) 

In turns out that in the current environment lots of young people have the degree and $20,000 plus in debt but can't get a job - despite the fact that there are over three million job openings, according to the Bureau of Labor Statistics. We have too many graduates with degrees in communications and sociology and not enough young people with the vocational training, technical smarts and work appetites that manufacturers and energy companies are looking for these days (see my recent blogs on "Jobs Looking for Workers").

4. Unemployment.  Take the first three "discontent drivers" and mix in a more traditional source of unrest - an above average cyclical rise in unemployment - and you have a steamy stew of popular unrest on the left, right and center of the political spectrum.

No matter that the bottom line number - 14 million unemployed - is made worse due to extended unemployment compensation benefits and the vast amounts of Washington-generated uncertainty about budget deficits, future tax rates and prospective healthcare costs. The job situation plus the three other drivers discussed above account (in varying proportions) for the bulk of the energy behind the Tea Party and Occupy Wall Street movements. 

Addressing the Discontent.  How to address these four drivers of discontent?  Turning around the CEO pay spiral and the higher education establishment's marketing mantra and wastefulness requires a few intellectually credible, politically-savvy leaders, whether they are politicians, academics or maybe someone off the street or the TV screen. 

Bankers will always labor under a suspicion of being evil magicians, but they usually survive concentrated popular assaults.  And the unemployment problem normally resolves itself as the business cycle moves on - if the uncertainties generated by government policy and inaction can be reduced in time.

Of course there are significant differences between Tea Party and OWS followers. The most important is the size and role of the Federal government in the economy and in our lives.  But the four common drivers are perhaps the most significant aspect of these movements today.

Are there any statesmen (or women) out there who can credibly and sensibly steer the ship of state through these choppy waters?

 

BEATING UP THE BANKS

As an economist and former banker, I think you have to start feeling sorry for senior management and shareholders of our largest banks.  After all, whatever their past sins, as a result of the recent Frank-Dodd legislation they are supposed to make their profits from low risk activities so they don't have to be bailed out by the government for high-risk debacles.

Hidden Fees? But today's supercharged political environment is creating a bizarre situation. When the major banks try to increase their prices for basic services, like checking accounts or debit cards (to make up for lost profits on activities now denied to them), they generate an avalanche of hot political rhetoric. This includes charges of "hidden fees" by President Obama, in referring to a widely publicized announcement by Bank of America that it was instituting a $5 a month fee for many debit card holders.

Aside from the President, the rhetoric tends to be from those Congressmen and "consumer advocates" who pushed into the financial reform legislation a section that put limits on the fees that bankers can charge merchants for debit card transactions. Of course, this part of the legislation had nothing to do with the subprime debacle, and everything to do with a long-standing complaint by retail merchants about bank card transaction fees. That is the way the Congressional sausage machine works.

Pay Now or Pay Later. So, consumers who paid for the convenience of bank card debit activity through higher prices when they shopped, will now pay for that convenience with higher fees on their cards. The only change is that the transaction cost of using cards will be more transparent. Do retail merchants really want customers to use dirty dollar bills?

A contributing factor to the banks' dilemma are today's extremely low interest rates (thank you, Ben Bernanke). This means that customer deposit balances cannot be invested by their bank at a significantly higher interest rate to help profit margins.

Loss of Clout.The large banks' political clout has seriously eroded over the past three years.  Even Fox News is now lumping Bank of America severance payments for recently-fired senior mangers with fuel for anti-bank Wall Street demonstrators. But while there is a reasonable argument for market-based constraints (e.g. higher capital requirements) to discourage the biggest banks from becoming too large, there is no credible economic argument to institute price controls on basic bank services.  

It would be most helpful if the President and more Congressmen, newspaper editorial writers and bloggers could understand basic economics when it comes to the cost of running the nation's payment system - and the implications of trying to set price controls on what it does.  If you want a healthy banking system, the last thing you want to do to is to start controlling prices for bank services.