TOPICS IN POLITICAL ECONOMY

JOBS LOOKING FOR WORKERS, CONT.

Yet another current and substantive report on "Factories Struggling to Find Skilled Workers," this time from this past Sunday's Washington Post.

Reporter Peter Whoriskey, writing from Holland, Michigan, notes that while presidential candidates roam the state promising to bring jobs back, " the jobs are already here.. . what's missing are the skilled workers needed to fill them." Michigan manufacturers are looking for machinists, particularly those with the ability to handle numerically-controlled equipment. Welders, tool and die makers, and assembly team leaders with basic programming skills are hard to find.

By one recent survey done for the Manufacturing Institute, there are as many as 600,000 manufacturing jobs going unfilled. The article correctly points out that high schools persist in making entrance into four-year colleges the goal of graduates - despite the fact that skilled operators-programmers make from $18-$28 an hour while the upstairs "white collar" designers make $14-$24.

Maybe, thanks to governors in the 41 states that cut spending on higher education last year, the word is getting out that for many young people four-year college degrees are a waste of time and money - and that there are plenty of jobs out there that don't require a four-year degree.

If the governors' actions send the message to the school boards that set policies for the nation's high schools, that would be a major step towards reforming the higher education Goliath - and meeting the needs of American industry.

For additional facts and analysis, check out my posts in the "Education" category written over the past 18 months, including one earlier this month.

HOW TO MESS UP THE FINANCIAL SYSTEM: IMPLEMENT THE VOLCKER RULE

One of the many provisions of the Dodd-Frank financial reform legislation was a section intended to prohibit proprietary securities trading by commercial banks, e.g. that wasn't at the behest of clients. It was strongly advocated by former Federal Reserve Chairman Paul Volcker.

 "Don't gamble with depositors' money!" was the stern injunction.  But what is the difference between gambling and taking risks?  Card-players, most conspicuously blackjack players, can be extremely careful in calculating the odds at any given point and disciplined in how they play. Are they "managing risk" or are they "gambling"?

Similarly, when bankers make loans to individuals and companies they expect to incur losses.  But if they are disciplined in their lending, their good loans provide earnings that offset losses on the bad loans and still leave something for the shareholders.

FX 101.  Providing customers with the ability to buy and sell foreign exchange, government securities, or interest rate swaps is important function of large banks. But banks cannot undertake large transactions in these markets without incurring a variety of risks.

Let me, as a former foreign exchange system manager, give a relevant example. If General Motors contacts Citibank and asks the foreign exchange desk for a price on $300 million New Zealand dollars for delivery exactly six months from now, it does not tell the bank whether it wants to buy or sell $NZ. 

If Citibank wants to keep General Motors as a foreign exchange customer, it has to quote realistically on both the buy and sell side, since the traders at General Motors monitor second-by-second many of the same computer screens as the traders at Citibank.This forces the bank to quote a very narrow "spread" between its buying and selling prices.

But, assuming GM accepts a quote from Citibank, the bank will end up with a $300 million risk position if it does not already have another customer at the same time whose deal would fully offset the new transaction. (Indeed, it might end up with an even larger risk position if it had been already exposed from earlier deals.)  Saddled with increased risk, the trading desk must now decide how and how quickly to reduce its exposure (within five minutes? end of day? end of week?).

Collateral Damage.  The same trading realities rule the markets in other financial instruments.This is why a number of foreign governments have expressed alarm at the intended regulations: they are concerned that the U.S. banking institutions which have "made markets" (provided "liquidity") for buyers and sellers of their sovereign debt will reduce their market-making activity. That would result in wider "spreads" and increase the cost of issuing new sovereign debt.  This fear is substantiated by the fact that trading in U.S. government securities would be exempt from the Volcker rule.

Totally "naked" speculative trading, such as recently brought down MF Global Holdings, is easy to spot.  But trying to divine when, in the minds of the trader, the lines between customer-related market-making, hedging and outright speculation have been crossed is an impossible task - even with the 300 pages of regulation and explanation that attempts to implement the Volcker Rule.

The most comprehensive and substantive criticism of the proposed rule can be found in the January 18 Congressional testimony of Brookings fellow Douglas Elliott.  He makes a strong case for repealing the rule or, at the very least,

". . . for Congress to send a clear signal that regulators are to implement the rule in a modest fashion that focuses on stopping only those activities that very clearly violate the Volcker Rule without halting activities where the intent of the transactions is unclear."

Even Paul Volcker sounds contrite about the proposed regulation, telling Charlie Rose recently that "Oh, I think it's OK . . . the regulation itself is only 35 pages."

Hopefully regulators and Congress are paying attention to the warnings from every direction - and recalling the words of Reinhold Niebuhr:  "We mean well and do ill and justify our ill-doing by our well-meaning." But Chairman Volcker may be in for another lesson in the law of unintended consequences.

 

HIGHER EDUCATION: WELCOME TO THE BUBBLE MACHINE

President Obama travelled to the University of Michigan last week to talk up higher education - and threaten its administrators with de facto price controls.

At the same time that he proudly pointed to his Administration's steps to increase the demand for higher education - capping student loan repayment schedules, increasing loans and grants to students, reducing interest rates on loans, and extending the tuition tax credit - he promised to push Congress to steer federal campus-based aid to "colleges that keep tuition affordable, provide good value, and serve their students well."

Clearly, the President didn't take (or didn't pass) Economics 101 when he was in college.  The relentless increase in the cost of higher education has been underwritten in large part by the availability of the very programs that the President wants to expand. The scale and growth rates of these programs is staggering: the Department of Education estimates that between fiscal years 2009 and 2012, post-secondary student aid and tax benefits will have increased by $41 billion to $181 billion or nearly 30%.  

Look at Germany.  As a starting point, the Administration might look closely at Germany's educational system. In Germany, according to the OECD's "Education at a Glance," only 26% of adults have tertiary (e.g. college or higher) degrees, compared to the U.S. with 40%. 

Yet Germany's unemployment rate is running at 6.7% compared to our 8.3% at a time when many U.S. manufacturing industries are desperately seeking qualified workers. (See my "Jobs Looking for Workers" posts over the past six months.)

Clearly, the track record of the Federal government's intervention in higher education is abysmal.  As Charles Murray, the author of "Real Education," put it recently, without that intervention "the last three decades would have seen a much healthier evolution of post-secondary education that focused on concrete job credentials and courses of study not constricted by the traditional model of the four-year residential college."

Pumping Up the Bubbles.  Instead of radically restructuring and downsizing Federal higher education subsidies, which increase the demand for education and the ability of administrators to increase tuition costs, the President wants to use them to force de facto price controls on every institution of higher learning. This is like pumping more hot air into the higher education bubble while simultaneously making it easier for everyone to join the party.

If this looks like the basic politically-driven policy formula which gave us the subprime mortgage crisis - and which is driving the inexorable increase in health care costs -you're right.