By Tanner Strutzenberg on July 28, 2011

With all the sovereign debt crises currently rocking the global economy, including the impending default of the U.S. Government, a small but vocal minority has been gaining traction advocating the abolishment of the Federal Reserve and a return to the gold standard. This is perhaps understandable given the great uncertainty in the Dollar and the American economy, but nonsensical nonetheless.

The most important thing to know about value of gold in the monetary policy debate is that it is a rock that is found buried in the ground. Its value is determined by the dynamics of supply and demand just like any other commodity. As such, it is no more or less vulnerable to speculative asset bubbles or price manipulation in financial markets.

The value or fiat currency is backed only by the promise of the U.S. Treasury, which ultimately means the value of the Dollar is backed by nothing but the popular belief that a Dollar is valuable. Gold money, on the other hand, is theoretically redeemable for gold bullion. Gold! The advantage is that the Dollar’s value is backed by an inherently valuable asset. But what determines the value of gold? We quickly arrive right back where we started. What makes gold valuable besides a popular belief that gold is valuable?

The strongest argument for the gold standard is that it removes the influence of bankers and politicians - undoubtedly guiltless parties - over the value of the Dollar. The Dollar is ultimately a measure of wealth, and allowing central bankers and politicians to inflate the currency diminishes everyone’s wealth. But the problem with removing the measure of human wealth from human agency is that the measure of wealth is then arbitrarily regulated by the supply of a rock that is found in the ground. Over the long run, the American economy has grown quite steadily and predictably. Even the present recession promises to be a short detour on the long run growth trajectory. As the economy grows, it is perfectly intuitive that the money supply must grow proportionately. How is this supposed to happen if the creation of new money is incumbent on the discovery of new supplies of a rock that is found in the ground? If new gold supplies cannot be located, deflation of the Dollar will be a certainty as real output increases.

Furthermore, imagine if the new supplies of gold are found on foreign soil. Currently, many Americans are concerned about the leverage China wields over us by holding our debt. These holdings currently only account for 8% of all American treasury debt. Imagine the consequences of the Chinese, or any other adversarial power finding a major lode of gold within their borders. If one’s imagination needs to be jogged, I suggest looking toward our relationships with the producers of another vital commodity, oil, for a starting point. As an aside, I would suggest that if we were to tread down the well-worn road of commodity money in the future, crude oil, rather than gold, would be the commodity of choice on which we hypothetically ought to peg the new currency.

A return to the gold standard is nothing more than economic medievalism: a return to a time when wealth was measured by the monarch who sat on the largest, shiniest pile of gold. Fiat currency will never be a perfect currency system because it is ultimately a human currency. The creation, storage, and measurement of wealth are all uniquely human endeavors, carried on by human beings, and subject to human imperfections. This is true of central banks and the halls of Congress. Still, I’ll take the problems that come with a fiat currency system any day over the week over a return to dark ages of monetary policy.

By Tanner Strutzenberg on July 12, 2011

I painted a fairly bleak picture of structural unemployment in my previous post. First, let me reiterate economists do not agree on any quantitative measure of structural unemployment in the economy, nor do they agree that it is a pressing issue moving forward. Paul Krugman has argued that structural unemployment is a non issue under present circumstances, while Narayana Kocherlakota of the Minneapolis Fed is worried that structural unemployment is ultimately eroding the Federal Reserve's capability to fight high unemployment through conventional monetary policy tools. I'll let the experts continue haggling over the precise extent of the problem. If President Kocherlakota is correct, however, policy makers need to ask some serious questions about the efficacy of monetary policy moving forward.

Cyclical unemployment, the kind of unemployment arising from downturns in the business cycle, can be addressed by the Fed by lowering short term interest rates to give businesses greater incentive to invest in new production, which of course requires new workers. The key idea here is that the Federal reserve can stimulate the demand side of the labor market - employers looking to hire new workers.

Structural unemployment is essentially a phenomenon of the supply side of the labor market. Employers are looking to hire, but the right workers simply aren't available to fill the needed positions. Dropping interest rates can help incentivize would be employers, but cannot address the fundamental lack of supply for labor in the desired positions.

So what can be done at the policy level to help workers find the skills needed to fill new jobs? That's a tough question. Making a decision to uproot one's family to a new location where jobs are plentiful or to learn new skills is something few people take lightly. In the most recent recession, the federal government extended unemployment benefits to keep families solvent while these issues work out, but this is a band aid solution at best.

A more robust solution? Policy makers need to focus more on the solutions readily available to them. American community colleges provide an affordable means for people of all ages and backgrounds to learn new high-demand job skills in a relatively short time. This is particularly true in the health services industry, where a two year degree in nursing or physician's assistance can open the door to jobs in an industry struggling to hire qualified candidates despite the high unemployment numbers.

Community colleges offer a number of remediary, certification, and continuing education courses as well as many other resources to help unemployed Americans change the course of the career or simply stay at the top of their game.

What other options are out there to help gain new skills in a hurry? I'm curious to hear your advice (No, I'm perfectly content blogging at the moment. No, honestly!) I'd also like to hear the experience of those who have struggled for an extended time to find employment. Are jobs available in your area, or simply jobs you are unqualified for? Have any of you seriously considered returning to school or relocating in hopes of finding greener pastures? Inquiring minds want to know.

By Tanner Strutzenberg on July 7, 2011

The phrase "jobless recovery" is one we have become all too accustomed to hearing in the financial news.  Economists assure us economic growth is underway, but most Americans take little comfort in knowing that the recession officially ended in June 2009.  At that time, the official unemployment rate was 9.5%.  Fast forward 24 months to the present, and the most recent figures from the Bureau of Labor Statistics place the official rate at 9.1%.  Over the past 2 years, GDP has grown at an approximate average annual rate of 2.4%, while unemployment has only fallen by a net 0.4% over the same period.  The failure of the recovering economy to create new jobs has led many economists to speculate that the labor market is suffering from something much more severe than simple lack of demand for workers.

Many economists fear structural unemployment has taken hold in the American economy, which occurs when the workers available lack the necessary job skills to fill positions in growing sectors.  For example, a carpenter who has been laid off from his job in the construction industry cannot readily go seek employment in a booming sector like information technology or health care.  Thus, while job openings exist, the unemployment rate will not decline until more workers have the skill needed to perform the jobs available.

It is extremely difficult to calculate the percentage of structural unemployment in the labor market as a whole.  Take our carpenter again as an example.  The carpenter has been out of work for, say, 18 months now because there are no constructions projects going on in his area.  The housing market collapse, however, is a largely cyclical phenomenon.  There was a bubble that burst, and now the market is slowly sorting through the issues created by oversupply in the past decade.  In several years, the market will rebound and carpenters will again find new employment opportunities.  It seems easy enough to simply put a check next to the carpenter's name in the cyclical unemployment column.

On the other hand, no one would seriously say to the carpenter (who deserves a name at this point) "Don't worry, Jeffery, you're cyclically unemployed, not structurally unemployed.  Just wait it out a few years and you'll be right back to work."   Presumably, our carpenter has pressing financial obligations, not to mention mouths to feed that cannot wait several years.  The carpenter needs to either continue searching for work in an extremely tight market, move to another location where perhaps jobs in his field are more readily available, or begin looking for work outside his industry.  Thus, as we can see over time, cyclical unemployment becomes structural unemployment.

The issue of cyclical versus structural unemployment are naturally of great interest to tenured academics and financial market analysts, but why does any of this matter to our Jefferey?  Let's review his options.  He hasn't had any luck finding work in his present location over the last 18 months, so let's rule that out.  He needs to either move to a more promising locale, or look at gaining some new skills so he can seek employment in a different sector.  Both options are quite costly, both financially and in non-pecuniary terms.  Now imagine millions of Americans precisely in Jefferey's situation, and you can begin imagining the problems associated with widespread structural unemployment.

What sectors are hiring?  Which ones are stagnating?  And what can be done at the public policy level to help workers find new jobs in new sectors?  Tune in later this week to find out how structural unemployment could effect your bottom line.

By Tanner Strutzenberg on July 6, 2011

The Consumer Financial Protection Bureau (CFPB) is scheduled to begin operations on July 21, but it remains unclear who will head the new agency and what regulatory power it will have. The Bureau was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to educate and protect consumers from predatory lending practices. However, it has been mired in controversy since its inception by opponents of financial reform and financial sector lobbying groups.

Republican leaders are concerned that a powerful consumer watchdog agency with broad regulatory power could mire lenders in costly compliance costs, which would ultimately be passed on to consumers in the form of higher bank fees and interest rates. A more cynical interpretation: Republicans want to ensure the agency is little more than a paper tiger with no real power to curb fraudulent financial practices.

Last May, the House Financial Services Committee voted to put strict limits on the authority of the Director of the Bureau, and congressional Republicans have pledged to block any presidential nominee unless serious structural changes are made to the organization. Three measures recently passed in committee would 1.) replace the Office of the Directory of the Bureau with a five-member panel, 2.) allow the financial regulatory panel to overturn existing regulations with a simple majority vote rather than two-thirds, and 3.) prohibit the agency from operating until the Senate confirms a director. None of these measures are expected to pass the Senate, let alone survive a presidential veto, but the Senate confirmation of the Bureau’s first director is expected to be a no-holds-barred political dogfight.

While politicians continue wrangling over the exact scope and nature of the nascent agency, I think it’s important that consumers understand more of the agency’s mission and how it will impact consumers rights as borrowers. According to their official website, “The central mission of the CFPB is to make markets for consumer financial products and services work for American – whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” This mission is separated into three primary components: to educate consumers about responsible borrowing practices and how to identify abusive lenders, to ensure industry compliance with federal regulation through enforcement of agency policies, and to research consumer behavior to better understand the needs of consumers and identify the practices that put them at risk for exploitation.

Until legislators finalize the organizational structure and operating budget of the new agency, it will remain unclear exactly how the agency will evolve as it emerges from the primordial ooze of the legislative process. Beltway insiders are torn whether to expect a lion championing the rights of consumers or a paper tiger that will subsist only at the mercy of banking industry special interests. Look for more details right here as the process unfolds over the next few weeks.