What Happened to the Skills Mismatch?

We once actually had a few nice words (scroll to the paragraph about 'central planners recognizing their limitations') for Minneapolis Fed chief Narayana Kocherlakota when in 2010, he talked about the fact that the labor market is not a strictly homogeneous blob (even though it is of course true that labor is a non-specific factor of production) and that the Federal Reserve could do very little to alleviate a mismatch between the labor skills that are in demand and those that are offered on the labor market.

In fact, such a mismatch tends to typically emerge after a credit-expansion induced boom turns to bust, as the boom is usually concentrated in specific sectors of the economy. These sectors tend to attract an overly large share of the labor force and other factors during the boom phase. Once the bubble bursts, many of the newly unemployed workers can no longer find work in the same branches of industry in which they used to work. At the same time, as the economy is in the process of readjusting to the the true state of consumer demand and attempting to find a proper balance between savings, investment and consumption, demand for different labor skills may emerge that cannot be satisfactorily supplied by those just laid off.

 

Moreover, they may be offered jobs at a lower pay grade, which many in the initial phase of the downturn tend to eschew, preferring to wait for a recovery in the hope that they can be reemployed in their old jobs at the same wage rates, thus temporarily adding to the rate of catallactic unemployment as well.

Kocherlakota was correct in pointing all of this out and indirectly admitting that the 'dual mandate' was even more impossible to pursue than a mere 'price stability' mandate. He naturally didn't go as far as denouncing the latter as well, as it would then have become nigh impossible to justify the continued existence of the central bank.

 

'Too Tight'

We then took note already in September of this year that the former critic of loose monetary policy suddenly came out in support of even more of it – two years after having criticized 'QE' and lodging a dissent, and at a time when the 'recovery' had progressed some way from those considerably darker days.

Now he's going even further. With both 'QE3' and 'QE4' underway, Kocherlakota now argues – wait for it – that the 'Fed is too tight'.

In closing remarks of a speech he delivered on Thursday, Kocherlakota had this to say:

 

“Congress has charged the Fed with making monetary policy to achieve two Main Street objectives: keep inflation close to 2 percent and unemployment low. Monetary policy tools operate with a lag of a year or two. These lags mean that the FOMC’s policy decisions are based on how it expects the economy to perform over the medium term. My own forecast, conditional on the FOMC’s current monetary policy stance, is that inflation will run below the Fed’s target of 2 percent over the next two years and the unemployment rate will remain elevated. This forecast suggests that, if anything, monetary policy is currently too tight, not too easy.”

 

(emphasis added)

Good grief!

There's not one word anymore in this speech about the labor market's idiosyncrasies,  but quite a lot of talk about the Fed's economic and 'inflation' forecasts. These forecasts are created with mathematical models, which as a rule work on the GIGO principle ('garbage in, garbage out'). As we have mentioned on previous occasions, the Fed hitherto couldn't forecast its way out of a paper bag.  In fact, it is simply not possible to make quantitative forecasts about the economy, at least none that make any sense.

While Kocherlakota is correct that the effects of monetary policy changes arrive with a lag, one cannot even determine the precise duration of that lag in advance, or  determine what the effects will consist of in detail. Some effects will actually arrive much later than others as the new money percolates through the economy, and  by the time they do, may no longer be recognized as lagged effects of policy measures put in place a long time ago (the 'stagflation' of the 1970s comes to mind in this context). At best one can make qualitative forecasts about such things, which are constrained by the laws of praxeology.

We do know one thing for certain: creating more money from thin air will not create a single iota of wealth. On the contrary, it will end up weakening the economy further, by furthering capital malinvestment. No economic activity can actually be funded with money from thin air – but scarce resources will certainly be diverted into activities that destroy rather than create wealth. Even though this may appear statistically as 'economic growth' for a while (just as the housing bubble did), it is in reality a period of capital consumption.  In effect, we are heating the house by burning the furniture.

Kocherlakota is looking into the fireplace,  where the Chippendale and the last chaise longue already crackle and smoke, and now wants to throw the four- poster bed on top of the smoldering pile as well.

 


 

albanese_fire

 

The house is getting warmer already … we must be doing something right!

(Image via http://www.brainpickings.org)

 


_____________________________________________________________________________________________

   

Dear Readers!

You may have noticed that our header carries ab black flag. This is due to the recent passing of the main author of the Acting Man blog, Heinz Blasnik, under his nom de plume 'Pater Tenebrarum'. We want to thank you for following his blog for meanwhile 11 years and refer you to the 'Acting Man Classics' on the sidebar to get an introduction to his way of seeing economics. In the future, we will keep the blog running with regular uptates from our well known Co-Authors. For that, some financial help would be greatly appreciated. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

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