the FT: America’s reading problem

I like Gillian Tett, the US managing editor for the Financial Times.  It’s partly because she has a PhD in Anthropology, partly because she has a wide breadth of interests that allow her to write much more interesting columns than the average journalist.

Her latest is about “America’s Reading Problem,” an article that contains the results of Department of Education research documenting the fact that ” 14 per cent of the adult population (or 32 million people) cannot read properly, while 21 per cent read below a level required in the fifth grade. And 19 per cent of high-school graduates cannot read.”

Hartnell College, a community college in Salinas, CA has a powerpoint online that contains a more detailed version of the same information.

Ms. Tett points out that this reading deficit, which has persisted in the US for a long time, tends to reinforce the distinction between haves and have-nots.

I have two thoughts:

–if government economic policy is reliant totally on monetary measures and not on education reform, no wonder 0% interest rates + quantitative easing for a long time have been necessary to  provide the (low skill) jobs that will shrink the unemployment rate.  Imagine what those jobs must be like.  It also seems to me very likely that higher rates will make jobs for the illiterate disappear very quickly.

–I’ve been unable to find the original government source document referred to, although the results are in the Tett article and in many others that pop up through an online search.   The only Department of Education report I can find says simply that literacy rates in the US are similar to those elsewhere in the OECD.

How odd.

I normally search government websites several times a week, so that’s maybe a thousand instances.  This is the first time something like this has happened.

 

why the Fed is looking at/for wage gains

This is Jackson Hole week, when the world’s central bankers convene in Grand Teton National Park in Wyoming to compare notes.  From their meetings, we’ll get a better sense of what the architects of the current emergency-easy money policy are thinking and planning.

Conventional wisdom  is that in times of economic stress the central bank should lower interest rates to a point significantly below the rate of inflation–and keep them there until people and companies borrow the “free” money and invest in large enough amounts to launch an economic rebound.

One indicator that the Fed is watching carefully is the rate at which wages are rising.  In theory, employers only raise wages a lot when they’ve run out of available unemployed workers and can expand only by headhunting away people who are already employed elsewhere.  So wage increases at a faster clip than inflation mean it’s high time to tighten money policy;  sub-inflation wage gains–the kind we have now–mean there’s no rush.

Policymakers appear to be giving this rule of thumb a rethink, however.

For one thing, short-term interest rates have been at effectively zero for over half a decade.  You’d think unequivocal signs of economic strength should have been evident long before now.

There’s no sign I can see that central bankers have any sympathy for the plight of savers (read: the Baby Boom and the elderly), whose desire for safe and stable fixed income investments has been the chief casualty of the economic rescue effort.  However, they do seem to be concerned that the search for yield in a zero-interest-rate world has caused savers to buy exotic instruments (hundred-year bonds, contingent convertibles, for instance) that will likely suffer wicked losses as rates begin to eventually rise toward a normal 3.5% or so.  Is the cure worse than the disease, at this point?

Lately, the money authorities seem to be expressing a second worry.  Suppose the emergence of inflation-beating wage gains isn’t the reliable indicator it’s thought to be.  If so, the Fed may be distorting the fixed income market–and buying trouble down the road–for no good reason.

Why would sub-inflation wage gains be the norm, even in an expanding economy?

Maybe in past economic cycles, high wage gains were caused mostly by the tendency of union contracts to index wages for inflation, not by overworking headhunters.  Maybe the psychology of managements penciling in inflation-plus or simply inflation-matching annual wage increases for the workforce has gone by the boards in a world that has experienced two ugly recessions–the more recent one an epic decline–since the turn of the century.  …sort of in the way inflationary expectations have disappeared from the minds of current workers.  Again, if so, maybe interest-rate normalization should happen at a faster pace than currently planned.

We’ll likely hear more on this topic as this week’s meeting gets under way.

Fed board members speak

Over the past couple of days, Richard Fisher, President of the Federal Reserve Bank of Dallas, and Charles Plosser, President of the Federal Reserve Bank of Philadelphia, have made public comments about the state of the economy and about money policy.  I think these are early indications of the Janet Yellen style of communication, which would seem to me to be considerably more blunt than her predecessor’s.  The main points, as I see them:

1.  weather aside, the US economy is now operating at very close to its maximum sustainable rate of somewhere in the 2.0% – 2.5% real annual growth range

2.  money policy is too loose at the moment.  Excess money is flowing into speculative financial activity, evidenced by unusually high prices for the most risky stocks and bonds.  In other words, tapering will continue apace.

3.  the Fed is focusing on the next step in removing emergency stimulus–that is, raising interest rates.  That step is not as far in the future as financial markets appear to think

4.  economic growth in the US is being held back by inappropriate fiscal policy.  Congress and the administration have wasted the opportunity presented by five years of low interest rates to make obvious policy improvements, like revamping the tax code, that would make growth stronger.  Washington’s behavior isn’t too different from what has been happening in the rest of the developed world.

5.  withdrawal of unconventional monetary stimulus may have unforeseen negative consequences, since this is the first time QE has been done.  The implication is, I think, that a little less dysfunction in Washington might help the process along.

In short, the Fed is in tightening mode.  And, interestingly, it is trying to shift the spotlight onto the administration and Congress as the only possible source of further economic growth.