Friday, January 1, 2010

Things Fall Apart - The Cost of Arrogance

Reflecting on the end of what has proven to be a turbulent year in the economy, I wonder whether or not 2010 will prove to be the year that we finally learn from our mistakes, both the errors of our actions and the predictive failures that allowed us to be caught so ill-prepared for the economic devastation of the past two years. Over the preceding decade our brightest scholars had embraced the theoretical perfection of markets, confident in the intrinsic connection between price and underlying value. Confidently, we had declared ourselves immune to the massive market failures that led to the great depression of our grandparents.
In retrospect, I don’t think the events of the past two years reflect so much a failure of our economic policy as a lesson in humility for the excesses of our hubris. Increasingly, swayed by the elegance and purity of mathematical solutions, we embraced a manner of thinking that aimed to define complex human behavior in terms of predictable and rational mathematical relations. When applying the rationale of the current market and price theory, not only was the economic collapse unpredictable, it was virtually impossible. Bubbles could not burst because they could not, by definition, exist.
When finally forced by circumstance to come to grips with the fact that monetary policy alone could no longer suffice to spur activity as the interest rate approached zero, economists have either had to accept purely Keynesian responses, such as expanded government spending or do nothing at all and simply declare that recessions and massive job loss are natural adjustments ultimately good for the economy.
Workforce Development has been equally handicpped by this same type of flawed thinking. The federal government provides funds to communities to implement demand-driven training because the historical data dictates the logic of that approach. We utilize historical and survey data to predict skill needs corresponding to projected industry growth and assume that if a workforce is prepared with the appropriate skills, employment will result. But, just as in the economic scenarios above, we fail to allow for the behavioral side of the calculation. We surmise that employers will behave rationally and that when the underlying conditions provide a basis for expanded hiring, that jobs will be created. But when these jobs fail to appear, we find ourselves at a loss, lacking any tools to address the situation. One problem is that job creation is often directly linked to very human and altogether irrational (though predictable) behaviors. In the current economy hiring mangers are far more likely to be concerned about further losses than incremental gains and when the media is saturated with stories of foreclosure, layoff and bankruptcy, these employers (especially small employers) extrapolate what they have heard to their own situation. Consequently, when all we can offer is services which respond to market demand we find ourselves relegated to waiting for the actions of a labor market that is essentially paralyzed.
Like Neoclassical economists stuck in denial, some at ETA continue to cling to the belief that those areas that are unable to place workers into jobs are simply not using their data effectively to link to market demand despite abundant evidence that the real problem is the lack of demand itself.
Unless we reevaluate the policy tools we are providing for workforce development, we will see diminishing returns for our expanded training investment. I’m not advocating for corporate welfare, but until we understand and can offer the kinds of incentives to employers that will increase their willingness to risk expanded hiring, many areas will experience increasing labor force detachment, be forced to devote an increasing proportion of training resources to participant support, and fail to produce a timely return of jobs from the expanded federal investment.
I think the economists have seen the light. I'm optimistic that the workforce system will soon follow suit.

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