Budgetary Darwinism

I’ve heard a number of people refer to current economic disaster as a tsunami or “perfect storm” but, as events continue to unfold and the upcoming state and federal budget cycles loom large, it’s clearly time to update the disaster metaphor. What we are about to experience in government is closer to a massive asteroid strike, an Extinction Level Event that will cull those programs that are unable to quickly adapt to a radically new paradigm. Given the fact that a hallmark of government programs has never been the ability to rapidly adapt to changing situations, the challenge facing those of us with the responsibility for providing public services is both immediate and immense.

Many of our programs have become comfortable with slow adaptive processes, responding to budgetary ebbs and flows by corresponding adjustments to the scale of activity. When funding is adequate and changes are incremental, programs evolve slowly, rarely challenging fundamental suppositions about what, in fact, is actually needed and how it is best provided. When need exceeds funding, waiting lists result. Many program administrators bemoan the inadequacy of services but are perfectly willing to place the responsibility solely on the funding bodies that won’t provide the resources to allow the current delivery models to be scaled to meet the increasing needs of our citizens.

However, like an asteroid approaching the Earth at speed, impact has become inevitable. Disaster movies aside, there are no nuclear solutions to return things to the way they used to be. Large and ongoing shortages of financial resources will trigger a kind of budgetary Darwinism that will relegate some programs to the scrap heap of history. Only those that can adapt effectively to a radically new environment will survive. Like the dinosaurs, those slow but majestic programs that have relied upon a history of dominance and political cachet to provide the resources to support their ponderous frames will quietly vanish from the scene. To survive in this new milieu, we must adapt, take risks, be entrepreneurial, and as my Director repeatedly reminds me, “Meet our customers where they are at.”

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.

The Red Queen's Advice

As I read today’s news, I was struck by the item reporting the much higher than expected quarterly profits by J.P. Morgan Chase. The headline was JPMorgan profit jumps, but warns on credit cards. The essence of the article was that the investment banking business was doing surprisingly well, but that the consumer mortgage and credit card losses were accelerating. No surprise there. The methods used by banks to manage credit card risk have always displayed a curious brand of logic from a consumer perspective, but in the current economic environment, it’s taken on the extremes of a Lewis Carroll story. As long-time customers who, on the whole, have always paid their bills lose income and begin to struggle making payments, bank risk rises, so card interest rates and minimum payments increase for the universe of cardholders to attempt to offset the collective losses to the bank. The minimum payments can actually double for some customers. Entire new groups of cardholders who were previously able to make their monthly payments are no longer able to make the newly increased payments and begin to fall behind. Bank losses increase and interest rates and minimum payments continue to rise stressing the next tier of cardholders. So it goes, ad infinitum. As the Red Queen said, “Now, here you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Over many years of relative stability, many people have mistakenly learned to think of credit card debt in terms of a fixed and predictable payment and developed what they thought were manageable budgets on that basis while ignoring the large amount of underlying debt they were carrying. The fallacy of that thinking has been a painful lesson for many. I sometimes wonder if a radically different response from a maverick bank could be more effective in the long run. What if they identified financially stressed cardholders with high balances that had reliably made payments for a long time and offer them an opportunity to estabish a fixed payment at a more reasonable rate that they could budget for and set it up on an automatic withdrawal. The lower rate could apply more of the payment to principal while still making payments on time giving the bank predicatble income and the consumer a pathway to decreasing their debt. It would not cover the losses from those who were absolutely unable to pay their cards, but would preserve an entire group of historically good customers from sinking further into debt and risking more defaults. Such a radical bank might even find that these customers appreciate their action and become fiercely loyal to that bank when better times return. It could amont to exchanging a smaller amount of physical capital for a greater amount of social capital and clearly differentiating that bank from its competitors...Or, perhaps I’ve just watched too many reruns of It’s a Wonderful Life for my own good.

Fireworks, Festivals and Fortitude

Between the fireworks, parades and community festivals of the Independence Day weekend, I ran across the following online article by Heather Boushey from the Center for American Progress.
http://www.americanprogress.org/issues/2009/07/recession_today.html

For me, this article served as a reminder that, despite the forecasts of impending economic recovery, millions of American families will continue to struggle to survive, cobbling together a patchwork of government assistance, and short-term or under-the-table work when they can find it. Many of those fortunate enough to have accumulated assets when times were good are depleting their resources to maintain standards of living, while confronting the uncomfortable realization that those standards will need to change significantly in the future.

Although there’s nothing dramatically new presented here, the timing is perfect and some of the facts in the article deserve a second look:

• 
  · The share of the population with a job fell to 59.5%, lowest since 1984
  · The number of mass layoffs in May reached an all-time high of 2,933 incidents, indicating more pain to come in the pipeline
  · The average hours worked fell to 33/week, a historic low
  · The unemployment exhaustion rate for the initial benefit period (26 weeks)reached 49.2% in May
  · Only 67.7% of adult men are employed, a number that had never previously fallen below 70.5%
  · The number of discouraged workers has more than doubled to 793,000 since the recession began in December 2007

These are stark reminders that this recession has transcended the cyclical shedding of jobs impacting those with marginal labor force attachment to penetrate the broad spectrum of the American population. While the massive debt resulting from efforts to stimulate the economy and shore up our safety net is painful, desperate times call for desperate measures. One thing is clear, however…the stimulus investment must be treated with a level of critical importance. These funds cannot be treated as simply “more of the same” to be used in precisely the manner to which we have become accustomed. Our traditional workforce, economic development, education and community resources are being called upon to facilitate the kind of revolutionary practice needed to make a difference in the future direction of our economy and our nation.

So, while I'm participating in this most American ritual watching tonights fireworks, I'll feel just a little more connected to those around me and further convinced that what we do, indeed, matters.

A Uniquely American Tragedy

For those of us who have been fortunate enough to retain employment and health insurance coverage, it’s sometimes easy to lose track of the significance of how closely the two are tied in the United States. Lost among the stories detailing the foreclosures and other financial tragedies arising from the current recession, a recent report sheds some light on what has become a frighteningly common occurrence over the past decade, and one that remains largely unknown in most other industrialized nations. The American Journal of Medicine recently published an update to an earlier clinical research study which explores Medical Bankruptcy in the United States. The study covers the period immediately prior to the current financial meltdown, and exposes some startling and sobering facts which illuminate both the increasing fragility of the American Dream and the role that employer-provided health insurance plays with regard to family income security.
In 2001, the researchers found that medical problems had contributed to 46.2% of bankruptcies 5 states. This was significant when originally released since earlier studies in 1981 found that, at that time, only 8% of bankruptcies were the result of medical expenses. Expanding and updating the study via a random national sample of bankruptcy filers in 2007, the study found that the percentage of cases where bankruptcy was accompanied by loss of income due to medical reasons or having to mortgage a home to pay medical bills had risen to 62.1%. The share of American bankruptcies attributable to medical issues had risen by 49.6% in just six years. Some particularly interesting findings were that less than 25% of the debtors were uninsured when they filed for bankruptcy, but 40% had experience a lapse in coverage during the two years prior to filing. Most of the debtors were middle class, middle-aged and had gone to college.
I felt a sense of personal unease after reading this report. For me, it presented a stark reminder that “There, but by the grace of God, go I” and that today’s economic events must not obscure our need to address critical issues of health care in the United States.

Angst in the Heartland

It’s only when the tide goes out that you find out who’s been swimming naked. - Warren Buffett.

After a meeting I attended recently, I was talking about the recession with an economic development acquaintance who brought up a line of questioning I’ve been hearing increasingly often. “What if jobs never recover? Is it possible that something is occurring on the scale of the industrial revolution, where jobs, as we traditionally view them, will not be created in anywhere near the number to which we have become accustomed? What if our region recovers from the current economic crisis at a new lower point of equilibrium where the number of jobs needed to produce our outputs has been significantly reduced and despite the emergence of new industry sectors will not support full employment?”

These are fair questions, and ones that were also asked several years ago as productivity increases driven by technology began to reduce the labor needed for the manufacturing of durable goods. Amidst the apprehension accompanying the approach of a new millennium, futurists pondered the trends established in the late 20th century and offered visions of a number of alternate realities. Like the multiple dimensions common in science fiction, some futures were characterized by a vision of a nation embarking on a golden age where wealth, created by scientific advances, was sufficient to meet the general needs of our population and individuals were empowered to indulge their interests and self-development. Others painted a much darker future where the wealthy and educated profited immensely from overall expansion of output, but those lacking resources to invest or highly specialized education or skills, joined the traditional poor in a fully stratified society of haves and have-nots.

While these dark visions of a new America, slouching towards Bethlehem, were frightening, it was hard to view these fears as anything more than the paranoid ramblings of a pessimistic few. Despite the major structural shifts occurring in regional economies based on the manufacturing of durable goods, new industries and service jobs were expanding, productivity was increasing, immense wealth was being created, and the slowly rising tide was keeping (almost) all boats afloat.

Suddenly, with the deep global recession from which we have yet to emerge, these fatalistic concerns have taken on a new life. A University of Cincinnati Poll, released today reveals the current depth of pessimism among Ohio residents. How does this impact our workforce development strategies. Over the past several years we have focused our energies on being “demand-driven” in our services. What then, when resources are avaialable but demand is limited? Do we assume that, upon recovery, the historic labor market trends that existed prior to this recession will pick up where they left off? Will our industries which have adopted less labor-intensive methods to survive the downturn return to previous patterns of employment or will Darwinian survival eliminate the weak leaving only those most able to benefit from technology and globalization at the expense of a large segments of the labor force?

These speculations, despite their implications, divert us from what must remain our immediate focus. There are significant resources currently available with which to prepare our existing workforce for an uncertain future. It is especially critical that we use these resources effectively to provide the services and training which will best prepare our population to participate in any future economy. Where do we start? It is certain that we must broaden the focus of our efforts. We must engage our communities, recognize our common needs, develop new alliances and leverage existing assets to operate effectively on a regional scale. While it remains critically important to ensure the skills of the regional workforce are adequate to support the replacment needs of our remaining large industries and the specialized needs of emerging growth sectors, the mechanics required for that effort are not new. It remains substantially the same demand-driven structure with which we have become familiar. However, we must also develop pathways for those who will not gain access to those jobs to enable them also to prosper in a changing environment. These workers will need to be more flexible and entrepreneurial than ever before. Demand in this context will be immediate and fleeting. Their “jobs” will often not resemble the traditional jobs of the past. (Peter Creticos did a nice paper on the inadequacy of our current metaphors to describe work in this current context) Their ability to utilize technology will be increasingly important as companies continue a trend towards parceling out smaller portions of old jobs online, creating opportunities for new specialization in all industrial sectors. Critical thinking, time management, team processes will all become increasingly important as many workers will need to package multiple short-term or part-time engagements, sometimes simultaneously, and work with virtual ad hoc teams of co-workers. New companies will emerge which connect virtual networks of individual workers possessing specialized skill sets to meet short-term needs of other industries. Where we may have limited ourselves, through policy, to a focus on traditional “family-sustaining” jobs with benefits provided by a single employer, we may have to re-think those self-created barriers in the light of a rapidly changing reality.

When the facts change, I change my mind. What do you do, sir? - John Maynard Keynes

Funding Distribution and the Noveau Poor

During my time as state workforce administrator for Ohio, one of the duties that had become a ritual responsibility with each economic downturn was my journey to the Cleveland/Cuyahoga County Workforce Investment Board to explain why their allocations were smaller than those from the prior year. Not that they were alone in questioning the reductions they experienced, I was also receiving letters from the workforce boards of the Appalachian counties in southeastern Ohio asking the same question.

The board members all knew that the allocation formula was based primarily on poverty and unemployment. Hadn’t we provided WIA training that clearly told them about that? The funding reductions seemed to defy logic. After all, weren’t these areas among the poorest in the State? The economies of each had experienced higher than average unemployment for many years. Lack of transportation, industry change, aging infrastructure, inadequate financial support for schools, and multi-generational poverty presented challenges to these areas on a much larger scale than many areas of the state. They questioned the State’s calculations. Surely the numbers must be wrong. Things had not gotten better, if anything they had gotten worse. Reducing their funding seemed to defy logic.

Each time, I would dutifully explain how funding formulas worked. That poverty was based on decennial census data and would remain unchanged until the next census, effectively taking that factor out of year-to-year funding variations. What remained as the factor driving the calculations was unemployment data. They would listen quietly as I explained the relative nature of the calculations. That the thresholds for ASU unemployment and excess unemployment were fixed and that as the economy declined and more areas experienced employment loss, those areas with historically high unemployment that always exceeded the established thresholds were being joined in that group by additional areas that now qualified due to increased unemployment. They sighed as I explained that without additional resources being added, the same amount of funding was being shared by more areas who met the qualifications for excess and ASU unemployment. Eyes glazed over as I explained that excess unemployment had little impact because it counted only those unemployed in excess of 4.5% of the labor force but ASU unemployment was the real culprit, because it counted all those residing in such an area, giving heavy impact to the densely populated counties surrounding the metro areas. Ultimately,they accepted that the calculations were correct, but never that they were right. It was difficult to accept that the poorest areas of the state with the highest unemployment would experience reductions while suburban areas, with comparably healthier economies were receiving increases. They would shrug and leave the meetings further convinced in the illogic of government regulation and the fundamental unfairness of it all.

While the ability to comprehend the complex and arcane science of government had always been a source of some ego satisfaction for me, I never felt good leaving those meetings. Like a professional spin-doctor, I left feeling empty, aware that I had successfully defended a policy that I could not rationalize in my own mind.

Since my retirement, those duties now fall to someone else. But, as I read about the rollout of the new decennial census, an uneasy thought crossed my mind. Could we see something similar occurring when poverty is recalibrated among the areas of the state? Could the current recession set a new departure point for poverty based upon the impacts of large-scale layoffs and income loss that will remain in place for the coming decade skewing the distribution of resources away from the areas of historical poverty towards areas more likely to recover in the coming years? I’m not sure. But in any event, it will be someone else’s charge to explain that one.