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.

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