Month: August 2011

Education.

But obviously, it’s not that simple.  Telling everyone to go to college and get a liberal arts degree isn’t a tenable solution.  Nor is just throwing money at public education.  But education also means retraining workforces and in that vein, Community colleges and select for-profit education companies have a potential role to fill.

The first step needs to be addressing the mismatch between skills and jobs.

Capital Investment Incentives.

Rather that lowering corporate tax rates – which induces exactly the behavior we’ve gotten in the last three years.  Cost cutting to the bone to maximize profitability to take advantage of tax rates that corporations recognize as unsustainably low, why not incent companies at the national level to invest in new productive capacity?

New investments in the country’s capital base is a path towards sustainable modernizing of the economy.  Hiring incentives are less effective because employees have become a disposable asset, when the subsidy dries up, the incentive to keep the employee can erode as well.  In contast, an investment in a capital asset has more enduring value.

Make Fiscal Stimulus count – and also address labor gaps:


It’s not rocket science to identify the sectors and industries with the greatest unemployment imbalances.  If fiscal policy is to be a Keynesian step-in support – make sure it is supporting areas that need it.  If Government is spending money in sectors with full employment (case in point – federal money going to state budgets and state employees), that is not serving the role of tempering the pain of a secular industrial shift (like we have with the downsizing of the housing industry).  In contrast – using the state employee/state budget issue, it’s actually inflating a bubble further – postponing the necessary adjustments and allowing workers to put their heads in the sand – the proverbial kicking the can.

We know that level of benefits and degree of employment for most state governments (CA and IL are glaring examples) are unsustainable relative to taxpayers willingness and ability to support those services, but the political will is absent and so what happened?  States used Federal stimulus money to cover their current operating structure and put off any changes – money way down the drain.  No structural changes, and the state employees that will eventually get fired are still in their jobs just waiting for the ax to fall (or kidding themselves) instead of retraining and getting focused on finding a different way of supporting themselves or adjusting to lower pay.

There are glaring areas of public under investment that have been ignored and swept under the rug for 30+ years.  Infrastructure (and no I don’t mean College Gymnasiums) chief among them.  There are things that need to be done and there is excess human and physical capital idle everywhere in the US.

I don’t know the answer, but I do know that the status-quo is broken.  Looking to a top-down solution to provide everyone a squeaky-clean job that they don’t have to work to hard at and will allow them to live like they did the last 10-15 years isn’t going to happen.  The longer we listen to politicians and policy makers who insist that it is, the harder the eventual adjustment will be when it occurs.  The sad reality is that many many people are going to need to accept a lower standard of living than they’re accustomed to.  The current efforts to reverse this trend are a sad attempt to push us back to a bubble-economy – the soundbite of “trying to fix a problem of leverage with more leverage” – a better policy effort would be to recognize the adjustments that need to be made and put investment incentives in place (punitive short-term capital gains, higher taxes on corporate profits, more aggressive prosecution of corporations off-shoring profit centers, and big incentives for companies willing spend growth capital) that move us more rapidly towards an economy with kinds of demands on labor that soak up the slack in our (and the world’s) economy.

Cleantech (broadly-defined) seems to me to be one obvious starting point.  And the markets would seem to support this if you look at investor interest and capital flows.

The notion of full employment as an attainable steady state is flawed by the the use of the view of a static target.  Certainly we can agree that as a society, a productive, working populace with adequate opportunities for work – that’s not the issue.  The issue is that shaping top-down policies around a view that 95% of the population should be employed at all times misses the mark by a huge margin for several reasons:  Industry Shifts, Relative Cost Shifts, Education dislocations, and Geographic dislocations.

The world is a dynamic place, but imbalances occur and take time to come back to balance.  And the longer those imbalances are allowed to persist, the more painful the reckoning when it comes.

Take any base of employment – the needs of that industry are not static.  The productivity of workers in the field advances (or declines), the demands on the goods or services expand or contract, and the ability to provide those services at the most efficient level changes (comparative advantage).

When these shifts occur, workers are going to get displaced and jobs are going to get lost.  And more times than not – those same jobs aren’t going to come back – no matter how much cheap capital, government stimulus programs, or animal spirits we get imposed on us.  What is needed is new jobs and the skills to fill them – and a recognition that this is the permanent reality and not a bad dream.

To put some meat on the bones – let’s think about the US Housing market in the 2000’s.

• Huge Job Creation – industry expanded dramatically
• Learned skills in Finance, Construction, Realty, Local Govt., Landscaping, Home Improvement
• Large worker base was attracted to the industry by opportunity and compensation driven by demand outstripping supply.  
• Industry as a % of the economy expanded to several times its long-term average as a big slice of the economy devoted itself to building, buying, selling, improving, and caring for – housing.

When this reverts to a sustainable level – there are huge numbers of mortgage brokers, Realtors, builders, and landscapers – that won’t be able to do that job anymore – period.  They’re going to have to apply the skills learned in their previous job to something new, or they’re going to have to develop new skills to do something different – and importantly there is no basis for saying that what they earned before is relevant.  This is hugely distressing and an under appreciated problem, but there is nothing inherent in the skill-set of a mortgage broker or a Realtor that warrants a six-figure paycheck – but the reference point of past earnings is a huge impediment limiting employment transition – people don’t want to take a step backwards – it’s just human nature – and this gums up the resetting of the workforce.

Until that resetting takes shape – it is just pushing on a string and silly political handwaving to say there is any chance of an economy of full employment.  The mis-match between new opportunities for unemployement and the base of available workers is just too wide.

The evidence of this dynamic is seen in two places – first is the lower overall unemployement levels at higher education levels (my assertion being that college educated workers can adapt to a broader set of less commoditized roles), and second that there a huge numbers of  unfilled job listings in the US where companies aren’t able to find qualified workers.

Obviously this isn’t the whole story – there are real biases towards the unemployed and unfair stigmas attaches to the capabilities of those out of work for extended periods.  Age bias, workers viewed as overqualified, too expensive, or not worth the risk.  This isn’t fair and the issues aren’t addressed by a view of overall workforce imbalances.

But, having said that, targeting full employment and implementing public policies directed at trying to force the economy to get there – ignores the structural imbalance in the economy and blindly trusts that with free money, government stimulas, and tax cuts for “job creators” – without prioritizing the structural changes in the economy, policy-makers are driving a speeding car navigating through the rear-view mirror.

Who’s to say that 4.5% structural employment is the proper target given today’s 9-10% unemployment level and the current makeup of the workforce skills and demographics?  Perhaps I’m missing the presence of this analysis, but at minimum a careful investigation of the jobs flows (meaning specific Industries losing and gaining jobs matched with skills of unemployed) should be a starting point.

If, for example getting to a unemployment rate of 4.5% with today’s economic structure would require industries like home-builders to return to 2005-06 levels, then we’re wasting our time.  That’s not going to happen and better policy would be to identify and force a retraining of that section of the workforce.  Admittedly still an unwieldy and blunt policy directive, but better than just cutting interest rates and crossing your fingers.

I’m increasingly convinced that any puppet-master, top-down solution to supporting the American Economy is inherently flawed as it relies on a view of economies as systematic – applying a scientific practitioner’s view to the process (the analog being Medicine and Surgeons).  Just as our understanding of the complexities of the human body are slow in coming and constantly surprising practitioners – so too with economies.  The important distinction is the contagion effect – a surgeon isn’t operating on all of us and the value of feedback loops that facilitate learning by practitioners in diminished by the long observation lag of policy effect in economics.  Meaning that developing expertise on the part of our economic ‘surgeons’ is an extraordinarily costly and long process and vulnerable to debunking (often rightly) when unpopular as “snake-oil” or “witchcraft”

Current policy-makers are limited to blunt instruments (like a civil-war surgeons).  Ex. Make money cheaper  or more expensive, give Congress/States/Executive Depts. more latitude to spend, lower or raise the tax burden and costs to companies.

This problem is amplified by the diluted impact of these tools and their inconsistent application.  Using Monetary Policy – Cheap money doesn’t flow everywhere across the economy – in the current form it flows through Wall Street where it gets stuck a lot of the time.  And the often touted Wealth Effect as a means of lubricating the economy is bribery and unsustainable (the Economic Equivalent of a Defibrillator).

Fiscal Stimulus gets expressed through Congress and the Executive Branch – meaning it gets hugely politicized and is vulnerable both to being stolen (yes it is stolen) through lobbies and pet projects – all in the name of compromise that is nothing but political posturing grandstanding.

My thought is that we have clear evidence of two things.  One that economies do not operate as rational systems as we currently understand them.  And, two that a clear-eyed examination of our limited policy capabilities and limited understanding of the economic systems means that we are conducting very costly experiments in a lab without a hard consideration of the cost of those expirements.  We don’t know what impact these policies will have, but we have consistently given the keys to overly confident puppet-masters who keep tinkering and assuring us that they’re going to get it right – that the economic cycle doesn’t need to happen and that we’re in for a smooth utopian ride, just trust them.  All the while, the interventions continue to cloud our understanding of what is going on, and like the patient that is constantly being administered one drug after the next by physician unable to diagnosis the illness, we go from one unhealthy symptom to the next in a drug-induced haze.

Can the focus get any more short term?  Is it irrational with the influences on the market getting more and more top-down each week?  It seems unfathomable that this can persist – at least with the current level of participation.

Just today – up we go (oversold bounce?), then pause – must defer to the view from the Great Oz.  Oh, now we’re going to have two more years of weakness?  Guess those GDP forecasts were too rosy?  Then (wait for it) we’re going back up – fast – since, oh yeah, He’s heli-Ben, he won’t let us go down.

It seems certain to me that the market is now discounting some serious monetary help coming out of Jackson Hole.  If we don’t get QE3 then, you have to expect it’s risk-off again big time.  Hard to hang your hat on those choices.  Seems like we need a serious reset of agenda to get past this frenetic headline watching flavor of market participation.

It seems likely to me that Retail investors are more likely to not want to play anymore – that fear will win out given that the upside potential of participating seems limited to whatever bump is likely to come from another round of QE.  Certainly not the effect on confidence that the policymakers are insisting they’re trying to engender.