Missing the Point: The Chimera of “Full Participation”

Much ink has been spilled of late over employment rates– job creation, unemployment, and “participation.”  While the first two are the most frequently cited as indicators, it’s the latter-most– the percent of Americans who are working– that, it is implicitly argued, speaks to the actual presence or absence of a recovery.  If percentage participation returns to historical levels, our personal-income-converted-into consumption economy will recover.

But as the ever-illuminating Calculated Risk explains here and here, there are fundamental demographic reasons why participations rates won’t– can’t– return to their historic heights.

Some of the recent decline in the participation rate has been to due to cyclical issues (severe recession), but MOST of the decline in the overall participation rate over the last decade has been due to the aging of the population. There are also some long term trends toward lower participation for younger workers pushing down the overall participation rate.

This decline has been visible in prospect for years– demographic dynamics are very slow to change– and it’s going to continue, as this chart (based on BLS economist Mitra Toossi’s projections) illustrates:

 click here for larger image

To put those rates into demographic prospective, this plot (from The Census Bureau) illustrates the “Baby-Boom-rabbit-passing through the snake” demographic dynamic that defines the U.S. today and into the future:

 click here for larger image

The argument over employment these days is over how to increase participation; there’s implicit agreement that a) this is the right thing to do, because, b) it will create the conditions for a recovery.  The problem is that, past a relatively minor point, we can’t.  While the U.S. isn’t in nearly the demographic straight-jacket that binds most of Europe and Japan and China, there is a very real ceiling on participation… and that ceiling is falling.

So if we are to make a material dent in the problems that ail us, we’re going to have to respond differently than we have been.

For a start, we might note that the primary reason that we have are in a somewhat better demographic position than– that’s to say, not quite so aged as– other developed countries is that we’ve enjoyed strong immigration of relatively young (working and child-bearing aged) folks from countries/cultures that value family.  That’s dropped off in the xenophobic wake of 9/11– and that’s aggravated our problem.  There are myriad reasons that immigration reform is important; for the purposes of this argument, suffice it to say that it could go a long way toward replenishing and reinvigorating our work force– and generating the income on which our economy and the society it supports depend.

And we’re going to going to have to re-focus our efforts on creating new, higher-value-added kinds of jobs– and on creating the populace that can fill them.  Even if there weren’t a falling ceiling on participation, it wouldn’t be enough simply to stamp out thousands of new low/minimum-wage service, retail, and health care jobs.  If employees don’t earn enough to be viable consumers, the consumer economy– and the social services that depend on it– will continue to shrink.

At the same time, we need to be less concerned with recovering what we’ve lost; more, with trying to invent the new jobs– in alternative energy, biotech, nanotech. et al.– that can create enough value to allow for reasonable wages.  And that of course means that we have also to be making the social and physical infrastructure investments– education/training, health care, transport, telecoms, et al.– that those emerging fields require… and that other countries are already making.

Of course, the devil is in the details of observations as over-arching (and, one hopes, obvious) as these; they are complex challenges, surely difficult to meet.  But it’s the direction– and the commitment to that direction– that matters: if we are not, as a nation, even trying to meet them– and at the moment we are not– there’s no real chance that we will.

Auguste Comte may have over-reached when he said that “demography is destiny”; but demography is certainly a defining dynamic of the reality that we have, as a nation, to navigate.  And so we’d do well to recognize demographic reality for what it is– and to stop arguing, as politicians on all sides have lately been doing, over the right ways to do the wrong things.

Collect ‘em all!

52 Shades of Greed: The oligarchs who’ve benefited from the excesses that led to the crash of 9.15.08– and from the crash itself– memorialized in a deck of cards.

Waiting for Godot…

source

We have noted that, historically, small business has played a key role in creating the jobs and growth that have led the U.S. economy out of recession, and that the troubles besetting small business today help explain the depth and duration of our current troubles (e.g., here or here).

Now, from the Cleveland Fed (via the ever-illuminating Calculated Risk), an explanation of the connection between low home prices and stalled small business growth.  The report analyzes small business borrowing, and notes that homes equity borrowing is an “important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances.”  It concludes:

Everyone agrees that small business borrowing declined during in the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.

While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses.

Of course, not all small businesses have been equally affected by the decline in home prices. While many small business owners use residential real estate to finance businesses, not all do. Those more likely do so to include companies in the real estate and construction industries, those located in the states with the largest increases in home prices during the boom, younger and smaller businesses, companies with lesser financial prospects, and those not planning to borrow from banks. These patterns are also evident in the data sources we examined.

The link between home prices and small business credit poses important challenges for policy makers seeking to improve small business owners’ access to credit. The solution is far more complicated than telling bankers to lend more or reducing the regulatory constraints that may have caused them to cut back on their lending to small companies. Returning small business owners to pre-recession levels of credit access will require an increase in home prices or a weaning of small business owners from the use of home equity as a source of financing. Neither of those alternatives falls into the category of easy and quick solutions.

No “easy and quick solutions”…  if we’re to wait for home prices to rise and conventional mortgage lending to recover, the wait could be painfully long.

But perhaps that’s not where we should be looking at all.  Perhaps we should be encouraging the emergence of a new suite of financing options for small businesses: from micro-credit (more likely in practice “micro-credit on steriods” to meet the scale of the individual needs, but the principle’s the same) to new credit unions– co-ops that would enable small businesses, in effect, to lend to each other.

In fact, both kinds of institutions (and many variations on these themes) exist already– they simply need to be scaled.

That’s not an “easy and quick solution” either.  But it has the extra benefit of building a financing structure that does not depend on the consolidating financial behemoths whose rapaciousness is a(nother) part of our problem…  and it beats the hell out of waiting for Godot.

Is there an echo in here?…

Crowd at New York’s American Union Bank during a bank run early in the Great Depression.
The Bank opened in 1917 and went out of business on June 30, 1931. (source)

As Lateral Thinking reports, there’s an uncomfortable– if not indeed, an eerie– resemblance between the events of the early 30s and today:

As we have said many times lately, history rhymes… Today’s world looks very much alike the 30s… See what David Rosenberg has to say about it:

“DARING TO COMPARE TODAY TO THE 30′S
Coming off a crash (’29) and rebound (’30); aftermath of an asset deflation and credit collapse banks fail (Bank of New York back then, Lehman this time around); natural disaster (dust bowl then, oil spill now); global policy discord (with the U.K. then, with Germany now); geopolitical threats; interventionist governments; ultra low interest rates (long bond yield finished the 1930s below 2%); chronic unemployment (25% then, 17% now); deflation pressures; competitive devaluations; gold bull market (doubled in Sterling terms in the 30s); debt defaults; sputtering recoveries and rallies; onset of consumer frugality.“

Add to that the growing concern over the sanctity of foreign debt (as remarked by, e.g., The Bank of England)…  At the very least there’s reason to dust off those concerns about a double-dip recession– and to be careful to recall that, while inflation is the demon we’ve fought these last several decades, deflation lurks still.  (C.F.  here and here.)

UPDATE, JUNE 30: David Leonhardt of the New York Times in a similar vein…

“…what remains after one has forgotten everything he learned at school.”*

The Bureau of Labor Statistics reminds us that it’s smart to stay in school:

But as Calculated Risk reports, while unemployment among the best educated is still lowest, it’s increased as much in percentage terms for them during this current recession as for any other group.

click to enlarge

One notes that all four groups** were slow to rebound after the 2001 recession– not an encouraging reminder if one is hoping for a brisk employment-led, consumption-fueled recovery this time around.

But in some ways more striking is a difference we might expect, but that hasn’t yet emerged.  Calculated Risk:

I’d expect the unemployment rate to fall faster for workers with higher levels of education, since their skills are more transferable, than for workers with less education. I’d also expect the unemployment rate for workers with lower levels of education to stay elevated longer in this “recovery” because there is no building boom this time. Just a guess and it isn’t happening so far … currently the unemployment rate for the highest educated group is still increasing.

Clearly, from an individual’s point-of-view, it’s still smarter to get more education than less.  But the perturbations of past periods remind us that the gearing between between academic degrees and financial success isn’t always perfectly tight…  Indeed, those with sharply-defined professional credentials in fields– e.g, finance– that are unlikely even in the intermediate term (if ever) to recover their bubble-fueled growth rates, may find their advanced degrees at best unhelpful; at worst, downright prejudicial.

Economic recovery and growth will be driven to some large extent by innovation; that innovation will create new– and new kinds of– jobs.  Looking even just five years out, much less ten, one has to admit that it’s just not possible to predict what these emergent jobs, nor their requirements, will be.  (Consider, e.g., the hottest topic– and job category– in marketing/advertising these days: “social media marketing”…  which wasn’t even a glimmer a decade ago, and was just being born five year ago.)  This is a challenge for those new to the work force, who have to wrangle the product of their schooling and their personal experience into a shape that can fit the entry-level positions they seek.  It is a much bigger challenge for those  mid-career who find themselves needy of making a move:  these more mature folks have not only to learn new fields, they also have to re-direct the considerable momentum of perception and habit that characterized their old– and they have to do those things, usually, in ways that justify salaries way north of entry-level.

All of which underlines for your correspondent the extraordinary value of a liberal arts education.  When one is faced with a “working adulthood” that is one transitional challenge after another, no skill is more valuable than the capacity to adapt.  And no capability is more central to that adaptation than the ability effectively and efficiently to learn.

This is precisely what, at its core, a liberal arts education is about:  learning to learn.

There are many, many other reasons, rooted in personal and societal benefits, to pursue a liberal arts education, and top support a strong foundation of liberal arts in higher education.  But the lessons of the last couple of years– indeed, of the last several decades– suggest that the economic rationale is plenty strong as well…

And besides, it’s fun.

* “Education is what remains after one has forgotten everything he learned in school.”
- Albert Einstein

** To put these cohorts into perspective, the Census Bureau suggests that, of these folks “25 yrs. and over” (in 2008):
- 13.4% had less than a high school diploma.
- 31.2% were high school graduates, no college.
- 26.0% had some college or associate degree.
- 29.4% had a college degree or higher.

UPDATE:  Reader JK directs our attention to another treatment of the data, in the NY Times. As he suggests, even more dramatic.

Main Streets or Mean Streets?…

Dark clouds have gathered over small business in the U.S.– and over the prospect that it can lead us out of our economic morass in the way that it has in the past.  Two charts from Calculated Risk tell the unfortunate story:

1) Job losses (from peak pre-recession employment levels) have been worse in this recession than in any since the Great Depression:

click to enlarge

2) Those job losses have come, in this recession, much more heavily from small business (45%) than in the last recession:

click to enlarge

… Which together suggest that there’s less chance than our recent experience might suggest that small business will lead a recovery.  As Dr. Melinda Pitts of the Atlanta Fed (the author of the second chart) suggests:

Looking ahead, it’s not clear whether small businesses will continue to play their traditional role in hiring staff and helping to fuel an employment recovery. However, if the above-mentioned financial constraints [contraction in available credit; see here] are a major contributor to the disproportionately large employment contractions for very small firms, then the post-recession employment boost these firms typically provide may be less robust than in previous recoveries.

The implications of this hit to small business for the pace of a recovery are obvious and discouraging.

But in many ways more concerning are the the implications for the shape of a recovery.  As our economy begins to move up and out of the trough in which it’s mired, big companies will be playing a relatively larger role in the economy– and will be getting bigger (both relatively and absolutely).

Case in point: this morning’s New York Times reports that “Support Builds for Tax Credit to Help Hiring.”  But while one of the aims of the bipartisan sponsors of such a move is “to encourage small-business development,” it’s questionable whether it can.  Those tax credits will be useful only to companies that can find the cash to invest in new jobs that can generate profits to shelter… and in the credit-constricted environment in which we currently sit, that means companies that have either lots of cash or the “too big to fail” credibility that gives them access to debt.  In the current environment it does not mean small business.

Per “Beware the Land of the Giants…,” this is a dangerous situation; all growth is not created equal.  We live in a dynamic global market, where a nation must innovate or fall behind.  And we live in a nation in which wealth and incomes have polarized, and middle- and lower-class real wages have steadily fallen for over a decade.  Leaving aside the powerful arguments for fairness, considering only the economic, we live in a nation in which the lives of most must improve if there’s to be enough consumption to support all.

Which is all to say that, in the situation we’re in, it is not sufficient for the U.S. simply to stabilize its economy; we must reinvigorate it.  And if we’re going to re-energize, that means that we have to find ways to encourage small business, from main street shops to start-ups that aspire to grow into mega-corporations.

And that means that we need to rethink the ways that our government is “helping.”  As noted before, the one thing that the TARP funds did not do is the one thing they were meant to– re-start the flow of credit.   Thus, the continued decline in employment.

So, when the second round of “The Stimulus” comes (and it surely will, whether it’s acknowledged as that or not), it’s critical that it come with enforcement that assures that it is put to its intended purposes.

Similarly, as Congress looks to take steps that will be perceived as responsive to the pain that Americans are ever more widely feeling, it’s critical that those steps– from tax incentives to regulations– actually are responsive.

It’s not so complicated; but it’s hard.  It’s hard because the extraordinary tide of funding flowing into Washington to shape Congressional action– lobbying monies, campaign contributions– is flowing primarily from large, entrenched interests: the big, who want to get bigger.  The change that we need will come despite those efforts, not because of them.

We can, and we should, do our best to keep our Congresspeople honest and on mission.  And, given our not-very-encouraging experience of that effort, we should lean into effort’s like Larry Lessig’s Change Congress.

We are for sure going to continue to pay for the excesses of the past few decades.  The only question is whether we can convert that heavy penalty into the price of renewal.