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.


Today’s (Roughly) Daily features Hans Rosling’s wonderful The Joy of Stats.  By way of an illustration of just how important it is to understand– really to understand– ” the numbers,” this recent post (on last week’s announcement of a drop in the unemployment rate) from Zero Hedge:

Labor Force Participation Rate [**] Drops To Fresh 25 Year Low, Adjusted Unemployment Rate At 11.7%

While today’s unemployment number came at a low 9.4%, well below expectations, the one and only reason for this is that the labor force in America has plunged to a fresh 25 year low. Assuming a reversion to the mean in the long-term average participation rate back to 66%, means that the civilian labor force, which in December came at 153,690, a drop of 260,000 from November, is in reality 157.6 million, a delta of 3.91 million currently unaccounted for. Maybe someone can ask Bernanke during his imminent presentation before Congress what happened to the unemployed population, which would have been 18.4 million if this labor force delta was incorporated, resulting in an unemployment rate of 11.7%.

* “The theory of probabilities is at bottom nothing but common sense reduced to calculus.” – Laplace

** The labor force participation rate is the percentage of working-age persons (16-64) who are not in the military and are participating in the labor force: that is, who are either employed or unemployed but looking for a job.  People in that age groups range not participating in the labor force are typically students, homemakers, persons under the age of 64 who are retired; in tough economic times “discouraged workers”– those who believe that that they cannot find work– join the cohort.

Waiting for Godot…

December 21, 2010


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.

Been down so long…

September 3, 2010

If only it looked like “up” from here…

First, viz. the U.S., the BLS reported this week:

Nonfarm payroll employment changed little (-54,000) in August, and the unemployment rate was about unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment fell, as 114,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment continued to trend up modestly (+67,000).

The ever-illuminating Calculated Risk puts those numbers (which are being reported as a pleasant surprise to the extent that they weren’t as bad as many feared) into perspective:

click image to enlarge

… suggesting that any light at the end of this particular tunnel is likely a pretty distant glow at this point…  and thus that any real recovery– a restoration of employment, and the consumer purchasing power and confidence that would accompany it– may be a while in coming.

Second, lest we imagine that the disappearance of Europe and the PIIGS from the front page mean that all’s well, a chart from Clusterstock all-too-aptly titled “Europe’s Crisis Coming Back In 3…2…1…“:

click image to enlarge

While the financial problems of Europe’s periphery ‘PIIGS’ economies (Portugal, Italy, Ireland, Greece, and Spain), has receded substantially from business headlines, this doesn’t mean that their crisis is over, or even getting better.

In fact, the creditworthiness of nations such as Greece, Portugal, and Spain is looking worse than ever, as represented by % spread between the yield demanded by bondholder for ten-year PIIGS government bonds and the ten-year bonds of Germany (Germany is Europe’s version of a ‘risk-free’ yield to compare things against). For all of the PIIGS, it is worse off than before the European Unions’s one-trillion-dollar affirmations of support for the PIIGS, or before the much bally-hooed bank stress tests.

The frenzy surrounding the Eurozone crisis may have ebbed, but it’ll be back…

Japan?  Their economy, already in shaky shape, has been rocked by an unexpected rise in the value of the Yen against the dollar (and thus unanticipated– and unwanted– pressure on exports).

The governments of the developed world seem to be behaving as though this is all a kind of “hurricane season” through which they need simply to batten down.

If only…

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.

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:

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

As we face the situation recounted in Part One

We’re all going to be making economic sacrifices for awhile, making cuts in order to dig ourselves, individually and as societies/economies, out of the trench into which we’ve fallen. There is, in country after country (and household after household), a great deal of arguing about which things to cut, and how far; there’s even (I believe wise) talk of restructuring the worst of the debts to make them more manageable.  Still, there’s no disagreement that something has to give, and that one way or another, the sacrifices required will denominated in some combination of lower consumption and reduced government services.

But as Lou Gerstner knew when he took on the turnaround of IBM, we can’t save our way to growth.  We can cut to stop the bleeding; but if we want to create opportunity and the possibility of improvement and growth, individual or national, we have to find ways to add new value– value that will translate into employment and well-being.  In theory, this new value can be created in incumbent companies or in innovative new ones; historically, it’s come from some combination of both.

But this time around, there’s data suggesting that we will be unusually reliant on innovation and entrepreneurs to create jobs– that’s to say, that incumbent companies can’t/won’t…

Celerant Consulting, an HR consulting firm, has just released  a corporate workforce productivity study, drawing on a  review of hundreds of subjects across the developed world (download a pdf of the report here).  The striking findings are summarized in this chart:


As the report observes,

Across all four industries surveyed – Energy, Chemicals, Healthcare, and Consumer Staples – the Impactability Study revealed a similar pattern of inefficiency. Value-add activity accounted for 50 percent or less of time spent on the job, leaving significant room for improvement. Although areas such as Healthcare and Chemicals are to some extent exposed to greater bureaucratic hurdles that direct more hours to approval processes, there is no question that each industry can reduce costs by refocusing the organization’s workforce.

One can quibble with Celerant’s methodology, and argue for marginally higher or lower productivity numbers in one sector or another.  But I doubt that anyone feels that the report is fundamentally wrong.  In our hearts (and minds and stomachs) we know that organizations that struck their “Coase balance” when the state of technology and society were very different, and have accreted layers of organizational sediment ever since, are bound to be inefficient today.  From Dilbert to The Office, we recognize the situation even as we laugh at it.

So, there’s plenty of productivity to be had in incumbent companies without adding any staff.  Indeed, these big companies may even be able further to reduce their employee costs, either by continuing to reduce staff or by holding– even lowering– wages and salaries.  Indeed this is what the Bureau of Labor Statistics suggests is happening: productivity up; labor costs down…  Not very good news for the economy as a whole, in which employment is a continuing concern; but OK for shareholders, right?

In the very short-run, maybe; but overall, not so much.  Companies that are focused on cutting costs, in which employees are fearful of their salaries or jobs, are not hot beds of innovation.  There are exceptions, like IBM under Gerstner; but they tend to prove the rule:  most often, companies in the Celerant boat are trying to figure out how to do the same things with less (or, like the airlines today, to do less with lots less).  Innovation in companies like these too often amounts to figuring how how to charge more for the same thing (c.f., airline “service fees”).  This is, as Gerstner knew, no way to build a profitable, growing future.

Clearly, big, incumbent companies should try to innovate.  Some (again, pace Gerstner) may get it right.  But, for all these reasons, many more probably won’t– if they even try.

So, if incumbent companies aren’t likely to create the innovation and employment that we’ll need to achieve sustainable growth in our economies, where will we find it?

It’s been long believed that small businesses, and the jobs they create, lead economies out of recessions.  Surely, they have historically played play an important role (a role threatened by the current contraction of capital available to them.)

But Paul Kedrosky argues that we should look more specifically to new companies.  Using the mathematical  idea of the “drunkard’s walk” (a version of the probability theory concept of the random walk), he illustrates the “inevitability” that new companies are key…

…the central thing about job creation from young companies is its inevitability. It is a species of mathematical certainty (one driven by initial simplicity and a wall) that young companies must create the most jobs (even without assuming particular skill on their part, or taking into account sectoral or economic growth, both crazily conservative assumptions).

“Crazily conservative assumptions” indeed.  Those new companies are– certainly not entirely, but largely– exploring the frontiers of the market.  They are innovating products, services, and processes– creating the “stuff” of real economic growth.  And they are giving their employees the opportunity to learn the skills and work habits that can achieve it.

So while cutting away the fat in incumbent companies and established markets is both necessary and useful to economic renewal, it doesn’t begin to be sufficient.  Real growth requires the creation of new value, in new ways.  And while there are some older, bigger companies that can pull that off, it is historically the role of small, new entrants— of the entrepreneurs and their start-ups.

How do we encourage new business, create the conditions in which it can help us out of the trench that we’re in?  There are detailed answers being developed in lots of spots, e.g., at the Kauffmann Foundation.   Here, let me suggest one very obvious theme:

If we want to encourage innovation and entrepreneurship, then we have to stop pursuing policies that pre-empt them by advantaging large incumbent companies and their desire to preserve– and milk– the status quo.  From obvious fronts like financial, securities, and anti-trust regulations, to corners as seemingly arcane as the patent process, the deck is stacked.

Indeed, these policies knit together to become a kind of “pro-consolidation platform”– one that both parties have adopted.  The results, we’ve already begin to see:  the financial crisis, the reduction in meaningful consumer voice and choice in an increasing number of arenas, the feudal concentration of income, wealth, and power in a big-bank, big-company elite…


Beware the Land of the Giants— it is a barren place.

As Adam Smith argued, markets can be a wondrous thing, they can lead to increased economic growth, increased welfare, and increased equality– but only if the governments that legitimize and police them work to be sure that they are actually “open” and “free.”

Thursday’s mysterious Space Mountain-like stock market plunge aside, the domestic U.S. economic news last week seemed pretty good:  employment up, personal consumption expense up– sounds like a recovery.

And a recovery it may ultimately be.  But a peek underneath those number and a look out at the global economy each suggest that it’s premature to party…

My friend, anthropologist Grant McCracken, is an insightful observer of the American consumer.  Last year, as many were arguing that a new frugality– a “new normal”– was sweeping the nation, he begged to differ.  In The Harvard Business Review Blog, Grant argued that consumers would soon be spending again as though it were 1999. And indeed, in Q1 consumer spending added 2.6 points to GDP growth, following a strong Q4 last year.

But as Calculated Risk observes, the entire increase in consumption in Q1, and most of the growth in prior months, has been due to government transfer payments and reductions in personal savings.  That’s to say: Grant’s right, we’re continuing to spend…  we’re just not earning to support the expense.

click image to enlarge (source)

Perhaps that’s at least in part because we’re still not working.  This week’s report of 290,000 new jobs notwithstanding, the unemployment rate rose to 9.9%.  Add in the number of workers who are involuntarily on reduced hours and the number (U-6, as the BLS calls it) swells to 17.1%.  And then there is the record number of people unemployed for 27 or more weeks– 6.72 million, or 4.34% of the work force.  To put this in perspective, the recession of the early 80s peaked at 10.3% unemployment; but long-term (27+ weeks) unemployment never rose above 2.6%… to wit, the preponderance of transfer payments as noted above.

click image to enlarge (source)

There are lots of signs that can signal an economic rebound; but in the end, a sustainable recovery will be built on employment, on jobs.  In Part Two, a look at where those jobs might (and might not) be found.  But first, a quick look at the global context in which any U.S. recovery will have to make its way.  In a way that’s analogous to the domestic employment situation, underneath the good news of the moment, there’s trouble.

To wit, the news this morning of European-IMF agreement on a bail-out plan for Greece:  it’s encouraging…  But friend Peter Herford recently forwarded a terrific (albeit, mildly terrifying) piece from Der Spiegel, looking at the underpinnings of the European debt crisis: “The Mother of All Bubbles.”

Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it…

Here, too, we find ourselves returning to jobs as a– the– central concern…

As we think about the ways in which we in the developed world have lived beyond our means, we arrive quickly at the extraordinary accumulation of public debt that’s the “hero” of the European drama (which isn’t to say, of course, that it’s not an issue in the U.S. and elsewhere):

click image to enlarge (source)

…and at the kind of private debt– commercial, mortgage and consumer credit– that contributed so powerfully to the 2008 meltdown:


click image to enlarge (source)

But as we consider private debt, it’s worth calling out the corporate/commercial component– the bit that’s directly related to the businesses that provide jobs.  While there have been some bankruptcies among over-levered companies, corporate credit doesn’t seem, given the relative paucity of attention its gotten, to have played much of a role in getting us into our current pickle.  Indeed, most of the concern about corporate debt since 9-15-08 has been around whether there would be enough of it to support a recovery.

If governments are going to be reducing their services, then growth will have to come from new/higher incomes, from real growth… and that– the creation of those new jobs and of those higher incomes– is the role of business.   If we’re going to climb out of the trough we’re in (a trough that, if Spiegel is right, could be about to get deeper still),  business must create new (and new kinds of) value, and in so doing, create jobs.

And so, to Part Two


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