Karl Smith of Modeled Behavior pointed me to an interesting post by Arnold Kling, arguing that the great depression, and possibly the crisis of 2008 was the result and/or realization of positive productivity shocks (generally regarded as good things):
The Keynesian model of the Depression is that it was a problem of aggregate demand. The real business cycle model says that it was a negative productivity shock. The PSST model says that it was a transition from one pattern of specialization and trade to another, caused by a positive productivity shock. With tractors, farmers did not need laborers and tenant farming became uneconomical. With trucks, roads, and refrigeration, we needed less local meat and produce, so that farmland near cities could be converted to suburbs and returned to wilderness. In manufacturing, we needed a smaller fraction of labor devoted to production and more people to work on distribution and organization. More women found that their comparative advantage was in market work rather than housework. Thus, by 1950 we had very new patterns of specialization and trade.
What happens though if productivity gains are not recognized over time, or gains are only partially recognized (as measured by output/unit of labor, etc)? Technology has been available for a decade or more that would have seen many of those laid off post 2007 more gradually over time had the tech been adopted that way and had the greater economic landscape encouraged it. What if shocks like the most recent (current?) financial crisis allow, if not downright encourage firms to play catch-up, by taking drastic and quick action to recognize previously un-recognized productivity gains? If GDP and BLS data is even remotely accurate, it seems like we’re now, post-crisis, doing more with less, and there’s very little reason to expect this trend to reverse course anytime soon, if ever.
Consider for example large financial firms. The biggest among them – think Citi, Bank of America, JPM, Wells Fargo – are hulking conglomerates built from decades of acquisitions, but have been painfully slow to recognize the “synergies” used to rationalize those deals. Most of these firms still use decades-old technology and processes (I know this all too well from personal experience) simply because they get the job done, and in a race to keep up with the Jones’, no bank executive wants to explain a few quarters of “one time” expenses related to development & deployment of pricey new platforms.
But when life throws you lemons, the best you can do is to make lemonade, and in the midst of the financial crisis and subsequent “recovery,” many of these firms finally started upgrading their systems. (Whether this was just a way of keeping up with competition – with its implicit chicken or the egg conundrum – or using a larger story to mask otherwise major corporate moves is besides the point.) This means that many of the back and middle office clerks who were paid say $15-$25/hour (more for managers) to fill out paper trade tickets and pass all sorts of paperwork between redundant and inefficient departments are being laid off & replaced by automated systems that do their jobs far better, faster, and (over time), cheaper.
To give you an idea of the magnitude of these layoffs, consider that for every trader or broker there may be just as many operations staff. Sure, some will remain to support the new systems and handle the more complicated work that’s too hard/expensive to automate, but many of the lower-wage/skill ones will get the boot, despite their managers’ best efforts to protect their kingdoms (and you bet your butt these managers want to keep their own jobs and are fighting tooth & nail for their employees out of pure self interest).
How do you re-employ someone who’s spent the past 10, 20 or more years of their life working as a back office clerk or in a service (call) center, with no 4-year degree and minimal skills beyond whatever narrow work they’ve been doing every day for such a large part of their lives when similar jobs are disappearing just as quickly as theirs did?
Not a lot to be optimistic about, eh?
Its one thing to be unemployed when you’re in your 20’s and you’ve got a good support system, but when you’re later in your career, it can be absolutely catastrophic, as Megan McArdle explains:
Now think about what is happening to millions of people out there who don’t have that: whose savings and social networks are exhausted (or were never very big to begin with), who are in their fifties and not young enough to retire, but very hard to place with an employer who will pay them as much as they were worth to their old firm. Think of the people who can’t support their children, or themselves. Think of their despair.That is what these numbers mean: millions of people, staring into the abyss of an empty future. We don’t know how to re-employ them. The last time this happened, in the Great Depression, World War II eventually came along and soaked up everyone in the labor force who could breathe and carry a toolbag. I hope to God we’re not going to do that again, so what are we going to do with all these people?
Technology has been rendering repetitive task and low-skill jobs obsolete for hundreds of years, and up until now, we’ve always found a way to get those displaced by tech back into the workforce. Many of the people who’ve been recently laid off find themselves facing a Sisyphean task: their job, and many of the jobs that utilize the same skills simply do not and will not exist again in the foreseeable future. The brokerage houses I mentioned above aren’t going back to using paper tickets and keeping paper copies of every document except in the case of massive business interruption (like an Earthquake running through the center of Manhattan), as so doing is about 3 spots down the list in the business continuity plan, and even then they won’t be re-hiring the tens (collectively hundreds) of thousands of people they laid off.
Service (eg call) centers are moving (poorly) to more automation and less human interaction (and much of that human interaction is outsourced to India etc). New firms (eg Facebook, Twitter, Zynga, Groupon, etc) and industries (eg renewable/green energy) are sprouting up from coast to coast and likewise ramping up hiring but I don’t think they’re ever going to have the need for all of these displaced (especially) service workers, no matter how big they get. Even if they royally screw up customer service (probable, if not extremely likely), much of it will be computerized, self-service, etc, requiring far fewer employees per customer or user than firms traditionally have. At best we can hope some of the long-tern unemployed find a place with these new firms, but I think it more likely these new economy firms will hire out of the younger generation right or recently fresh from University. When the older generation of the long term unemployeed need jobs more than ever in their lives, the only ones that are likely to pop up will almost by definition disqualify them, at least in the minds of those with the jobs to offer.
And this is just looking at a portion of our service sector. If we want to talk manufacturing, that’s going to take some sort of significant shock that causes firms to (correctly) realize that many of the benefits of third world-manufacturing aren’t worth the costs/risks. Its possible, but any meaningful improvements will take a decade if not more, far longer than the unemployed have to wait around.
The numbers don’t capture how bad it really is. No job, no money, no way to support yourself and your family, relegated to government support programs you always thought were beneath you just to feed your kids with nothing on the horizon to get you out of bed in the morning. For anyone who’s spent any time unemployed, you know just how depressing this is the physical, psychological, and emotional toll it takes on you and those around you. Some turn to drugs and alcohol, some just give up entirely.
I’m not saying we’re facing an impossible task in finding jobs for our millions of long-term unemployed (to say nothing of jobs for the millions entering the workforce each year), but its going to be a pretty damn steep, miserable uphill battle for many of our friends and neighbors.
** I started writing this post in late winter/early spring of this year**