Archive for November, 2008

Martin Kenney
by Martin Kenney
Sun Nov 30th 2008 at 6:11pm UTC

Clueless and Irresponsible Americans

Sunday, November 30th, 2008

This is the most amazing newspaper report I have ever read.

People on unemployment benefits, single mothers with children, and soon-to-be-unemployed people working in construction stating that they are keeping their Christmas shopping expenditures down – they are even shopping? Another volunteers, “I don’t usually save, so this year is different,” as she buys an iPod.  “He really wants one thing.” WT*? She needs to say, “We do not have the money and you can’t have it!” Another’s husband is in construction and doesn’t get enough work, and she is spending $1,000 – this is called “saving?” And Obama is promising to give these people a bailout?

The proper analogy for the situation is the following. Category 10 hurricane winds are already uprooting trees, the swells are breaking over weakening sea walls, while these folks are heading down to the beach for a last stroll and they expect to be bailed out? There will be no freaking money left as Paulson, Bernanke empty the Treasury for the final heist, even as Obama is bringing back the previous gang. The world economy is being tag-teamed by idiot savants blinded by the failed mainstream economics.

For the last two years, as Rich can attest, I have been telling people to hunker down, unload real estate, equities, and be in cash. I remember sitting on airplanes and telling people this. And they answered to me, “You are a pessimist, I’m an optimist!” I remember walking around a lake in August 2008 with a friend of mine affiliated with a very large conglomerate. I gave my typical better hunker down a “bad moon’s on the rise” speech. And he said, you are overly pessimistic etc. In October, his firm got the equivalent of a multi-hundred million dollar margin call. Now he won’t speak with me – probably because I have put my investment dollars where my mouth is.

The suffering that Cassandra went through. In earlier times, an “optimist” was not a synonym for a “fool.”  Optimism is associated with realism – not deliberate ignorance. Sometimes people can’t hear or feel the wind even as it is tearing at the clothes on their back.

I only hope I am wrong and the people buying on “Black Friday” are right. If they are wrong and I am right, their children will have iPods but be relegated to homeless shelters. This searing experience will never let them forget how thoughtless their “optimistic” parents were.

Am I wrong?

Richard Florida
by Richard Florida
Sat Nov 29th 2008 at 9:13am UTC

The Way to Recovery

Saturday, November 29th, 2008
My Globe and Mail column says we gear the stimulus to growing the new economy, not propping up the old.

Financial recovery needs a massively different mindset

RICHARD FLORIDA

President-elect Barack Obama has announced his intention to restart the American economy with hundreds of billions in new spending on transportation, public works and energy. Ever since John Maynard Keynes, economists have seen such fiscal stimulus as the key tool for leading economies out of recession. In 1971, Richard Nixon famously remarked, “We are all Keynesians now.”

But what worked during the Great Depression may not work quite as well today.

By the time Keynes published his classic General Theory of Employment, Interest and Money in 1936, it was clear that government had to spend money to counter economic decline, and it was also clear where it should be spent – on big construction projects such as highways, public works, even housing. At the time, Keynes famously remarked that the economy would be better off even if all workers did was dig ditches and fill them up again.

While few economists believe the global economy will fall into a 1930s-style collapse, a similar approach to the current financial crisis may not work as well now for a simple reason: Today’s economy is largely driven by the creative industries that have grown up over the past two or three decades. The overall picture now bears more resemblance to the early industrial economy of the mid-to-late-19th century – when industries such as automobiles, chemicals and electronics were just emerging – than to the relatively mature industrial economy of the 1930s.

Restarting economic growth this time around will require a new social and economic framework that is in line with the new idea-driven economy.

The trouble is: We remain trapped in the mental models of the old industrial economy. The bursting of the tech bubble in 2001 held back the emergence of the new order. Scaring investors out of technology, the Internet and emerging economic sectors, it sent capital flowing out of the creative economy and back into the safety of housing and real estate – from “clicks to bricks,” so to speak. This is why attempts to prop up housing prices or to bail out Detroit are giant steps backward.

The way out of the current crisis involves creating the social and economic conditions within which the new system can evolve. While it is impossible for anyone – least of all government policy-makers – to know what this system will look like, there are several things that can help it along.

The first step must be to reduce demand for the core products and lifestyle of the old order. The industrial economy more than a century ago required a revolution in agriculture – one that improved productivity and reduced the share of agricultural labour from roughly 50 per cent of all workers in North America in 1900 to less than 5 per cent today. Cheaper food then freed up disposable income for cars and other household products.

What’s needed now is to massively shrink expenditures on houses and cars to free up spending for newly emerging goods and services. Part of this rollback will naturally occur as the real-estate bubble deflates and housing prices fall. But we need to take it a step further if we truly want more demand for new kinds of economic activity.

Our reliance on single-family homeownership is a product of the past 50 years – and the experiment has outlived its usefulness. Not only is it now readily apparent that not everyone should own a home, and that the mortgage system is a big part of what got us into the current financial mess, but homeownership also ties people to locations, making it harder for them to move to where work is. Homeownership made sense when most people had one job and lived in the same city for life. But it makes less sense when people change jobs frequently and have to relocate to find new work.

Housing production remains a cottage industry that needs to be brought into the 21st century. As a sector, it holds huge potential for making environmental gains, reducing energy use and overall consumption, and introducing new technology.

Government can also encourage a shift from ownership toward flexible rental housing. Instead of bailing out homeowners who have fallen behind on their mortgage payments, tying them to houses and locations for life (and taking up 38 per cent of their income or more), why not take the houses off their hands and rent them back at a much more affordable rate? This would allow people to move more freely as their job, career and lifestyle prospects change. Government incentives spurred a massive increase in homeownership after the Second World War; it can do the same for the expansion of new, more flexible forms of rental housing today.

Both energy and transportation must become significantly cheaper before we can shift into a new era of economic growth. Every economic revolution has been premised on the rise of new and less expensive sources of energy to power growth, and a drastic reduction in the costs of moving goods, people and ideas. The car will surely remain part of our life, but we need to improve rail, subway and bus transit. We should also make a major effort to reduce widespread commuting patterns.

Imagine a future where people live in plug-and-play rental housing units – able to move quickly when they change their jobs, with many shrinking their commute to a short walk or bicycle trip and many others able to trade in their cars for accessible mass transit.

Last but not least, government investment can help to revolutionize the way we develop people. Human capital investments are the key to economic development. But many of our schools are giant creativity-squelching institutions. We need to reinvent our education system from the ground up – including a massive commitment to early-childhood development and a shift away from institutionalized schooling to individually tailored learning. This will require a level of public and private investment of a magnitude larger than the widespread creation of public schools and modern research universities a century ago.

Only by catalyzing such a wholesale shift in our underlying socio-economic system – and thereby unleashing the massive innovative and productive potential of our time – can government investment restore our economy.

Michael Wells
by Michael Wells
Tue Nov 25th 2008 at 8:44pm UTC

Left, Right, or Center

Tuesday, November 25th, 2008

With all the talk about Obama’s governing from Left, Right, or Center, I haven’t seen much talk about specifics. The leftish website “Politics Done Right” has an interesting chart and discussion of the policies on the President-elect’s website.

Most of this discussion, moreover, has dwelt in the realm of tactics, presentation and salesmanship rather than grand strategy…

In the case of Barack Obama, however, I would argue that there is not as much need to worry about tactics. If his campaign was any indication, Obama is not much of an outsourcer — he will dictate the tone of his administration. Moreover, we actually have quite a bit of information about what his longer-term goals are.

Lots of Creative Class economy stuff here – education, urban policy, research, infrastructure. While I’m pleased with the range and content of the proposals, I worry about the sheer numbers. What do you think?

Richard Florida
by Richard Florida
Tue Nov 25th 2008 at 7:11am UTC

Class and the Crisis

Tuesday, November 25th, 2008

The crisis is likely to have extremely uneven impacts by economic class. The Prosperity Institute team has charted fluctuations in employment by major class over time. The creative class seems much better to navigate downturns in the economy, while the working class experiences heavy losses. Jim Milway and I summarize the key results here.

Breaking News from The Globe and Mail

Where a recession will hurt the most

Monday, November 24, 2008

If a recession hits Canada, as many think is already the case, will its turbulence affect all of us in the same way? Not if past history is a guide.

The good news is that it’s likely that the continuing shift in our economy from traditional blue-collar, working-class jobs to creative and service jobs will dampen the effects of job losses – over all. But those in the working class will feel the pain much more.

Our economy is composed of four classes, defined by the kinds of work people do. The first is the working class, consisting of workers who use physical skills and carry out repetitive tasks (for example, tradespersons, mechanics, crane operators and assembly line workers). Next is the service class, where workers engage in relatively low-autonomy occupations providing services, for example, food-service workers, janitors and clerks. Then there are those in farming, forestry and fishing. Finally, there is the creative class – the growing number of workers who are paid to think. These include scientists and technologists, artists and entertainers, and managers and analysts.

Defining our economy by the work people do is different than the conventional way of defining it by industries. Somebody may be working in the automotive industry but is not necessarily working on the assembly line in a working-class occupation. Actually, about a third of employees in Canada’s manufacturing industries are in the creative or service class. Manufacturing firms like General Motors and Research In Motion have many of their employees in creative occupations like design, accounting and research.

Our economy has experienced the dramatic growth of some occupational classes alongside the significant decline of others. Employment in the creative and service classes is growing most quickly in Canada. Over the past 25 years, the creative class has grown from 24 per cent of the work force to 34 per cent; the service class has been steady at 41 per cent. In the meantime, the working-class percentage has fallen from 29 per cent to 22 per cent. Only 3 per cent of workers are in the remaining class of farming, fishing and forestry occupations.

In both Canada and the United States, the share of workers in the working class peaked in the early 1950s and has fallen to about 25 per cent. At the same time, the percentage of employment in our manufacturing industries has also been falling. Yet, manufacturing output continues to grow – manufacturing is truly a productivity miracle.

What we’re witnessing is a replay of the employment decline in the farming, forestry and fishing class in the first half of the 20th century. Around 1900, fully 45 per cent of Canadian workers were tilling the soil, cutting trees, or hunting and fishing for our food. Because of massive productivity improvements in the agricultural and resource sectors, we’re able to meet greater consumption demands of Canadians and untold numbers around the world with only 3 per cent of our work force today.

With the growth of the service and creative classes, wage inequality takes on a new face. Creative-class occupations in Canada pay considerably more than the other three – on average 39-per-cent more than all occupations. The service class earns 22-per-cent less than average. Working-class occupations pay 13-per-cent less than average annually. Service-class occupations are dominated by women and are much more likely to be part-time jobs, while the working class tends to be a male preserve. People in the creative class are much more likely to be university educated while those in the working class and service class are less likely to be university graduates.

But perhaps the biggest and scariest difference is in the impact of unemployment.

Unemployment rates among the working class have been more than triple the rate of those in the creative class and about double the rate of those in the service class over the past decade. Service-class unemployment has been about double the creative-class rate and has not diverged from it in the past 20 years.

And look at the last recession in Canada. Unemployment rates among the working class rose to nearly 16 per cent in 1991, while the creative class and service class experienced much more modest increases.

As many observers see Canada heading into another recession, will the working class be as vulnerable?

Our work at the Martin Prosperity Institute, in collaboration with public and private partners, will focus on the effects of this shift on our industries and occupations. Our goal is to help policy makers, businesses, regions and people adjust to changes – ensuring that we make an effective transition to having more jobs that possess the right mix of skills, pay as much as possible, and add real innovative value and productivity to our economy.

Richard Florida
by Richard Florida
Mon Nov 24th 2008 at 1:21pm UTC

Jane Jacobs or Adam Smith

Monday, November 24th, 2008

Jane Jacobs famously took on Adam Smith’s notion that specialization leads to growth. She countered basically that specialization can and does lead to doing the same thing better, but that it does not lead to creating new things and the new industries and work that go with it. For that, a social collectivity called the city was required.  Over at the NYT Economix, Catherine Rampell points to a new paper which finds that

ants that specialize are no more productive than ants that don’t. The author, an evolutionary biologist at the University of Arizona named Anna Dornhaus, studied how efficiently rock ants completed their tasks of brood transport, collecting sweets, foraging for protein and nest-building. An ant was considered more specialized the more it concentrated its work on one particular task.  She found that the ants that specialized in these tasks did not perform them more efficiently than ants that remained “generalists,” and in some cases performed their tasks less efficiently. Her conclusions: “My results indicate that at least in this species, a task is not primarily performed by individuals that are especially adapted to it (by whatever mechanism). This result implies that if social insects are collectively successful, this is not obviously for the reason that they employ specialized workers who perform better individually.”

Richard Florida
by Richard Florida
Mon Nov 24th 2008 at 1:20pm UTC

Go Canada

Monday, November 24th, 2008

Canada’s banks provide a model for the U.S. and the world according to none other than Time magazine.

Why has Canada withstood the subprime tornado better than other countries, and should the Canadian banking system be a model for G-7 and G-20 leaders when they gather in Washington on Nov. 15? Consider that the Geneva-based World Economic Forum … earlier this month ranked Canada’s banking system as the soundest in the world. The U.S. came in at No. 40, and Germany and Britain ranked 39 and 44, respectively.

The average capital reserves for Canada’s Big Six banks — defined as Tier 1 capital (common shares, retained earnings and non-cumulative preferred shares) to risk-adjusted assets — is 9.8%, several percentage points above the 7% required by Canada’s federal bank regulator. That’s a little better than major U.S. commercial banks like Bank of America, but significantly higher than an average capital ratio of about 4% for U.S. investment banks and 3.3% for European commercial banks.

Another factor that helped make Canada the new gold standard in banking was Ottawa’s decision in the late 1980s to allow commercials banks to acquire investment dealers on Toronto’s Bay Street, the country’s financial hub. As a result, these institutions are subject to the same strict rules as commercial banks, while U.S. investment dealers are subject to only light supervision from the Securities and Exchange Commission. Morgan Stanley and Goldman Sachs, of course, will now be under the U.S. Federal Reserve’s supervision since they have been chartered as bank-holding companies …

There is, of course, a flip side to Canada’s regulatory system. When the global economy was flying high, Canadian banks complained about not being allowed to merge to become more significant international players. “In hindsight, that decision may have saved Canada from having a Royal Bank of Scotland on its hands,” says Lawrence Booth, a finance specialist at the University of Toronto’s Rotman School of Management, referring to the overly ambitious bank’s bailout earlier this month by the British government …

Perhaps when world leaders sit down in Washington to forge a 21st-century New Deal for the global financial system, it may have more than a smattering of Canadian banking know-how.

I feel pretty darn comfortable with them personally. But it remains to be seen how Canada’s economy and currency will fare during the recession. Your thoughts?

Wendy Waters
by Wendy Waters
Mon Nov 24th 2008 at 7:02am UTC

Let Him Keep the Blackberry

Monday, November 24th, 2008

Technology has enabled the newer mobile, flexible workplace that allows for better collaboration, faster decisions, and higher productivity.

The White House, as well as the U.S. government generally, over the past 8+ years has demonstrated an increasing performance deficit in these areas of collaboration, decision speed, and productivity, particularly when compared to private corporations, who have embraced new technologies and new workplaces.

Consider these three examples: FEMA’s inability to manage the crisis in New Orleans; the CIA and FBI and other agencies not being ready on September 11, 2001; and the clumsy response to the current economic challenges. Inquiries and reports related to these examples have revealed that various key people and agencies have lacked access to timely information or have been unable to collaborate quickly.

Then consider comparable private sector capacity: Wal-Mart is a world leader in logistics, infinitely superior to either FEMA or the military and indeed did end up helping out with post-Katrina needs. Within the Google servers is probably more information about what potential terrorists are up to than at the FBI or CIA.

For U.S. government agencies to catch up even modestly to the productivity and innovation capacity, a new approach to workplaces is likely needed.

It could start at the top. I would suspect that few Presidents of major, successful corporations don’t have a Blackberry or the equivalent.  Anyone who wants to have a laptop with high speed Internet access on their desk can have it. Denying this to Obama seems ridiculous –and if the President cannot decide this for himself, exactly who is in charge of the USA?

Security is a huge issue at every big company; this therefore does not seem like a good reason to tell Barack Obama he can’t have a Blackberry.  The White House should be able to employ top IT people to put in appropriate security measures.

One argument I’ve heard as to why he shouldn’t have one is that all of his correspondence becomes public record. But what does that have to do with the Blackberry?  In 2008, considerable official correspondence between all types of companies and organizations happens in e-mails. This is just 21st century workplace reality - the Office of the President needs to catch up. (I’m sure Obama knows what should and should not be said in e-mail messages!)  And, he could always decide to read only.

Electronic communication is a key part of dynamic workplaces today that enable better collaboration and higher productivity. It was key to how Obama mobilized a nation to become President-elect.  I would think that it will be key in the new White House — but it will be interesting to see what the Obama team decides to do.

Martin Kenney
by Martin Kenney
Sun Nov 23rd 2008 at 11:14pm UTC

Poker Face

Sunday, November 23rd, 2008

In an interesting article by the author of Liar’s Poker, Michael Lewis discusses the current stock market collapse.

The article is thought-provoking in its own right, but it brings up an intriguing question: Were the folks who created the Wall Street securitization machine part of the creative class? Were these financial innovations innovations at all? To put a punctuation point on the question, are flimflam persons and those that create Ponzi schemes creative? They certainly are clever and imaginative.

Michael Wells
by Michael Wells
Sun Nov 23rd 2008 at 9:40am UTC

Creative Power

Sunday, November 23rd, 2008

This article from PM magazine of the International City/County Management Association (IMCA) gives a local government viewpoint on the importance of arts and creativity to a local economy. Here are a couple of quotes:

Nationally, the nonprofit arts and culture industry generates $166.2 billion in economic activity annually, which is a 24 percent increase in just the past five years. That amount is greater than the gross domestic product of most countries. This spending supports 5.7 million full-time jobs in American cities and counties-an increase of 850,000 jobs since Americans for the Arts studied this in 2002. What’s more, because arts and culture organizations are strongly rooted in their communities, these are jobs that remain local and cannot be sent overseas.

Our industry also generates nearly $30 billion in revenue for local, state, and federal governments every year. By comparison, the three levels of government collectively spend less than $4 billion annually to support arts and culture. This is a spectacular 7-to-1 return on investment that would thrill even Wall Street veterans.

and

New research by business scholars demonstrates a greater understanding that creativity is at the leading edge of innovation. In the 2006 report, Are They Really Ready to Work?-prepared by the Conference Board for its Fortune 1000 business constituency-U.S. employers point to “creativity and innovation” as one of the top skills needed by new hires to succeed in the workplace.

The applied skills that support innovation, such as critical thinking, communications, and problem solving – all skills commonly acquired in a quality arts education – were rated even more important than the traditional skills of basic reading, writing, and math. These business leaders further stated that the importance of creativity and innovation will only increase in the future.

Richard Florida
by Richard Florida
Fri Nov 21st 2008 at 2:09pm UTC

Geography of Online Communities

Friday, November 21st, 2008

Map via XKDC (h/t: Charlotta Mellander). Thoughts?