Creative Class

In a word - no.

Citing Justin Fox’s terrific chart of unemployment then and Kevin Drum’s comments, the always-insightful Matt Yglesias writes:

Populists on the left and opportunists on the right have taken to condemning the series of “bailouts” the government has undertaken since the fall of Lehman Brothers. And certainly I think these situations have been mishandled in a number of respects. And beyond that, I think these situations are inherently problematic in a variety of ways. But there’s a strong case to be made that the policy response to the recession has made things better than they might otherwise have been. When I say something like that, people tend to pester me in response for specifics: What, exactly, would have happened if we’d just let AIG and Citi and Bank of America and others collapse? The problem is that it’s impossible to say, in detail, what would have happened.

Yglesias is right: It’s hard to say exactly what might have happened without the bailouts and stimulus.

But something much bigger is at work today then in the 1930s. It’s the structure of our economy that’s the key – and that dwarfs the effects of government bailouts, stimulus, and related policy.

Our economic class composition and occupational structure have changed dramatically over the past several decades. In the 1930s, the majority of Americans worked in manufacturing and related industries. We had an enormous working class. These industries and jobs are very vulnerable to recessions and business cycle shifts with tremendous ups and downs. Recessions – never mind bigger events like the current crisis – devastate manufacturing and working class jobs -  as Michael Mandel, Ryan Avent (which Yglesias more recently cited), and our own research at the Prosperity Institute has detailed. The creative class, which now accounts for some 40 million workers and about a third of the workforce is much more flexible and resilient. It is this changed economic class and occupational structure which are keeping us from Depression-level unemployment rates.

The bailouts and stimulus, while they may help at the margins, also pose an enormous opportunity costs.  On the one hand, they impede necessary and long-deferred economic adjustments. The auto and auto-related industries suffer from massive over-capacity and must shrink. The housing bubble not only helped spur the financial crisis, it also produced an enormous mis-allocation of resources. Housing prices must come a lot further down before we can reset the economy – and consumer demand – for a new round of growth. The financial and banking sector grew massively bloated – in terms of employment, share of GDP and wages, as the detailed research of NYU’s Thomas Phillipon has shown – and likewise have to come back to earth.

On the other hand, there is the classic question: What better and more effective things might have been done with these trillions? That’s for historians to ponder and decide. But the combination of the massively misallocated resources produced by the bubble (plus the costs of military adventures) combined with humongous bailout spending puts the U.S. behind the economic eight-ball in a way it has not been in more than a century. Having hold on the reserve currency helps, but it cannot absolve all these compounded sins.  Sooner or later the money will run out; bills will come due.

That creates a wide open structural opportunity to accelerate what Fareed Zakaria has dubbed the “rise of the rest” to accelerate. Crises are periods where the relative position of nations and regions can and do change dramatically. (Do I think the U.S. will lose its hegemonic position: Of course not. My hunch is that the U.S. is in the same position structurally as England at the onset of the Long Depression of 1873. It was not until the next major crisis – the Great Depression of 1929 and the onset of WWII that it lost its position to the United States. So worst case: The U.S. has one more long-cycle at the top of the heap). But, just think of all the ways the trillions of bailout money could be used to build the economy of the future. And while you’re doing that imagine that some other places outside the United States that have been patiently building and conserving their resources may start to figure out how to do just that.

The clock of history ticks on. Over time, it tends to leave behind those places who get stuck, get trapped, or try too hard to breathe life back into the old order, neglecting the new one that is emerging. And that’s what really worries me.

Last week, we looked at what makes for happy states. One thing that stood out was that states with larger concentrations of the working class had lower levels of well-being.

So, we decided to take a closer look at the relationship between the working class and several key indicators of state wealth and well-being.

What we found is striking  – and frankly troubling. States with large concentrations of working class jobs had lower levels of income, GDP per capita, and well-being – pretty much everything across the board.

There were significant negative correlations between states with a large share of working class jobs and three of the five component indices in the Gallup well-being index: healthy behavior ( -.65), physical health (-.42), and life evaluation (-.31), as well as for the well-being index overall (-.51).

The pattern was similar, even worse, when we looked at the relationships between the working class and GDP per capita (-.51), income (-.69), human capital levels (-.71), and housing prices (-.62).

So maybe it’s time to think twice when we hear how important it is to save “good” working class jobs.  Individually, that may well be the case. Some of these jobs pay very well, and lots of people who lose them may find it difficult, perhaps impossible, to find similar work at their pay levels

But from the point of view of society and economic development broadly, it’s important to recognize that states with large concentrations of working class jobs do very poorly in terms of wealth and well-being.

These findings distress me personally. Looking them over and over, I found myself thinking back to advice  my father – who spent more then 50 years as a worker in a Newark eyeglass factory – gave my brother and I long ago. “Boys,” he said, ”I do this so you won’t have to. That’s why you have to stay in school, study hard, and go to college.” I understand much better now what he was driving at.

One so far relatively undiscussed aspect of the downturn is the effect on America’s nonprofits, sometimes called the third sector. I spent this weekend with a friend who’s a retired corporate CEO, has a personal foundation that supports local and international projects, and is very savvy in business, finance, and nonprofits. He said he’s heard that as many as half of U.S. nonprofits (charities) will go out of business during the current downturn, which he expects to last a couple of years.

Here are a few observations I can make from what’s happening in Oregon, and in the grants world.

• Many foundations, having seen their endowments dive with the stock market, are cutting back on large grants. In addition, they’re moving from longer-range capacity-building grants to meeting people’s immediate needs (as one foundation director put it, from philanthropy to charity).
• Arts organizations are seeing their donations and audiences shrinking. Seasons are being cut back, shows canceled. Some of the weaker players are seeking mergers or takeovers by larger organizations.
• Safety net organizations like free clinics and food banks are flooded with not only the poor but the formerly middle class.
• Capital building campaigns are dead in the water.

Nobody knows yet whether or how the stimulus money will affect nonprofits. If the federal government decides to fund projects through grants it may save or even enlarge some nonprofits. To the extent money flows through the states or direct federal spending it will probably have little effect.

A story in today’s New York Times says nonprofits are being flooded with high-level formerly employed volunteers. As anyone who’s worked in nonprofits can tell you, this can be more of a headache than a blessing.

There have been numerous stories in Oregon about how various nonprofits are faring. What are others finding in your communities?

It sounds counter-intuitive. But during recessions average wages tend to rise. Unusually, in this recession, in the USA, productivity has also risen – by 3.1 percent during Q4 2008 (a year into the recession).

James Surowiecki in The New Yorker explains

Companies are slashing payrolls: 3.6 million people have lost their jobs since the recession started, with half of those getting laid off in just the past three months. Yet average hourly wages jumped almost four per cent in the past year. It’s harder and harder to find and keep a job, but if you’ve got one you may well be making more than you did twelve months ago…

It’s not because businesses are generous that wages are sticky; it’s because employers are worried. In part, bosses are afraid of what economists call “adverse selection”: if they cut wages, it’s the least productive workers who would be the most likely to stay, while the best workers would start looking elsewhere. (Even in a weak economy, businesses still compete for talent.)

And although Surowiecki doesn’t directly mention it, this recession has the added anxiety for many businesses of talent shortage. Now that it is tougher to bring in foreign talent to the U.S., the need to retain existing productive, creative people may be bigger than ever in some industries. And attracting and retaining the best people would be tough if widespread wage cuts were occurring as this tends to undermine the entire workplace productive process. Surowiecki again:

After the 1990-91 recession, the economist Truman Bewley interviewed managers and labor officials at more than two hundred companies and found that most believed that wage cuts wreck employee morale and eat away at productivity. Whatever money they’d save by cutting wages, bosses assume, would be cancelled out by the decline in effort and the breakdown of trust that wage cuts would create.

Apparently layoffs are less damaging to morale than paycuts. Those laid off leave and take their “misery” with them. Presumably good Human Resource management can help the remaining staff bond together to help the company survive.

That productivity has been on the rise this recession may suggest that Human Resources departments are indeed helping to keep morale high. It also may be that certain layoffs may have targeted those workers who dragged down morale and productivity (it’s easier to lay people off than fire them, legally speaking).

The above story contains U.S. data and examples. Tavia Grant in the Globe and Mail published an article Saturday with anecdotal stories of some Canadian organizations requesting pay cuts, arguing that in this recession things are different.

Based on the above, I’d wonder how “forward thinking” or long-term viable these firms are – is cutting pay a last, final step before bankruptcy? And, I’d stress that I believe there is a big difference between asking or requiring people to reduce their hours or work a four-day week, and asking them to reduce their pay without cutting hours – however, feel free to disagree.

Is your workplace feeling more productive or perhaps “efficient and focused” in recent months? How are wages holding up?

So the past couple of days at the MPI – under the ever-watchful analytical eye of Charlotta Mellander – we took the Gallup happy states data and compared it to various measures of state economies. This is a first cut analysis and it’s dealing only with correlation or association and not causation, but the relationships are nonetheless interesting. Here’s a quick rundown.

Our analysis is in sync with what Will Wikinson already has pointed to: State happiness is associated with income (a correlation of .33 with our measure of average income), as well as housing prices (.49). Makes sense: People are willing to pay to live in happy places, and people with more income have more choices. And it’s even more closely associated with levels of human capital (that is, share of adults with a bachelor’s degree or above – it’s . 77)

And what about the creative class? Happy states appear to be creative states – at least as measured by the share of people employed in creative class jobs (with a correlation of .48). The correlations are even higher for the the super-creative core and the the overall creativity index (.53).

Makes you wonder: Are creatives more likely to live in happy places or are they more likely to be happy people? Well… psychologists have identified a powerful relationship between creativity and happiness. Mihaly Csikszentmihalyi finds that engaging in creative activities like writing, playing music, computer programming, mountain climbing, or chess is a major source of happiness. But in her workplace studies, Teresa Amabile of Harvard Business School says it works the other way around: She finds that it’s happiness – or should I say happy workplaces – that generate creative thinking and workplace innovation as opposed to vice versa. Psychologist Barbara Fredricksons suggests that “positive” people are more open-minded, less racially biased, more likely to see the bigger picture, and ultimately more creative. So maybe this kind of thing scales up from who we are and what we do to where we live.

On that score, yes, happy states are also apparently those greater concentrations bohemians (.43), immigrants (.36 ), and gays (.32), as well as states with higher levels of high-tech industry (.22) or those with more innovative potential.

One worrying finding: States with a large concentration of the working class are far less happy – with a negative correlation of (-.51). That’s downright unhappy. Perhaps Marx was right after all about the alienation that comes from industrial work – or in this case the unhappiness found in working class locations. We’ll be doing more on the connection between economic structure and state happiness in the future.

Is there any connection between between happy states and the personality types that live there? Using data provided by Cambridge University psychologist Jason Rentfrow we were able to compare happy states to the concentrations of the five major personality types – extroversion, agreeableness, conscientiousness, openness-to-experience, and neuroticism. While it may not come as a big surprise, neurotic states were far less happy states – the correlation between the two being (-.62). The correlations for all four other personality types were all insignificant.

Take a look at the graphs here and let us know what you see – and think.

From the New York Times Economix:

The folks over in Hamilton get it:

Hamilton Chamber of Commerce’s new president says manufacturing companies have to re-invent how they produce goods if they are to survive in a changing global marketplace. “The key to recovery and prosperity is to harness the full talents and capabilities of our people where they work,” said Ruth Liebersback, who came to Hamilton in 1974. Ms. Liebersback, chief financial officer for the Hamilton Bulldogs, told the chamber’s annual general meeting last week during her installation as the new chamber president, that despite the dire economic news surrounding Hamilton, there are opportunities to capitalize on. “We need to play to our strengths,” she said. Citing urban affairs analyst Richard Florida, Ms. Liebersbach said the manufacturing industry “needs to reinvent” industrial production by instilling new management models. Being creative means, she said, companies must adopt ideas from their workers … “We need to work together as one community and do it creatively,” she said.

Will Wilkinson picks up on the relationship between happiness and income.

(Gallup Organization via NYT Economix). Click here for map fun.

I take this as a very good sign:

The global economic crisis is an opportunity for Canada to cash in when the eventual recovery arrives, Prime Minister Stephen Harper said Tuesday in his first major speech on the current recession. Ottawa will ensure the country comes out of the recession faster than other nations and stronger than ever, Harper said, adding Canada entered the global recession in a position of strength compared to other countries. “For Canada, this crisis does offer opportunity,” Harper said in a speech to the Brampton Board of Trade.  Ultimately, it is an opportunity to position ourselves so that when the recovery comes, we’re among the first to catch the wave.”  Canada was the last “advanced country” to fall into recession, he said.

“If there ever was a time to put away that legendary Canadian modesty, it is now,” Harper said.  “Notwithstanding all the troubles around us, Canada has real advantages, real assets, and we should not hesitate to remind investors, partners and leaders around the world of the comparative strengths of our country.”

A colleague who was at the speech reports: He pulled stats from the Fareed Z (Newsweek) piece and was very bullish on Canadian banks, financial systems and, as he said: “Canada will be able to take advantage of this economic crisis.”