Creative Class

Felix Salmon points to Julia Ioffe’s TNR story on Nouriel Roubini, zeroing in on the long journey back to recovery.

Given the right changes, perhaps the United States can develop with the productive long view in mind, and maybe its human talent can be spread more equitably. “When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive,” he had told me earlier. “Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that’s actually a good change. The transition is painful, but the result may be good.”

Salmon’s comment is spot on.

[O]ver the long term, I’m optimistic that the redeployment of US human resources away from finance and into the real economy is bound to be a good thing. But in the medium term, the process of “scaling back and turning inwards” around the globe is going to be extremely painful – and is far from over. Or, to put it a more familiar way, things are going to get worse before they get worse. Only very slowly and very painfully might they start to get better — and it’s not going to happen any time soon.

The thing that strikes me most is how very long it takes for economies to reset themselves during crises. Recovery from both the Long Depression of the 1870s and the Great Depression of the 1930s took the better part of two or three decades. Both required not just a new wave of technological innovation, the creative destruction of various industries, and new modes of government economic intervention, but were premised upon a whole new “spatial fix” – the rise of the “modern” industrial city after the Long Depression and suburbia’s rise after the Great Depression – to set in motion broad new patterns of consumer spending and demand which could power longer-run growth. My own father was just eight in 1929, my mother three, when the stock market crashed. They left Newark for a close-in working class New Jersey suburb in 1960 – three full decades after the onset of the crash.

Governments and central banks certainly have better monetary and fiscal policy tools at their disposal now and are more adept at managing economic downturns. Still, I fear it will be a much longer road to full recovery and a new normal than most people expect.

James Surowiecki notes that:

“[In] 2008, for the first time in sixteen years, the finance and insurance industry shrank. Since 1980, this sector’s share of the economy has grown by almost half. Now, apparently, the worm has turned.”

A couple of months earlier, Eric Janzen predicted that:

As more and more risk pollution rises to the surface, credit will continue to contract, and the FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s. The FIRE economy—which depends on the free flow of credit—will experience its first near-death experience since the sector rose to power in the early 1980s.

The FIRE economy – which stands for finance, insurance, and real estate – is extraordinarily concentrated geographically. FIRE made up a whopping 40 percent of Charlotte, North Carolina’s economy in 2006. But that didn’t make it the most FIRE-dependent economy in the nation. That distinction goes to Des Moines, Iowa. FIRE made up roughly a third of total economic activity in Bridgeport and Hartford, Connecticut; Bloomington, Illinois; and greater New York, as well as resort towns like Naples, Florida; Myrtle Beach, South Carolina; and Ocean City, New Jersey.

But, as of yet, the popping of the FIRE bubble doesn’t appear to be having any substantial effect on regional unemployment. There was no statistical relationship at all between the FIRE share of regional economies and the unemployment, measured as either the Feb. 2009 unemployment rate and as the change in that rate between Feb. 2008 and Feb. 2009, according to number-crunching by my colleague Charlotta Mellander. There was a slight positive correlation between real estate and both the unemployment rate (0.13) and the year-over-year change in unemployment (0.17).

But one aspect of real estate economies – construction – does appear to put regions at substantially greater risk. The correlation was higher between regional share of the construction industry and the unemployment rate (0.18) and even more so for year-over-year change in unemployment (0.23).

Hard to say why, but one reason may be that regions with a large share of finance and insurance jobs are economically more diverse. Or perhaps finance and insurance workers have skills that are more flexible, enabling them to shift jobs relatively more easily than say construction workers or blue-collar workers in general.

One thing is clear: the recession continues to hit hardest at older industrial regions and those with sprawl-driven, construction-heavy economies. Those with large shares of finance and insurance jobs seem to be adjusting relatively well.

It’s clear that the economic crisis is having uneven impacts on different types of workers and different kinds of communities. Highly educated people and highly educated places are holding up much better than others.

But among the most stable places in the current downturn are college towns.

Using data from the Bureau of Labor Statistics for March 2009, Martin Prosperity Institute researcher Patrick Adler put together the following graph which plots the unemployment rate for various states, major commercial cities, and college towns. The results speak for themselves.

Living through the current economic downturn, none of us take economic prosperity for granted anymore. We’re aware now, more than ever, of how important it is to cultivate the things that contribute to long-run economic growth and sustained prosperity as well as to regulate and cope with those which can come to jeopardize that prosperity.

Economists mainly agree that there are two things that power long-run economic growth. Thanks to the Nobel-prize winning work of Robert Solow, we know that technology is one. Human capital is another. Detailed empirical studies by Harvard’s Robert Barro and others show the connection between human capital and economic growth.

But what about class – does it matter? Using data from the International Labour Organization, Charlotta Mellander developed class profiles for nations of the world. The graphs below show the relationship between two main classes – the creative class and the working class – and two common measures of economic growth - gross domestic product (GDP) per capita and total factor productivity (TFP).

The results could not be more striking.

The creative class is strongly related to both GDP per capita and total factor productivity. In preliminary statistical analysis conducted by Mellander, the creative class effect was even stronger than that from the well-established human capital measure.

Now look at the graphs for the working class. Societies with large concentrations of the working class have lower levels of GDP per capita and total factor productivity.

Source of all graphics: Martin Prosperity Institute

New York and London are consolidating and strengthening their positions atop the global financial system, according to the FT’s John Pender.

The latest edition of the Global Financial Centres Index (GFCI) shows these two leading centers to be considerably more “resilient” than others, ranking as the world’s only “truly global financial centres.”

The GFCI, which is based on surveys of financial experts and professionals, rates financial centers on a point basis. London was on top with a rating of 781, followed by NY with 768. The ratings for these top financial centers fell only 10 and six points respectively since the onset of the crisis.

The next three centers – Singapore, Hong Kong, and Zurich – saw their ratings nosedive by 14, 16, and 17 points respectively. Tokyo has fallen out of the top 10, slipping to 15th place. Chicago is seventh, Boston ninth, San Francisco 17th, and D.C. 21st. Toronto is 11th.

Pender suggests that the only “plausible thesis” is that heightened competition to London and NY can eventually come from Asia. He points specifically to Shanghai, noting that China is running huge surpluses, its banks are well-capitalized, and its government is working hard to turn Shanghai into a global financial center by 2020.

But Shanghai currently ranks 35th on the GFCI, around the same as the British Virgin Islands and the Bahamas. Never mind it plummeting a whopping 30 ratings points over the course of the crisis. And there is considerable competition within Asia for the top financial spot – pitting Shanghai against Tokyo as well as Hong Kong and Singapore.

Perhaps a combined Shang-Kong center can emerge over time. Shanghai has the industrial muscle and economic size and scale, while Hong Kong brings openness and attractiveness to global talent.

But major banking centers are extremely resilient.  Even though New York overtook London during the last economic crisis of the Great Depression, London has come roaring back and once again eclipsed the Big Apple.

The real action will be further down the chain, as the economic crisis continues to wreak havoc on second- and third-tier financial centers.

Tyler Cowen points to a new NBER study that concludes that the shadow banking system is misnamed: it’s part of the real banking system and at the heart of the financial crisis:

“The ’shadow banking system’ at the heart of the current credit crisis is, in fact, a real banking system – and is vulnerable to a banking panic. Indeed, the events starting in August 2007 are a banking panic. A banking panic is a systemic event because the banking system cannot honor its obligations and is insolvent. Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms ‘running’ on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin (‘haircut’), forcing massive deleveraging, and resulting in the banking system being insolvent. The earlier episodes have many features in common with the current crisis, and examination of history can help understand the current situation and guide thoughts about reform of bank regulation. New regulation can facilitate the functioning of the shadow banking system, making it less vulnerable to panic.”

The Globe and Mail reports (ht: Wendy Waters):

Mr. Obama now proposes to levy a $210-billion tax increase (over 10 years) on U.S. corporations that operate through foreign subsidiaries – making them, by and large, the (nominally) highest-taxed corporate entities in the world. This will be negative for the United States, potentially terrific for Canada.

Beginning soon, major U.S. corporations can be expected to move head offices to Toronto and Calgary to take advantage of the lowest corporate tax rates (by 2012) in the G7. In the end, Mr. Obama will have ensured neither revenue nor jobs.

With GDP falling at a “hefty” 6.1 percent annual clip, Harvard’s Jeff Frankel parses the data:

The previous record-holders were the recessions of 1973-75 and 1981-82, each of them four quarters in length according to the official NBER chronology. In the current downturn, the NBER’s Business Cycle Data Committee determined that the economy peaked in the 4th quarter of 2007…  The NBER also keeps a more precise monthly chronology. The postwar record is 16 months, again shared by the 1973-75 and 1981-82 recessions. To match this monthly benchmark, the current downturn would have to have continued into April. Our best single indicator as to whether it did so will be the employment number to be released by the Bureau of Labor Statistics next Friday, May 8. It almost certainly will show that there were further job losses in April. If so, it will further confirm the dismal conclusion: one would have to go back 80 years, to the disaster of 1929-1933, to find a longer recession.

Here’s a cool map of the global banking crisis.

Unemployment continued to rise in March. The unemployment rate increased from 8.1 percent to 8.5 percent, according to the Bureau of Labor Statistics (BLS). Some 663,000 Americans lost their jobs in March, and overall 5.1 million Americans have been put out of work since the onset of the recession in December 2007.

But the real unemployment rate is as high 15.6 percent according to the BLS U6 measure which includes marginally attached and discouraged workers.

The impact of the recession continues to be extremely uneven by gender, race, class, and occupation.

• Men continue to experience higher rates of unemployment than women – 8.8 percent vs. 7.0 percent – due to the concentration of men in manufacturing jobs.
• The unemployment rate for whites was was 7.9 percent compared to 11.4 percent for Hispanics and 13.4 percent for blacks, and 6.4 percent for Asians.

Unemployment is even more uneven by education or human capital level.

• The unemployment rate for college graduates is 4.3 percent, half that for high school (only) graduates (9 percent) and one third of the 13.3 percent rate facing those without a high school degree.

And there remain huge differences in unemployment by class and occupation.

• The highest rates of unemployment remain concentrated in working class occupations – production workers (14.9 percent), and transportation (12.7 percent) as well as construction and extraction jobs (22.7 percent) and farming, fishing and forestry (21.7 percent).
• For service class workers the unmeployment rate is 9.4 percent.
• Unemployment is significantly lower for the creative class. For management and business occupations – including hard fit financial jobs – the unemployment rate is 4.5 percent. For professional and scientific occupations, it remains less than 4 percent (3.9 percent).

UPDATE: This chart, from Ryan Avent, shows occupation by class/ major occupational grouping for the past three months.

Avent writes:

As the economy begins to recover, the lines for these categories are going to shrink, but they’re not going to shrink at the same rate. In particular, production occupations may see very little movement in their line at all — many of the manufaturing jobs lost during this recession (in the auto industry say) won’t be coming back. Even if construction employment improves, it will be a long time before the construction labor market is anything resembling tight … Recovery from this recession, in other words, is intimately connected to facilitation of long-term sectoral shifts in the economy. The hard part is how to facilitate those shifts.