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

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.

Scientific American says the quant revolution in finance bears part of the blame for the crisis and it’s time for new and better models of the way the world really works (via Mark Thoma).

These lapsed physicists and mathematical virtuosos were the ones who both invented these oblique securities and created software models that supposedly measured the risk a firm would incur by holding them… Without the formal requirement to maintain debt ceilings and capital reserves, the commission had freed these firms to police themselves using risk tools crafted by cadres of quants … For its part, the quant community needs to undertake a search for better models—perhaps seeking help from behavioral economics, which studies irrationality of investors’ decision making… These number wizards and their superiors need to study lessons that were never learned during previous market smashups involving intricate financial engineering…

Maybe. Adding behavioral assumptions is a nice tweak, but it won’t remedy the fundamental flaw of this kind of approach. The number wizards need to do much more than read and quantify history. The problem is that that quants and much of modern economics for that matter have neglected the systematic study of economic transformation. What’s needed goes far beyond more historical and behavioral data points. Concretely this would mean building on the fundamental insights of Darwin, Marx, Schumpeter, and Jacobs to create a real scientific understanding of how economies grow, evolve, generate crises, and restore themselves. There are very, very few economists or social scientists that are willing to take on these big questions. And to build these models will not only take big thinkers, but reasonably large and stable teams of theorists, economic and financial historians, computer scientists, data-base experts, and others. It’s what we’re trying to do here at the Prosperity Institute, and I’d encourage others to join in.

Forbes.com lists the best places for real estate to rebound (h/t: Dean Alexander): Seattle, San Francisco, D.C., New York, and L.A. come out on top. Hard-hit Detroit is last.

Prosperity Institute researchers Patrick Adler and Ronnie Sanders compare this to the creativity index. The Forbes’ rebounders have a creativity index score (.852) some 30 percent more than the hardest-hit group (.619).

Here is an analysis put together before the election, by Prosperity Institute researchers, Patrick Adler and Ronnie Sanders.

Over the past few days we (Ronnie Sanders and Patrick Adler) have been analyzing the results of the 2004 election in order to better understand the dynamics of this race. Considering that dominant polling and analysis has, for over a month, predicted an Obama victory, our guiding question was, “ What states and counties that went to Bush in ’04 will Obama most easily convert in order to win?”

We concluded that if Obama wins, he will surely win these states, on the strength of his performance in metropolitan counties. New Mexico, Iowa, Ohio, Nevada, Florida, and Colorado. Meanwhile, even if he wins it will be very hard to win these states:North Dakota, Montana, Indiana, West Virginia, and North Dakota.

If Obama wins all of the Swingable states and retains all of the Kerry votes, he will win 312 electoral votes, and ultimately the election. To do this, all he will have to do is swing the metro vote in these states by 5 percent or less. Considering that 275 is the electoral threshold, there is significant margin of error for Obama within these states.

Here is a little about our approach, thoughts, and predictions.

Approach:

Study Population: The Red Swing States

We confined our analysis to the so-called “red swing states” – places that went to Bush in ’04 by a very small margin, and places that are now considered in play by Real Clear Politics – a polling aggregator. These were Florida, Iowa, Indiana, Missouri, Montana, North Carolina, North Dakota, New Mexico, Nevada, Ohio, Virginia, and West Virginia. Swing states, which Kerry won, like Pennsylvania and Wisconsin, were not relevant to the question, even though Pennsylvania might yet throw a wrench into tonight’s results.

Our goal was to narrow these swing states into a list of swingable states – we wanted to “separate the wheat from the chaff” (what is chaff by the way?!), when it came to which states would put Obama over the top. In order to do this we made one crucial assumption: metropolitan voters provide Obama with the easiest path to victory. With this assumption in place, we then examined the places where a small metropolitan swing to Obama would swing the entire state in his favor.

Behind the Assumption

Our focus on metropolitan areas as Obama areas was based on numerous factors including:

-The concentration of African Americans in metropolitan areas, and Obama’s strong performance among this group in the primaries.

-Obama’s corresponding weak concentration among rural voters, especially in places like West Virginia and Pennsylvania.

- Obama’s perceived appeal to creative class values (see Florida 2008) and the creative class concentration in metropolitan areas. Also, data collected by the MPI which says that states which “leaned republican” in 2004 have much higher concentrations of the creative class than states that were solidly republican.

- McCain’s decision to nominate Sarah Palin to the ticket, based largely on her ability to connect with rural voters.

- Analysis by pundits like David Brooks which has supposed that republicans have recently alienated some formerly republican professionals, who are concentrated in metropolitan areas.

And more…

States with the most “Swingable” Metropolitan Populations

We began our data analysis by looking at the amount of votes that George W. Bush won by in each state, determining how much of the Bush victory came from the rural communities in that state, and how much came from the metro communities. In all but two of the Bush swing states, Bush won the metro vote by a small margin, and the rural vote by a large one. But in Iowa and New Mexico Bush lost the metro vote, and won the rural vote by enough to win state:

’04 Votes

State                                     Metro  Kerry Votes         Metro Bush Votes

Total electoral votes : 12

Because urban populations in these communities are so high, Obama will only need to convert .0081 percent of Bush metro voters in order to win all of New Mexico’s electoral votes. He only needs .0094 percent of Iowa’s votes to swing that state.

States with very “Swingable” Metropolitan Populations

Even though Kerry lost the metropolitan vote in the rest of the states, he lost it by such a small margin in Ohio, Florida, Nevada, and Colorado that he stands a good chance of swinging these places, if his current momentum holds.

’04 Votes

State                                     Metro  Kerry Votes         Metro Bush Votes

OH	2654038	2718504
NV	386710	394829
FL	3528087	3852775
CO	924742	994139

Electoral Votes: 61

In order to swing these places in his favor he only needs to convert no more than 5.25 percent of Bush’s ’04 voters to his side. Ohio’s 20 electoral votes would swing to Obama if he only converts 2.2 percent of Bush metro voters. Meanwhile Nevada would swing with 2.4 percent while Nevada and Colorado would swing with a 5.2 percent metro increase. Of course.

Obama’s job would be even easier if it adds metro voters, especially from his key voting blocks.

States without “Swingable” Metropolitan Populations

Electoral Votes: 45

Of these states, the most swingable state is Missouri where Obama would need to convert 8.36 percent of Bush metro voters or add an equivalent amount of voters to win. Two states that have recently been added to the swing state category, North Dakota and Montana, would require urban swings of more than 30 percent.

So there you have it, an election that was dominated by rural images and characters might well be decided by marginal increases in metropolitan counties.

Here is the full Metro  Swing Chart

Columbia University political scientist and Rich State, Poor State author (and great friend of the Prosperity Institute), Andrew Gelman tells the story in charts, facts and figures.

The youth vote really mattered.

But the country remains split, as Gelman notes, ” The red/blue map was not redrawn; it was more of a national partisan swing.”

Writing in the Globe and Mail, my good friend and Prosperity Institute “builder” Geoff Beattie nails the key difference between two kinds of development strategies. One creates fictitious wealth, the other is key to real, sustainable development.

The two approaches – building versus trading – are profoundly different. What we have seen in recent months are the consequences for the markets of both domination for too long by a trading mindset and ever decreasing levels of regulation. In other words, as the game was getting faster and tougher, the rule book was getting thinner and easier.

The pattern of constant trading had ever more deleterious effects. As return expectations grow, traders become exposed to ever-escalating levels of risk. Because the pipeline of new, high-quality investment opportunities is not infinite, traders are forced to tolerate higher levels of risk. When returns start to suffer, they have to leverage their capital by investing borrowed money to help juice the investment return …

In contrast to traders, builders invest with the intent of seeing a business opportunity develop over time … Builders invest over the long term and integrate risk management into their strategies as they must inevitably ride the highs and lows of the economy. Builders expect, and navigate through, the downturns based on a confidence in the underlying fundamentals of the business, its market and its management. Builders understand and engage in the businesses in which they invest and thus contribute both to the businesses’ success as well as that of investors …

The influence of the trader mentality has crept beyond Wall Street and the business world and infiltrated government policy, with devastating results. Decades of deregulation by the American and other governments has allowed a free-for-all in the financial markets – not to mention airlines, telecoms, energy and even prescription drugs. It has been supported by a political philosophy that disregarded the long term, expected markets to resolve their own problems, threw money at problems when they did arise, and let diplomacy and relationship-building wither away in business and foreign affairs.

How do we recover the builder orientation? I hope the discipline of the markets will start us off. It is extremely valuable to have a new generation of investors live through a major market downturn …We also need to revisit how we judge and compensate our business leaders and, for that matter, government leaders…The average lifespan of a CEO of a Fortune 500 company is now less than four years. How can we expect them to be interested in the long-term health of their business when their tenure lasts only a few years?

There is also an important role for government and public policy …Good government isn’t big government or no government; it is smart government that embraces its responsibility to look decades ahead and build the appropriate policy infrastructures for growth and prosperity. Our tax, corporate and securities laws need to foster and reward the builder mentality with incentives and stability.

In short, we need to restore a builder mentality in government, on Main Street, in our boardrooms, among institutional investors, and around the kitchen table. The pain we all feel now will be wasted if we don’t learn from it.