Creative Class

Here’s my interview with BusinessWeek’s Michelle Conlin:

Richard Florida: The U.S. Is Facing a ‘Talent Shift’

The bestselling author worries about the consequences of so many American-educated MBAs starting their careers in Asia

Richard Florida, the author of the bestselling books The Rise of the Creative Class and The Flight of the Creative Class, is a preeminent thinker about human capital and its importance for business. His new book, The Great Reset, due out in April, argues that a true recovery will require a complete break from the consumption lifestyle and a move towards a new economic model that is actually sustainable.

Florida is the director of the Martin Prosperity Institute and a professor of business and creativity at the University of Toronto’s Rotman School of Management. Bloomberg BusinessWeek talked with Florida about how many American-educated MBAs are no longer beginning the Grand Tour of their careers in the U.S.

Bloomberg BusinessWeek: Some of the best and brightest American-educated kids are seeing their future—in Asia. Does this worry you?

Richard Florida: From the beginning, I’ve been worried about this talent shift. Two things are happening. Countries such as Canada, Australia, and New Zealand are going after our best and brightest. In China and India, the best and the brightest are staying. One of the biggest tools foreign companies have is our business schools. All these great companies are coming to recruit. This shift is happening in real time right in front of our eyes. I see it in the Rotman School where I teach.

What are you seeing there?

I did the commencement address this year. I was blown away. In enormous numbers, the students were going to China, to India, to the Middle East. To a person, they said they found much more opportunity and possibility for career advancement over there. My jaw dropped. I literally could not believe how many kids.

The trend looks pervasive to you. Yet there’s radio silence from policymakers.

People in Washington are brain dead about this.

How to save Detroit, how to stimulate the mortgage industry. This flight of talent out of this country is actually a much more fundamental problem than anything talked about in Washington. Keeping top talent here as well as attracting top talent to our shores is a fundamental economic advantage. I don’t think most people want to admit what’s happening. They don’t want to see it.

Why the denial?

I think we in the U.S. have taken this for granted for so long. When I see the figures that 50% of all patented innovation in the U.S. comes from foreign-born inventors, I think that the important core of American ingenuity is not American ingenuity. It’s the ability to attract the world’s best people. That’s part of what made Hollywood great—European directors.

How do you see this playing out?

I don’t think any one country will dominate us. But if China picks up its share of global talent, and then India, and then Australia—you add up those percentages, and they create an enormous structural disadvantage for us. It erodes our competitive advantage. The U.S. always used to benefit from these big crises. In the 1870s, we got a lot of immigrant skills. In the 1930s, a lot of Europeans poured in. Now look what’s happening. I mean, imagine Silicon Valley without Andy Grove.

Business Week examines how Gen Y is coping with the crisis. Boulder, San Francisco, and D.C. top the list. College towns and big cities dominate the list prepared by Kevin Stolarick and our MPI team.

So we dug into some Gallup data on what Gen Y wants in cities and here’s what we found:

Jobs are clearly important. Gen Y members ranked the availability of jobs second when asked what would keep them in their current location and fourth in terms of their overall satisfaction with their community ….

[T]he highest-ranked factor was the ability to meet people and make friends. Makes perfect sense, since Gen Y intuitively understands what economic sociologists have documented: Vibrant social networks are key to landing jobs, moving forward in your career, and one’s broader personal happiness. They not only desire a thick labor market but what I have come to call a thick mating market, where they can meet new people, go out on dates, and eventually find a life partner. They recognize what psychologists of happiness have shown. It’s not money per se that makes you happy; it’s doing exciting work and having uplifting personal relationships …

Where older Americans see high-quality schools and safe streets as key, Gen Y understandably ranks the availability of outstanding colleges and universities higher. Many are likely to go back to graduate school, and having great programs nearby is a big plus. When it comes to their overall community satisfaction, access to open space, being in an aesthetically beautiful city, and having access to vibrant nightlife are also quite important; Affordable housing, air and water quality, and availability of religious institutions matter too but slightly less so.

When we look at the factors that affect the likelihood Gen Ys will stay in their current community, the beauty of the place again mattered, along with its climate, the ability to get around easily with little traffic, and affordable housing.

This is important, because Gen Y members are considerably less attached to where they live than other Americans. About a quarter (26.5%) of them said they were extremely satisfied with the place they currently live, compared with nearly half (47.4%) of all Americans. Twentysomethings are on average three or four times more likely to move than forty- or fiftysomethings.

Image courtesy of Tata Housing

Tata – the Indian mega-conglomerate that launched the $2,000 car – has created a housing division which is building new apartments ranging from $7,800-$13,400 dollars outside Mumbai (pointer via Planetizen). Business Week’s Prashant Gopal explains:

Tata’s housing division is targeting a segment of the market that was largely overlooked during the housing boom. India’s builders were concentrating on building shiny new high rises and mansions on golf courses … Luxury flats in Mumbai can cost more than ones in Manhattan. But these apartments won’t be luxurious. The Tata apartments will be built on 67 acres in Boisar, an industrial area where many lower-wage commuters already rent. These apartments will be absolutely tiny. The carpeted area of the smallest units will be 218 square feet, too small even for most Manhattanites. The largest units would be about 373 square feet.

Check out the pictures, floor plans, and payment plans here.

BusinessWeek’s Michael Mandel writes:

• Our problems are structural, and there’s still a huge force behind the status quo.
• If the last 10 years was just an accumulation of massive debt and stagnating salary, then the next decade going to be hell on Earth!!
• What’s held us back is tech, tech is the next logical step for this economy.
• I would argue that the last decade was one in which we tried to maintain a standard of living way beyond our means by massive borrowing and that the next decade will be the tough one because we are in the beginning stages of having to pay the piper. In the long run we will have to learn to live within our means…
• [Y]ou are touching on the essential question of the postmodern economy: how do we create enough new consumption markets to keep everybody employed?

Agreed: The essential question. It’s not just tech or even the creative destruction of industries. Economic recovery will require a massive shift in how and where we live. Breathing life back into the industries, behavior patterns, and lifestyle arrangements of the old, fordist order won’t work because it simply cannot create new demand and consumption patterns. We actually need to reduce the costs of the old fordist housing, energy, and transport nexus so that these new markets can open. Until we begin to understand this, and think and act – and design public policy with this in mind – we will go absolutely nowhere. Why such a massive failure of intellect and imagination on this score?

The new unemployment numbers in both the U.S. and Canada are legitimate cause for concern. But as BusinessWeek’s Michael Mandel notes, those job losses are concentrated in the routine-oriented, tangible economy. The intangible or creative economy continues to fare much better:

This morning’s employment report was absolutely horrible, with the unemployment rate rising to 7.6% and almost six hundred thousand jobs lost, in just one month.

But in the midst of the gloom, it’s essential to point out that the damage is still concentrated in the ‘tangible sector’—that is, those industries which either produce,move, or distribute physical goods. In January the percentage of job losses coming from the tangible sector fall somewhere in the range of 75%-85%. (The exact number depends on how many of the temporary help layoffs are in manufacturing, construction, and retail—there’s no way to tell).

Meanwhile, the jobs losses in the intangible sector are much more moderate. Education and healthcare are still growing, and other intangible-producing industries have relatively small losses.

The housing bubble essentially propped up the tangible sector, badly distorting the “real economy” and biasing investment toward it and away from the more rapidly growing and more stable intangible sector. We’ll only begin to get toward recovery when we stop unnecessarily propping up the tangible sector and allow housing prices to fall to more realistic levels, essentially freeing up demand for the goods and services of the still growing intangible sector.

The new issue of BusinessWeek (December 22) finds economist, Michael Mandel digging into the jobs data. What he finds is very interesting: jobs in manufacturing, transportation, construction, and extraction are tanking – what he calls the “tangible sector” and we call the “working class” have cratered, but jobs in professional fields, management, and science and technology – he calls them the “intangible sector,”we say “creative class” – continue to grow. The U.S. economy has lost nearly two million jobs in the past year, close to the 2.2 million jobs lost in the 1973-75 recession (we’ll go past that benchmark soon if we haven’t already), and unemployment (as officially defined) stands at 6.7 percent. But unemployment in manufacturing is 9.4 percent and even higher, 12.1 percent in construction and extraction. Here’s the rub. Of nearly all the 1.9 million jobs lost, 1.8 million of them  were tangible sector jobs. The intangible sector actually added 515,000 jobs. The economic effects of the crisis remain very uneven for socio-economic classes and for regions.

Had a great chat with BusinessWeek’s Mike Mandel this morning on the crisis, its geography, and what to do about it. Then I came across this post by Nouriel Roubini (via Naked Capitalism).

With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise… To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar.

He notes that the crisis will be longer and deeper than virtually anyone thinks. But why?

The reason is becoming clearer and clearer every day. The crisis is at bottom the crisis of Fordism. It emerged around housing – the single family home, the pivot point of Fordist consumption. It’s not that the technology and idea-driven creative economy is not productive, it’s that our complex financial system in effect over-allocated the fruits of that productivity into the old cornerstone of the Fordist economy. Instead of creating new demand for technology or better health care or new energy or flowing into savings, that productivity translated into increased demand for housing.

So the current bailouts are fundamentally flawed. Propping up the housing-auto nexus of Fordism will only forestall the inevitable. Bailing out homeowners will only essentially handcuff them to their homes, leaving them paying out huge shares of income on housing and housing-related goods and making it impossible to achieve the mobility so many will need to locate economic opportunity. On a social level, it will keep pouring good money after bad, leaving us wrapped up in the old Fordist economy, unable to generate the demand for or the savings needed to generate the new system architecture and infrastructure required to reset the economy on a new and hopefully more sustainable growth trajectory.

The only way out of the crisis is to simultaneously create demand for and investment in these new areas, in part by massively reducing the amount of consumer spending on the old house-auto nexus.

So any government investment should do the reverse of the current bailouts. Instead of propping up these older sectors artificially it should aggressively seek downward adjustment in their costs, perhaps by investing in efforts to increase the efficiency and management of housing and reduce the costs of cars, energy, and mobility. Fiscal stimulus should also focus on the growth sectors of the future. In my mind, this turns on five interrelated factors:

1) Revolutionize the housing delivery system – More rental less ownership; better construction and management, creation of new housing delivery and management systems which allow for flexibility required to shrink the journey to work and allow people to move more freely as their job, career, and lifestyle prospects change.

2) Transform transportation – Everything from more energy-efficient cars, market pricing of roads and highways, to mass transit, high speed rail, and increased reliance of bikes and walking (especially as the journey to work can be shrunk via more flexible housing tenure).

3) Alternative energy – Moving out of the carbon-based economy, shrinking energy costs, and creating new areas for investment.

4) Revolutionize the human capital system – Economists agree this is the key to long-run growth. Currently we waste more of it than virtually any other resource. We need to massively invest in human talent and creativity on a mass scale. This requires an individually oriented, creativity enhancing (as opposed to creativity-squelching). This means moving well beyond schools to flexible, tailored approaches to creative development, including a massive commitment to early childhood and fundamental from-the-ground-up remake of our educational system.

5) Any solution has to do three interrelated things – It must encourage new investment, the creation of new technologies and enterprise, and accelerate creative destruction. To do so, it must shrink the overall costs of the housing-auto nexus, freeing up capital and demand that can flow into new areas as well as increased savings. It must increase investment in and demand not just for technology but for human development, health (holistic and other), and for experiences more broadly.

Problem is: We’re doubly handicapped in getting from here to there. For one, we remain locked in Fordist mindset which sees the problem as how to reset the old housing-auto nexus. It is too early in the transformative process to perceive the full contours of the new, emergent system and to identify the core investments with real precision. Compounding this is the limits of extant theory. Economics in its current guise overvalues simple micro-models based on the efficient allocation of market systems. Of course some economists have junked this, most notably the new empiricists who believe the answer is to be found in improved models and better data. The real issue is that we lacked theoretical understanding of the dynamics of capitalist economic crises and transformation – modern-day, scientific frameworks and dynamic models based on the broad kinds of understanding advanced by say Schumpeter and Marx. This is not just an academic point; it is a terrible handicap in understanding and dealing with the current crisis and and evaluating alternative paths out of it.

The sooner we dump the talk of the bailout and get on with understanding and building the sustainable economy of the future, the better.

BusinessWeek’s Michael Mandel writes:

[W]hat if the Bernanke-Paulson view is wrong? What if financial stress is a symptom, not a cause? What if we face a wrenching readjustment of the global real economy rather than a crisis of confidence rooted in the financial system? What if Bernanke and Paulson are treating the wrong problem? What if investors, realizing that their long held assumptions about the global economy are wrong, are rationally bailing out of stock markets in almost every country, at least for now?

In fact, there’s good reason to believe that the current crisis reflects a growing realization: Long accepted patterns of cross-border technological transfer, foreign trade, and global finance are simply not sustainable… You can’t pay back rising debt with falling wages; something had to give. The first thing that broke were subprime mortgages, given to less creditworthy borrowers. But once investors started to look, they realized that the entire global edifice was built on an impossibility… That’s why the financial crisis has spread across the globe. Investors are peering at every country, from Kuwait to Korea, asking the question: Is it sound enough to survive if American demand for imports falls? The problem is in the structure of the global real economy, not the financial system.

He’s got a point.

Harvard competitive strategy guru, Michael Porter, lays it on the line in BusinessWeek:

The stark truth is that the U.S. has no long-term economic strategy—no coherent set of policies to ensure competitiveness over the long haul. Strategy embodies clear priorities, based on understanding the strengths we need to preserve and the weaknesses that threaten our prosperity the most. Strategy addresses what to do, but also what not to do. In dealing with a crisis, experience teaches us that steps to address the immediate problem must support a long-term strategy. Yet it is far from clear that we are taking the steps most important to America’s long-term economic prosperity.

More here. The economy is the new adminstration’s job one. The crisis provides the opportunity to move beyond patchwork and develop the kind of broad economic strategy Porter advocates. Can Obama and company deliver here?

As originally published in BusinessWeek, this is the third and final installment in a series about improving corporate decision-making. Part 1. Part 2.

What about the customer-service representative at the very bottom of the hierarchy? We all know what happens when we get a voice at other end of the line who is clearly following the manual and making no decisions – “I’m sorry, sir, the policy doesn’t allow me to do that.” That is, for us, the absolute definition of dreadful service – we loathe that experience. We know from experience that the customer-service representative must be a choice-making brain as well.

So every single person in the corporation, from the CEO at the top of the hierarchy to the customer-service representative at the bottom, is a choice-making brain. The distinction between formulation and implementation is false. Most importantly, the dominant design metaphor for the decision factory is deeply, deeply flawed – and a flawed design metaphor will produce flawed designs.

A superior metaphor for the modern decision-factory corporation is a white-water river. In this conceptualization, choices cascade from the top of the corporation (the source in the mountains) to the bottom (the mouth of the river). Each set of rapids is a choice point, with each “upstream” choice setting a context in which the choice immediately “downstream” is made. As decisions cascade downward, the choice-maker above must set the context for the choice-maker below by:

1) specifying her choice and the rationale for the choice;

2) describing the resultant next-level choice that her decision begets;

3) offering to assist in making the resultant choice, to the extent that the next choice-maker needs the assistance; and

4) offering to revisit and modify her decision if the user finds it impossible to make a productive next-level choice in the context of her decision.

HUMAN UNDERSTANDING. Within this cascade of choices, executives at the top of the corporation make the broader, more abstract choices involving larger, long-term investments, while the employees toward the bottom make more concrete, day-to-day decisions that directly influence customer service and satisfaction.

All the choices must integrate with each other to create a seamless cascade. Hence, all the choice-makers feel they’re in a joint venture, even though there’s a clear hierarchy from top to bottom. Importantly, in this conceptualization, every employee is both brains and arms and legs, chooser and doer – just like a real human being!

This conceptualization is also much more conducive to decision-design excellence. When the corporation is understood as a choice cascade, it’s clear to each decision-maker exactly who the users of their choices are and what types of choices those users will need to make subsequently. Since they’re all in the choice cascade together, each decision-maker is more inclined to gain deep user understanding rather than “throwing the choice over the wall” for “implementation.” Deep user understanding provides more raw materials for the visualization of creative solutions.

POSSIBILITY KNOCKS. The cascade also creates a more conducive context for collaborative prototyping. Feedback from the downstream users who are more clearly linked together in a collaborative venture encourages the revisiting and the refinement of upstream decisions over time. The result is a more robustly designed loop of data, insights, and choices that flows from the customer to the top of the corporation and back down again in a productive circle.

A better design metaphor doesn’t guarantee better design. But abandoning the brain vs. arms and legs for the cascading river opens up the possibility for better decision design, leading to creative customer solutions and a healthier, more authentic corporate culture.

Click here to read this article in its entirety at BusinessWeek.com.