Monday, July 16, 2012

Some of my readings

  1. Alan Greenspan, Age of Turbulence - disappointing. Mostly I was trying to learn something behind his thinking when he looks at numbers. Except for the instance when he was describing the lack of productivity gains from the Internet (which I’m dubious there ever was any) there was very little to be gained from this book.
  2. Gary Katzenstein, Funny Business - illustrates how naive an American can be when he is accepted into an internship at Sony. It is a hilarious look at his life in Japan for the short time he was there. It is a story of cultural differences and at times illustrates the ugliness of Americans abroad. He is able to laugh at his own follies which I think is what made this book a fairly breezy read.
  3. Peter Lynch, One Up on Wall Street was so self-effacing that I wondered how Peter Lynch ever made any money.
  4. John Perkins, Confessions of an Economic Hit Man - appealed to the conspiracy theorist in me but at the end I had to confess that it all sounded just a little too wild.
  5. FM Scherer, International High Technology Competition was a little disappointing. I’m not particularly sure what I had expected but the most interesting parts were definitely the narrative portions of how US industries responded to foreign competition in the high-technology sector. The responses were categorized into “aggressive”, “submissive”, “business-as-usual” as well as the outcomes from these responses. Of particular interest was whether firms increased, cut back or did nothing in terms of R&D expenses. The regression analyses can be considered exploratory since there weren’t really any strong conclusions that could be drawn from them (at least from my point of view). This was mainly because there didn’t seem to be real strong patterns in how firms responded although nationality/international experience of managers seem to be an important factor.
  6. Arnold Danielson, Consolidation of Banking, or How Five Banks Bought 50% of America's Biggest Business - this book was outdated the moment it was published since the financial crisis of 2007 came in the heels of its release. For someone with little knowledge of the US banking industry this was a good introduction to how inter-state regulation of banking led to the creation of the bank conglomerates that stood just before the subprime mess. The story continues to unfold however.
  7. Mario Livio, The Equation that Couldn’t Be Solved was enjoyable and a good introduction to the lives of Evariste Galois and Niels Abel. It was a little too much to expect the book to teach me about symmetry and group theory however. The question of symmetry seems to be the heart of quantum physics today but it was not handled very well for a novice like myself. Like many pop science books the explanations were forgotten after the last page.

Sunday, July 15, 2012

Reliability of electricity

Last week we were out in Edinburg/Woodstock area near the Shenandoah Mountains. As is sometimes the case, we came across a bulletin board outside a realtor’s office and looked at what was available for sale in the area.

I was a little surprised to see a home for sale with a whole house generator. These have become quite popular in recent years with an increasingly (and seemingly) unreliable power grid. I was surprised for several reasons:

  1. I expected more homes in rural areas to be more off the grid than most, i.e. propane for heating and perhaps for running electricity, septic tank, well water, etc.
  2. I expected people from rural Virginia to be hardier than Washingtonians (then again, perhaps the seller was a Washington transplant - or perhaps I have a misplaced bias)
  3. I expected that dense cities were more vulnerable in terms of length of outage and people affected than rural Virginia. The flip side is that the more rural you are the less likely that restoration will be quicker since utilities tend to emphasize fixes that put the most people back online as soon as possible.

Most disturbing was the sense that perhaps electricity has become much more unreliable in recent years. Unfortunately, there appears to be no good data on the reliability of the electric grid. Scientific American reports based on an MIT report:

“Data on outages are neither comprehensive nor consistent, however. Most outages occur within distribution systems, but only 35 U.S. States require utilities to report data on [distribution outages]… it is accordingly impossible to make comprehensive comparisons across space or over time.”

The World Bank carries out surveys of electricity outages and its effects on manufacturing industries but the US is a non-respondent. A backup power supplier, Eaton has a report of blackouts in the United States (register for download) but only has data for 3 years which makes it hard to detect a trend.

More promising are reports from LBL, in particular this and this. From the latter, is the conclusion of a study in January 2012:

In other words, we still don’t know what we don’t know.

Friday, July 6, 2012

Kiasu again

From NGM:
If there is a single word that sums up the Singaporean existential condition, it is kiasu, a term that means "afraid to lose." In a society that begins tracking its students into test-based groups at age ten ("special" and "express" are the top tiers; "normal" is the path for those headed for factory and service-sector work), kiasu seeps in early, eventually germinating in brilliant engineering students and phallic high-rises with a Bulgari store on the ground floor. Singaporeans are big on being number one in everything, but in a kiasu world, winning is never completely sweet, carrying with it the dread of ceasing to win. When the Singapore port, the busiest container hub in the world, slipped behind Shanghai in 2005 in total cargo tonnage handled, it was a national calamity.

The word has made it into the dictionary and has even become a dish:
… kiasu is a noun and adjective from the Chinese Hokkien dialect, meaning "extreme fear of losing, or of being second best". It's a notion the neurotically ambitious Singaporean and Malaysian professional middle classes regard as so self-defining that their sitcom character Mr Kiasu is a similar emblem of endearingly gruesome national character as Mr Brent is to us.

Having made its way to the Singapore-English hybrid tongue called Singlish, kiasu completed its trek across the etymological world in March when the Oxford English Dictionary included it on its quarterly list of new words, thereby qualifying it for Call My Bluff.

But enough of the linguistics and on to today's restaurant, which by way of an exquisite red herring worthy of Gogol happens to be called Kiasu. And which, by way of an enchanting irony worthy of a writer begging for the sack, need have no fear of being second best itself.

And on Singlish (again from the NGM):
… the government has maintained a campaign against the use of "Singlish," the multiculti gumbo of Malay, Hokkien Chinese, Tamil, and English street patois that is Singapore's great linguistic achievement. As you sit in a Starbucks listening to teens saying things like "You blur like sotong, lah!" (roughly, "You're dumber than squid, man!"), Singlish seems a brilliantly subversive attack on the very conformity the government claims it is trying to overcome. Then again, one of Singlish's major conceits is the ironic lionization of the flashy, down-market "Ah Beng" culture of Chinese immigrant thugs and their sunglass-wearing Malay counterparts.

A previous post here.

Lying heroes

Two years ago K1’s unit of study was ‘Heroes’ and one of the books they read was Greg Mortensen’s Three Cups of Tea. At the end of the school term, it was revealed that almost all of the book was a figment of the author’s hyper imaginative mind. Or did he succumb to all the things that he thought he was?

On page 129, Mortensen quotes Edmund Hillary:
But I’ve learned through the years, as long as you don’t believe all the rubbish about yourself, you can’t come to too much harm.

In retrospect, the fallout from Mortensen’s Central Asia Institute was almost inevitable. The board could not get him to account for anything and his coauthor David Oliver Relin remarked about how difficult it was to work with Mortensen (pg. 229).

At the end of the term the teacher spoke about the CBS ‘60 Minutes’ expose to the class. My sense was that universally the kids felt betrayed although this was not the word they used. The most important lesson I think they learned from this was that “Anybody can lie” and “Don’t believe everything you read”. In may ways I saw this an almost transformative experience as they shifted from 6th to 7th grade that year. And perhaps it’s a good thing to learn early and together as a class that lying is leads to distrust.

The time for arithmetic and poetry is past. Nowadays, my brothers, take your lessons from the Kalashnikov and rocket propelled grenade
- graffiti spray painted on the courtyard wall of the Korphe school.

Thursday, July 5, 2012

Take your children to work day

No, it's not today but I've been thinking.... We have been watching some old movies with the kids: Sound of Music, Mary Poppins, etc. and we have been enjoying the bonus features of how the movies were made. It would have made for one very exciting take your children to work day if they could see all the work that goes into it.

Given that many of us now work in offices I gather that take your children to work day must be pretty boring (for the kids anyway). Take what Anne-Marie Slaughter considers exciting and rewarding:

In between, the days were crammed with meetings, and when the meetings stopped, the writing work began—a never-ending stream of memos, reports, and comments on other people’s drafts.

Well, maybe not this aspect of it but one can’t help but think that she misses it.

Perhaps Shakespeare should have written...

Let’s kill all the bankers. Martin Wolf has hit the proverbial nail but sadly not on a banker’s head:

My interpretation of the Libor scandal is the obvious one: banks, as presently constituted and managed, cannot be trusted to perform any publicly important function, against the perceived interests of their staff. Today’s banks represent the incarnation of profit-seeking behaviour taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with.

And if I’m reading this right a call to return to the Glass-Steagall days.

By misreporting lower LIBOR rates the banks (and I won’t be surprised if it’s limited to Barclay’s) have potentially raised borrowing costs for multiple entities including countries. Banks and the financial sector as a whole are causing negative externalities which are not being internalized by each individual bank.

The Coasian approach would be to ask whether property rights are well defined and if this is the case then private transactions or the tort system would be one way to realign the interests. If property rights are not well-defined then the legal system can be used to define them.

Consider the subprime crisis. I take out a subprime loan and think that I have partially owned my house. Unfortunately, the shenanigans of the financial sector have made it difficult for me to make my payments. Perhaps the recourse should have been not to repossess the delinquent property by the bank but for the homeowner to sue the bank. (I wonder Shakespeare would have said to having both lawyers and bankers solve each other’s problems.)

Unfortunately, doing so puts the entire financial system and the economy in jeopardy by weakening the balance sheet of the banks. Property rights cannot be assigned here. If systemic risk could be accurately measured then perhaps a market of tradable systemic risks could be created. As much as free-market advocates would like to believe that the sector can discipline itself it is more than apparent now that it cannot. The financial sector should be treated as a public good and regulated as such - countercyclical capital requirements are a start and some type of externality tax would perhaps be the way to go although this would be extremely difficult to get right.

Wednesday, July 4, 2012

Does correcting for self selection change the policy question

Consider an experiment of whether job training after layoff increases the probability of being re-employed. A ‘naive’ treatment effect would be to compare the effects of those who enrolled in job training and those who didn’t. The estimated effect would then be the difference in likelihood of being employed for those with job training and those without. The policy question addressed here is whether job training increases the likelihood of employment.

But the econometrician would argue that those who did not enrol in job training are different from those who did and that these characteristics are unobservable to him (the econometrician, e.g. motivation might be unobservable). In order to accurately estimate the impact of job training one would have to compare apples to apples, i.e. those who applied for job training but were (randomly) rationed out of the program. This gives the correct estimated impact. But the policy question now seems to be whether those who applied for job training but were not denied increases the likelihood of being employed. I would argue that this is NOT the policy question of interest.

The policy instrument is to shift people into job training - assuming that the impact is or can be positive. But by estimating the impact only for “motivated” people this naturally assumes that the unmotivated will not be treated. Suppose the following:

  • A randomized control trial of a job training program is run and impacts estimated.
  • The impacts are found to be large and cost benefit analysis shows that the benefits are positive on net.
  • What happens when the program is scaled up, i.e. rolled out to the entire population of unemployed (instead of just to the treatment and control who were "similar" in the trial)? Should we assume that the impacts would still be the same as in the RCT? Are the participants on the now scaled up program still similar? An RCT advocate would argue yes - but - isn't the original intent of scaling up a program to get as many people as possible to participate regardless of the original composition of the treatment and control groups?
  • Should the scaled up program be the same as the RCT, i.e. a static program that doesn't enroll anyone but just allows the "motivated" to enroll themselves? What if there was an effort to try to get the recalcitrant unemployed into the program - after all since the benefits are positive, don't we want to extend the benefits to as many as possible? If there were such an effort would the estimated impacts still be the same as in the trial?
  • Suppose that after the completion of the trial we find that the population of unemployed has changed so that there are now more women than men? Do we deny one gender the treatment because it is no longer the same as those in the randomized trial?

Tuesday, July 3, 2012

Rules based or principles based

Lessons from Enron based on Peter Elkind and Bethany McLean’s The Smartest Guys in the Room and Kurt Eichenwald’s Conspiracy of Fools. One of the reasons I read these books was to understand what exactly it was that Enron did - i.e the structure of the SIVs etc. Neither book helped. Both tried to explain it but it made no sense to me.

And perhaps it is because that they made no sense at all. The accountants (Fastow and Causey among others at Enron and Duncan at Arthur Andersen) really seemed to do what they could to inflate profits using whatever machinations they could under the existing rules at the time. It was all about following the rules and stretching their definitions as far as possible. It really seemed as the Elkind and McLean book pointed out that in order to produce a duck and if they did not have a duck they would get a pig, stick a yellow beak on it, paint its feet yellow and paste feathers on it and call it a duck just because the rules defined a duck as an animal with yellow feet and beak and white feathers.

Two factors seemed play a large role - rules based accounting and the ability to mark to market. The latter allowed the accountants to manipulate cash flow and to use definitions and rules to exclude themselves from being classified as a trading firm. Market failure played a role in this and in this sense I mean failure of free markets. All the information on what Enron was doing was available but analysts (e.g. John Olson) who pointed out Enron’s weaknesses were fired by the investment banks who wanted Enron’s business.

Corporate shenanigans will always occur especially during boom and the answer may be that it will have to be a little bit of both - rules and principles although it’s hard to see how it can possibly work. Both books were a bit of a letdown. I thought that I was reading about two different companies. Eichenwald’s book gives less emphasis on the role of Lou Pai and focuses more on Fastow and Kopper.  This was the book that I thought would provide most insight but it reads more like a diary of their activities. Elkind and McLean’s book provided a broader sweep and the narrative is a little better but I wouldn’t recommend either book. I’m a little ambivalent about the role of Lay and Skilling. Neither book convinced me that they knew what was going on but it is hard to believe that they did not know that nothing was going on in order for Enron to meet analyst expectations quarter after quarter. One thing clear was that greed conquers all. Nothing could get in the way of their greed.

What about giving some praise for their self esteem

The school year came to an end about 3 weeks ago for K1 and K2. One of the the complaints that K1 had over the course of the year was the lack of feedback from her piano teacher and another teacher at school. By feedback she meant praise.

I mentally rolled my eyes when I heard it and said nothing. Whatever happened to just sucking it up and doing it - or doing it for the sake of doing it well? After all, it is getting hard to distinguish praise from positive feedback these days.

Here are some of my favorites from Lori Gottlieb’s article:

...all of this worry about creating low self-esteem might actually perpetuate it. No wonder my patient Lizzie told me she felt “less amazing” than her parents had always said she was. Given how “amazing” her parents made her out to be, how could she possibly live up to that? Instead of acknowledging their daughter’s flaws, her parents, hoping to make her feel secure, denied them. “I’m bad at math,” Lizzie said she once told them, when she noticed that the math homework was consistently more challenging for her than for many of her classmates. “You’re not bad at math,” her parents responded. “You just have a different learning style. We’ll get you a tutor to help translate the information into a format you naturally understand.”

With much struggle, the tutor helped Lizzie get her grade up, but she still knew that other classmates were good at math and she wasn’t. “I didn’t have a different learning style,” she told me. “I just suck at math! But in my family, you’re never bad at anything. You’re just better at some things than at others. If I ever say I’m bad at something, my parents say, ‘Oh, honey, no you’re not!’”  

Yet the kids seem to know when praise is genuine and when it’s not. At summer horse camp the counselors used to give out ribbons to everyone for something vague like “most improved in …” Fill in the blanks with your favorite. This supposedly protected them them from the “ravages of competition” and kept them from competing with each other. (In elementary school, they play kick ball but the PE teacher prohibited them from keeping score - but some kids kept score anyway and would shout it out. Then PE teacher would then say “We are not keeping score!”) One of the things that surprised me then was what would happen when they actually competed? They went in for a horse competition and got thirds or fourths or even fifths. (There are only 5 riders in each competition.) I was glad to hear them say something like “Finally, a ribbon that actually means something!”.

From the article:

Last month, I spoke to a youth soccer coach in Washington, D.C. A former competitive college athlete and now a successful financier, he told me that when he first learned of the youth league’s rules—including no score-keeping—he found them “ridiculous.”

How are the kids going to learn? he thought. He valued his experience as an athlete, through which he had been forced to deal with defeat. “I used to think, If we don’t keep score, we’re going to have a bunch of wusses out there. D.C. can be very PC, and I thought this was going too far.”

Eventually, though, he came around to the new system, because he realized that some kids would be “devastated” if they got creamed by a large margin. “We don’t want them to feel bad,” he said. “We don’t want kids to feel any pressure.” (When I told Wendy Mogel about this, she literally screamed through the phone line, “Please let them be devastated at age 6 and not have their first devastation be in college! Please, please, please let them be devastated many times on the soccer field!”) I told the coach this sounded goofy, given that these kids attend elite, competitive schools like Georgetown Day School or Sidwell Friends, where President Obama’s daughters go. They’re being raised by parents who are serious about getting their kids into Harvard and Yale. Aren’t these kids exposed to a lot of pressure? And besides, how is not keeping score protecting anyone, since, as he conceded, the kids keep score on their own anyway? When the score is close, the coach explained, it’s less of an issue. But blowouts are a problem.

He told me about a game against a very talented team. “We lost 10–5, and the other team dominated it. Our kids were very upset. They said, ‘We got killed!’ and I said, ‘What are you talking about? You guys beat the spread! The team we beat last week lost 14–1!’ The kids thought about this for a second and then were like, ‘You’re right, we were great! We rule!’ They felt so much better, because I turned it around for them into something positive. When you get killed and there’s no positive spin, the kids think they’re failures. It damages their self-esteem.”

At the end of the season, the league finds a way to “honor each child” with a trophy. “They’re kind of euphemistic,” the coach said of the awards, “but they’re effective.” The Spirit Award went to “the troublemaker who always talks and doesn’t pay attention, so we spun it into his being very ‘spirited,’” he said. The Most Improved Player Award went to “the kid who has not an ounce of athleticism in his body, but he tries hard.” The Coaches’ Award went to “the kids who were picking daisies, and the only thing we could think to say about them is that they showed up on time. What would that be, the Most Prompt Award? That seemed lame. So we called it the Coaches’ Award.” There’s also a Most Valuable Player Award, but the kid who deserved it three seasons in a row got it only after the first season, “because we wanted other kids to have a chance to get it.” The coach acknowledged that everyone knew who the real MVP was. But, he said, “this is a more collaborative approach versus the way I grew up as a competitive athlete, which was a selfish, Me Generation orientation.”

I asked Wendy Mogel if this gentler approach really creates kids who are less self-involved, less “Me Generation.” No, she said. Just the opposite: parents who protect their kids from accurate feedback teach them that they deserve special treatment. “A principal at an elementary school told me that a parent asked a teacher not to use red pens for corrections,” she said, “because the parent felt it was upsetting to kids when they see so much red on the page. This is the kind of self-absorption we’re seeing, in the name of our children’s self-esteem.”  

Monday, July 2, 2012

What rhymes with derecho

James Fallows reports on the awful state of US infrastructure based on the state of DC after the derecho. I’ve complained about Pepco enough that I won’t be doing it here. Instead, the fair citizens of Columbus, Ohio who suffered just as badly from the same storm seem to have the same comments about their power company (Scroll to comments.)

For example:
Another year, another storm, another week without power. AEP continues to shower their executives with millions while shirking their responsibility to improve their rickety system and make it better able to withstand a windstorm. Just as they did after the hurricane (and the ice storm, and the other windstorm), I bet they will ask for (another) rate increase to pay for flying in crews to fix a system that will fail the next time the wind blows. What needs to happen is for PUCO and regulators to say NO, and have AEP not turn a profit this year or next. They shouldn't be rewarded with massive profits when they continually fail to make the necessary investments to minimize the effects of the next storm.
- David Olive -

If it’s not just DC and it’s not just Pepco - then perhaps it’s the free market or global warming?

Two pop economist books

The two books Naked Economics by Chris Whelan and The Undercover Economist by Tim Harford seem to have common elements of the authors discussing coffee, beer, and wine. And let us not forget the condescending I know-it-all-because-I-am-an-economist tone that people like me use when we are talking down to those who just don’t understand. There is nothing more annoying to me than to read a book that sounds like myself. If you can stand being spoken down to because you want to learn how economists think then these books are for you.

Unfortunately these two authors are journalists pretending to be economists even though they do have graduate degrees in economics. One of them - I forget which now and I’m not sure I really care anymore - talks about the evils of certification and how it restricts the supply of services by discussing how electricians need to be certified and how this has increased the price of their services. (I’m not disagreeing with the analysis here and I probably would have used the same tone.) He gloatingly points out that people are literally dying because they are now doing electrical work themselves. Of course this is anecdotal evidence - if he truly were an economist he would have said something like this: “The impact of certification of electricians on accidental electricians has increased by a factor of 16 as a result of certification requirements” or something like that - but then again, they’re journalists after all so they do have to make it intelligible to the lay audience and rely on anecdotes rather than statistics.

Sunday, July 1, 2012

A flexible economy

Alan Greenspan in his book Age of Turbulence refers to economic flexibility as a reason for the US economy’s ability to withstand the shocks of the collapse of the stock market in 1987, the savings and loan crisis of 1990, the Mexican crisis of 1994, the East Asian crisis of 1997, the Russian default of 1998, the failure of LTCM, the dot-com bubble, and 9/11. (The housing bubble was probably the last bubble to break the back of this economy.)

He has referred to it in his past speeches, for instance,
Flexibility implies a faster response to shocks and a correspondingly greater ability to absorb their downside consequences and to recover from their aftermath. No specific program encompassed and coordinated initiatives to enhance flexibility, but there was a growing recognition, both in the United States and among many of our trading partners, that a market economy could best withstand and recover from shocks when provided maximum flexibility.

This was during the period of the Great Moderation which Greenspan was wise enough to acknowledge that the resilience and moderation could not be fully attributed to central bank policies alone. While the reference is presumably to the ability of the economy’s GDP to absorb these shocks it isn’t clear what caused this increased flexibility. The hand waving economist points to deregulation and competitive market forces but surprisingly the data devourer that he is known to be did not delve deep enough into the statistics to find out whether this moderation at the aggregate level was real, deep and wide.

Economic flexibility can also refer to the the range of options available to a policy maker. For instance, being up against the zero nominal interest rate as we are today is not flexibility. The ballooning deficits in the early 2000s during the tenure of Bush II limited the ability of the government to try to pass a larger fiscal stimulus. But since most of the shocks occurred during the Clinton administration when deficits were falling and surpluses were projected this might have added some flexibility in the economy.

We also know that during the past 20 years, the rich got richer, the financial sector got bigger and riskier, and the low and middle class earnings either stagnated or fell. In the 1980s, Bud Crystal published In Search of Excess, a criticism of CEO compensation. It drew outrage from both CEOs and the public - the former believing that their pay was not excessive. Over time, the furor faded and excess compensation became the norm rather than the exception. As is clear in hindsight, the economy really wasn’t that flexible and never was. This is one of the times that the aggregate statistics fooled the economists and perhaps this is because the Greenspan aura had yet to wear off and inflation targeting was the rage and economists were too eager to confirm their biases either of competitive market forces or effective policymaking.

There is no doubt that there is some truth to the Greenspan idea that deregulation has contributed somewhat to economic flexibility. The European labor market provides that contrast - where employment is more rigid and firing and layoffs more costly. Production is considered flexible if it is able to adjust quickly to demand and supply shocks or if it can switch from producing widget A to widget B in less time. Again there may be some truth in this kind of flexibility with the introduction of just-in-time inventories - although JIT can also be a curse when the supply chain does not function as expected. If this is all there is to flexibility then again the economy really can’t be so flexible that it could have absorbed all those shocks. Something else must have been at work and that something else is still elusive.

For workers, flexibility really isn’t an option, it’s a necessity. If creative destruction could be measured then it is one measure of flexibility. How much creation comes out of the destruction - a flexible economy is one where there is more creation than destruction. As capital is reallocated toward new industries and new jobs are generated how well the destroyed workforce responds will be one yardstick to measure creative destruction. Do the old workers start new companies, acquire new skills and move to other industries quicky? While entrepreneurship does provide one component of creation, the other component - that of retraining workers is less successful. Acquiring new skills and adapting has always been hard and it is difficult to believe that during the Greenspan era this was really happening.

One possibility is that the asset price bubble in particular the dot-com bubble that began in 1995 masked the weakness in the labor (and perhaps the product markets). This was a time when hiring was in such a frenzy - programmers were flipping jobs like homeowners would flip houses a decade later. Even those who weren’t trained as programmers thought they could be programmers and signing bonuses flourished just for finding workers who were willing to be trained.

This is one experience:

  • Skyrocketing salaries resulted in a rash of neophytes entering the software development field with giant dollar signs in their eyes.
  • Internet companies with irrational, unsustainable business strategies built to cash in and hiring at a frenetic pace.
  • You were never more than two degrees of separation away from a tale of some programmer who became an overnight millionaire.  

But the demand for programmers does not only affect their salaries. Without doubt, it would also affect the salaries of production, sales, support and administrative staff and not just those in the IT industry. Just as many of the companies of this era really had no hope of existing beyond their initial venture funding, many of these workers really had no skills to fall back on once the bubble burst.

Those who really could program moved were able to move into other sectors. But the hiring frenzy also tapped into the lower rungs of the ability scale of workers whose existing salaries set an expectation that they were better in their minds than they were in reality. They really didn’t have the flexibility required to move into other jobs. Overall, sticky expectations might have been set.

The history of employment training is one that is littered with more failures than successes. In Big Blues: The Unmaking of IBM by Paul Carroll, in the post-Watson era:

Lucente had few options as he went about expanding the U.S. sales force, because IBM’s tradition of lifetime employment mean that he couldn’t simply hire from the outside. He had to take the people whose programming and manufacturing jobs were being eliminated and retrain them as salesmen. That meant months of schooling and many months more for these people to get comfortable in their new jobs. Even them, senior ex-IBM marketing executives now acknowledge, the quality of the sales force suffered. The say salesmen are born, not retrained. Even if someone was the best plant foreman ever, it didn’t mean he’d ever learn to close a sale. While IBM says it doesn’t keep statistics on how many of those put into the sales force are still with the company, the senior ex-IBMers say that the vast majority of those retrained at such expense have left as the sales force has imploded in recent years. (pg. 163, 1994).

The inflexibility of workers is a constant - retraining is hard. But harder if the job itself is changing or has changed - it may require the use of more specialized tools, the nature of the tasks might have changed and have also become more complex. Consider the administrative assistant or in the early days the secretary. He or she (more likely the latter) was required to know shorthand, take dictation, and type on a typewriter. Today, he or she is more likely not to know shorthand, some dictation but must learn not just how to type in a word processor but also perhaps use PowerPoint, Excel and manage a contact database. Moreover, it is more likely that several people are using the services of one assistant whereas in the past it was almost a one-to-one ratio. The nature of the job has changed and has become more complex.

Throughout the history of economic turmoils, the rallying cry has also been more education (as well as more retraining). The belief was that a college education was necessary for flexibility and in that a liberal arts education that taught someone how to think was more important than teaching specific job-related skills and knowledge. A college student could possibly be all things to anyone because he or she had the general skills to learn new task and job specific skills. This may have been true once but increasingly the question asked is - is it still true?

Consider this article (originally in Time) on the Washington bubble (HT: MR)
Most of the people who have moved to Washington since 2006 have been under 35; the region has the highest ­percentage of 25-to-34-year-olds in the U.S. “We’re a mecca for young people,” Fuller says. One recent arrival says word has gotten out to new graduates that Washington is where the work is. “It’s a place where a ­liberal-arts major can still get a job,” she says, “because you don’t need a particular skill.”

Where education was once the bastion of flexibility, it is increasingly true that the inflexibility of the entire education sector from high costs to irrelevant courses has become a curse for college graduates.

Flexibility of an economy has three components: government (via monetary and fiscal policy), production (the ability to adjust to demand) and labor (the ability to adjust to demand). (Not quite related to the US is also exchange rate flexibility.) Historically, labor has been and still is the most inflexible. While the late 1990s might have provided some government flexibility when interest rates were not at a zero bound and deficits were small this component is period is too short to justify the period of Great Moderation which dates from the early 1980s to the 2000s. Moreover, the production sector was suffering from the onslaught of Japanese competition and had not had time to implement the lessons learned from this competition and the investment in information technology had yet to really pay off in terms of productivity.

While the sources of the moderation will probably not be known it is clear that policy makers and economists were fooled by the aggregate statistics - fooled because after being a dismal science for such a long time, they were looking for something to cheer about. Fooled because they wanted to pat themselves on the back that their theories of market forces and deregulation really could lead to desirable outcomes without knowing fully the paths through which these forces interacted.