Retrain or Restrain

In recent blog, I identified one group of economists who believe that what this “recession headed for a depression” actually is… well… it’s just a permanent adjustment – they call it a “reset” – to real and justifiable values. They tell us that cheap borrowed money gave unqualified and imprudent buyers the opportunity to bid up the price of stocks, homes, businesses – not because they were actually rising in value, but because an unregulated market was artificially creating unsustainable demand for assets that really were not, in absolute value, growing. We artificially increased demand with cheap money, while the supply of worthy assets remained at much lower level. Let the market fall, they say, and let the chips fall where they may.

This reset some has truth and some fiction. Some assets actually did grow – many new technology companies, real estate in nice neighborhood near central areas of jobs and businesses in urban areas with real population growth, low margin mass retailers, new forms of entertainment like video games, to name a few – but even these prices were inflated by excess demand.

But the truth tells you that homes, far from urban centers with long commute times created to serve unqualified buyers, financial companies that built their values on buying overvalued assets with cheap money or those that in fact helped generate the cheap money and the unqualified borrowers, and manufacturers (and their retailers) that allowed costs and benefits to their workers to reflect hyper-inflated values are the most vulnerable structures for a permanent “reset.” These are the core “impaired values” that have literally dragged down the economy… not just for themselves, but for all of us.

The March 7^th New York Times tells us that “Across the nation, 19 million houses and apartments — nearly one out of every seven — are vacant, the highest percentage since the 1960s. But only about six million of those homes are for sale or for rent. That means millions more could still flood onto the market, depressing prices further.” They note that most of the currently reported real estate sales are really banks buying homes out of foreclosure.

So if there is a reset taking place, the above arenas are likely to see that downward adjustment as their lot in life for the foreseeable future, we need to address that reality. The government is trying to find that tipping point where they can eliminate as many of these business models constructed on unsustainable growth assumptions from the rest of the economy – a necessary and healthy separation but for one huge variable – jobs. What do you do with the millions of people whose training and livelihoods are in fact based on these real dinosaurs of inflated businesses that really cannot return to anywhere near their prior “values”?

With a seeming monthly job loss adding half a percent point every month, the government’s February unemployment number, 8.1%, show that 651,000 jobs were lost. If you apply what I feel is a better government number to quantify unemployment – the “alternative measurement” which adds those who want jobs but don’t know where to look and those who can pick up part-time or occasional work but want full time work – the unemployment number rises to over 15%. The old recession model just assumed that when times get better, normal employment will resume. But will it?

The March 7^th NY Times provides this perspective: “ ‘These jobs aren’t coming back,’ said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. ‘A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.’… Since the recession began, the economy has eliminated a net total of roughly 4.4 million jobs, with more than half of those positions — some 2.6 million — disappearing in the last four months alone.” And it’s true that extreme financial crisis does weed out those sectors whose time was running out anyway. It always has.

Yet the prospect of millions of jobless Americans with unwanted skills is a nightmare for any politician, and you can only go so far in trying to keep people employed where their business has already met the grim reaper of obsolescence. The American lifestyle most certainly will be downsized for most of us for probably the rest of our lives. Growth will return, but at a more realistic pace (I think we learned our lesson) and from a lower starting point. Green growth, efficient energy use and the elimination of wasteful practices can moderate that contraction, but we are going to be living with less for a long time.

I addressed the financial sector in earlier blogs… proposing solutions, so I suspect that I have to add some clear solutions to this blog as well. The only answer to stem this jobless trend (which includes the quality of the work as well as the sheer number of the employed) is a theme I have been harping on for years: education. We need smaller classrooms, better equipment in the classroom, more “state-of-the-art” training for teachers to prepare them to teach relevant subjects, more hours in the classroom starting at earlier years, and reinforcement in parents of the necessity of an education. We need more post-high school training – not just college but trade schools – and think of the research departments of our best universities as job-creating machines. We also need a massive new commitment to adult education – it needs to be cheap or free, but we have to prepare millions of displaced Americans with relevant training in fields with real potential.

Finally, we need to avoid a litany of bad habits: expelling or suspending disruptive children from classroom (there have to be better alternatives – maybe boot camp – to tossing an unskilled gang member out into the streets with nothing to do but get in trouble), cutting education budgets at the first sign of trouble, funding the rich in the hope (yet unrealized in 30 years of testing) that they will “trickle down” money and jobs to the less fortunate or even the middle class, and reaching to import restrictions and protectionism (which will generate retaliation instantly) instead of deal with the real “job skill” issue. And if we can get “secure” immigrants either with lots of investment capital or serious and relevant education, since they have created 25% of the sustainable jobs in this country in recent years, give them green cards!

I’m Peter Dekom, and I approve this message.