Blue Sky series: The anonymous hedge-fund manager's plan
Late last week, I spoke with former SEIU president and current Georgetown fellow/fiscal commission member Andy Stern about hosting a series of pieces laying out different ideas to kick-start job creation. The idea here is not to see how many compromises can dance on the head of the congressional pin; it's to see what exactly different experts think needs to be done. In Ben Bernanke's memorable term: "blue sky thinking."
The first piece came, naturally enough, from Andy Stern; the second was from Dean Baker, the third from Mark Zandi, the fourth from Heather Boushey, and the fifth from Michael Lind. In the coming days, there'll also be pieces from Rep. Paul Ryan, Sonecon's Robert Shapiro, the Peter G. Peterson Foundation's David Walker and others. Today's, however, comes from the Anonymous (ex)-Hedge Fund Manager. Yes, that Anonymous (ex)-Hedge Fund Manager.
Stop focusing on supply and demand and start thinking about friction and complexity
Anonymous (ex)-Hedge Fund Manager
The debate over how to deal with the country’s unemployment problem tends to decay into a fight over stimulus spending vs. reducing marginal income tax rates. That’s an important question to settle, for sure, but we should not overlook two crucial issues: friction and complexity. We need to find ways to reduce the friction that restrains labor from moving from where it used to be needed to where it could be better employed today. We need to consider that complexity can deter and distort economic activity at least as powerfully as high taxes.
Investment bubbles create derivative people bubbles. The credit bubble led to the creation of too much housing in the wrong places. It also sucked too many people into house-building and mortgage-broking. It lured them to cities that wouldn’t have grown, absent a credit bubble. One approach to dealing with the unemployment that’s resulted from the violent deflation of the bubble is to try to stimulate aggregate demand until all this excess labor is absorbed. Yet it seems to me that the sine qua non of a sustainable recovery and a sustainable rise in employment is a re-sorting of the labor market, a reallocation of labor from the bubble-pumped industries and regions to other uses and other places.
Stimulus will prove a blunt instrument. A new health-care entitlement will stimulate demand for medical services, but it won’t turn Arizona drywall hangers into Texas orthopedic surgeons. That is to say that stimulus might create as much or more demand for labor in sectors and geographies that don’t need it as in sectors and geographies where unemployment is high. This is what Minneapolis Fed President Narayana Kocherlakota was talking about in a speech last month: “Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch —geography, skills, demography — and they are probably all at work.”
Labor needs to transition from where the cul-de-sacs where the bubble perniciously lured to where it can add real value. Unfortunately, there are meaningful frictions that make the industry and geographic transition difficult. Government policy should aim to grease away the friction where possible. Perhaps some fraction of the money and effort expended on providing credit to “keep people in their homes” should be devoted to creating credit products to facilitate mobility — a worker with a job offer in a new location perhaps should be able to borrow against the security of future paychecks. North Dakota has an unemployment rate below 4 percent, while Nevada’s exceeds 13 percent. At what point does a credit policy hell-bent on foreclosure-mitigation become a scheme to imprison negative-equity homeowners in depressed areas, for the benefit of banks?
Transitioning from one industry to another often involves retraining, but many workers have skills in areas unrelated to their recent work. Expensive retraining programs shouldn’t be required just for the sake of a credential. Employers could look past the costly signaling of credentials if they could feel comfortable using tests to identify qualified workers. Maybe the government ought to call off the EEOC dogs with respect to enforcement actions against tests that supposedly have a “disparate impact” on protected classes.
While friction prevents the right labor from getting to the right place, complexity deters demand for it. At the right price, somebody will figure out a use for labor, either through existing businesses’ hiring or the creation of new businesses. Policymakers understand that lowering the cost of labor should incentivize employers to use more labor. What policymakers need to appreciate, though, is that cash costs (wages, taxes, benefits) are only part of the real cost of hiring. The complexity of hiring is a cost. One worries about the costs of firing an employee if that becomes necessary because the hire was a miscalculation or a bad fit. Is this last hire potentially tomorrow’s expensive and distracting lawsuit? Every marginal hire means more compliance costs, more management costs.
Unfortunately, most of the proposals on the table only attack these marginal cash costs – and do so temporarily and with quite a bit of complexity. The proposed investment tax credit has a similarly complex set of rules and eligibility criteria. Complexity vitiates the effect of these incentives.
Long ago, before I became a professional investor, I worked as a management consultant. I took on a project that involved designing a compensation system for a corporate sales force. I devised what to me seemed like an incredibly elegant system, one that took account of all the different ways a salesperson might try to game it, that considered a myriad of contingencies and unusual situations. In the end, my boss said that what I had designed would work wonderfully – to detect if the company had inadvertently hired any robots. For the complexity of the system of incentives outstripped the cognitive capacity of a normal human salesperson to respond rationally to it. Highly targeted and tuned job-creation and investment-incentive programs run into a similar problem.
Policymakers ought to be looking for ways to promote hiring and entrepreneurship that are simple and straightforward; in fact, the ways might themselves take the form of making hiring and employing people simpler, making investing in or starting a business simpler. Reduce the overall cost of hiring and investing by reducing not just cash costs but reducing the risk and stress factor.
Instead of a targeted and time-boxed investment tax credit, just keep it simple and lock in a permanent, low rate for the very long-term capital gains that are associated with the successful start-up. Scale back or get rid of Sarbanes-Oxley, a compliance monster that deters venture capital by blocking the IPO exit. Promoting small-business lending probably won’t hurt matters, but by all accounts the corporate sector is cash-rich. Demand for credit from credit-worthy borrowers is weak. Better to focus on removing non-credit barriers to entrepreneurship. Scrap the new 1099 reporting requirement – starting a small business is scary enough without the prospect of having to track for the IRS every vendor relationship. Instead of giving stimulus money to states to support downward-inflexible public sector wages, give the money to states as grants to replace foregone revenue if the states cut regulatory fees and associated complex paperwork related to starting a new business and occupational licensing requirements.
Debates over economic policy too often get derailed by the extreme reification of theoretic economic concepts. How to make sure our fellow citizens have the opportunity to participate productively through work veers off into a grudge match between “aggregate demand” and “supply-side response.” These great, big high-level constructs merely capture the granular, diverse, semi-rational decisions of millions of human beings. Policy shouldn’t lose sight of the impact it can have at the human scale. Government should work to lubricate the friction that prevents individuals from moving to where their labor can be put to best use, and to reduce the complexity – often exacerbated by well-meaning crisis response – that can prove as costly and job-killing as any tax.
September 16, 2010; 3:49 PM ET
Categories: Blue sky series
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