Wednesday, November 5, 2008

Why Would You Want This Job?

Those of you who pall around universities are no doubt aware of the insanities of getting a job. Few people really know what they want to do, and so end up following whatever career bubble is big at the moment. Of course, the econ majors look at all sorts of highly unpleasant jobs with mediocre hourly wage. Private Equity is a big job opportunity here, and I think the following quote is priceless:

First Year #1: "Did you hear about the [big foreign bank] presentation yesterday?"
First Year #2: "No."
First Year #1: "This managing director is up in front of the podium answering a question about work-life b
alance someone asked, the junior guys are sitting in chairs on the stage behind him. Fifteen, maybe twenty seconds after the question one of the junior guys literally passes out and falls out of his chair onto the stage. They called the paramedics and everything. It was crazy."
First Year #2: "Is h
e ok?"
First Year #1: "Fine, apparently. Exhaustion. Just got off the plane from London, no sleep for a week because of a deal he was working. Right after the man
aging director just talked about how great the work-life balance is."
First Year #2: "They have a London office? Are they hiring for the Londo
n office?"

I wonder about this in the context of politics sometimes. The benefits of entering politics are obvious; Brooks has some good pieces on the massive ego involved. But, especially today, the costs are also apparent and sometimes you have to wonder why anyone would ever want to deal with certain problems.

Consider the problems facing the US Government. For one, the public debt has topped $10 trillion with no end in sight. This is not quite so horrible compared to other countries, but pretty bad nonetheless. This will be an enormous problem looking forward, as expenditures are headed steady upwards and revenues are so-so.
A huge problem that's going to hit the Obama Administration is something I've worked on a bit in my day job--the upcoming failure of Option ARM loans. These were really some of the worst structured products developed lately; the premise being that you can pay less than a normal loan balance because house prices only go up. Seriously. These people are going to wake up in 2010-2011 with loans resetting, balances well in excess of housing prices at the absolute bottom, and they're going to walk away from their homes in droves.

Below is a picture of the federal budget, and you can really see the impact of GWOT and the sprawling DHS on government spending on the defense side. Obama will most probably find it difficult to meaningfully cut this issue. He's stated that he'd like to add more soldiers, and the Democrat measure of doubling down in Afghanistan will probably be expensive as well, as that country is dying. Some sort of political compromise with the Taliban would probably be cheapest, but would also be hard to sell. It's almost certain that another crisis will emerge in the next four years;
Iran failing, further problems in Iraq (which, really, the US can't reasonably abandon responsibility for), Afghanistan, or ongoing problems in tribal Pakistan. One of the biggest issues with military spending is the unofficial agreement of military branches to split spending in equal ratios among the Air Force, Army, and Navy. This is horrible for all sorts of reasons, as the demands on the Army have never been higher, while there are really no peer competitors against the US Navy or Air Force. It's unlikely that we're going to see another Bill Clinton-style peace dividend.

The cost of health care is also expanding at insane rates. Of course, there are all sorts of great consequences of better health care. But the marginal dollar spent on health care has very little value added. Spending on healthcare varies dramatically around the country, and it's not clear that these variations explain different health outcomes. And, of course, health and lifestyle issues are more important to health than medicine. Doctors are essentially handing out different treatments for the same conditions with little concern for cost or efficiency. The evidence-based medicine movement sounds great, but will probably have little actual impact on lowering costs.

The rising cost of healthcare is leading to one of America's two entitlement problems; the exploding cost of Medicare/Medicaid. Obviously projecting straight-line out might not be the most reasonable estimate, but the government will have to take up more and more of the slack as private and employer insurance markets unravel. These programs alone are tens of trillions in unfunded liabilities; add to that several tens of trillions more for Social Security.

There are really two big ways of restraining health costs--consumer choice (as in Singapore) or government rationing, and Obama has really failed to endorse either. You can read this endorsal of Obama's health care plan, which does have some things going for it. But to imagine that a "technological revolution," or paying for results (which they do in Britain, if I'm not wrong, with the result that doctors game the system) will do anything about the trajectory of health care costs is silly. All sorts of health care systems work in other countries, but the likely path of American health care will likely follow Massachussets--a greater role for the state, more penalties on employers for not providing coverage, and higher costs. Maybe this is about what we should be doing; I just don't want to be the one to figure out how to pay for it. Payroll taxes to pay for social security and health spending is probably the worst way I could imagine to do so.

It's also shaping up how that fleecing the rich bit isn't a great response. It's unlikely to happen soon anyway, the country being in recession and all. But as the Federal Government depends largely on rich people for funding (and especially, post-2003 or so, on capital gains taxes), you have much less revenue when the ranks of the richest are decimated.

So there are long-term and short-term problems. The long-term ones are more severe, but America is perhaps better placed to deal with them than other countries. A culture of entrepreneurship, relatively free markets, etc etc all boost America's productivity with respect to zombie countries like Japan or Italy, which are looking at large swaths of industry which are globally uncompetitive, massive debts, large government involvement in the economy, and of course that looming demographic death spiral combined with xenophobia towards the immigrants that could otherwise save their economy.

The short-term really depends on events in the next four years. In one scenario, the economy dips, but recovers in time for Obama to be hailed as a Democratic tonic to the failed Bush-Kirk policies. In the other, things continue to get worse globally, finance takes its time coming back, and the recovery in the rest of the economy becomes jobless. The cost of foreign crises and domestic bailouts both wrecks the economy while derailing Obama's broader domestic agenda, which was basically premised on the notion that the big thing wrong with the economy was the excessive share of income going to the rich. Another energy crisis is also possible; is there really that much more oil production now than six months ago? Housing remains shot while the option ARM folks default as well.

What can the Federal Reserve possibly do? Interest rates are going to remain low for some time. Boosting the money supply--at a time when there is plenty of money waiting on the sidelines--will encourage further speculative bubbles and lead to an eventual crisis in inflation that can really only be solved by Vockler-style massive rate increases. The impact of interest rates in the upper teens will be not be good on a highly indebted consumer base suffering a bad recessing following a so-so decade, and even if this happens on more of the "upswing" portion of the recession. The European consumer base was never that strong, and at some point American consumers are going to have to start saving if they want to enjoy their (longer and longer) retirements. Where will the recovery come from? Of course, Chinese consumers appear to be using some of that cash they've been saving, and the government there also has plenty of cash, though there's plenty of pessimism in that part of the world too. But much of any sort of surplus sales there generate will presumably flow to corporate profits. After all, the factories are all there; excess rents will just be repatriated as manager compensation. Other emerging markets are facing all sorts of currency and sovereign debt crises, while the commodity producers aren't doing too great.

And once we purge the bubbles out of our system, what sort of "real" substantive employment is going to take place? Who could possibly be hiring in three to four years? Much of the job growth in the last eight years--such as it was--was driven by construction (real estate bubble) or finance (real estate and stock bubble). Of course, infrastructure and alternative energy are always mentioned. I suspect they will turn out to be new government boondoggles that further destroy the budget. William Bernstein makes the point that there's no real economic law that says that technology needs to improve jobs. After cars made horses obsolete, they died off by the millions. It's hard to guagethe demand for American unskilled labor the future, but it's hard to imagine a scenario in which it goes up that much; so presumably that whole sector of the country will kind of stagnate, clinging to their guns and so forth.

Again, a lot of this depends on timing. Best case scenario for Obama: Things start improving by the time 2012 rolls around. That really is a long time; it was hard in the 2002 recession or 1992 bust to think of things improving, but of course they did, because the fundamentals of the American economy were, and are, strong. Of course, neither of those times during a period of global problems and credit issues. But if things don't start to get better, I expect to see ads about the Obama-Kirk economy pull in a wave of populist, social conservatives into office.

1 comment:

Dan Balck said...

I think you managed to confuse the public debt, which is about 10 trillion, with the budget deficit, which is a little over 1 trillion. although, according to the white house, our 2008 deficit is only 239 billion.

im glad youre an econ major, this stuff can get pretty complicated sometimes. if you want some help on your homework, just let me know.