Wednesday, March 23, 2011

Breaking: finance professionals don't want to live in Utah

Karl Smith tries to find skills mismatch to answer Paul Krugman's "it's the demand, stupid" story of unemployment, and cites an anectode of Extend Health, a Medicare health insurance exchange firm in Salt Lake City, Utah, which is struggling to find it's ideal candidate: "over 40, with a background of financial services in order to qualify for insurance licensing."

Wait... what??? We have a lack of people in their 40s with finance backgrounds? No, that can't be right. We have too many of them. They are just too busy grabbing bonuses on Wall Street (or have already retired to St Kitts) to bother showing up for an interview in Utah. This is an outrage, but not news: finance, as an industry, has weathered the crisis very well, despite having caused it.

Just goes to show that if only the fall in demand for finance industry professionals were commensurate with the peripheral damage they have caused, if they could somehow be forced to pay for the externalities of their activities, labor market efficiency would hardly suffer.  Of course, were this to happen, we'd have "socialism."

Tuesday, March 15, 2011

Inequality, uncertainty, etc.

I've been pondering lately how it's come about in the U.S. that a person with income in the 95th percentile does not feel rich. There are many angles to see this through. One argument is that someone earning, say, 250K in Manhattan lives in a very expensive place, so isn't really rich, especially if she's got some expensive education to pay off. Another is that the same person's actual and aspirational "peer" group are people that earn the same or a lot more than she, and, to boot, she is likely to be working in an industry where money earned is a primary metric of achievement and so when someone of the same age and similar educational background is making 10x the amount that puts a significant damper on spirits.

So much for the 250K earner then. We don't have to stop there, but let's think of the poor sod making 2.5M. Does he (and it's probably a he) feel any different? Does he feel "rich"? I would suggest that it's unlikely. Why? Here we can go deeper and ask - what is it to be "rich" anyway? From a subjective perceptive (which is what we're talking about, and as opposed to the objective perspective, for which metrics like multiples of median income generally suffice), to feel "rich" is to think that one earns and has in excess of what one needs for the lifetime. This state is a very difficult one to achieve for very nearly everyone who depends on a salary/bonus for a living, and it scarcely matters how much that salary/bonus is - for that salary is seldom assured for even one year hence.

The 2.5M per year chap's problem, you see, is that he has built up for himself, the missus and the Jr. a system of consumption that requires extremely high inputs, and yet his job is such that he can never assure himself of being able to procure the necessary income to sustain this system of consumption, and feels trapped as a consequence. The guy with a $50K per year and a cheap rental will absolutely justly say: well, fuck that guy, his $5 million mortgage, $10K per week summer rental in the Hamptons and the use of a helicopter as occasional personal transport. And fuck his missus too, with her insatiable appetite for $1000 pairs of shoes and $10K handbags. Our Richie Rich, however, doesn't feel that way. He may even comprehend, on a moral level, that his level of consumption is noxious -- but that will not make abandoning that consumption entirely and abruptly any less stressful. Think about it: he may loose that $2.5M income at a drop of a hat, for jobs like his are rarely secure. But his consumption is, in economist terms, sticky, and difficult and even painful to unwind on short notice. I am not asking you to have sympathy for Richie Rich. I am asking you to understand that he too, very likely, mutters to himself, "Fuck all of the other SOBs too, I do not feel secure and have far too little assurance in what the future holds to feel rich enough to share." Less quietly, our Richie Rich will, if he can, lobby his congressman to keep taxes in check - for he needs to squirrel away every dime that is left of his income, after his system of consumption is through with it, to shore up his future well-being.

This, then, is the mysterious uncertainty that CNBC was harping about all of last year. Increasing marginal taxes, in this line of thought, reduces private sector savings of the high-spenders and therefore increases their nervousness/uncertainty in their ability to sustain the same level of consumption in the near and far future. As a matter of social justice, it is very proper to assert that, hey, perhaps this level of consumption should not be sustained. But social justice is very rarely a primary concern for anyone on a personal level, where stability and continuity are paramount and, I think, more important to the level of happiness than the actual level of income (an empirical study on this is overdue).

The same sentiment is also what makes the job of a teacher a "cushy" one in the eyes of the quacks on CNBC. Teachers have what no financier has: stability. It's a lower middle-class kind of stability, but it's stability nonetheless. The social justice argument (a very misguided one) for the Scott Walker-style union busting is that it is unjust for public sector employees to enjoy the level of stability (not income) that they do, and we should strip that away to make society more egalitarian. Nevermind that this just makes the country as a whole a less happy place.

P.S. To be sure, the foregoing should not be new to microeconomics and behavioral economists, who have long known that risk aversion pervades personal desicion-making. But I think that this concept has been very much underutilized in macro analysis and especially in policy making.