Sunday, May 23, 2010

Creative Destruction

The term "creative destruction" was invented by Joseph Schumpeter to explain the upheavals of capitalism as new method and new products displace the old and individual lives are destroyed.

Here's a bit from a NY Times article by Catherine Rampell entitled "In Job Market Shift, Some Workers Are Left Behind":
Many of the jobs lost during the recession are not coming back.


For the last two years, the weak economy has provided an opportunity for employers to do what they would have done anyway: dismiss millions of people — like file clerks, ticket agents and autoworkers — who were displaced by technological advances and international trade.

The phasing out of these positions might have been accomplished through less painful means like attrition, buyouts or more incremental layoffs. But because of the recession, winter came early.

The tough environment has been especially disorienting for older and more experienced workers...


This “creative destruction” in the job market can benefit the economy.

Pruning relatively less-efficient employees like clerks and travel agents, whose work can be done more cheaply by computers or workers abroad, makes American businesses more efficient. Year over year, productivity growth was at its highest level in over 50 years last quarter, pushing corporate profits to record highs and helping the economy grow.

But a huge group of people are being left out of the party.


Economists have seen this type of structural change, which happens over the long term but is accelerated by a downturn, many times before.

“This always happens in recessions,” says John Schmitt, a senior economist with the Center for Economic and Policy Research. “Employers see them as an opportunity to clean house and then get ready for the next big move in the labor market. Or in the product market as well.”


But there is reason to think restructuring may take a bigger toll this time around. The percentage of unemployed workers who were permanently let go has hovered at a record high of over 50 percent for several months.

Additionally, the unemployment numbers show a notable split in the labor pool, with most unemployed workers finding jobs after a relatively short period of time, but a sizable chunk of the labor force unable to find new work even after months or years of searching. This group — comprising generally older workers — has pulled up the average length of time that a current worker has been unemployed to a record high of 33 weeks as of April. The percentage of unemployed people who have been looking for jobs for more than six months is at 45.9 percent, the highest in at least six decades.


Of course, just as there is a structural decline in some industries, others enjoy structural growth (the “creative” part of “creative destruction”). The key is to prepare the group of workers left behind for the growing industry.

“You can bring the jobs back for some of these people, but they won’t be in the same place,” says Thomas Anton Kochan, a professor of management at the Massachusetts Institute of Technology.

The White House has publicly challenged the idea that structural unemployment is a big problem, with Christina D. Romer, the Council of Economic Advisers chairwoman, instead emphasizing that stronger economic growth is what’s needed. Still, the administration has allocated dollars for retraining in both the 2009 stimulus package and other legislation, largely for clean technology jobs.
To the individual steamrollered by history, this isn't much of a consolation. It is like a soldier who loses his life in a war. A personal tragedy, but if you pull the frame back it may represent a war that's been won. Good for society, but a disaster for the individual.

Most developed countries recognize this paradox, so they have a social safety net to protect the innocent victims of an economic recession. But for some crazy reason, the US has a hypertrophied sense of individual liberty and responsibility, so it lets the victims of a big event like a recession suffer alone, usually ashamed for their personal "failings", when in fact the individual is up against the impersonal forces of economic history.

One parting shot: again the Obama administration is showing up a day late and a dollar short. They just don't recognize the wrenching adjustment that this Great Recession is imposing on roughly 10% of the population. I compare this to WWII while 10% of the population was at the front fighting a desperate war risking life daily while the other 90% were at home working -- long shifts to be sure -- but partying, and socializing, and feeling good because times were definitely better than the Great Depression. The burdens of war fell unevenly and unfairly on the generation of young men who fought to save their country for those at home safe from the ravages of war. This current economic storm is very much the same story.

Or... to put it grimly in the words of this article while reflecting on one victim of the financial catastrophe:
With so few local job prospects and most of her possessions of value already liquidated she has considered selling her blood to help pay for the move. But she says she cannot find a market for that, either; blood collection agencies, she said, told her they do not buy her blood type.

“Sometimes I think I’d be better off in jail,” she says, only half joking. “I’d have three meals a day and structure in my life. I’d be able to go to school. I’d have more opportunities if I were an inmate than I do here trying to be a contributing member of society.”
Put that grim reality up against those raking in big incomes while grousing about Obama's socialism, those dead set again any "tax increases" or "big government". They remind me of those partying late into the night in the early 1940s and complaining about gasoline rationing and how tough it was to buy a car or new tires.

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