"Aha" Moments on the Global Financial Crisis

Review of The Unfair Trade: How Our Global Financial System Destroys the Middle Class (New York: Crown Business, 2012), by Michael J. Casey (403 pages)

Let’s get right to the point: this is simply the best book yet on the global financial crisis. If you can only read one book to understand the contemporary global economy, this one should be it. It’s a thoughtful work that deserves more reviews, a wider readership, and better sales (it’s currently at #122,700 on the Amazon sales rankings).

Although The Unfair Trade is less readable than some books on the crisis, it does a better job of explaining how “global imbalances” explain several seemingly unrelated problems. (For example, who knew that Western Australia’s iron ore mines were booming with Chinese demand?)

Granted, Casey’s account is less entertaining than Michael Lewis’ The Big Short (Amazon sales rank #1,244) or his Boomerang (Amazon sales rank #3,732), and it’s less analytical than Nouriel Roubini’s Crisis Economics (ranked #66,794). It’s not as personal as Greg Smith’s Why I Left Goldman Sachs (ranked #17,508), and it lacks the simplicity of Charles Ferguson’s attack on Wall Street corruption in his brilliant film Inside Job. At times, it digresses into finance-speak. But it’s an excellent piece of serious financial journalism, aimed at explaining globalization to readers. Unlike these others, this book makes globalization the central theme, from beginning to end.

Like Thomas Friedman’s The Lexus and the Olive Tree, Casey connects the dots between seemingly unrelated problems, showing how they are all part of a global trading and financial system. Yet he does this by rooting his analysis firmly in real world stories. Unlike Friedman, who tended to confine his interviews to global elites or taxi drivers, Casey tells the stories of ordinary people in China, the United States, Argentina, Australia, Mexico, Indonesia, Iceland, Spain, and Peru. Such stories, featured in each chapter, ground the narrative firmly in the real world and show how the fates of ordinary people are connected to global market forces and government policies. I repeatedly had “aha” moments when Casey linked these stories to global patterns, just as I did when reading Friedman back in the early 2000s. But this is serious journalism for grownup readers, not cutesy punditry.

Throughout the book, Casey aims to explain globalization to concerned citizens like his neighbor, “an avid and thoughtful reader” (p. 1). And Casey largely succeeds in this task. But—beware—you will need to be avid and thoughtful. His style is not as breezy as Michael Lewis' or as punchy as Friedman’s and will require some work. Still, if you can push through some occasionally dense passages in this 400-page tome, you will be rewarded with a grasp of the global economy that far transcends the shallow diagnoses of the Left’s lame Occupy Wall Street movement and the Right’s reactionary Tea Party movement.

The causes of our current malaise, in Casey’s view, go far deeper than greedy bankers (the complaint of the Left) or “socialist” governments (the complaint of the Right); rather, they are the result of a “network of flawed policies that distributes the spoils of integration unfairly, benefiting politically privileged elites and holding back everyone else” (p. 3). What does that mean? Read the book: it's Casey’s effort to explain this complex process of globalization to “everyone else.”

However, anyone who understands this famous (and hilarious!) JibJab video will understand the main elements of Casey’s story:

Six “global imbalances” are central in The Unfair Trade—and in the video. First, as the video puts it, “it starts with sweatshop labor in a foreign factory.” China has a massive pool of cheap labor which is facilitated by China’s hukou system of residential registration in provinces, a system that allows employers to exploit migrant laborers (pp. 80-83).

Second, the massive China advantage in labor markets has created worldwide pressure to meet the “China price”. As the executive in the video sings, “we’ve got to make crap cheap enough to sell to Big Box Mart.” As chapters 2 and 3 of The Unfair Trade demonstrate, the China price has hurt U.S. manufacturers.

Third, nonetheless, “we’re on a shopping spree” buying lots of “cheap crap” (to quote JibJab). Despite the hollowing-out of American manufacturing, American consumers keep on buying stuff. The United States economy is heavily based on consumption of retail goods (nearly 70 percent of Gross Domestic Product is consumption), many from the Big Box Marts of the American retail strip.

Fourth, “with a wallet full of credit cards I never leave deprived,” says the guy in the video. American households have too little savings and rely on cheap credit to keep up with their neighbors at the same time that growth in their real incomes has stagnated (Casey, p. 211). We need that stack of credit cards to pay for the “cheap crap” we buy at Big Box Mart so we can keep our standard of living. But where is the credit coming from? China’s massive exports, high domestic savings rate, and exchange rate controls have allowed its central bank to build up massive financial reserves in the trillions of US dollars, which it uses to buy U.S. government debt or private financial investments. China, among other global savers, fuels cheap credit (Casey’s focus on China is attacked in this rather lame review by Tyler Cowen; if we read "China" to mean the giant pool of excess savings around the world that also includes oil states and other net exporters then Casey is spot-on).

Fifth, like the main character in the video, we put our “cheap crap” in houses that were often financed with cheap credit aided by China. The growth of liquidity fueled a speculative bubble in real estate prices, leading many Americans to believe that their houses would appreciate in value increase forever. When that bubble popped after 2007 and housing prices dropped, many Americans lost immense amounts of personal wealth as the equity in their homes disappeared. Many have been foreclosed, while millions remain underwater, owing more on their mortgage than their house is now worth. Casey’s point is that an excess of global savings from places like China caused ordinary people to drown “in a sea of global financial liquidity” (p. 63). Mortgage bankers, flush with global cash, were lending like crazy into 2008, and far too many Americans were willing to borrow.

Sixth, like the video’s hero, many American workers were downsized out of manufacturing jobs and lost retirement savings. Ordinary workers remain in a labor market characterized by “deflation”—a downward trend toward lower wages and benefits. At the same time, as Casey points out in chapter 9, the Federal Reserve’s strategy of “quantitative easing” (buying U.S. bonds, therefore putting money into the economy) has contributed to inflation of gold prices, financial market prices, and prices within other countries. Quite literally, the Fed became a “global liquidity machine,” boosting prices outside the U.S. and in financial markets but not really contributing to a domestic recovery with job creation. Globalized financial markets make it impossible to limit the effects of Fed policy action to the U.S. economy. Capital flows to wherever it can earn the highest return, anywhere in the world.  

Casey also describes Argentina and Western Australia as winners in the competition to supply China’s soy and iron ore needs (chapter 4), while Mexico and Indonesia lost out in the competition for cheap labor (chapter 5). Iceland forms “both a cautionary tale and a source of hope” for what could be done to reform banks (chapter 7), while the European crisis is “a compelling example of the damage done when domestically determined national policy making is placed in the context of an increasingly integrated and globalized financial system” (p. 301) full of “bond vigilantes” (chapter 8).

The book concludes by imagining four scenarios—a Euro crisis, a China crisis, a dollar crisis, and a trade crisis—before laying out a set of twelve modest policy suggestions that could begin to prevent any one of these crises from bringing down the world economy.

I am seriously considering adopting this text for my International Political Economy class. It’ll be a bit of a slog for some undergraduates, but it’ll be worth it for those “aha” moments. 

Inside the Great Vampire Squid

Review of Why I Left Goldman Sachs: A Wall Street Story, by Greg Smith (New York: Grand Central Publishing, 2012)

Earlier this year, Greg Smith, a young financial industry executive, announced his resignation from the giant Wall Street firm Goldman Sachs, where he had worked for twelve years, mostly in New York. But he didn’t send his Goldman supervisors a standard resignation letter.

Instead, he worked secretly for months on an essay “to distill into simple terms exactly what I felt was wrong” (p. 236). After confirming Smith’s story, The New York Times published the essay just days after he cleaned out his desk late on a Saturday night. (Readers of this blog might recall this posting about the op-ed on the same day it came out.)

Smith writes that “Goldman would later tell me they had surveillance video of me walking out the front lobby with my box and backpack. They thought I had larceny in my heart, when all I had was freedom” (p. 243).

Smith’s ticket to freedom--the op-ed piece explaining why he was leaving Goldman--attracted so much attention that he was reportedly offered a $1.5 million advance to publish a book.

But reviews of his quickly published memoir have been mixed. The New York Times’ James Stewart complained that it “was curiously short on facts.” Not surprisingly, The Wall Street Journal sided with Goldman Sachs and said that Smith deluded himself into “taking his dissatisfaction [with his pay] as a betrayal by the firm he loved”—something that Smith explicitly denies (p. 241). Forbes said that his “story just doesn’t add up” or “make any sense.” These judgments, as I’ll show, are unfair and miss the point.

Instead, I think this book is an interesting glimpse inside a company that Rolling Stone magazine’s Matt Taibbi famously called “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

BusinessWeek’s reviewer, Bryant Urstadt, offers a more sympathetic reading, comparing this Wall Street memoir to Michael Lewis’ Liar’s Poker, a tell-all story of Lewis’ time at the former Salomon Brothers company that I described last year as “a hilarious send-up of the big shots who ran Salomon by someone who saw their greed and recklessness firsthand. Lewis was close enough to be on the inside, but critical enough to keep his distance; his account turns out to be a readable introduction to Wall Street, specifically the bond market, in the 1980s.”

Like Lewis, who was an art history major at Princeton, Smith was recruited out of an elite school (Stanford). But Smith was an economics major who was passionate about comparative advantage and about making money. Lewis, the liberal arts student, by contrast, seemed unimpressed with money and bemused by investment bankers.

Lewis was also modest about his own ambitions as a twenty-something young person. Greg Smith, however, comes across as an earnest over-achiever who was proud of making it in the competitive world of Goldman Sachs. To cite one example, he stresses how rigorous the recruitment process was, pointing out that only 2.2 percent of people who apply for internships or full-time positions get an offer (p. 9). He was clearly pleased to be in the 2.2 percent. By contrast, Lewis “takes his own advancement as a sign that something’s not right at Salomon Brothers” (to quote Urstadt's review). A little humility would have helped Smith’s case.

And he’s not nearly as entertaining a writer as Lewis. Smith narrates at least two brief conversations with Goldman big-shots happening at urinals, and it just sounds weird. Lewis, a born storyteller, would have made more of this material.

Whereas Lewis quits after seeing the absurdity of Wall Street’s bond market, Smith only gradually sees Goldman’s greed and ethical shortcomings. For years, he doesn’t ponder the absurdity of profiting from complex financial instruments that few people understood. Instead, he was so gung-ho about Goldman that he did corporate recruiting for them.

Still, even if it lacks drama, Smith’s story of growing disenchantment with an employer he loved does tell us something about Wall Street's role in the global financial crisis. We can profitably read Why I Left Goldman Sachs as an accurate picture of a typical young person who entered Wall Street in the early 2000s. And we should read the details, while not bombshells, as significant indicators of the corrupted culture of Wall Street, from a highly sympathetic source. 

What follows are a few glimpses inside the “great vampire squid’s” way of doing business, by one who was there and saw how it contributed to the global financial crisis.

Goldman Sachs became a hedge fund rather than a trustworthy adviser. A number of reviewers have glossed over this important point, but it seems central to Smith’s departure. As he puts it, “a fiduciary stood in a special position of trust and obligation where the client was concerned. This role was applicable when the firm was advising the client about how the client should best invest its money versus pushing the client into investments that generated the largest fees. . . . This ideal of doing what is right for the client, and not just what is right for the firm, was there, prescribed in the 1970s by former senior partner John Whitehead in his set of 14 Principles” (p. 111).

So what had changed? Goldman had been privately held until 1999, and its partners could maintain control of the firm. Once Goldman went public, issuing stock in 1999, the pressure to generate ever-higher profits increased, and the partners lost control. Instead of investment banking, “proprietary trading” became the profitable service to sell. And sometimes Goldman would become a co-investor in such trades. “In the old days,” writes Smith, “the firm would advise a client to invest its own money in something; in the new universe, the firm could now invest its money in the same thing” (p. 113). The problem, however, was “when the firm changed its mind (or masked its intentions) and made a bet in the other direction from the client’s” (p. 113).

In other words, Goldman might advise a client to buy into a complicated scheme and then turn around and bet against that scheme. Such conflicts of interest became more common, but Smith trusted his bosses “for a long time” (p. 114).

By the end of 2008, however, Smith says that he was growing wary of a corporate culture that promoted a trader to managing director who was gouging clients (pp. 154-55).

When Senator Carl Levin of Michigan held public hearings in 2010 on a famously “shitty deal” that Goldman advised its clients to buy—the perfect example of a conflict of interest and what Goldman called an “axe” (see below)—Smith watched them on TV in Asia, where he met with a client the next day. When the client said that he couldn’t trust Goldman, Smith’s instinct was to think of how to fix the problem (p. 186). But the high-level Goldman partner working with him didn’t seem to care and was only interested in making money in the short-run. “Maybe this was an isolated example, but it was not what I expected from a partner” (p. 187).

However, other evidence from the book suggests that this was not an isolated example.

PATC meetings or Bonus Day

Smith explains how a ten-minute meeting each December would decide each employee’s Per Annum Total Compensation (PATC). Informally, Goldman people called the ritual Bonus Day. As he puts it, “there was an absurd amount of emphasis placed on these meetings. For many people, the session determined a person’s entire self-worth” (p. 119).

On Bonus Day 2006, when he was in his mid-20s, Smith was told that he would make “close to half a million dollars” (p. 119). And, even though he had also been promoted to becoming one of thousands of vice presidents, he was disappointed!

Later, he describes how the compensation system became “largely mathematical: you were paid a percentage of the amount of revenue next to your name” (p. 233). Naturally, “the problem with the new system was that people would now do anything—anything—to pump up the number next to their name,” which poisoned “young minds” (p. 233).

An excessive focus on individual compensation, regardless of how well you served your clients, surely helps to explain the problem, even at Goldman, which was widely considered to be the best-run, most ethical Wall Street firm. No less than authority than Nouriel Roubini contends that compensation was a root problem in the crisis (Crisis Economics, pp. 68-69, 184-91).

Even if Smith is motivated by sour grapes, which he denies, the problem of compensation, attached to booking profits without regard to consequences, remains.

Elephant Trades and GCs

Amid growing uncertainty in 2007, Smith also explains a growing emphasis on making huge “elephant trades” that made Goldman a million dollars or more in profit. “When you executed one of these trades, the revenue would go next to your name in the form of a gross credit, or GC” (p. 126). Later in the book, he describes the focus on GCs as corrupting Goldman’s culture (pp. 190, 229, 234). He tells how his supervisor, Georgette, came to his desk and said, “The only time I want to hear from you is in the form of a one-line email that states how the big trade was and what the GCs were” (p. 225). This emphasis confirms the impression that profit crowded out care for clients and corroded Goldman’s organizational culture (Smith’s primary grievance).

While others think Smith is naïve to complain about this—we are talking about Wall Street after all—he is documenting an important shift in Goldman’s culture. And it’s a story connected to larger cultural shifts (from Enron to professional sports and beyond). As profit becomes everything—or the only thing—communal trust is corroded. 

“Structured derivatives” and selling tuna

Smith describes how the complex financial products called derivatives could harm real people. For example, the city of Oakland bought a swap from Goldman that was designed to hedge against interest rate increases. “The product ultimately backfired, and is now costing the city millions of dollars” (p. 152). He likens Goldman’s sales of derivatives to a company that sells tuna:

The can clearly says, “Bumble Bee tuna,” and features a cute little logo. You go home, and most of the time you enjoy some delicious tuna. But let’s say you get home one day and find dog food inside the can. How can this be? you wonder. They told me it was tuna. But then you look at the back of the can. There, in print so tiny as to be almost unreadable, is printed something like “Contents may not be tuna. May contain dog food.” (p. 153).

Unfortunately, “most clients pay as close attention” to “the fine print of the ten-page disclaimer at the end of the contract” as “you do when you hit the Accept button before downloading music from iTunes”(p. 153).

Clients beware?

A reasonable person might therefore counter that buyers should be aware of what they are buying, especially when they are investing millions of dollars in pension (or other) funds for someone else. But Smith contends that Goldman preyed on the “Client Who Doesn’t Know How to Ask Questions.” Such clients were “the perfect target to sell a type of derivative known as an exotic—a very complex product that could be made to look much simpler for the client when dressed up with enough bells and whistles as a structured product” (p. 163). In other words, they were buying tuna cans that might have dog food in them, but they had no idea.

Smith says that some of these clients would end up on Goldman’s top 25 clients list, as ranked by the fees they paid to Goldman. “There is something highly disconcerting,” he writes, “about seeing a global charity or philanthropic organization or teacher’s pension fund in the top twenty-five of a firm’s clients” (pp. 163-64). In other words, Goldman profited from the naïveté of these non-profit clients.

Selling Axes

Smith says that he was bothered by pressure to sell risky investments or positions that Goldman wanted to axe from its books, even though it knew that these investments would harm clients. Here’s how Smith nicely describes the problem:

The firm believes, deep down, that one outcome is going to transpire, yet it advises the client to do the opposite, so the firm can take the other side of the trade and implement its own proprietary bet. One way to understand this is to think of selling donuts. Say you own a Krispy Kreme doughnut store, and you have too many doughnuts in stock and need to sell them before they go bad. In order to drive up sales, you could say “Our doughnuts are fat-free!” That would technically be a lie, but it wouldn’t get you sent to jail. It might open you up to legal action, but who really wants to go to court? Suddenly people would be rushing in to buy these delicious Krispy Kreme doughnuts, convincing themselves that if a brand as reputable as Krispy Kreme is saying the doughnuts are fat-free, then it must be true. Axes are something like surplus Krispy Kreme doughnuts that Goldman wants to clear from its inventory, making a compelling, but not always completely accurate, case for clients to buy them. (pp. 230-31).

The most famous axe of all was the notorious Abacus/Timberwolf deal made famous by Senator Carl Levin in the following interchange with Goldman witnesses.

The problem with this deal was that Goldman could “see what both buyers and sellers [were] doing” (p. 185). It knew that the Timberwolf investment was a bad one, and advised clients to buy it, yet at the same time that it was also betting its own money that Timberwolf would crash in value.

This problem of “asymmetric information” means that Wall Street firms like Goldman are like casinos that can “effectively see everyone’s cards” and even determine which cards you get (in complex, unregulated derivatives. “Certainly not much scope for the casino to lose in this scenario” (p. 248).

Working in London, Smith was involved in selling dubious products akin to the “fat-free” Krispy Kreme donuts to “the national banks of sovereign nations, countries with millions of citizens who were depending on their governments to get their shit together” (p. 232).

Goldman Sachs’ behavior had terrible real-world consequences for governments in Europe and around the world. Ripping off these central banks is hardly ethical business, and Smith is right to be upset about this.

A whitewashing self-study

Smith describes how Goldman went through a year-long Business Practices Study, ending in January 2011, which appeared to be more of an exercise in PR and spin than a genuine attempt to learn lessons from the crisis, dashing his hopes (pp. 192, 218-19). In a follow-up seminar to discuss the study a few months later, Smith says that he suggested to a high-level partner that managing directors needed “to be held accountable” and reforms be put into practice, but the partner “looked at me with a blank stare and nodded wordlessly, almost robotically” (p. 230).

We shouldn’t be shocked that Goldman failed to police itself as it ripped off its own clients. “This was happening all over Wall Street,” writes Smith, “but Goldman Sachs was supposed to be a leader” (p. 241).

Or maybe it really was just a huge vampire squid.

Either way, Greg Smith is free now.

Mashup: Twitter, Celebrities, and the Middle East

First it was Paris Hilton and now it's Kim Kardashian. When reality TV celebrities with Twitter accounts are unleashed on Middle Eastern shoppers, you can expect controversy. But this is not a simple story of hatred of the West. Rather, globalization is the issue.

In case you missed the last week's worth of celebrity news, Ms. Hilton and Ms. Kardashian are both branching out into global retail. Neither of them, however, expected to generate a backlash when doing PR for new stores opening in the Arab world. But they did.

When Ms. Hilton recently tweeted, "Loving my beautiful new store that just opened at Mecca Mall in Saudi Arabia!", she immediately generated a firestorm of comments against the commercialization of the holiest site in the Islamic religion. It's true: the Saudi regime has allowed all kinds of commercial development within the precincts of the holy city, and this is actually the fifth Paris Hilton store in the country.

"Everything that is holy is profaned," wrote Marx and Engels. But even they might have been appalled by this extension of global commerce into sacred territory.

 And now Ms. Kardashian has provoked a demonstration in the tiny island state of Bahrain, where she was invited to promote the opening of a new store in a chain that sells milkshakes. When she arrived in the country, she tweeted, "I just got to #Bahrain! OMG can I move here please? Prettiest place on earth!"

Despite this seemingly positive spin on Bahrain, Ms. Kardashian's visit generated protests, which may have required some tear gas to be put down.

Why would her visit provoke a riot? Do Bahrainis hate reality TV or milkshakes? Wouldn't they be flattered that an American celebrity loved their country? She also visited Kuwait, and there were no protests there.

Well, it turns out that Ms. Kardashian was being attacked on Twitter by Amber Lyon, an ex-CNN journalist who reported some of the most damaging stories on the Bahraini government's crackdown on pro-democracy protesters and who won a number of admirers among the Bahraini opposition. Ms. Lyon's take helps us understand how Bahrainis might see it.

Here were Ms. Lyon's responses on Twitter, escalating the rhetoric:

• Kim K doing more PR for dictator RT: "@KimKardashian:Thanks Sheikh Khalifa for your amazing hospitality.I'm in love w/ # Bahrain

•  .@KimKardashian's tweets supporting #Bahrain regime are so ignorantly reckless, she is now complicit in doing PR for dictators 

• Hey @KimKardashian , how much money did oppressive #Bahrain regime pay you to laud them all day to ur 16.7M followers? #PR4Dictators   

• Hey @KimKardashian ,since ur now 'besties' w/Bahrain dictators, plz ask them to stop torturing & murdering journalists, doctors. Thx. 

My guess is that Ms. Lyon's efforts helped to spark some of the outrage, although Ms. Kardashian's utter ignorance of Bahraini politics may have been enough.

Either way, however, Twitter is helping to fan the flames of  existing conflicts, speeding up the response of audiences across the world. And if nothing else, this silly little media firestorm illustrates the globalization of media.

We live in a crazy world.

A Visit With Friends

Readers of this blog may recall how, during the so-called Arab Spring, our Bahraini friend, Shubbar, was first arrested and arbitrarily detained, only to be released after fifty days, by which time the government of Bahrain had arrested his father-in-law and two brothers-in-law.

Yesterday, even as Hurricane Sandy was blowing in to our region, we had the privilege of meeting with him and his wife, Hajar, for an all-too-brief lunch here in the States. And we are delighted to report that he and the family are doing very well. Shubbar is enjoying his freedom.

However, his father-in-law received a ten-year sentence from the Bahraini government last year--merely for expressing his political opinions non-violently. Hajar and Shubbar are trying to tell their story and raise awareness of what the government of Bahrain is doing to continue to crack down on the majority population of the country (the Shia, who make up around 60-65% of the population).

Whether Romney or Obama is president for the next four years, I hope either administration will put pressure on the Bahraini government for its ruthless crackdown on peaceful dissent in the spring of 2011. 

Hajar's father's case is being appealed, and there is a chance that a judge might release him or reduce his  sentence. That would be a good sign for the future reconciliation of the Bahraini people--something we should all hope for.

Upward Mobility in America? Maybe Not.

Inspired by old Horatio Alger tales, Americans tell themselves that anyone can work hard and succeed here. But is that true? 

One of the most important policy questions for the United States is whether young people from less-privileged backgrounds have the opportunity to go to college. All they need is pluck and determination. But is that true? 

Looking globally, Americans also think that upward mobility is more common here than in old Europe, which traps people in dependency on government welfare states. Americans tend to think that the European countries have static class systems that keep people in their place, while we have an open system that allows people to rise or fall based on individual accomplishments. But is that true?

Maybe not. A recent report on education from the Organization for Economic Cooperation and Development (OECD), which is basically an international club of rich country governments, suggests that the United States lags behind other wealthy countries in educational opportunities for mobility. 

Consider the following striking chart from the OECD education report (on page 102 in the original PDF).

This is a complex graphic, so here's the official OECD explanation for how to read it:

The chart shows the odds of someone from a low educational background attending higher education. The odds ratio is calculated by comparing the proportion of parents with low levels of education in the total parent population to the proportion of students in higher education whose parents have low levels of education. Taking the results for the United Kingdom as an example: 25% of all students in tertiary education have parents with low levels of education (light blue bar), while 42% of the parent population have a low levels of education (dark blue bar). This results in an odds ratio of 0.61 (dark triangle). If young people from a low educational background in the United Kingdom were as likely to attend higher education as those from more educated families, 42% of the student population would come from low educational backgrounds, giving an odds ratio equal to 1  (p. 102).

Now let's look at the United States (on the far right hand side of the chart). Roughly 18% of the population of parents in the United States has a low level of education (defined as not completing high school). But only a tiny percentage of this group's kids--kids who are now between the ages of 25 and 34--have gone on to participate in higher education. Now, in fairness, the report adds a note that Australia, Canada, New Zealand, and the US may be under-reporting their numbers, so they could be skewed low. We should also look at historical trends.

But the larger point remains, and the numbers reinforce common sense: in the United States, if your parents dropped out of high school, it is highly unlikely that you'll go on to college. 

And we're not even talking about completion of a degree program (whether a two-year associate's or  bachelor's). Even if a child of high school dropouts starts college, it is unlikely that he or she will finish. Across the whole OECD, an average of only 20% of the kids of high school dropouts ever get a post-secondary degree, and the US, Italy, Portugal, and Turkey fall well below this average. In fact, according to the report, over forty percent of the current batch of children of high school dropouts (currently aged 25-34), in both the US and those other three countries, haven't even completed high school themselves!

From firsthand experience at universities like my own, faculty and staff know that many "first-generation college students" (which includes children parents who have finished high school and/or completed some college classes) struggle to figure out how to navigate the system and graduate within six years. 

Responding to these concerns, the Gates Foundation recently funded a website that focuses on college completion. The idea is to figure out who is doing well and who is doing poorly at getting their students to finish with a degree. If completion is the goal, why not focus on measuring it?

Imagine yourself as a poor American kid from the country or from the city whose parents dropped out of high school. You hear people telling you to work hard. But you're in a school system that lacks resources or in a family that is struggling to get by. You can succeed, but only against a host of sociocultural forces working against you. You don't Horatio Alger tales; you need major support.

The contentious debate over "education reform" is driven partly by a desire to help kids like this, partly by a desire to promote justice and equal opportunity, and partly by a desire to gain economic competitiveness in an age of fierce competition and globalization. 

No matter the motivation, Americans have a lot of work to do in making the rhetoric of upward mobility a reality. 

The Outsourcing of Labor and Dis-Integration of Production

Yesterday was Labor Day--a great time to pause and think about how work has changed from the good old days of unions and posh benefits. Outsourcing and global production have undermined corporations and workers alike. But they empower those who can take advantage of the new game.

The extreme edge of this new game can be understood in a provocative thought experiment posed by professor Gerald Davis of the University of Michigan Business School in a recent conference paper (thanks to this New York Times blog for first alerting me to the paper). Professor Davis imagined how you could create a killer new iPhone app called "Remote Drone Assassin" along with actual drones that you could sell to mercenary companies, "without leaving your couch."

First, he wrote, you could go to the Plug and Play Tech Center and rent a  desk and fancy mailing address. (Why bother with a real corporate HQ?)

Second, you could "incorporate online in Liberia for $713.50" through the Liberian Registry site. (Who needs lawyers in Delaware?)

Third, you could fund your idea through the crowdsourcing site Kickstarter. (Who needs venture capital anymore?)

Fourth, you could hire programmers to actually design your software app through ODesk, "the world's largest and fastest-growing online workplace." (Who needs to hire people you even know?)

Next, you could hire a low-cost Chinese manufacturer to make your drones through Alibaba.com (Who needs to make it at home?)

If you don't want to sell through the Apple Store or Amazon, you could arrange payment through Square, which allows you to charge credit cards through your iPhone or iPad. (Who needs to work directly with the credit card companies?)

Finally, when it comes time to ship the goods to the mercenary company, you could use Shipwire. (Why bother with the biggies like UPS or FedEx?)

You never left your couch, and you managed to employ a bunch of subcontractors to bring your drone and its app to market. Still, what have you actually contributed to the US or world economy? Did you actually work? You never left your couch.

An extreme scenario, perhaps, but it illustrates the loss of the ideal of craftsmanship--the satisfaction of being involved in the whole of a process, from beginning to end (a key theme in chapter 5 of my book). Professor Davis' scenario also helps us understand the puzzle of the jobless recovery. Profits and economic growth occur all along the way, but no U.S. workers are employed. Except for maybe one couch potato.

Thankfully, this is an absurd extreme, but it does suggest that if we are not careful we may outsource ourselves to death.

Jobless Economic Growth?

Note: This blog took an unofficial summer sabbatical, but I hope to start posting again as the school year gets rolling.

Why does a company like Apple boom at the same time that few jobs are being created?

Over the last few years the U.S. economy has been growing (according to GDP figures) and corporate profits have been solid (record-setting, in Apple's case). But job creation is stagnant. What gives?

One big reason is the spread of automation, outsourcing, and cloud computing (using networks of others' computers to complete tasks). Today's New York Times ran a prominent  story on Amazon's cloud computing services with two rather telling quotes in it.

First was a quote from the founder of a young company called Cue, which scans huge amounts of data and provides personalized services with it. Its founder said,

I have 10 engineers, but without A.W.S. [Amazon Web Services] I guarantee I’d need 60,” said Daniel Gross, Cue’s 20-year-old co-founder. “It just gets cheaper, and cheaper, and cheaper.” He figures Cue spends something under $100,000 a month with Amazon but would spend “probably $2 million to do it ourselves, without the speed and flexibility.”

So his company may become profitable (as will Amazon) but he can employ a fraction of the engineers he once would have needed.

Another quote reinforces the point. This was from the CEO of Good Data, a company that sifts through data to help with sales:

“Before, each company needed at least five people to do this work,” said Roman Stanek, GoodData’s chief executive. “That is 30,000 people. I do it with 180. I don’t know what all those other people will do now, but this isn’t work they can do anymore. It’s a winner-takes-all consolidation.”

From 30,000 to 180. And we wonder why profits and unemployment (even among tech-savvy groups like engineers) are both up at the same time?