You always have a choice

The phrase “You always have a choice” is extremely prevalent in super hero movies. Ranging from Batman Begins to Spiderman 3 to Wolverine. In whatever situation you’re in, you can do the right thing do the wrong thing or through brute force come up with an alternative that you can force to occur. This really epitomizes the rugged individual and the ideal American to some extent. No matter how down on your luck you always have the choice to be or do something better. The GOP really pushes for this, where many of the candidates argue that they were self made men. I think this is also the root cause for a typical response to the 99% protesters (or someone asking for an increase in minimum wage) – “Get a job.” If the choices are get a job, or not work, the C -brute force response now is – “start your own company” or “make your own job.”

Before, you assume I’m just bashing the GOP, this also comes from the left. The environmental movement also assumes this is possible in regard to personal behavior and reducing your carbon footprint. In many cases they assume that it’s easy for people to change their behavior, because they want to protect the environment. If we wanted to we could drive less, we could buy the less impactful light bulb, we could turn off our computers at night, etc, but people are lazy or don’t care.

So, are the GOP and environmentalists right? We’re all lazy and don’t want to make the right choices? That we don’t want to work or that we don’t want to do what’s right for the environment? I think that for the most part neither is true. You will find freeloaders or people that protest saving electricity by turning on as many lights as possible. However, most people don’t behave that way. So what’s the problem? Why do we have uneven unemployment in some areas, why don’t we all work to save the environment?

It goes back the the choices we can make. One of the big assumptions in economics is that the work force is mobile, that when there’s unemployment in one part of the country people move to where the work is. However, we saw that in the US that isn’t true with this recession. The only people moving were migrant workers which may have been illegal. Why? Why wouldn’t someone with no job in California move to another state to find a job? Well some of it comes down to their ability to move. If they own a house and the choice is to lose everything end up in deeper debt because selling your house (if you could sell it) would leave you hundreds of thousands of dollars in the hole with nothing to show for it, do you really have a choice?

In this way our choices are bounded by our situations. A woman may want to drive less because she wants to do what’s best for the environment, but she has a difficult choice. Move closer to work so she could walk and take her children out of a great school and move them into a lower quality school. I think it’s a no brainer which one she would choose. However, let’s say that the schools are the same, her children may not want to move because they’d have to make all new friends. The gains would be very minimal. There are a lot of costs to moving closer to work even if everything else would stay the same. This case also assumes that there’s only one driver. In many cases this choice would involve two people and the trade offs for one driving farther could complete negate the benefits of moving.

Unfortunately, I don’t believe that we are able to make whatever choices we want. Our choices are constrained by the circumstances we live in. There are ways to work around these constraints to improve our ability to make choices, but that is not easy and certainly not free. When we make policies that impact choices and make assumptions about people’s ability to make choices we need to be aware of these constraints and work to remove them.

Business Cash Reserves and Innovation

I found an article on MarketWatch that discussed the fact that the private sector is, in fact, doing just fine. As the author mentioned, this didn’t go over very well whenever Obama mentioned it a few weeks ago. However, he’s right. Companies as a whole are doing extraordinarily well (see graph below), but normal people aren’t seeing it. I’ve discussed this before in a Future of Employment post.

As you can see from the graph Corporate profits are at an all time high. We also know that investments are still occurring in new equipment. We know from the numbers that companies aren’t hiring. I think that the GOP would argue that this is because of regulation uncertainty, which they are contributing to. From what I’ve seen the Democrats don’t really have any sort of good explanation for the lack of hiring. The author of the MarketWatch article claims that companies aren’t spending money on new employees because they are returning most of it to stock holders through dividends or stock buybacks. The data supports this perspective to some extent. Part of it could be the fact that many companies are automating, outsourcing and offshoring all contribute to some level or another.

I think that it’s a combination of these factors plus one other factor. This was added as something as a throw away at the end of the article, but it really stuck with me. “Corporations may be intensely profitable, but they have no profitable ideas about what to do with the vast sums they earn.” This comment is extremely important, especially when you couple that with the article that the Washington Post just published about the difficulty of PhDs finding jobs. 

These researchers are the core of the future for innovation at companies. If companies aren’t hiring these scientists, despite the fact that many claim there are skill gaps, then they are unlikely to innovate moving forward. My old roommate in the Netherlands, Brian, told me that the Holst Centre where he worked created 3 jobs for every employee at their research center. I’ve seen similar numbers in one of my courses as well. 

In this case the trickle down effect actually works. You hire researchers and they need to have technicians building equipment, which needs to order parts and raw materials to build those components. Which requires additional labor elsewhere. While 3 for 1 may not seem like the greatest ratio, those other workers typically make good money and will end up spending money elsewhere.

Innovation drives the economy. Companies need to look at how they manage risk, especially if they are sitting on huge reserves of cash. Putting more money into research for their field can lead to huge disruptions in technology and could lead to an increase in market share.

I will talk more about these risks in my next blog.