Richard Zeckhauser on Jobs, Inequality and Preventing the Next Financial Crisis

September 2015. GrowthPolicy staff members Jennifer Nash and Devjani Roy interviewed Harvard Kennedy School Professor Richard Zeckhauser, focusing on the three key questions which motivate the GrowthPolicy website. Below is an edited version of Professor Zeckhauser’s comments.

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Where will the jobs come from? | What should we do about inequality? | How to prevent the next financial crisis?

SECTION 1: Where will the jobs come from?

 Key points and recommendations.

1. Being adaptable will be a key capability for the workforce of the future.
2. The lifetime job in one workplace is going to become a rarity. Multiple short- or medium-term positions in different organizations will be the norm.
3. The future is always difficult to predict but particularly so for labor markets.
4. Learning how to make decisions effectively in a highly uncertain world is a critical life skill; it should be taught to the next generation.
5. Recommendation:
• For individuals whose job prospects are weak, create a standardized skills development-and-certification program, skills that are not proprietary to any employer. Such skills, including showing up promptly and regularly for a recreational program, working as an altar boy, demonstrating capabilities in using the Internet, might be thought of as merit badges. Certification of past employment, even for the lowest-skilled workers, could come via an electronic resume based at a minimum on tax records and on merit badges earned. Dead-end jobs are not dead-end if they help climb the next rung on another ladder, as low-level recorded employment would do. The goal: To incentivize and help workers to develop a portmanteau of transferable skills that apply to any job.

This is a difficult question to answer because we’ve frequently been wrong in the past. Think, for example, of today’s severe teacher shortage whereas there were few teaching positions a few years back. The world, in many respects, is very hard to predict; that is why I support teaching probabilistic decision-making skills to the younger generation, starting in elementary school. There are some jobs for which you train and the skills are not very useful for other positions—i.e., they’re not transferable. If you train to become a professional basketball player or a physical therapist, those are the only jobs you can do. But for the vast majority of jobs, you just perform in a job. So you want people who build a resume, act responsibly, speak well in meetings, have some type of technological capabilities, and are flexible and adaptable. These are transferable skills useful to any position.

Twenty or thirty years ago, people took a job and, while they may not have stayed in that position forever, they most likely stayed in the same organization for a long time. But most people these days end up working for many different organizations over their lifetime. So you want to train people to be diversely talented, and to anticipate that their career will be subject to significant changes.

SECTION 2: What should we do about inequality?

Key points and recommendations

1. Offer a government-run wage-subsidy program with subsidies for low-wage workers (Schuck and Zeckhauser, 1970). The lower the wage earned, the greater the per-hour subsidy offered.
2. Revitalize vocational education instead of our current almost-exclusive emphasis on purely academic education in most jurisdictions.
3. Enhance the productivity of low-income workers by raising and documenting their skills and creating new career tracks that move across employers.
4. Reform K-12 education system by offering high-quality individualized online education. Earmark $1,000 to provide each child with a basic, functional computer with Internet access.
5. Create a nation-wide, electronic resume-collecting service to keep track of employment records. This would be particularly helpful for low-wage, transient workers.
6. Implement merit badges, such as those in the Boy and Girl Scouts, as a means to document important job-related skills, including some that merely demonstrate responsibility. This, in turn, will encourage individuals to develop such skills.
7. Reform the K-12 educational system by offering high-quality, individualized online education. Earmark $1,000 to provide each child with a basic, functional computer with Internet access, to provide access to online classes that allow for individualized instruction.
8. Create targeted immigration policy favorable first towards highly educated foreign workers and second towards wealthy foreign investors who commit to invest domestically and hire American workers. Recognize that immigration policy for the highly skilled is a fundamentally different problem, and should be divorced from immigration policy for the unskilled, the focus of 98 percent of our current discussion.
9. Scale Medicare premiums to income. Phase down social security payments with income.
10. Given that the interest rates at which the government can borrow are at historic lows, invest in government projects, such as infrastructure replacement, that yield reasonable returns. Such projects will bolster employment for many workers in the bottom half of the income scale. This recommendation, however, just reflects prudent investment. Fortunately, it would bring strong ancillary benefits.

Inequality is one of the great challenges of our time. I fear that many superficially appealing solutions won’t work. The one I’m worried about today is the $15 an hour minimum wage, which is getting a lot of support and will surely be voted into law in a lot of jurisdictions.

There have been a lot of studies on minimum wages in the past. The empirical evidence is contradictory, but all the past studies have looked at moderate increases or modest cross-geographic disparities in the minimum wage. Currently contemplated legislation would involve a doubling of the minimum wage [from roughly $7.50 an hour (depending on the jurisdiction) to $15.00].

U.S. labor markets are reasonably competitive. If you run a store and can hire someone who will work for $7.50 or $8.00 an hour, you will do that because this gives you the ability to hire a lot more workers. My general point is that dramatically raising the minimum wage will be disastrous for low-skilled workers. People who are currently making, say, $12 an hour will benefit from a $15 an hour minimum wage because they are relatively skilled compared to the $7.50 an hour workers, and will [eventually] get moved up to $15 an hour.

Mechanization will also be a threat to low-skilled workers, and doubly so if minimum wages take a leap. I speculate that every major company in the United States alert to the minimum-wage issue is looking for ways to substitute high-skilled, high-wage workers for low-wage, low-skilled workers, and is simultaneously looking for ways to find machines and new technologies that will substitute for low-wage workers.

I do have a recommendation as to how we should help low-wage workers. Over forty years ago, Peter Schuck and I co-authored a research paper entitled, “An Alternative to the Nixon Income Maintenance Plan” (1970, Footnote 1). We proposed a wage-subsidy program. That subsidy would come from the government, not the employer, for all low-wage workers. Unlike the Earned Income Tax Credit, the subsidy level would depend on the wage level, not the earnings level. Let’s say you are working for a relatively low wage. The wage-subsidy program might make up half the difference between your wage and $15 an hour. So if you’re paid $7.50 an hour, you will receive a $3.75 subsidy. If you make $10 an hour, you get a $2.50 subsidy. If you’re paid $15 an hour, you get no subsidy.

This program would be beneficial in making subsidies greatest for the least-skilled individuals, who are usually also the lowest paid. And the government is paying for it, so an individual company has no incentive to get rid of its least-skilled workers.

The most important thing to do for low-skilled people workers is to figure out a way to get them securely onto the job track. I have a recommendation related to this: We should implement a nation-wide electronic resume-collecting service that collects everybody’s employment records and feeds them in electronically. I would also award merit badges, as the Boy and Girl Scouts do. Basically, I want to have lots of opportunities for people to acquire and document new skills. These capabilities, readily communicated to potential employers, will open up new employment trajectories for the future. The idea is to get people working towards something at every juncture of their working lives.

We also need to take education more seriously. The educational system for our lowest-skilled individuals is a disaster. Technology is going to be the wave of the future and we are never going to get all the math and science teachers that we need. But we can arrange online courses where we get the world’s best teachers to impart important skills. It would be even better if one of the world’s best teachers was in every classroom in the United States, but that’s not going to happen.

The other thing we can do is offer individualized online instruction. A great example is the Khan Academy, which has done an excellent job teaching high-school math, and now goes well beyond that (Footnote 2). We can spend $1,000 on every child in the United States, providing each with a basic, functional computer. We can easily provide Internet access, certainly in urban communities in the United States. That capability would open up an array of avenues for providing online education.

In the education category, I would also suggest that we consider reintroducing vocational education in a big way. We believe everybody should get a college degree and perhaps become an executive. We no longer train many children, at least in America, to become auto mechanics, gardeners, carpenters, plumbers, or electricians. If you’re a skilled auto mechanic, you can easily earn a very good middle-class wage in a way that you can’t if you’re a checkout clerk at CVS or the equivalent, which is where many of our “academically trained” students end up. So I would drop the myth that everybody should go to college and start to say, instead, “There are some people who are much better auto mechanics and they should learn to be an auto mechanic.”

A fierce debate is raging around immigration policy in the United States. But virtually all of the debate is based on what we should do with illegal immigrants or potential illegal immigrants, who are mostly low-skilled people who mostly compete with our low-skilled citizens and keep down the wages for America’s low-skilled jobs. That’s one type of immigration policy.

But there’s another type of immigration policy question at stake: what should we do about high-skilled people with graduate degrees from respectable universities. And this second immigration track has nothing to do with the low-skilled people, and should be considered as a completely separate category. Canada, for instance, has an immigration policy that is highly favorable to highly educated people with high skills. I would extend this solution to such people who want to come to the United States, and also to people willing to invest money into our economy. If rich people from other countries want to come here and hire Americans, and would be allowed to do so, that would be good for the U.S. labor force. A policy favoring skilled and investing immigrants would create greater competition for high-wage jobs, and would boost the demand for low-wage jobs. Reduced inequality would follow. Canada’s immigration policy has helped that nation secure much greater equality than is found in the United States.

SECTION 3: How should we prevent the next financial crisis?

Key points and recommendations

1. Financial crises are situations that mostly arise due to ignorance, not due to uncertainty. Ignorance is present when we can’t even identify the states of the world that may occur in the future.
2. Because each financial crisis is unique, remedies for the previous crises rarely prevent future crises.
3. Financial crises are frequently caused by speculative bubbles. Unfortunately, such bubbles are difficult to identify until they burst.
4. Global financial markets are increasingly connected and new financial instruments are emerging at an alarming rate.
5. Recommendation:
• Create a financial intelligence agency with purely investigative functions, hence no regulatory duties. The agency would be responsible for scanning the global markets for possible financial crises the way intelligence agencies such as the CIA scan for possible security crises.

I think we’re just going to have to live with financial crises. We can make them less likely, we can make them less severe, and we can anticipate them somewhat better. But financial crises are inevitable. If we were to put this interview in a time capsule and come back a hundred years from now, we would still observe financial crises. Preventing financial crises completely by imposing punitive penalties, either financial or by prohibiting activities that entail some danger, would be akin to preventing auto accidents by saying, “You can drive no faster than twenty miles an hour.” That would get rid of 96 percent of the auto fatalities to be sure, but it would have very deleterious effects. On net, it would not be worth it.

Financial markets are like living, breathing beings that transform themselves constantly. They move very fast and I suspect that innovation and speed will continue to be the norm. When you impose new regulations, smart investors always figure out ways to dodge them, finding new financial instruments or locations that bypass regulatory strictures.

Each financial crisis is distinctive. Tomorrow’s financial crisis is going to be quite different from what we saw yesterday. The 2008 financial crisis was caused significantly by the advent of new derivatives that were unfamiliar to all parties. This crisis penetrated the financial system much more significantly that had previous crises. For example, the crisis associated with savings and loans institutions [in the 1980s and 1990s] affected only a small segment of society.

But financial markets are thoroughly interpenetrated now. In 1997, we had the Asian financial crisis, a major crisis, but it didn’t affect the rest of the world very much. But today it probably would. A lot of what happens in a financial crisis is also due to psychology. Everybody was worried that when Greece was going through its troubles recently, this would trigger a run on banks in Spain and Portugal. But that didn’t happen. However, late this summer when China became a concern, financial markets plummeted all over the world, and volatility became enormous. Markets moved dramatically on snippets of news, or less.

As the financial world becomes more interdependent, we can expect more financial contagion. New financial institutions and instruments are arising much more quickly than most participants can master them. In the last few weeks, we’ve seen Apple Pay get a lot of attention (Footnote 3). There are bitcoins (Footnote 4). I’m sure there will be important financial instruments in the future that I’ve not heard of. Also disturbing, new instruments compete with old financial instruments, such as 500 euro bills, to help promote unsavory activities.

There are so many ways to shuttle money rapidly around the world today—new ways to seek a little bit of an edge, a little bit of a greater financial return. Such efforts often lead to speculative attacks and speculative bubbles, such as the speculative bubble that triggered the 2008 crisis in the housing market. One trouble with speculative bubbles is that we don’t know they’re speculative bubbles until they burst. When a speculative bubble does build up, their investors have strong interests in having the bubble continue. Those investors’ efforts, and their failure to face reality, add to the pressures inflating the bubble.

My recommendation, as mentioned, is that we should set up a financial intelligence agency. In my view, it should not have any regulatory powers, because as soon as you confer regulatory powers, you have potential fights for regulatory jurisdiction. You also have regulators who recognize dangers but are hesitant to act, given the disruptions and blame that might follow. Allegedly, the savings and loan crisis was made much worse due to such reluctance.

My proposed financial intelligence agency will be a body that monitors the financial environment, scanning for developments that look potentially dangerous. Were dangers or potential dangers identified, the agency could go to the Treasury Department or the Federal Reserve or the SEC or even the President of the United States, and say, “We’d better worry about this.” So that’s my recommendation: An agency with no responsibility except to scan and look out for various financial developments.

Ignorance implies states of the world that we cannot identify in advance. Financial crises are predominantly situations of ignorance, not uncertainty. Once we recognize that we’re in a state of ignorance, we should change the way we think about the world. We can’t prevent the most likely next financial crisis by telling banks they need to keep an extra billion dollars or so in reserves. Instead, we should always be scanning the horizon for new risks. Once we recognize this, we could go to a situation where the expected magnitude of what we lose drops from 100 to 50, and the likelihood of a crisis goes from 1% to 0.5%. But crises will still occur, and when one does, we’re still going to lose 50. If we could cut the likelihood and severity of auto accidents in half, we could cut auto fatalities by perhaps 75%. Not perfect, but very welcome. Preventing financial crises is not possible. Cutting their likelihood and severity would greatly benefit the world.

[1] Peter Schuck and Richard Zeckhauser, “An Alternative to the Nixon Income Maintenance Plan,” Public Interest 19 (Spring 1970): 120-30.
[2] https://www.youtube.com/user/khanacademy
[3] “Apple Pay” is Apple’s mobile payment service, which lets iPhone 6, 6 Plus, and Apple Watch owners make electronic payments using their mobile devices.
[4] A “bitcoin” is a decentralized virtual currency, created and held electronically by companies and people instead of traditional central banks. It is also known as a “cryptocurrency.”


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