Housing and the Labor Markets: Management of the Interfaces of Economic Subsystems
By: Onur OzgodeThe ongoing crisis in the housing market seems to illustrate how the economy can be thought of as a vital system and how that system and its governing can be conceptualized. The article points to how the labor market and the housing market can interact in unexpected ways and prevent markets to reach equilibrium.
The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer. Or people seek, as in Dr. Morgan’s case, an escape from harsh northern winters.
Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people like Mr. Kirkland and Dr. Morgan are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring.
In 2007, the inter-state migration dipped at a rate of 27 percent compared to last year, highest decrease in the rate of inter-state migration in the last 15 years! This seems to hint at the re-conceptualization of the economy as an open systems with interacting sub-systems and non-economic domains. In this new way of thinking, the problem of government becomes how to manage these interfaces where different series interact and influence each other. In the last post and in our conversations on the management of the economy, Stephen and I have been arguing for a transformation in the conceptualization of the economy as a vital system that needs to be governed accordingly rather than simply intervened upon. In this perspective, crisis is external to the exogenous to the system, rather than endogenous as Keynesian paradigm would argue. In the Keynesian paradigm, the crisis located at the natural life cycles of capitalism; due to the need for large scale re-investment at the end of each business cycle, the balance of savings and investment gets obscured and unless intervened the economy rather than coming back to the equilibrium point fails to restore the market equilibrium. So, the solution is proactive government intervention with the goal of prolonging the business cycle. The problem is located within the very nature of capitalism. However, as we have been seeing in the housing crisis the problem has nothing to do with fixed costs of re-investment of the business cycle. It rather has to do with the mismanagement of risk, which seems to be an agent of translation between different domains. It is a way to manage an interface, i.e the housing market, and indirectly the labor market, and people’s seemingly non-economic needs of inhabitation. As we have been seeing, miscalculation of risk is posing great vulnerabilities to the economy as a vital system, and the problem of crisis manifests itself in terms of shocks disseminating from one sub-system to an other. Then I presume the problem becomes one of resilience and robustness of the interfaces connecting different domains within the economy: the ability to absorb unexpected, and yet immanent shocks. So, can we actually understand the neoliberal language of regulation, as opposed to intervention, in terms of the management of interfaces? Probably Stephen can tell us more with regard to risk.
April 4th, 2008 at 6:03 am
I agree with this analysis Onur. So to take another contemporary example, the question was not how to prevent Bear Sterns from failing, but how to make the failure possible without creating a systemic crisis. The answer after the 1929 crash was deposit insurance by the government — which is essentially a way of decommodifying the risk, if you will. The Bear Sterns takeover is a very different kind of move. It essentially says: we (the government) make you (the investment bank’s shareholders) take the hit (by purchase at a very low price) while trying to avoid systemic crisis. I have read analyses that say this takeover was basically an effort to save the secondary market on insurance of securities. So it is trying to preserve the market for the securitized risk but preventing its fluctuations from bringing down the economy more broadly.
I am still not sure about the endogeneity/exogeneity of crisis in each case. What I *do* agree with is the idea that in Keynesianism you try to smooth out the shocks — whether they are external or the production of internal factors like overproduction crises. In this alternative economy as VSS paradigm what you try to do is make the sub-systems of the economy resilient.
As Onur knows, I have been tracing precisely this movement in the early arguments about structural adjustment. The point is basically that in response to the financial shocks of the 1970s and 1980s, the impulse was not to regulate the international financial system but to deal with inflexibilities in national economic systems, which were reconceptualized not as just inefficiencies but vulnerabilities. The argument was moving, in that case, from seeing shocks as “external” economic crises to seeing them as “internal” system vulnerabilities that had to be managed through structural reform. I may try to post something on this soon.
Finally: the housing story Onur tells is about the mechanisms through which the mutual adjustments between population and production are managed. Isn’t that what someone called the biopolitics of population?
April 6th, 2008 at 10:30 pm
I think it is clearly the case that current talk about the credit crisis treats it as a problem of VSS. What I’d highlight is the extent to which it takes place via scenario narratives. There are a finite number of them current floating around the econ/finance blogosphere. Nouriel Roubini’s “12 Steps to Systemic Financial Meltdown” is perhaps the most discussed. A very interesting feature of this is the use of systematic comparisons between the current crisis and a limited number of previous ones: 1929, Savings and Loan, LTCM, Japan’s Lost Decade, the Nordic Crash, the Asian Crash. (Bernanke’s playbook so far has been exactly what he said ought to have been done in the Depression.) People bring them up, assert a narrative of how they worked, adduce similarities with the current crisis, and then assess the applicability of the action that the compared-to government took. Similarly, smart peoples’ initially forays into attempting to think about how to prevent a repeat (after dismissing Paulson’s proposal as so much eyewash) focus on the idea of vulnerability, and how and whether the sorts of vulnerability reductions mandated for the banking system can be extended to the broker/dealers and derivatives products. I urge you to read NY Fed President Geithner’s testimony to the Senate, both for its wonderful overview of the crisis, and to see how he was thinking about the Bear meltdown– entirely through scenario enactment and vulnerability analysis. http://www.newyorkfed.org/newsevents/speeches/2008/gei080403.html
But I’m not sure how new it is to think about the financial system in such a manner. Wasn’t the Federal Reserve System from the start imagined as providing a backstop to certain systemic vulnerabilities, the key scenario being that of a bank run? And I think it is important to distinguish the central banking system from monetary and fiscal policy, which are and remain interventionary. It seems to me that one of the interesting facts about the current financial management system in the U.S. is that it bifurcates into active management systems– primarily monetary policy– and systemic vulnerability reduction– regulation, depository requirements, etc. And a body of financial doctrine has evolved in response to this, again, based on those same 70s and 80s problems that Stephen mentions, and about which I’d like to hear much more from him. Around that time, a number of important papers were written that show that market agents’ behavior adjusts in response to govt action and in response to the frequency of govt action in such a way as to make it ineffective on the long term if indulged in infrequently and completely ineffective if used continuously. These were discoveries of various sorts of economic reflexivities. The key one was probably the Lucas critique of monetary policy. These sorts of theories would be interesting to examine more closely. On account of such reflexivities, interventionary behavior ought to be minimized in favor of vulnerability reduction, and a clear distinction made between them. In the current crisis: the new alphabet-soup of Fed facilities (TAF, TLSF, PDCF) and the changes to Freddie and Fannie’s regulations are vulnerability reduction, the interest rate changes and tax rebate are interventionary (as was of course the Bear bailout). Greenspan elevated non-interventionism to dogma, claiming that the Fed should focus on vulnerability reduction and picking up the pieces once things tumbled down, but there is now significant highly-placed talk about redirecting its orientation to puncture asset bubbles before they form, thanks to the Tech Bubble and now the Housing Bubble (and as we watch the formation of a commodities bubble).
On the issue of risk: The derivatives market is forcing a rethinking of risk, or rather has been, since I first saw articles picking up the theme several years ago: while derivatives markets smooth out idiosyncratic risk, they can dramatically exacerbate systemic risk. They do this in two ways, first by spreading it around, and second because of their peculiar reflexivities, which come out in several ways. First, securities pricing models (and the derivatives based on them) are based on statistical-archival data, but in a systemic event the correlations observed therein cease to hold and *no one knows* what their price is– they are “mark-to-model” instruments– so they become toxic, and the inability to calculate risk prevents the market from operating at all. Trying to think about the place of unknown risk in the current credit crisis strikes me as a possible interesting thread to pursue in thinking about the economy today. Second, risk management models rely on discovering uncorrelated variables in the historical data, and then making hedging bets based on these uncorrelateds– but these models are now so widely used that they make those uncorrelateds correlated! Models assume that they are the only trader trading on model. The result is that everyone sells into the market at the same time, causing the prices to drop on the things they are trying to get rid of, causing the models to re-trigger for another sell-off.
I have three clarifying-begging questions, though, in response to the previous two posts,
1. What exactly do you mean by interfaces? It seems strange to me to view the economy as segmented in such a way that we can speak of interfaces. And in any way that it doesn’t seem strange, it doesn’t seem new or noteworthy. I’m thinking of representations of an economy: first, as systems of equations in a macro model, in which everything is connected to everything else and talk of subsystems seems imposed, and second, in a flow chart simplification of such a model, in which such subsystems do appear. (I have a book on the Stalin economy which includes both such a model and such a representation of it.) Moreover, it seems to me that the problem in the credit crisis is not flow across interfaces nor the resilience of them, but rather the breakdown of the financial system– what Bernanke has called “the financial accelerator” in essays worth reading– which lies at the center of everything else. And the vulnerabilities to be addressed are primarily those of this financial system.
2. What do you mean by saying risk is an agent of translation between domains? That sentence is opaque to me.
3. What do you mean by speaking of endogeneity/exogeneity? I would think that the current crisis is very much being thought of as endogenous– indeed, one of its peculiarities is that nothing else is happening nationally and internationally on which responsibility for it could be landed.
Finally, I’ve been following the econ/finance blogosphere extremely carefully, or as much as my time time allows, in hopes of writing something about it soon. I’ve been archiving the ongoing commentary for later use, and if anyone wants to see my distillation of the coverage, please check my delicious feed: http://del.icio.us/a.e.leeds
April 6th, 2008 at 10:41 pm
Oh, I should introduce myself! I’m a 2nd-year Anthropology PhD student at UPenn. I hope to write my dissertation on the formation of economic knowledge around the problem of poverty in contemporary Russia. I’m very interested in the construction of the economy as an object of thought, the ways it is represented or represents itself and the state mechanisms required to do so, and the institutionalization of the separation between the economic and the political, historically and discursively. Or, at least, those are things I hope to work on if I can make them specific and plausible enough. I’ve recently been talking to Stephen about these and various other things, including the credit crisis, and he directed me to this post, asking that I share thoughts.
April 7th, 2008 at 5:40 am
Adam — thanks very much for this, and welcome.
There is a ton of stuff in your post, just a couple things.
(1) Don’t you think there is a difference between deposit insurance and vulnerability reduction? As I said, I think that deposit insurance is effectively “decommodifying.” The entire point is that on a systemic level it would create moral hazard problems. So you do something else: you don’t try to avoid the losses, but make sure that the losses don’t cause systemic problems. That seems to me quite different. Whether it is new is another question.
(2) I am not sure that either Onur or I are exactly saying that this is new (I read back through our emails and there doesn’t seem to be anything to that effect). Though of course at different moments different techniques predominate. For example, I just read some material yesterday about the Keynsian interpretation of inflation in the 1970s, which, in part, traced it to bottlenecks in domestic production. Kind of fascinating! So the answer was more structural intervention rather than liberalization, which was of course what would eventually be argued was needed when the structural adjustment pattern consolidated.
(3) The endogeneity/exogeneity distinction is something we need to think more about. One context in which this has come up is the shift that Andy and I initially observed from thinking about “threats” to systems in terms of the characteristics of the threat itself to thinking about the features of systems that make them vulnerable. Threat becomes an *intrinsic* feature of the system rather than an external event. I would like to think more about how that distinction maps onto the domain of the economy.
Lots more — but again: Adam, thanks for posting, and terrific that you are following these developments so closely.
April 11th, 2008 at 4:24 pm
Nice to “meet” your Adam and thanks for provoking comments.
First, I also agree with Stephen that we are not saying that this is new as a vital system. Though I have some questions about when might the economy have become a vital system. I think Tim Mitchell posed a similar question by asking when economy came to be thought as the economy as a domain. I personally don’t buy his argument about Keynes and find it merely at the level of representation. I guess the question that begs an answer is when do we start to observe systemic properties from this domain. I mentioned this in a previous post on the systems engineering and operations research.
I think interfaces are one way to go about in response to this question. One hypothesis might as well be that the economy becomes a vital system once effects in the domain of the economy are felt in domains that are seemingly not related or vice versa. The crisis in the housing market and its relation to the labor market seems to be such a problem. In this respect, the notion of elasticity seems to be one way for economists to measure the properties of this system. It is also interesting that along with resilience this term sounds to have origins in materials science. Piore & Sabel’s Second Industrial Divide in a way an argument of this sort with regard to the production sector.
On the inflation, it is interesting to note that there is a similar thread that comes from Taylorism to Veblen and finally to Galbraith that inflation is a problem of production deficiency which is caused by ill-informed and selfishly profit seeking capital owners who do not maximize the production, but under the effect of the price system try to maximize their profits which in turn means underproduction. So, a more radical critique than that of Keynes can be seen as that bottlenecks are not due to the material conditions of production, but due to how that system is administered.