Richard Florida's previous job creation idea
In a May post ("How Not to Fix America's Broken Jobs Machine") we mentioned University of Toronto Professor Richard Florida's then-latest job creation idea: to focus on service jobs that can't be offshored or automated, and to upgrade the "entire job category" of service industry jobs so that they paid more. In an op/ed in the Financial Times then, Florida wrote,
Mr. Obama should make upgrading service jobs the next step in repairing America's broken job machine. A national service initiative, bringing together "service innovators" -- such as Zappos (NASDAQ:AMZN), Starbucks (NASDAQ:SBUX), or outdoor clothing retailer REI -- would be a good start.
As we noted at the time, a problem with that idea of Florida's was that, in the private sector, higher entry level wages require higher margins:
[T]here's a limit to how much relatively low-margin retailers can afford to pay their workers, no matter how innovative they are at customer service. Zappos may add value with its unique corporate culture, but there is a limit to how much value a retalier can add by buying sneakers wholesale and selling them retail. [...] Since high margin manufacturers producing high value products can afford to pay their workers more than lower-margin retailers, you might think that Florida would suggest government find ways to facilitate the creation of more manufacturing jobs instead of trying to 'upgrade' low wage service sector jobs.
Richard Florida's latest job creation idea
Richard Florida offered another job creation idea on The Atlantic website this week ("Teach Job Creation at Our Business Schools"). In a nutshell, Florida's latest idea is to teach MBA students to make creating jobs a primary goal of their businesses, alongside maximizing profits:
We teach business students to care about accounting, profit maximizing, and long term strategic thinking. Why not teach them about social accounting, employment maximizing, and the long term impact of consumers having enough money to support our future businesses?
The problem with Richard Florida's latest idea
A relative handful of companies claim to be "mission-based businesses," with an explicit mission of creating employment (though sometimes these claims warrant skepticism, as we noted in a post about Etsy). But the mission of nearly all businesses is to maximize profits, and management incentives are generally aligned accordingly.
Incentives matter
Expecting business leaders to unilaterally stop trying to maximize profits and to try to maximize employment instead is naive. As Louis Uchitelle noted in The American Prospect last month ("Once Made in the USA,") even CEOs who care about creating jobs in America respond to incentives to do otherwise. Uchitelle asked Dow Chemical Company (DOW) CEO Andrew N. Liveris, who has written a book about the need to increase manufacturing in the U.S. ("Make it in America: The Case for Reinventing the Economy,") whether Dow would respond to Chinese government incentives to expand its operations in China:
“You betcha,” Liveris says [...] “I hope you hear the great sucking sound as we go over there, because it is very important that we compete globally.”
Uchitelle noted that low labor costs aren't the only reasons foreign companies have been building factories in China -- the Chinese government uses a carrot & stick approach to encourage that. As an example, he cited the German manufacturing powerhouse Siemens AG (SI), which was only allowed to sell its high speed locomotives in China after agreeing to build them there.
Industrial policy trumps pabulum
China has a tough-minded, self-interested industrial policy. We don't. Pabulum about "social accounting" won't take the place of one.
A look at the hedging costs of Florida's service innovators
Of the three retailers mentioned by Richard Florida as "service innovators" in the quote at the beginning of this post, one, REI, is organized as a consumer cooperative, and so is not publicly traded. Another, Zappos, is owned by Amazon.com, Inc. I'm not sure if Florida considers Zappos' parent company to be a service innovator, but I have included it in the table below just in case, along with the other service innovator Florida mentioned, Starbucks Corporation. In addition, for comparison purposes, I have included the SPDR S&P 500 ETF (NYSEARCA:SPY).
The table below shows the costs, as of Thursday's close, of hedging Amazon.com, Inc., Starbucks Corporation, and the SPDR S&P 500 ETF against greater-than-20% declines over the next several months-- using the optimal puts for that. First, a quick reminder about hedging with optimal puts.
Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. With Portfolio Armor (available in Seeking Alpha's Investor Tools store, and as an Apple iOS app) you just enter the symbol of the stock or ETF you’re looking to hedge, the number of shares you own, and the maximum decline you’re willing to accept (your threshold), and then the app uses its proprietary algorithm to scan for the optimal puts.
Symbol | Name | Cost of Protection (as % of position value) |
AMZN | Amazon.com, Inc. | 3.96%* |
SBUX | Starbucks Corporation | 3.12%* |
SPY | SPDR S&P 500 ETF | 1.20%* |
*Based on optimal puts expiring in January, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
