There is good news in the bad news of Wall Street’s layoffs, or so Schumpeter would say. Why? Because as painful as it is, an economic recession creates the seeds of future economic growth. It does it from the reallocation of our economy’s highly liquid labor force and the dynamics of our entrepreneurial sector.
One day early this summer we all woke up to the collective realization that we had about 10,000 or so too many bankers employed on Wall Street. We found this out because Bear Stearns failed, and as the credit crisis raced across the word of finance, banks took the only real profit increasing action they can it the face of revenue declines and asset shrinkage, they laid off their work force.
Stories of the minutia behind why Bear failed, the whisper campaign, the Fed’s and Jamie Dimon’s machinations not withstanding, the fact was that we had collectively over deployed resources to the gatekeeping function of capital flow to the tune of about that many jobs. Add to the 10,000 the subsequent layoffs from other parts of finance and you come to a total number of excess people deployed to the capital allocation functions of the Street.
Now, the day after pink slips were delivered on Wall Street all those otherwise competent people didn’t instantly turn into stupid ignoramuses (hold your emails, cards and letters about your MD who was a stupid ignoramuses, I know all about those guys)
Most of those let go will enter into job hunts back in finance, some on the Street, some in the finance departments of commercial companies, a few will go into consulting (The real kind, like at Bain, not the unemployed looking for a job kind of consulting). Support staff and IT folks will fan out to other industries bringing their talents to those sectors.
So one way of looking at the Wall Street layoffs is as a reallocation of talent to more prosperous banks and to other more profitable industries. But if that was all that was happening then I wouldn’t be so upbeat.
Besides industry and firm reallocations, a small percentage of these very talented people are leaving finance altogether and starting their own firms. They are doing it in a wide range of fields. Fed up with the lifestyle and the pressure, the hours and the ignoramuses, they are beginning software ventures, logistics companies and even ventures as pedantic as bookshops. Its a large scale application of creative destruction; Schumpeter in action.
While it will only be a small group who end up out on their own, and of that small group a good sized percentage will fail at their new start ups, we don’t need many survivors to make a big impact on the economy. Entrepreneurial activity is so powerful that it doesn’t take much additional juice in this sector to add a big boost to our nation’s long term economic growth.
Also, since these people were already some of the smartest of the smart when they were recruited to Wall Street it is like adding a turbocharge boost to the entrepreneurial segment, the place where most new jobs are created and where most of the economy’s growth originates.
The disaffected unemployed who seek new opportunities outside the trajectory presumed by their historical resume, along along with the nations new immigrants, are our economy’s entrepreneurial recruiting grounds. Increases here ultimately lead to long term growth in our economy.
Good news indeed.
More from Dougist.com on the Financial Crisis