The Economics of Careers

One of the articles I already posted, had a nefarious tidbit that I missed the first time around. Here's the article from the LA Times again: A loan that'll get ugly fast

In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.

First, let us examine what a "pay option" loan is. Effectively, you are allowed to pay much less than the principal+interest on the loan. What happens to the difference? It gets tacked back onto the loan increasing the loan value (and naturally, you have to pay interest on that in the future.) Also, typically the rates reset to fixed ones after 3 years.

Why would you take such a loan?

Effectively, you are betting on the fact that interest rates will be lower in the future, or that you will make a lot more income in the future.

Please note emphatically that you're not betting that inflation will be higher in the future because the market will discount that in the form of higher interest rates in the future as well, and your loan will "reset" to include that!

Firstly, rates are at generational lows. I wouldn't bet on them going much lower.

Secondly, with globalization, there is no way in hell that the incomes of all of these people will be higher. Some will succeed, no doubt, but definitely not all of them.

Now, let's examine the statistics one more time:

2003: 0.8%
2005: 20%
2006: 33%

You should be able to smell the epic disaster looming in 2007, 2008, and 2009.

There is further evidence of the pain that is going to be felt:

California taxes both individuals and businesses at a very high rate. There is considerable evidence that in spite of population growth, California is losing both people and businesses. Evidence is provided below.

What this is telling me is that more and more Californians are taking on high-risk loans, and stretching to make the payments in order to maintain a lifestyle, rather than doing the rational thing, and rapidly downgrading it in the face of diminishing opportunities, and lower wages.

Back to the evidence of out-migration:

Here's a link to the data.

According to the California Department of Finance, the state recorded a net loss of about 29,000 people in 2005.

Please note that that is a loss after population growth!

The only "high tech" state that is doing considerably worse than California is Massachusetts (same high-tax problem) which is losing young workers at some abnormal rate. Currently, 20% of Boston (and surroundings) comprises of students. Yep, 20%.

Which begs the question, as to who's going to pay the piper in the future when businesses refuse to set up shop because of the taxes, and high-income earners leave the state?

California recently passed a law preventing either budgetary caps, or raising taxes, and issued new bonds that just pass the problem on to the next generation.

Spend all you like, don't increase the incoming revenue, and pass the buck along.

What would you expect the end result to be?

Every single one of my friends, anecdotally, who has set up a high-tech startup has done so outside of California or Massachusetts. Even New York is more desirable as a possible location than either of the above two. (That's simply astounding!)

If you think it can't happen, look at Maine. They have had their industry decimated for years, and nobody in their right mind would set up shop there.

Here's a typical example of a company that is planning to leave town. From the San Diego Union Tribune: SAIC is moving some of its brass east.

For some employees at SAIC's corporate headquarters in San Diego, recent weeks have been filled with anxiety over something that begins with a seemingly innocent telephone call.

“I received a phone call that was an invitation to manage my staff from our offices in McLean,” said one mid-level employee, referring to SAIC's facilities near Tyson's Corner, Va. “After some discussion, it was clear that it was more than an invitation. It was an announcement that my position was going there – with or without me.”

SAIC was founded in San Diego in 1969 and currently employs close to 5,000 people here. But the homegrown company, which specializes in complex engineering and technology programs for U.S. military and intelligence agencies, has more than 16,000 employees at its campus in McLean.

SAIC's eastward migration is logical to Wall Street analysts such as Peter Arment of JSA Research in Newport, R.I., who began covering SAIC after the company's initial public stock offering in October.

It only makes sense for a company that derives more than 90 percent of its business from the federal government to locate most of its operations close to Washington, D.C., Arment said in November.

It should be noted that for every defense job that leaves California, one or two "vendor" jobs will also leave for the same destination. Additionally, if the number of employees falls below some critical threshold, they will just move their entire operations to the other location. (It's cheaper to fly people to CA than have them live there.)

This is a non-linearity that very few analysts account for in their models.

Here's another company, Countrywide Financial that fired its employees in CA to move to Chandler, AZ (older news): Countrywide's Arizona Gold Rush: 2,000 New Jobs Phoenix-Bound.

Fast-growing Countrywide Financial Corporation (www.countrywide.com), accelerating its own sort of rewind of the California Gold Rush, has decided to add 2,000-plus new jobs in Chandler, Ariz.

"We are particularly excited about the opportunity to expand our presence in Chandler," said Patrick Benton, the company's executive vice president of administration. "As Countrywide has searched for new office locations in business-friendly areas outside of California, we have placed a good deal of focus on Arizona.

Please note unambiguously what "business friendly" means in these cases. It means "tax friendly".

So what does this have to do with careers, you may ask?

Folks, the rules of the game have changed. You are no longer guaranteed a job for any length of time. Secondly, the job may move, and either you move with it, or you get eliminated.

Anecdotally, I've changed my career once, and my job twice in the last five years, and I'm pretty much typical.

I'll go out on a limb and say that anyone who takes a 30-year mortgage is pretty much screwed. And screwed big time!

There are no guarantees for 30 years, and to argue that you're going to be in the same geographic location for even 10 is folly, in my opinion. Flexibility and nimbleness seem to be the order of the day.

After buying a house, you might as well put a giant tattoo on your forehead that your corporation and your boss can clearly see: "I'm a giant sucker. Please abuse me, and make me your bitch!"

Not having a care in the world automatically translates to higher salaries. You can aggressively negotiate for better projects and better terms, and there's not a thing that they can do about it!

This is clearly something that people carrying a white elephant of a house simply cannot afford to do.

Obviously, for people who have long-term careers (tenured faculty, or even nurses come to mind,) the argument would not apply.

Also, great careers are made by taking great risks. You can't possibly expect to succeed working for a large company. You need to work for startups, or start your own company. If you're going to take great risks career-wise, you might as well minimize any other forms of financial risk in your life.

This should be a rather simple argument to swallow!