Robert Reich: The Economics of People

By Allan Alter  |  Posted 12-05-2006

Robert Reich: The Economics of People

Equal parts economist, professor, polemicist and politician, Robert Reich is quite unlike any other business thinker on the current public scene. These days, the former Labor Secretary under President Clinton is a professor of public policy at the University of California–Berkeley, National Public Radio commentator and sought-after public speaker. But in his spare time, Reich worries that the U.S. has reached an economic crossroads and could take the wrong path, choosing protectionism over globalization and failing to take advantage of its most important resource: its people.

"We shouldn't be afraid of globalization. It creates tremendous opportunities to create value," Reich told members of the Society for Information Management at its annual conference in September. "That's where all of you come in. Because if we have the right human capital, and companies can continue to innovate, and the people in those companies are sufficiently linked together to take advantage of their talent, then technology, demographics and globalization are on our side. If that's not the case, we will have to pay the piper." CIO Insight Executive Editor Allan Alter explored these issues with Reich in multiple interviews. The following is an edited version of their conversations.

CIO Insight: You told CIOs we're at an economic crossroads because of three structural changes: globalization, technological change and demographic change. What's happening, and what's at stake?

Reich: Essentially, America's broad middle class is not sharing in the nation's prosperity to the extent that the middle class shared in it 15, 20, or 25 years ago. Not only that, but many more people are worried about the security of their jobs. There is more widespread economic insecurity than we've seen at any time since the Great Depression. There are three reasons why.

First, globalization is not really well understood. Most people assume it's about trade. It's not about trade; for the most part, it's about direct investment. Companies are becoming global supply chains. IT is being done wherever it is done most cheaply with the best skills. And that means IT is rapidly becoming globalized. In fact, all management is becoming globalized: Wherever something can be done cheaply and at the right level of skill, it will be done there. Note that I said "at the right level of skill," because it's not just a matter of cheap labor. The jobs of IT professionals who have skills that are in short supply, including the soft skills of having great knowledge of a particular industry or customer base, will not be jeopardized. But, undoubtedly, globalization is going to have a convulsive effect on the IT industry.

Technology is a second great force that will force many people to change their jobs and skill sets. In the future, anything that can be done routinely or can be reduced to software code will not be done by a person. And software is becoming ever more sophisticated. That means that we've got to think quite differently about who is going to do what in IT in the future. There will be many jobs, for example, installing, upgrading and consulting about new hardware and software. In healthcare and financial services there will be many IT jobs involving complex applications, and in the sort of consulting that identifies new needs and new IT solutions.

The third great force is demographics. The baby boomers are rapidly moving into their later years. The baby-bust generation, people born in the U.S. between 1965 and 1990, will be in relatively short supply. Companies will have to worry even more about recruitment and retention than they do now. Immigration will become an ever more contentious issue because we'll need many more people than we have available to do all sorts of jobs, at the high end and also at the low end. We haven't even begun to explore what it means to have a large portion of our population in their seventies and eighties. Already the elderly comprise the most politically potent group in America. What happens when all the baby boomers become elderly? Chances are the current political strength of the elderly will double, which means they will form a giant sump pump sucking benefits from the rest of the working population. How can the U.S. possibly afford that?

None of this economic uncertainty is due to malfeasance or nonfeasance of corporations of government. But that doesn't mean we should sit back and simply accept it. There are two great political parties in this country, and they are not the Republicans and Democrats. One is the "let 'er rip" party, which stands for the proposition that the economy should just be allowed to do whatever it's doing and let the chips fall where they may. The other is the "preserve and protect" party, which stands for the proposition that all jobs in all communities ought to be kept as they have been in the past. The problem is, neither of those positions is tenable.

That's why we need to embark on a whole different way of thinking about economic change and our people. And that means giving people the tools they need to adapt to a fundamentally different economy, beginning with early-childhood education and improved K-12 education access to post-secondary education. It means a job-training system that gives people the wherewithal to get the skills they need, when they need them, and provides unemployment insurance while they get those skills. We need a tax system that encourages and rewards people not just for taking financial risks, but also for being more flexible. We need social insurance that enables people to move from job to job and location to location without huge penalties and risks. Healthcare should no longer be linked to employment, so that people can change jobs without fear of losing their family's health insurance. And so on.

Next page: What does America need for success in the world economy?

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What does America need

for success in the world economy?">

You also said that America's success in the world economy depends more on the ability of its citizens to create value than on the competitiveness of U.S. companies. Why?

Because companies are rapidly going global. IBM, Hewlett-Packard, Oracle, Microsoft—every company that is in, or near, the IT sector is setting up shop abroad and doing research and development in China and India. Companies are selling and marketing abroad, and producing and manufacturing abroad. They are parking their savings abroad too; they are becoming global in terms of being global investors. The competitiveness of any place in the world, including a place called the United States, depends less and less on the profitability of companies headquartered in that location, and more and more on the capacity of the people that live there to add value to this increasingly integrated global economy. More Americans are working for companies that are headquartered outside the U.S. Nokia has a huge number of American employees. Toyota employs more Americans than Chrysler does. The nationality of the corporation is becoming less relevant. Far more relevant are the skill sets of the people within a geographic area or nation, and their capacity to continuously add greater and greater value.

Now, part of that responsibility for skills is up to the individual, to stay up-to-date. But part of that responsibility is a social and political responsibility. The geographic area must have world-class infrastructure: not just roads and bridges, but also a reliable energy grid. Access to broadband and good public schools is both a private- and public-sector responsibility.

Where should IT executives focus their attention in order to help their companies provide value?

I think IT executives, for their company's and shareholders' well-being, need to be assessing their employees' skills. They need to ensure that those skill sets are up-to-date, and that employees are able to work with one another both inside U.S. borders and also across borders, so they can generate even more value.

Today, there seem to dual anxieties in the IT workforce. IT workers fear the loss of their jobs, while IT executives fear they will not be able to find the people they need in the future. Which is the bigger problem?

The bigger challenge will be for IT executives to find the people they need. I don't see any reason to fear the loss of good IT jobs in the U.S. Every time the business cycle turns down I hear the same worries, and I've heard those worries for over 20 years. But every time the business cycle turns up again, IT professionals are once again employed and they get good jobs. The demand is rising faster than the supply; it's going to be harder and harder to get the quality of IT professional that American business needs.

Why is that?

Partly because of the increasing mythology among college students that IT is a risky profession. The mythology has also spread to engineering. Well, IT is risky. IT does go up and down with the business cycle, just like engineering goes up and down. The business cycle affects us all. The fact of the matter is that engineering jobs over the long term will do very well, and IT jobs over the long term will also do very well.

Next page: What if an IT worker's job is offshored?

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What if an IT

worker's job is offshored?">

But what would you say to a 50-year-old IT professional with two children whose job was just offshored?

Well, ideally that person would have continued to upgrade and change his or her skills, so that he or she would not have outmoded skills, or obsolete skills, or skills that are now going abroad. The truth of the matter is that IT is one of the most dynamic sectors in the economy. That is both an opportunity and a challenge for any IT professional. IT professionals have got to be on the lookout for continuous changes in globalization and technology, and adapt accordingly.

You are a professor. How do you convince younger people to want to take on a job that the popular press says is risky?

Well, basically I don't tell any young person what to do. But I do tell them, or suggest to them, that they assess their own personalities. Some people are risk averse by nature. They just want a steady job and a steady income; they don't necessarily want very much excitement in their lives. Other people want excitement. They want challenges. They want to learn new things. They're willing to accept some degree of risk. It's those people for whom IT provides a terrific set of possibilities.

Where do you see IT most improving productivity in the next three years?

Mostly in the area that I call "relational capital": the relationships inside a company between managers, executives, engineers and people who have certain specialized domains of knowledge. I'm talking about the capacity of groups of people to learn about their mutual skills and to build upon the insights of the group. The relationships among people take on value: Individuals know who they can go to for a particular source of wisdom. They can build on the skills of their colleagues. Certain individuals know which suppliers they can rely on. Customers can rely on certain technicians and salespeople inside the organization because they've had prior experience with those people, and have built up trust. Relational capital is one of the most important and yet most neglected areas of capital formation. Companies need to utilize IT so that everyone in an organization can take maximum advantage of everybody else. It used to be called knowledge management. It's more complicated than that, as we've all discovered. But because all other entry barriers are dropping so fast, we need IT systems that rapidly connect the right people to each other so that there are real synergies.

Blogs, wikis and social-networking software seem to be a way to build relational capital. But IT executives often worry that these technologies can cause security problems. Are they too worried?

In general, IT executives worry a little bit too much about security and not enough about creativity. Creativity, new insights about emerging problems and solutions, is more important than security because that is where the value is generated. An obsession with security looks backwards at the past, at value that's already been created. It doesn't emphasize the value in the future that creativity generates. An executive obsessed with security can completely miss the boat.

Where are IT investments most needed to achieve growth while sharing its benefits throughout society?

The healthcare industry desperately needs IT. None of the different pieces of the industry—providers, insurers, hospitals, and customers, clients, patients—are getting the right information in a timely way. For example, I just moved to California. Can my new doctor or dentist get easy access my medical records? No. Everyone's reinventing the wheel. How many times do you, as a patient, have to reenter all your basic information in hospital information systems? That's absurd. There is so much need for new efficiency in the hospital sector. I would also say that we need a lot of IT innovation in improving supply chains. A lot of attention has been given to supply chains, but basically the company of the future is going to be nothing but a supply chain. And those supply chains have to be highly functional.

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