Learning from My Employment Experiences, 5/31

comparing profit-seeking with government

Arnold, did you find that the profit motive at Freddie Mac made them much more customer oriented than the Fed? My experience at very large profit seeking institutions is that many workers end up shielded from customers and markets, leading to behavior that is like that of workers the non-profit sector. Yes, senior managers have that focus and line employees might too, but lots of folks don't.

—question from a commenter

One difference showed up very early in my tenure at Freddie Mac. There had been a lot of tension between my department, which assigned risk costs for mortgages, and the multifamily lending department, which resented the high cost that we assigned to their loans, based on theoretical models. At one point, I assigned one of my research assistants to compare the performance of the loans to our model expectations. It turned out that performance thus far (the loans were pretty new) was worse than expected, which he documented in a two-page memo that got passed up the line.

Late in the day, the CFO called a meeting that included the leadership of the multifamily department and the only person who was still working late in my department—the research assistant. At the end of the meeting, multifamily lending was suspended.

At the Fed, there is no way that a research assistant would ever have appeared at a meeting that included high-level officials. If there was a dispute within the organization at the Fed, the outcome would have been determined by the rank of the people involved. At Freddie Mac, the outcome was determined by the facts.

I claim that working for a profit-seeking enterprise rather than for a non-profit (or government) is likely to be more satisfying to you as an individual and more beneficial to society as a whole. I mean that as a probabilistic statement. Maybe there is a 70 percent chance that a randomly-chosen profit-seeking enterprise will work out better for you than a randomly-chosen non-profit. But 30 percent of the time, it would go the other way.

Below, I clarify what I mean by personal satisfaction and social benefit. Then, I narrate my own experience in terms of those two things.

Personal Satisfaction Defined

One reader suggested that we run a survey to test my hypothesis about job satisfaction. That is an interesting idea, but I would have to think carefully about what to measure and how to measure it. My hypothesis about job satisfaction is that organizations in the profit-seeking sector are more likely to weed out unsupportive bosses and back-stabbing colleagues. Again, “more likely” does not mean “certain,” by any means.

You have a supportive boss if that boss is trying to advance your career by giving you appropriate work assignments, training, exposure to high-level management inside and outside the firm, helpful counsel, and job placement assistance. An unsupportive boss will be indifferent, or worse, at giving you what you need. So I would want a survey that gets at that.

You have good colleagues if they value your success, or at least can accept it. You have back-stabbing colleagues if they are jealous of your success and try to hold you down.

Social Benefit

Overall, profit seeking in competitive markets is a positive-sum game. For individual transactions, this is validated by the market test, meaning that consumers willingly pay for goods or services. In the grand sweep of history, it is validated by the rise in living standards that takes place when property rights are well protected.

Socialists take the miracles of the market for granted. Most people did not know what a supply chain was until they were told that prices were up because supply chains were breaking. They never thought about the steps involved in getting that package delivered to your door.

For that matter, libertarians take government for granted. It is a privilege to be able to write complex contracts, to undertake long-term investment, and to know that tomorrow armed predators aren’t coming to destroy or capture everything you own. Just ask the people seeking asylum here.

But there are many government agencies that are not cost-effective or that actually cause harm. And there is no market test for whether or not a non-profit organization or government agency provides social benefits. The decision to fund those organizations is made by donors or legislators, not by the individuals who are supposed to benefit.

Up close, in a specific profit-seeking business, it is hard to tell whether social benefit is positive or negative. Deep in the bowels of some corporation, you may not see much connection between what you do on a day-to-day basis and the social benefit that your firm provides.

Also, real-world outcomes arise from a mix of games, not all of which are positive-sum. For example, a lot of activity on Wall Street looks to me like zero-sum wagering. To me, trading appears excessive relative to what the market needs for price discovery. Some people buy low and sell high, but their gains are offset by the losses of those who buy high and sell low. One can argue, though, that the wagering activity makes the stock market liquid, which lowers the cost of capital for firms. Maybe my perception of excessive zero-sum trading is wrong, and in the grand scheme of things providing liquidity makes it very positive-sum.

To me, trading in crypto-currencies looks like a negative-sum game. It’s like sports betting, except that you can rationalize sports betting as entertainment. With crypto, a lot of talent gets used up in the processes of “mining,” hackers trying to steal crypto assets, cybersecurity people trying to safeguard crypto assets, and developing new products and services in the ecosystem. Of course, there are use cases for crypto that people tout, so my skeptical take is not the last word. Maybe it will turn out to be a great thing.

My point is not to bash Wall Street or crypto. I just use those as examples that illustrate the difficulty of determining whether a particular profit-seeking activity is an essential element in the positive-sum game of market competition or a game in which the net gains are not there.

My Experience

I can only articulate what I needed for job satisfaction in hindsight. I can now say that what I wanted from a job are a location that turns out well for my family, financial security, opportunities to learn, and an outlet for my creativity. Only recently did I realize how important the creative outlet aspect has been for me.

My first job out of graduate school in 1980 was at the Fed in Washington, D.C. That was by far the best choice from the standpoint of location. My wife is from Baltimore, so we were close to her family. And our neighborhood worked out really well for us and for our children.

Working at the Fed was also fine for financial security, and up to a point it provided a learning opportunity. But creative outlet? No.

In late 1986, I left to work for Freddie Mac. It was technically an agency under the Federal Home Loan Bank Board, but it was in the process of freeing itself to become a profit-seeking enterprise. It provided me with a learning opportunity and a creative outlet.

My bosses mostly engaged in supportive behavior, but not always. My colleagues mostly valued my success, but some did not. I left when I found myself stuck in a particularly unpleasant situation.

I left to start an Internet business. That was a perfect opportunity to learn and to serve as a creative outlet. But sometimes your creative outlet does not give you financial security. So for a while I went back to having a day job. My wife, recognizing my emotional needs, encouraged me to keep the web site going on evenings and weekends. Within a few months, things started to break well for the web business, and very soon it became possible to quit the day job and still be financially secure.

Overall, where was I most socially beneficial? I don’t think I made any real contribution at the Fed. I did the sort of research and analysis I was supposed to do there, but it is hard to connect that to any particular outcome.

At Freddie Mac, I thought that my ideas helped in managing interest-rate risk and credit risk. For example, I got the company to move more quickly than it would have otherwise to substitute credit scores for human credit underwriting. That resulted in more accurate decisions at lower cost. It was arguably the most socially beneficial contribution of my lifetime. But about a decade after I left, the industry had become overconfident about credit scores in particular and risk management in general, so there was too much sub-prime mortgage lending. With that in mind, it is conceivable that improving credit underwriting had adverse unintended consequences.

With the web business, we were profitable (unlike a lot of the early web businesses), so we met a market test. I also think that we played a part in getting consumers and firms to see the potential of the web.

As things turned out, I think that my personal gain probably exceeded our social benefit. We sold our business to one of the dotcoms that went public in the midst of the bubble. My gains came at the expense of the investors who bought shares in the company that acquired us. Those shares shot up and then fell to earth during the crash, and in fact my partners and I were locked out of selling the stock until it was too late. But we were also paid partially in cash, which retained its value. If you want more of the story, you can scrounge around my personal web site. You could get the long version in my book Under the Radar, if you really want to go that far.

How do you tell whether or not the dotcom bubble was a positive-sum game? It launched some important companies and some important careers. But when the stocks crashed, a lot of money was lost that might have produced a higher return elsewhere.

The world is complicated. But I think that people tend to under-estimate the ability of markets to tell you what is socially beneficial. And they tend to rely too much on the intention heuristic to convince themselves that non-profits are doing social good.

I recommending putting effort into worrying about how the organization is going to treat you, especially when it comes to your ability to grow. What the organization does for the world is really difficult to be certain about, so it is harder to evaluate a job from that standpoint.