Are Iowans Risk Averse?

Tomorrow morning, I have the opportunity to be one of the panelists for the Des Moines Business Record's Power Breakfast series.  The topic of this month's breakfast is "Are Iowans Risk Averse?" 

When I mention this to peers and other colleagues, they all laugh and say "This will be a short talk, just say 'Yes', get up and walk out."  

If you would have asked me a month ago when the Business Publications team approached me to participate on the panel, that would have been my exact response, and my attitude and feedback was negative-bordering-on-sociopathy at our prep-meeting two weeks ago.  I have so much pent up frustration surrounding the rate of change in the Des Moines Metro (MSA), as well as the rest of the State, that it's easy for me to slip into anger and hostility about all the things we aren't doing.

But are Iowans really risk averse?  No.

(tl;dr: Defined Literally, "Too long; didn't read" Said whenever a nerd makes a post that is too long to bother reading.- Urban Dictionary)

Iowans are taking risks, and are gradually shifting from a 'big shoulder' economy (as my brilliant co-panelist David Swenson from ISU so eloquently phrased it) to one comprised of a greater percentage of knowledge workers, as evidenced by the traded clusters of insurance and finance that are physically instantiated in tall, shiny buildings downtown Des Moines.

The composition of the Iowa economy is perceived as being based on farming, which isn't entirely false given that over 1-in-10 working Iowans are classified as 'farming' by Iowa Workforce Development.  This number is down considerably from 1900, as the productivity of modern farms, the introduction of more efficient mechanical equipment, improvements in crop science, and yields of modern engineered seeds have driven down the labor demands for most farms.  This has resulted in higher yields per acre so much so that our government pays some farmers not to farm, in order to artificially suppress the supply and not cause prices to plummet.

This also drives behavior of the farmers to plant the highest paying crops, which means that we are now predominantly a state of corn and soybeans, owned by large industrial farming concerns, or family keiretsu with a patriarchal hierarchy of small family farms.  As any scientist will confirm, when you concentrate on a single crop or seed-stock, you will receive higher yield, albeit at the risk of epidemic disease given the artificially homogeneous environment you have created.  As a self-professed 'wine-guy', I refer you to the tragic tale of the Great French Wine Blight and the resultant economic devastation.

Are farmers taking risks?  Of course!  Every year, they 'plant and pray', as my good friend (and farmer) Larry Cleverly has said to me many times.  Many people will say that there is no riskier profession than farming.  They are taking additional risks every time they introduce new equipment, techniques, or source material onto their farms.  They are taking risks every time they try a new fertilizer.  They are taking risks that an increasingly-indebted government will continue it's welfare regime for unused land and artificial price subsidies for corn and soybeans.  They are taking risk in planting one or two crops based on single-strains of seed, opening themselves up to potential blights like the French wine farmers of the mid 1800s.

So, there is 11.73% of the farming labor force that is taking some degree of risk, for better or worse.

AND THANK GOD for our farming sector as well as the durable manufactured goods from companies like John Deere and Vermeer, (not to mention our thriving Insurance services), which provide us with the lion's share of our 31.8% of Traded Cluster industry (essentially, State exports).

The non-farm employment sectors of the Iowa employment base are concentrated around Health services (10.8%), Retail Trade (10.41%), Local Government (10.18%), and Durable Good Manufacturing (7.16%). 

Health services, which includes everything from doctors to nursing homes, is (by definition) a non-traded cluster. Same with Retail trade (exempli gratia: your local chocolatier, Apple store, or 24-hour fitness franchise), and the 1-in-10 people who work in local government.

Do these sectors take risk?  I'm sure their component-constituents adhere to the same curve as everywhere else, so it's a 'yes AND no' answer.  There are some fraction of them that take risk, innovate, find better and less expensive ways to provide their goods and/or services, and reap the benefits.  There are others who fail to adapt, risk to innovate, and either fail quickly or fade slowly away.  Healthcare demand is economically insensitive (you still get sick if the economy is good or bad), but retail is very sensitive.  Some will adapt and some will not. 

Durable good manufacturing is an interesting Gordian knot.  There are a number of Iowa durable good manufacturing companies, but it's my guess that a good portion of that is in manufacture of heavy farm equipment (Deere and Vermeer), windows (Pella), with possibly a little Rockwell Collins in there for good measure.  All of these companies work in industries with multiple competitors, so they are forced to continually refine and innovate their product offerings, so they will take risk in order to survive and thrive. (Take a look at the difference between Deere's stock price 20 years ago and today and tell me that they weren't innovating for marketshare and market capitalization).  

[Late Edit 2: Lynn Hicks makes a good point in the comments to not forget the lesson of Maytag and Newton, Iowa and what happens from an over-concentrated economic base.  I don't know the story of Maytag well enough, but I do know that their demise had devastating effects on Newton.  Let us sincerely hope that this never becomes the case with our local manufacturers of farm equipment, or the insurance industry.]

Market forces will dictate that retail and durable goods companies have to innovate and take risk in order to survive.  You have to give them a qualified 'yes' vote to risk.  Healthcare and local government are somewhat immune to market forces, so I am not so quick to give them a passing grade on risk, and you could easily make the argument that both of those sectors are present to counter-balance risk. 

When was the last time you wanted to go to a hospital that prided itself on taking risks?

So do Iowans take risk? 

Sure they do.

Do they do it as much, or as risky as other places in the United States?  Or the rest of the world in this global economy?

Not even remotely.

We are flush with primary/secondary sector jobs that pay below the US median average salary, but still pay higher than retail (tertiary sector).  As a result, we have imported over 13000 'High School diploma, equivalent, or less' individuals into Iowa since 1995.  Our state average unemployment is ~2/3 of the national average (6.1% vs 9.1%), but our wages are only 80% of the national average ($36,528 vs $45,831).  Only 1-in-4 Iowans have at least a Bachelor's degree.

We have done a phenomenal job of exploiting our core competencies in agriculture.  We have farming exports, farming equipment manufacture, and companies such as Pioneer/Dupont which itself exemplifies the best of what we can hope for in future bioscience efforts (despite the fact that I abhor their contributions to GMO and alleged strong-arm tactics towards small farmers).  As greater innovations continue to drive automation into farming and equipment manufacture, the labor requirements will also continue to decrease for these industries, and however lovely it would be to shift this labor pool over to quaternary/quinary-sector jobs such as those found in the research labs of ISU, University of Iowa, Pioneer, and others, we are a net-exporter of the expertise required.  In the same period that we imported the 13k+ individuals above, we exported nearly 25000 'Bachelors degrees or greater', ~1/3 of which were Graduate degrees. 

Shit, we really could use those people about now.  No worries, lets just grow some more, right?

Well, since most of those jobs are heavy in science, technology, engineering or mathematics, that brings us to STEM programs in our schools.  The American Institute of Physics, who likes to rate states based on their STEM programs in education, ranks Iowa 38th of these 50 states.  Luckily, the Governor has convened a task force to address this shortcoming in our 'pipeline', but that's many years away from workforce-ready.  Our colleges are not much better, with enrollments in science and engineering on a gradual decline, and many of the graduates either leaving the state or even the country once their degree program is complete.

[Late Edit: Our educational system in this state has challenges.  Every teacher I meet has the best interest of the students in their charge as their first priority, with differing methods of accomplishing their intended outcomes.  I was fortunate enough to participate in a roundtable discussion with Iowa Education Director Jason Glass and Development Director Debi Durham (as well as the peerless Trace Pickering from Grant Wood AEA), and was inspired by the sheer lust for change evident in the room full of educators.  The rhetoric coming from Director Glass is highly pragmatic and encouraging, acknowledging the problems and offering solutions. This 'can do' mindset was mirrored in a recent STEM presentation I gave to a representative section of educators and administrators from around Iowa. 

Having said the above, I am reminded of a movie I saw recently that had great actors, a fantastic script, sharp directing and impressive special effects.  The movie sucked.  Individually, the pieces were great, but somehow they didn't integrate well.  So far, I have seen great pieces in our local educational system with fantastic risk taking and disruptive thinking, but systemically we are still calcified in a 1940s model of education.]

Lets hope those improvements in farming and manufacturing take some time so we have time to train up a batch of scientists and engineers, right?  Well......recall that manufacturing is market-driven, so regardless of the rate that our local companies take risks, innovate, and thrive, the market will keep advancing.  If these Iowa companies don't keep pace with the rate of change, as was illustrated in "The Lexus and the Olive Tree" regarding micro-foundries in the rust-belt, Iowa and/or US Domestic manufacturers will lose market share.  Less market-share = less revenue = less money to pay for operations = less employees.  Whoops.

Bottom line: We have a workforce of 1.6M people in Iowa, of which 1/2 are living in one of the nine MSAs. (The non-MSA-dwelling half of the population is primarily employed in retail and professional services, with a goodly percentage working in manufacturing of non-durable goods (read: Livestock)).  If you apply the percentages, around 30% of the urbanites are in health services, retail or local government, leaving 563,000 people in the workforce. Most if not all of the sectors are taking risks daily.

But we have more than our fair share of issues. We are growing in population at slower than the national average as we are exporting our youth.  We are slipping academically, especially in STEM.  Iowa is ranked 45th in the Business Tax Climate Index, and 25th in Kaufmann's Entrepreneurial index of the climate for startups, in a nation that is ranked the worst of OECD countries in Corporate Tax regimes.

We have to sober up, and take action. Quickly.

We need to radically change the way we teach in our Iowa schools. STEM is not optional, STEM is a necessity.  Last week, my eldest daughter  (in 4th grade) had no classroom time for science, but two hours for practicing cursive.  She had hours of music class, but thirty-minutes of computer lab.  This is not representative of the world we are currently living in, much less the one she will enter as an active participant in 10-15 years.  (Look at the sorry state of the US Educational System ranked internationally here). If the public sector educational system either can not or will not respond to the challenge to bring our educational system back to it's previous international standing, then we'll work with legislators to create private alternatives to the public system that will.

During the time it takes to educate the coming generation in STEM, we need to create and grow the industries that will ensure the next generation of Iowans aren't 'une nation de boutiquiers'. Our strengths as a state are in agriculture, bio-sciences, advanced materials, and information technology.  These are blanketed in with a millon other 'targeted sectors' by IDED right now but we need to peel them off and create specific programs to retain the existing companies, grow them (and I don't mean more R&D tax credits), recruit other companies from outside the state to create complimentary clusters, and encourage the creation of new companies.  This will give our new STEM graduates some place to work within the state, rather than fleeing for the coasts once they have sheepskin in hand.

We need to create a streamlined flow between our key research institutions and business, so there is a win-win of commercial exploitation of the excellent scientific research being done within the State.    We need to include a research funding component based on commercialization, perhaps even tying tenure to it.  Meanwhile, we need to lobby for our Federal government to raise our federal R&D budget for pure science to pre-1970 levels (1.3% in 1970 vs .7% at present), which is such an important pipeline of necessary ideas and invention.

We are going to all need to invest in infrastructure locally, be it schools or businesses.  And by invest, I mean both invest-your-dollars-to-fund-Iowa-innovation in new ventures as an investor, but also buy-locally when you purchase.  Just as the buy-fresh-buy-local movement has created a healthy group of locavore farmers that are experimenting with new (read 'not soy or corn') crops, allowing for more wealth creation and better health, our local bio/materials/tech companies badly need your patronage.  I have, on more than one occasion, been told that a large local company would not purchase from a local technology company because they were, well, a local technology company.  If they are not competitive, for god's sake, tell them why!  That goes double for service providers.  Tell them why they are not earning your business, and be direct and honest about it. 

If you don't have a good reason, then give them your business.

Given the prevailing winds of an aging demographic, net-exports of college degrees, a slipping academic standing, and the rapid growth of not only competing States but other countries, lets hope that those half-million people take considerably MORE risk than they already do, because we have to make up some ground, and fast.

Comments

[Lynn Hicks]

Interesting post. Sorry I can't make the discussion tomorrow. A couple points:
1) We were asking "Are Wisconsinites risk averse?" 10 years ago. So is it geographical? Generational? What I think you're saying: It's not so much about psychology (our comfort with risk), it's about changing how we prepare people and companies to take risks and reward them for doing so.
2) Good point about durable good manufacturers and market share. No discussion about risk and Iowa should be complete without Maytag, and how a company, and a company town, failed to innovate and grow.
3) What's with you and Debi Durham referring to Michael Porter all the time?

[Christian Renaud]

Lynn,

Sorry to miss you tomorrow. Comments on your comments:

1) Indeed. We need to accept risk and failure as natural steps in growing. Just as in grade school, you learned by your mistakes. The same is true for the rest of life.

2) Indeed. Big miss on my part. Maytag should be in there and I'll add it as an in-line note.

3) I have no idea other than it's an easy way to say import/export sectors/clusters of an economic base. Porter and the HBS people usually do good research, and I try to read people who do their homework. :-)

[John Norwood]

Christian-

Enjoyed your remarks today, and your thoughts on the blog regarding risk aversion. I agree w/many of your observations.

If you don't mind, I'd take issue with a couple of things you say, because they are often repeated around here as self-evident conclusions, but I think they really need to be placed into context of the world around us.

1. Is the idea re: the brain drain of youth. I'd argue the issue isn't so much how many 20 somethingers leave to go someplace else, the more important question is how many come back in their late 20s/ 30s to work and raise families? Mobility is a fact of life, and 20 somethingers from around the country seek out adventure and experience, often away from the nest. We need more of that outside experience and creativity in this state, not less.
2. Related to 1. is the idea that our Regents universities export alot of degrees because we import alot of students. I noticed you pick up on that point. If we just serviced our own instate student needs, we'd have a university system of a much smaller scale and richness. The larger scale allows us synergies on many levels from Medical and engineering advances, to more competitive football. So, exporting students in and of itself is not a bad thing. How many students are staying to work at startups? When I asked that question back in 2003 at the UofI's Biz/entrepreneurial center...the answer from the director I met with was, paraphrasing, "no, our students don't do that...it's too risky..they go and work for companies like John Deere." We need to change that mindset as you all spoke so well about today.
3. This idea of population growth being stagnant and not a good thing needs to be re-thought in terms of sustainability. Why can't we have a sustainable economy with a stable population with the goal being full employment and ever increasing wages vs. the notional that we need to add more people to drive growth and prosperity? I think Europe might be able to teach us a thing or two about that, as well as overpopulated countries like China, which are desperately trying to reel in population growth. While Iowa's population has remained almost flat for 100 years, perhaps that is for good reason given our focus on agricultural productivity. Also, as David S. noted, while 2/3 of our 99 counties are shrinking as production agriculture continues to scale up, the other 1/3 in our metro regions are growing at a fairly steady clip. So, I think population growth in and byitself is not what we really need to compete successfully on the global stage: we need to think more about how "small can be beautiful"? How can we can use our smaller scale to advantage over high population/high cost centers of living like the Bay Area or Boston, where there is greater separation between the haves and have nots? We have tremendous cost and quality of life advantages in living and working in a smaller, less overpopulated metro; yet my observation is we tend to undersell those attributes.

I really like your messaging about mentoring. I think that's one of the most important keys, as I look back to my time around 128 and Sand Hill Road. Capital is mobile. People and ideas are mobile. We have lots of great ideas in this state. What we need is a community of experienced risk takers who can teach and lead others in starting new business ventures. I applaud all the speakers today as well as Mike Colwell's efforts to build the ecosystem. I'd encourage us all to look beyond just the Silicon Valley model. Minneapolis, Chicago, Omaha, KC, and other midwestern hubs may have some ideas that are a better fit for our midwestern culture.

Thanks again,

John

[Christian Renaud]

John, thanks for your comments. Appreciate the reasoned feedback.

1) Although I agree that seasoning and 'boomerang' youth that import talent back into the state are beneficial, I do not agree that we need to export as many as we are exporting. Demographically, we are losing youth and not replenishing them with net-imports, which creates a hole in our labor pool. Even more so in the startup world that I live in, which sometimes feels entirely populated by 20-somethings.

2) We are a good importer of students that come to be educated from out of state/country, and I'd prefer that we find a way to retain those smart folks than export them back out to their place of origin. In order to do that, as you say, we need to create sexy opportunities at startups to keep them from leaving. We're in a bit of a chicken-egg situation with that at present, but hopefully we have enough heretics like my friends and colleagues that want to build here that they will bootstrap a broader effort.

3) I don't propose that we need to grow faster than the national average, but that we need to grow at the national average. We currently do not. As far as quality of life and finding a 'work smarter, not harder' balance that allows us our luxuries and quality of life while not 'living to work', I think it is a great ideal that everyone is striving for that no one elsewhere in the world has yet to find either. We can play to our lower costs (and lower wages) to attract some people who are disenchanted by other urban centers, which will address some of the population loss.

In this case, I believe at a certain point we'll drop below a certain population point (and not raw population number, but the dependency ratio, reproductive rate, and composition of the work force, exacerbated by macro-economic factors like social security, medicare/medicaid, and unfunded pension programs public & private) that it will be nearly impossible for us to recover from. I assert that we need to take the actions proposed in my blogpost ASAP. That will help us build our own uniquely Iowan innovation ecosystem, and not a poor replica of a coastal one.