Bailouts, bankruptcies and the Middle Class

Our pre-pandemic stop in the Atlanta suburbs to visit my brother and his wife began a months-long dialog about the state of the nation.  On that occasion, we shared wine and political views --  simultaneously.  That can be a deadly combination but we somehow, we managed our way through it without resorting to violence.  Kidding aside, we had no major differences of opinion largely because we are members of the American, suburban middle-class. 

Our political views are affected by our shared values.  What the suburban middle class has always had in common is our desire to provide a secure home for our families, to support our children’s aspirations and to be financially secure in our retirement. Yes, we have that in common with others who are not in like socioeconomic circumstances.  But the middle class have shared experiences that bind us.  We have endured the ups and downs of the economy, job losses, mortgage crises without an expectation that a government bailout will carry us through.  My brother and I both have been small business owners.  We have gone through years of reduced or no income and still managed to pay the mortgage and save for our kids’ college education.  

I have always assumed we were in good company – that our neighbors shared our values and habits.  But, as I wrote last year (Borrowing Our Way to the American Dream), middle-class families are carrying more debt than they should to maintain their lifestyle.  Middle class living became more luxurious as two income families became prevalent.  Two jobs mean you need two reliable cars (we had one when I was a kid). All that hard work deserves a bigger house and bigger houses mean the kids no longer have to share bedrooms (as we did).  After school activities require big expenditures for travel and sports equipment (it was free, or we didn’t do it).  

In a recent email from my brother, he expressed his astonishment (okay, he ranted a bit) over a news report “showing long lines at food banks.”  The report was a public service call for contributions to keep the food bank stocked. Unemployed middle-class people were understandably concerned their children might go hungry.  His reaction matched my own although he was more eloquent: “You’re driving a frickin’ new SUV and you don’t have enough cash to buy food?”  

It’s hard for me to imagine that the combination of weekly unemployment checks and a $600 kicker from the federal government will cover all their expenses.  So, yeah, they’re suffering, at least in the short term.  But, as my brother ranted, “I made personal sacrifices to save money and plan for contingencies.  Now, these people are asking for my money to feed their kids.   These are the same people that claim they can’t afford health insurance and college is too expensive.   Their priorities are clear.  They want that brand-new SUV, but they want someone else to be their safety net.  I [have] the same anger when I hear politicians talk about ‘college for all.’  Wait a minute, I [sacrificed] to save in a 529 account.  Why can’t they do that?”

We now live in Bailout Nation.  Our government overextends itself in good times and, therefore, lacks the capacity to respond to crises.  And, the same can be said for families and businesses.  Our last firewall against total disaster is – as it was during the 2008/09 financial crisis – the Federal Reserve.  During this pandemic, those in government have the same rational fear as a decade ago.  The crisis may be more than our economy can endure.  So, we flood it with newly minted cash.  

But this time is different. In the weekly newsletter of the American Institute for Economic Research, Scott Burns describes how the Fed has used its emergency powers in this crisis.  The last crisis affected the financial system.  This one is in the “real economy.”  That has cast the Fed in the role of commercial bankers lending to businesses by purchasing corporate bonds and extending credit directly to companies a banker wouldn’t touch.  Something the Fed has never been good at.

Much like my brother, the companies that have managed their balance sheets well don’t need and won’t get relief.  Those that have been profligate get a bailout under favorable terms.  Our economic future would be made more secure if those companies were to go through Chapter 11 reorganization under the bankruptcy code.  The shareholders would lose everything; the bankers would take a haircut.  But the companies’ operations would continue under new ownership, ownership that would be more careful to avoid that same fate.  And, a hard lesson would be learned by the next generation of corporate leadership. 

Of course, crisis conditions place us at risk were we to allow this to happen.  Were too many companies to fail all at once, it could cause a supply shock to the economy accompanied by massive unemployment.  The depth of economic harm could cause another Great Depression.  

So, how did we get here and how should we move forward?

Burns refers to the work of George Selgin on this matter.  It’s difficult to summarize his 322-page whitepaper in a few sentences.  But I’ll give it a try.  Just STOP!  The Fed should outline its operating framework in such a way that those who run banks and industrial companies know what facilities might be available to them under crisis conditions – PERIOD.  

Oh, and there’s one more thing.  One should ask why so many corporations have placed themselves in jeopardy.  The answer is they are doing what the federal tax code incentivizes them to do.  Capital gains are taxed at a lower rate than personal or corporate income.  So, companies engage in extensive borrowing at the aforementioned zero interest rate and use the cash – not to invest it in building a better company – but rather to buy back their own stock, raising the price and lining the pockets of officers, directors and shareholders.  

Raise interest rates to a more normal range, eliminate the disparity in the tax code and watch what happens.  By the time of the next crisis, we might be better prepared.  

WHO WILL LEAD? 

Your choice: Democrat ineffectiveness or Republican hypocrisy

Sometimes you read something so obvious you can’t believe you didn’t figure it out for yourself.  Such was my experience when I read Russ Roberts’ piece on Medium titled “The Economist as Scapegoat.”  Roberts doesn’t just punch holes in a habitual argument.  Rather, he slams you between the eyes with a two-by-four.  He presents data that contradicts the idea that life has gotten worse for many Americans because of Reagan era policies based upon the philosophy of Nobel-winning economist Milton Freidman.  In other words, this convenient trope is not borne out by reality.  

In reality, Freidman’s proposals have never been implemented.  During the so-called Reagan era (the last 40 years), the nation’s budget has been managed more by the prescription of liberal politicians than conservatives, even – or especially – when Republicans are running the government. 

Over the last 50 years, government spending has increased both in real nominal terms… 

Government regulations have increased not decreased… 

And, out-of-pocket healthcare costs have decreased while government spending on healthcare has increased.  

Roberts argument motivated me to do some digging.  What about other liberal tropes?  Do they stand up to scrutiny.  The press likes to trumpet that the wealthy don’t pay their fair share of taxes. Here’s what the Congressional Budget Office has to say: 

Another persistent trope is the comparison to the economies of Europe and the progressivity of our tax code.  This analysis compiled by Bloomberg from OECD data presents an interesting, if complex, picture.  

The figures in the left-hand column are those most often quoted in the press.  But the figures in the right-hand column tell the tale.  The larger the ratio, the more progressive the tax code.  The largest economies in Europe, including the Scandinavian countries, have tax codes that weigh more heavily on the middle class than the wealthy.  

The Bloomberg article goes further to show how the generous benefits of European countries are financed in large part by consumption taxes (Value-Added Tax in Europe; sales taxes in the U.S.) that affect the poor and middle class more than the wealthy.  

American politicians want us to believe the system is rigged against us.  It’s only fair to tax the wealthy to pay the bill, right? Europeans follow a more moral path:  citizens who want government benefits are willing to pay for them.  

All of which suggests to me that what has failed us is not a decline in government investment but rather the persistent failure of the welfare state to address the needs of those who need it most while threatening to bankrupt the economy in the process.  So, perhaps, it’s a good idea to examine what got us here and consider restructuring our efforts.  The challenge, of course, is that doing so relies upon an overthrow of highly educated people who have promoted the idea they are omniscient and, therefore, worth every penny they are paid to spout nonsense.  This faulty presumption leads to bold predictions about how a large, unmeasurable, complex system (the American economy) will respond to government inputs (fiscal policy and regulations).  To be clear, I’m talking about how wrong our politicians and policy elites get things on an ongoing basis.

While the data support the idea that the welfare state has failed, the other side of the coin is perhaps more telling.  Far from following the “starve the beast” philosophy defined during the Reagan administration, Republicans have hypocritically done the opposite.  They have consistently voted for bigger and bigger deficits.  Far from reducing the size of government, they have allowed liberals to tempt Americans into an addiction to government programs while promoting their own brand of addiction: lower taxes.  

WHO WILL LEAD? 

Coronanomics Revisited

OUCH!

I recall lining up for polio shots when I was in school.  The vaccine provided at no cost by the federal government eliminated polio from the United States over the course of two decades according to the CDC, the organization on the front lines of the battle against COVID-19.  That’s what it will take before I personally feel safe again -- safe enough to resume normal life or whatever passes for normal on the other side of this.  Best case – two years!  Am I overreacting?  Maybe.  A preliminary study of Santa Clara County, California suggests the mortality rate of COVID-19 is no worse than seasonal flu.  So, I might be at the extreme end of a spectrum whose opposite is defined by those protesting the shutdown of the economy (the Walking Dead?).  You might be somewhere in between.  

A panel of experts from the American Association for the Advancement of Science has modeled the impact over the next five years.  They assume that, like the flu, immunity may not last forever.  Vaccinations might be an annual requirement.  Further, their model assumes there will be new waves of outbreaks as we begin to reopen the economy.  History provides examples.  In the Spanish Flu pandemic of 1918, cities that reopened quickly – Denver and Philadelphia -- dealt with a second wave that decimated their workforce and disabled their local economies.  

Despite the absence of anything resembling leadership from the president, a task force has laid out a three-phase plan to reopen the economy based upon some broad and easily understood criteria.  It wisely leaves the implementation to governors and local government officials.  But it’s clear that there must be federal support for it to work.  The governors can decide when to open up businesses and scale back stay-at-home orders.  However, there are serious resource constraints on what the task force describes as “Core State Preparedness Responsibilities.”  Left on their own, the states would be competing with one another for supplies of test kits, vaccines and protective gear.  And, of course, the states lack the funds to follow through.  The New York Times has reported on a Harvard University study calling for testing at triple the current as a prerequisite for reopening the economy.  As it stands today, we have no national plan or infrastructure to support testing on that scale.  Nor can we perform contract tracing to ensure proper treatment in a more open economy.  Both are part of the strategy outlined by the presidential task force.  But a strategy without a plan is just a wish.   So, for now, we are sticking with medieval rules: isolation or risk death.  

So, what happens to the economy? Well, for starters, we’ve got a thirteen-figure hole to fill.  That’s just my back of the envelope calculation.  But I figure that a 20% unemployment rate will amount to a $3 trillion dollar drop in annual GDP.  Add the budget gap in the states most affected and the need to shore up hospitals and you’ve got another trillion or two.  The $2 trillion CARES Act won’t be enough.  

A few weeks ago, I predicted a short-term drop-in GDP or a V-Shaped recovery.  I also said, the real long-term risk was a supply disruption.  Well, that’s what we have.  There are those who suggest that weak businesses should be allowed to fail.  Corporations have loaded up on low-interest debt over the last decade.  Now, they should pay the price.  Only the stronger firms should be allowed to thrive.  In most circumstances, I would agree.  However, much like federal response to the banking crisis of the last decade, allowing global businesses to fail may be too much for the economy to bear. 

To some degree, our prosperity relies upon the efficiency of supply chains that run from raw materials to manufacture to distribution to retail to consumers. Too much disruption will result in massive unemployment that will not resolve itself when we’re all permitted to go back to work.  Products won’t get to market; companies will shut down; and, people won’t be earning paychecks.  

The one economic bright spot in all of this has been the response of the Board of Governors of the U.S. Federal Reserve System.  Having learned the hard lessons of the 2008/09 financial crisis, they have focused on ensuring liquidity not just domestically but also globally, opening lines of credit for foreign central banks.  These actions will serve us not only in the near term but also in the long term as sovereign governments as well as foreign investors continue to see U.S. Treasury Bonds as the safest of safe havens in times of crisis.

After all, how else can we fund those multi-trillion-dollar fiscal deficits?  

WHO WILL LEAD? 

Coronavirus and the Economy

It’s hard to imagine all the economic impacts of the current Coronavirus crisis.  A recession – official or unofficial – seems likely.  (An official recession is defined as two consecutive quarters of declining GDP.)  If the crisis lasts for only three months, there will be a “Newtonian” surge (an equal and opposite reaction) in demand in the third quarter that will even out the economy for the year.  

Government can and should play a role in managing the economic crisis.  But what is that role and how should they play it? 

Generally speaking, there are two kinds of shocks the economy can experience: a demand shock and a supply shock.  The first occurs when consumers develop some fear – rational or irrational – about their near-term economic future.  In that case, they hold back on purchases, first of durable items like cars and appliances and then more routine purchases like clothing and eating out.  A supply shock occurs when there is some disruption in the supply of essential goods and services driving prices up dramatically.  The Arab oil embargo of the 1970’s is a good example.  

A demand shock often can be effectively dealt with by the Federal Reserve lowering interest rates thereby lowering the cost of purchasing durable goods.  Supply shocks are tougher to deal with as they may be caused by factors outside the government’s control.  Again, the Arab oil embargo serves as a good example.  

The US economy was stable at the beginning of the year.  When demand and supply are balanced, the economy is said to be at potential real output.  But the coronavirus response may cause both a demand and a supply shock simultaneously.  Demand is down because people are staying indoors affecting large purchases like cars and homes as well as routine small purchases.  A supply shock might occur if supply chains providing essential products are disrupted -- if, for example, workers cannot go to work in domestic factories.  In the case of a supply disruption prices will rise at a time when many Americans are out of work.  It is not straightforward to recover from a recession clobbered from both sides. This is the worst possible case because neither Fed action (monetary) nor Congressional action (fiscal) can maintain a supply chain or get people back to work.  So, the Fed can react or do nothing.  Lowering interest rates keeps unemployment low but raises prices causing inflation.  Doing nothing keeps inflation low at the expense of higher unemployment. So, the best government can do is try to lay some foam on the runway to ensure a soft landing.  

Many government and health officials have been praised for their candor, decisive action and leadership in this crisis.  We need the same degree of honesty about the economy.  There will be an economic disruption lasting three to six months.  We should not overreact.  Inflation and deficit spending will increase, and we shouldn’t be too worried about it in the short term.  Remember: borrowing is cheap right now.  So, let’s do what we need to do without too much handwringing. 

The Fed is doing the right thing by lowering borrowing costs for government and businesses.  Congress and the President are doing the right thing by providing stimulus for the near term.  The stimulus should be targeted to those who really need it: low income families and small businesses who don’t have the cash reserves to survive a sustained drop in demand.  

I have seen more than a few memes suggesting buying gift cards from local businesses and over tipping service staff.  These are all good measures we can take as citizens to flatten the economic curve during this crisis.  Let’s hope that government action can also flatten the curve of the health crisis.  

WHO WILL LEAD?

A False Notion of Prosperity

This post was originally posted on the Rochester Beacon website on February 17, 2020 under the title Albany's False Notion of Prosperity.

The factors that made Rochester a bustling, growing center of economic activity in the 19^th and 20^th Centuries are no longer relevant.  Founded around a river that emptied into the busy shipping lanes of the Great Lakes and connected to the Port of New York by the Erie Canal and railways, Rochester was a shining light on the western frontier in the early 19^th Century.  Its fortunes rose during the second industrial revolution as George Eastman founded Kodak, an enterprise that not only was a center of innovation but also attracted human capital.  

Our city has always occupied a middle space between urban centers like New York, Chicago and Los Angeles and rural company towns that rely on one major employer for their economic well-being.  In the last quarter century, Rochester has been treading water while manufacturers in company towns migrated their workforce to low-wage countries leaving them to the ravages of economic irrelevancy.  Some have taken matters in hand, embraced 21^st Century industry and created conditions that promote prosperity.

__________________

At the end of every supply chain is a consumer.  We buy goods and services depending upon our whims and capacity of our wallets.  Companies competing for our dollars have moved us from cable TV to streaming video, from landline phones to mobile and from postage stamps to email.  The home cities of firms driving those changes benefit from the downstream effects of their success.  Those cities – Boston, Seattle, Palo Alto -- attract the attention of investors and the momentum of investments creates boomtowns.

It’s possible for smaller cities to become magnets for investment too. Chattanooga, TN (population 179,000) famously transformed itself from fading rustbelt casualty to tech center boomtown by investing $330 million to bring no-latency internet to citizens and businesses.  The non-profit Kauffman Center outlined three intertwined layers leading to the success of the initiative. The drive for 21^st Century relevance began with the mayor’s vision of his low-cost-of-living hometown as a magnet for technology startups.  Abandoning the usual dogma of the left and right, business and government worked together cooperatively to obtain a federal grant to fund one-third of the project.  Not satisfied with “If you build it, they will come” city government sweetened the pie with financial incentives for I.T. professionals to move to their city.  Small though it may still be, Chattanooga’s metro area population has grown 11% in the last decade. 

Charlotte, NC – once the same size as Rochester and now two and a half times its size – attracted new businesses and jobs the old-fashioned way.  Lower taxes and proactive city and state governments worked for decades to make the city what it is today.  Rochester could duplicate that success.  We have a highly qualified workforce, entrepreneurial energy and an enviable array of colleges and universities. 

So, how do we New Yorkers (and Rochesterians) ensure we get a larger slice of the pie?  

A group of local business organizations has created ROC2025.  Describing itself as a “powerful new alliance of economic development organizations,” they have declared themselves in favor of Mom and apple pie.  It’s difficult not to support any of their initiatives:  workforce development, support for existing businesses, enhancing new business attraction and so on. But, in the end, we’re just whistling past the graveyard.  The overhead of high taxes, a heavy regulatory burden and a city school system that doesn’t graduate students prepared for the real world of work is simply too much for our local economy to bear.  

A prominent feature of Governor Cuomo’s administration has been economic development programs targeted at upstate New York.  And, for good reason.  The state only shows good economic results by virtue of the overwhelming success of Wall Street.  The governor took office as the nation (and Wall Street) was climbing out of the deep hole dug by the Great Recession.  So, while he loves to tout his record of having “created” over a million jobs during his reign, it is noteworthy that the rate of job growth is below the national average.  Also noteworthy is that over 70% of those new jobs were created in the New York metropolitan area.  

The non-partisan Citizens’ Budget Commission estimates the state spent roughly $10 billion on economic development in 2018.  Nevertheless, New York leads the nation in population loss.  Business interests and the conservative Empire Center claim the high tax and abysmal regulatory environment is the culprit (a claim with which I agree).  The governor claims it’s our lousy winter weather. Whatever the reason, it’s fair to say that so-called investments by government haven’t created a booming upstate New York economy.  

Government is unduly influenced by special interests and even the best and most ethical participants are unlikely to get it right for one big reason: They don’t have their own money invested in the enterprises they endeavor to help.  As for the enterprises, those seeking money from the government would rather spend the taxpayers’ money than their own as they should or would otherwise.  

Economic prosperity is rooted in private capital invested in promising enterprises.  Rochester could create the conditions that enabled Chattanooga’s success with local leadership embracing a vision and seeing it through.  But that vision, whatever form it takes, would be undermined by a state government addicted to the notion prosperity should  and can only be enabled by central government.  

WHO WILL LEAD?

Further Future: a 21st Century Economic Model -- Part 2

This is Part 2 of 2.  To read Part 1, click HERE.

No discussion of economics can exclude current hot button topics: income inequality, free trade, immigration and the urban/rural divide.  In the aggregate, the free trade regime promoted by every administration since Nixon’s breakthrough China policy has contributed to US economic growth.  The law of comparative advantage (first defined by David Ricardo, a disciple of Adam Smith) has been demonstrated to have the desired effect.  The US advantage in professional services, global management and innovation has served us well, creating high paying jobs in urban centers – New York, Silicon Valley, Chicago, Dallas, etc.  Unfortunately, the benefits are not universally available to everyone.  Or, to put it another way, no matter how many jobs are created for international tax experts in New York, none of them are going to be filled by a worker who has lost his job in a North Carolina furniture factory.  

In his book “The Future of Capitalism,” British economist Paul Collier proposes that we change the redistribution model.  Rather than tax the rich and give to the poor, he would have us adopt an “agglomeration tax.”  Mobility is critical to economic growth.  From the time of the Pilgrims, people all over the globe have fought to immigrate into the U.S. to take advantage of the economic freedom our social contract allows.  Within the U.S., migration between regions and from rural to urban centers is an indicator of economic success.  (That’s why the European Union adopted the Schengen Agreement permitting migration across national borders.)  Our economic growth has been driven by this agglomeration, particularly in the era of free trade.  Collier points out that not everyone benefits from their move to the big city.  Demand for housing and other retail products and services renders the cost of living much higher than outlying areas.  Those whose incomes fail to rise to the level necessary to offset the higher cost suffer.  Those whose income growth outstrips the higher cost thrive – investment bankers, lawyers, Silicon Valley entrepreneurs.  Collier’s agglomeration tax would take from the latter category and pass it on to rural communities to offset the economic damage.  

At first blush, this proposal might seem to make sense.  But redistribution hinders prosperity no matter how you design the formula.  And, in any event, such a proposal would be politically infeasible. 

The key to prosperity begins with capital formation.  If you don’t have the dough in your bank account to start a business, you have to attract investors.  And, investors are attracted to the prospect of great returns.  For government to fulfill its social purpose, it must create the conditions that attract private capital.  On the whole, the U.S. does a great job of this.  Indeed, our economic prospects rely upon our ability as a nation to attract Foreign Direct Investment (FDI).  

On a smaller scale, communities can only succeed by obeying the law of attraction.  Companies are attracted to friendly regulatory and low tax environments.  This may sound to you like an “old saw” from an old conservative (and it is!).  But that doesn’t make an invalid statement.  I’ll point to two examples of small cities who have overcome the impediments to economic development.  

Chattanooga, Tennessee famously bet the farm on high speed internet in 2010.  City government recognized that the path they were on would lead to the same type of failure experienced by other small manufacturing communities.  A $330 million project -- beyond the reach of the city’s budget, funded by $111 million from the federal government with the balance coming from municipal bonds issued by the city -- enabled the city to create no-latency internet service to any and all businesses and households.  The city has thrived by attracting high tech startups to its low-cost-of-living, superior-infrastructure setting.  More recently, the Lehigh Valley region of  Pennsylvania has begun its recovery from the shuttering of its steel plants by more traditional means.  Offering tax credits and abatements and promoting development of office parks was only the beginning.  The New York Times reports that recent economic development efforts are centered on development of urban centers to attract Millennials, featuring restaurants, bars and cultural centers.  

The critical element in these two stories is local initiative.  Attracting both federal grants and private investment is the prototype for small cities to thrive.  New ventures and established companies that will create jobs and young professionals who will settle, pursue careers and raise families is the key to success.  

States like New York, lacking the wisdom and fortitude to lower taxes and reduce regulation, make the mistake of substituting government funding for private capital.  The imposition of social criteria and friction costs reduce returns and ultimately fail the communities they endeavor to help.  

Local communities can learn from the successes of Chattanooga and the Lehigh Valley and create their own economic development strategies.  Strong communities keep talent at home, promote new ventures, support established businesses, improve city schools and create programs to train the workforce and provide transportation to where the jobs are.  

New habits, creative approaches and public buy-in are challenging.  For communities to succeed, its leaders – corporate, government and non-profit – must unite behind a common vision and convince the public to support it.  It won’t be easy; but it’s got to be done.

WHO WILL LEAD?

Further Future: a 21st Century Economic Model -- Part 1

The last half of the 20^th Century bred more than a few superstar economists.  Even those who are not students of economics have heard of Milton Friedman, Paul Krugman and Paul Samuelson.  Columbia University professor of economics Mark Skousen has a different threesome in mind.  In his book “The Big Three in Economics,” he argues on behalf of three who have the most lasting effect on our economic thinking:  Adam Smith, Karl Marx and John Maynard Keynes.  That each of them lived and worked in three different centuries is no accident.  It is, rather, a measure of how long it takes for breakthrough economic theories to take root and have lasting effect on the societies that embrace them.  

While Smith (18^th Century) and Marx (19^th) might be posed as polar opposites, Keynes (20^th) proposed a blend of free enterprise and government using fiscal policy to affect economic outcomes.  (We are now more affected by the monetary theories of Milton Freidman.  But he didn’t make Skousen’s cut.) 

The NY Times profiled an economist who endeavors to have that kind of effect on the 21^st Century.  Mariana Mazzucato -- born in Italy, raised in the US and teaching in London – would like to change “how society thinks about economic value.”  Eschewing the now tired debate that frames the free market and government as opponents, she points to the Internet, GPS and the silicon chip of examples of how government research has enabled free enterprise to flourish and society to benefit.  She also suggests that the political left is “losing around the world because they focus too much on redistribution and not enough on the creation of wealth,” according to the Times.  Her theories have been embraced by politicians of both parties who declare themselves to be capitalists but want government to be more active in achieving economic outcomes.  Elizabeth Warren would double federal R&D to “Create and Defend American Jobs”.  Meanwhile, Senator Marco Rubio (R-FL) has published a treatise outlining how the federal government should steer capital to favored industries. 

It would be easy to fall into the usual tribal debate about Dr. Mazzucato’s ideas – the libertarian right vs. the socialist left.  But the dogmas of either side don’t hold up under scrutiny.  It’s hard to argue that capitalist Silicon Valley startups enabled by Wall Street money haven’t created jobs, prosperity and the follow-on effects of both.  It’s also hard to argue that government didn’t play a role as technology from both the Defense Department and NASA is at the core of all digital businesses.  (The GPS system on which we all rely is still operated by the US Air Force.)

So, the question isn’t whether government research can benefit the economy or not.  It is rather where should we draw the line?  Mazzucato, Warren and Rubio would have the federal government not only directing research dollars according to social goals they deem beneficial but also extending government investments into the (no longer) private sector.  The paradigm they propose is not without precedent.  Countries as diverse as Japan, China and the former Soviet Union have created industrial policies to guide the economy.

There is no question that government can play an active role in wealth creation.  However, Dr. Mazzucato (as well as Senators Warren and Rubio) draw the line in the wrong place.  It’s certainly true that the iPhone wouldn’t exist without silicon chips, the Internet and GPS.  It’s also certainly true the federal government would never have invented the iPhone.  So, I would stop at having government invest in companies that will bring innovative technologies to market.  There’s plenty of private capital to make that happen.

Indeed, the digital technologies brought to fruition by government agencies had no commercial purpose when they were invented.  They enabled those agencies to pursue their objectives.  Silicon chips supported the space program.  GPS supports the US military. 

By contrast, the Obama administration invested in green technology to enable private enterprise to achieve a beneficial outcome.  The creation of the Advanced Research Projects Administration – Energy (ARPA-e) under the Department of Energy was meant to mirror DARPA, the Defense Department agency at the heart of the development of digital technology.  It has granted over $1.5 billion to 580 projects.  Many of these projects were highly speculative and haven’t borne fruit.  However, a select few have attracted $1.8 billion in private sector investments. In other words, the government invested in research where the private sector wouldn’t and, much like digital technologies, the private sector has taken the results and developed products that are market ready.  The greatest successes have come from the improvement in cost and efficiency of both solar panels for power generation and battery technology for electric vehicles.  So, it can be shown that the DARPA/ARPA-e model can be translated into commercial success.  

As for its social purpose, the results are a mixed bag according to Investors’ Business Daily.  The adoption of alternative energy throughout the US has resulted in a doubling of the percentage of total energy generated from alternative sources since the turn of the century.  However, in that time, U.S. consumption of energy from fossil fuels has remained about the same according to the Congressional Research Service.  Similarly, while there has been a boom in sales of electric and hybrid vehicles, the environmental benefits have been offset by the increased sales of SUV’s, this despite powerful financial incentives to buy electrics.  So, in the case of environmental technology, it might be said that government research has contributed to a green future but those who might benefit – the voters – have undermined our success. The game’s not over, of course.  More than 40 years elapsed between the invention of the silicon chip and the creation of the iPhone.  Few would have predicted it.  So, we shall see what the future holds when the future happens.  

End of Part 1 of 2 parts

Livin’ the US Economy Benjamin Button style

Based on a short story by F. Scott Fitzgerald, “The Curious Case of Benjamin Button” was made into a feature length film that was nominated for 13 Academy Awards.  Benjamin lives his life in reverse – born as an 84-year-old man, dying as an infant – as the calendar advances.  A recent report on our economic prospects over the next 30 years has me wishing I could live out my years like Benjamin Button.  Only, I would wish that the calendar would go in reverse as I got older.  Sort of a double reverse. 

The report from Price Waterhouse Coopers (PWC) projects the US in third place as measured in Purchasing Power Parity (PPP) by mid-21^st Century.  Six of the seven fastest-growing emerging economies today would be among the seven largest in the world by this measure.  Vietnam, Bangladesh and India would be the fastest growing during the intervening timeframe.  PWC, of course, is among the Big-4 global accounting firms.  Being business oriented, they recommend global companies invest in creating supply chains to serve those markets.  Since WWII, the US has relied on positive Foreign Direct Investment to maintain dollar strength and offset our negative trade balance.  If that flow were to reverse, we slip down the slope to less prosperous lifestyles.  

Moreover, Americans would have to adjust their world view.  Our economic power enables our military power.  The combination of the two enables us to influence world events and create a buffer between us and foreign adversaries.  We are protected not only by the two oceans but also by military alliances with NATO, Israel, Japan, Australia and the Philippines.  

It would be better to go back in time. 

If I were born today and could live my life as time went backwards, I would be oblivious to the slow growth economy of the 2010’s.  My parents might be awash in credit card, mortgage and auto loan debt.  But I’d be a kid.  What the heck would I know about it?  We would go through the reverse bursting of the Internet bubble, cashing in our tech stocks just in time to pay my college tuition which would be about half what one might pay today.  

I would get my first job during the booming 90’s benefiting from the Reagan and Clinton tax cuts and the peace dividend from the end of the Cold War.  In the 80’s I would buy my first house – a huge house supported by the two incomes my wife and I would earn.  I would go to Vegas and bet the longshot L.A. Dodgers to win the ’88 World Series behind Kirk Gibson’s walk-off home run in Game 1. Our middle-class lifestyle would include two new vehicles every three or four years, one of which would be a minivan to cart the kids around with all our stuff.  And, there would be plenty of stuff because I would be entering my peak earning years and spending money like I planned to die tomorrow.  

I would enter middle-age during the sluggish, high inflation 70’s and would buy a townhouse when the kids went off to college.  I would trade in my VW Beetle for a Buick LeSabre as gas dropped below a half a buck per gallon.  I would bet on Secretariat to win the Triple Crown while trying to remember whether the Steelers beat the spread when they won four Super Bowls in six years.  I would invest in big oil companies knowing they would get richer as a result of the oil crisis.

In the 60’s, I would grumble about all those hippies protesting on campus while I adjusted the rabbit ears on my TV so I could watch Neal Armstrong plant the first human footprints on the moon.  My Vegas bet would be on Broadway Joe to take the Jets to Super Bowl victory over my hero Johnny Unitas. My car would be lower, longer and wider with a massive V8 engine under the hood, all the better to get a quick start at red lights.  I would buy skinny ties and pocket protectors to prevent my ball point pen from ruining my dress shirts. I would know that the JFK tax cuts would be reversed and worry about the impact of higher taxes on my lifestyle.  I would invest in blue chip stocks as insurance against my smaller net salary – GM, AT&T, GE and IBM.

I would be secure in retirement and maintain my middle-class status while living in a 1,000 sq. ft. home and sharing one car with my wife because that’s what middle-class meant in the 1950’s.  There would be no smartphones or flat screens to distract me and no credit card debt to undermine my financial security. 

Benjamin Button lived to the age of 84.  Were I to live that long in reverse time, I would witness the devastation of WWII and the holocaust and pass on to my reward during the Great Depression.  But I would have lived during the American Century, the most prosperous time in our history… a time when children of immigrants could transcend their socio-economic status… a time when our leaders enacted bold legislation… a time during which the United States set a standard by which other countries were measured.

WHO WILL LEAD? 

Am I a libertarian or a utilitarian?

Evan Mandery, a professor at John Jay College of Criminal Justice, recently wrote about his experience teaching an ethics course based on Michael Sandel’s book, “Justice: What’s the Right Thing To Do?” (which I’ve read and loved).  He taught the course for a semester at Appalachian State in Boone, NC, thinking he might find a difference in how people make ethical judgments in the Deep South when compared to Manhattan-based John Jay.  He didn’t.

While exploring how people make those judgments, one student stood out – one he describes as a libertarian.  Mandery tells us he believes the student would “sacrifice himself for the greater good” and observes that “people are too willing to prioritize what’s politically expedient over fundamental values.”  I confess I find his view confusing as sacrificing oneself for the greater good sounds more utilitarian than libertarian.  It was John Stuart Mill, the utilitarian ethicist, who defined the “greatest happiness principle” as “a moral action that maximizes utility, or happiness, for the greatest number of people.”  If that’s utilitarianism, wouldn’t one who sacrifices oneself for the greater good be utilitarian?  

Lately, I’ve taken to calling myself a libertarian. It’s how I express my distaste for the two predominant political parties without engaging in a long-winded explanation.  It has the added advantage of not having to defend policies or candidates affiliated with one or the other.  

But, that’s an expedient position rather than a principled one.  The truth is I am more pragmatic than dogmatic, arguing for the action I believe benefits society most.  So, for example, I would never argue that businesses should not be regulated as a true libertarian might.  To argue in favor of the chaos that would result from the complete elimination of regulation is, in my view, both lazy and impractical.

So, am I a utilitarian?

French economist Thomas Piketty has observed that elites may be divided between the “Brahmin left” (Silicon Valley) and the “merchant right” (Oil & Gas magnates).  Each has captured one of the major parties leaving out those with little money or education.  And, so, both Donald Trump and Elizabeth Warren gain favor among them by espousing the theory that the system is “rigged.”

I reject the excuses of declaring the system rigged.  Sure, moneyed interests pour cash into our political system.  And, yes, those interests don’t much care about you and me.  But, at the end of the day, those of us in the middle-class are just trying to keep a roof over our heads, food on the table and enjoy ourselves with what’s left over.  The system, rigged or not, is what we learn to deal with.  In that sense, we – those who occupy the middle-class suburbs of most cities – might be libertarians.  We take responsibility for our own families and our own outcomes.  

So, am I a libertarian?   

WHO WILL LEAD?