29 December 2010

Breaking the Handcuffs of History - From Stimulating the Old Economy to Creating a New One

I'm a firm believer that the farther back one goes into history, the further ahead one can predict. This, of course, depends on understanding patterns and dynamics that drive events. As much as I love history as a means for understanding how we got here and the direction we're heading, I often see history used as a way to define what is possible rather than create new possibilities.

In today's economy, there are frequent parallels drawn to FDR and the slow recovery from the Great Depression. I'm not sure that the right lessons have been drawn from this.

WWII seemed to have ended the Great Depression. Industries like information technology and commercial aviation were direct products of the war effort. Industries like pharmaceuticals and media were less obviously a product of the war than of the many beneficiaries of the GI Bill that created so many knowledge workers who, in turn, created or made possible new industries so dependent on knowledge workers.

One lesson is that if we also stimulate the economy and fund education, we'll also stimulate GDP and create jobs. This is partly true - as can be seen by the fact that we've partly accomplished these goals. (GDP is again rising; unemployment stays disturbingly high.) But it seems to me that there is a more important lesson.

FDR partially, and the second world war more completely, didn't just nudge the economy towards full employment. FDR created entirely new departments and government bureaucracies in addition to the new industries that were spun off from the war effort. It wasn't just that old industries and government agencies employed more people: entirely new industries and agencies created jobs.

Bush started - and then Obama continued - a huge stimulus package. But neither have actually helped to create new industries.

Alternative energy is the obvious new industry that could be created by government initiative. Others include longevity enhancement, nanotechnology manufacturing and repair, commercial "space" travel, and mental health through cognitive science (and not just pharmaceuticals) to name just a few.

To date, the attempt to create jobs by cutting taxes for corporations and buying bonds from banks has proven wildly inadequate. Corporations now sit on top of a record $2 trillion in cash - money that's not being used to create products, processes, or jobs. Banks are still not loaning. Corporations and banks have money but they are not creating.

Instead of wasting stimulus potential through tax cuts and bank financing, the government would do well to directly fund the creation of new technologies and companies. Yes, fund new companies that represent new industries that would absorb displaced workers and hire new ones.

The real lesson of the recovery from the Great Depression is not to merely stimulate the old economy. It is, as well, to help play midwife to new ones. Until we're that bold, I think that our recovery is going to look more like Japan's decade long stagnation than any previous recovery we've enjoyed.

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