The International Monetary Fund and Federal Reserve have
both made downward revisions to economic forecasts this week. The IMF doesn’t
think the US will reach full employment until 2017.[1]
If that’s right, it will mean that full recovery took nearly a decade.
It doesn’t have to be that slow.
A couple of years ago, the IMF warned the UK against austerity
measures, predicting that the UK’s economy would grow by only 0.7% in 2013.
Instead, actual growth came in at 1.7% and is, this year, predicted to hit
2.7%.[2]
So why, even as it was raising taxes and cutting spending,
did the UK pull out of a double dip recession? Contemporary economic thought
would predict what the IMF did: that sort of policy will drag GDP growth down.
Well contemporary, proven economics suggests that the best
way to stimulate an economy in – or recovering from – recession is through a combination
of fiscal and monetary policy. Cut taxes. Increase government spending. Lower
interest rates. Have the central bank buy back bonds, putting more cash into
the economy. And for the most part, the short-term evidence is pretty clear
that this helps to stimulate an economy. To a degree.
Banks with more money might simply add to their reserves.
Households with more cash from tax cuts might just pay down debt. Corporations
with more money might just sit on it. And in fact, in the US these very things
happened. Corporate cash and equivalents rose to nearly $5 trillion by the end
of 2011[3].
$5 trillion. As of June 11, 2014, excess reserves at American banks was $2.6
trillion,[4]
going up roughly $2 trillion since early 2009. And households were paying down
debt, reducing their debt service to the lowest it’s been since the Fed began
keeping track in 1980. [5]
Economists use the image of pushing a string to illustrate the challenge of
translating credit into spending. And of course if spending doesn’t go up, it’s
hard to create new jobs.
The UK did something else. Or more precisely, something
more.
It’s not that the British don’t understand the importance of
credit and monetary policy. This is the country that gave the world the model
for central banking. John Kenneth Galbraith said of the Bank of England that it
is in all respects to money what St. Peter’s is to the Faith. The Bank of
England was founded about a century before the Bank of France and about two
centuries before the US Federal Reserve. The first to rely on monetary policy, the
British may have become the first to realize that there are more direct ways to
go after job creation, that while monetary policy matters it is not enough. Pioneers
in patent law, central banking and the modern corporation, the British may once
again be ahead of us in economic policy.
You can make credit easier, hoping that households and
businesses will spend more, thus creating jobs. Or you can fund startups
directly, cutting out the uncertainty and the middlemen. Rather than push the
string you can pull it. This is what the UK appears to have done as they
confounded the able economists at the IMF. It is what the US could do as well
to beat forecasts.
Measured by startup activity, the US at the end of 2012 was
still below its 2007 level. By contrast, the UK was up 29%.[6]
Even during its second dip, its second descent into recession, the UK’s startup
activity rose from 117% to 126% of its 2007 level. During that same time the US
– even as it avoided a second dip – nonetheless had a drop from 98% to 95% of
its 2007 level.
Even during the recession, the US media and pundits seemed
critical of funding for startups or expansion. By contrast, by the end of 2013 the
UK had help to fund 10,000 startups.[7]
This in just its first 18 months of their startup program. The plan is to help
fund 30,000 startups. The same ratio of startups in proportion to the US
population would be a plan for 150,000 startups. If we had the same program, we’d
have helped fund 50,000 startups through the end of 2013. This sort of stimulus
would inescapably create jobs and increase spending. It could confound expert
forecasts for economic growth.
Opponents of government funding for startups say that the
government shouldn’t pick winners or losers. Well, it’s too late to avoid that.
The government chooses which kids go to university and which kids go to jail.
The government chooses which defense contractors become huge and which go out
of business, which businesses get subsidies and which pay taxes. Governments
inescapably choose winners and losers. But in the process of choosing which
firms to help fund, they can directly create jobs and even industries.
Funding startups is just one tool that could be used for
creating more entrepreneurs. There is good reason to believe that the limit to
progress has shifted from a shortage of capital – the limit during the
Industrial Economy – or shortage of knowledge workers – the limit during the
Information Economy – to a shortage of entrepreneurs. If so, the economic lead
will go to the communities that do the most to popularize entrepreneurship,
making it more common. Last century in the West, economies popularized
knowledge work, moving from an Industrial Economy based on child labor in 1900
to an Information Economy based on adult education by 2000. Something similar
could happen in this century with entrepreneurship, but it will take a
combination of private and public sector initiatives.
The private sector in the US is doing a remarkable job of
popularizing entrepreneurship. An average of 325 crowdfunding campaigns start
daily.[8]
And that rate is doubling every couple of months. Few people realize that to
create a net of 200,000 new jobs in a month, the American economy has to create
about 4.7 million jobs given the gales of creative destruction are destroying
4.5 million jobs a month. Just as the capital of the Industrial Revolution
freed up people from manual work, enabling – and requiring – them to take on
knowledge work, the algorithms and software of the Information Economy have
enabled (and yes, is increasingly requiring) modern workers to take on more
entrepreneurial roles. Work has to change to keep pace. As the pace and scope
of automation increases, so must the innovation that creates new products, new companies,
and new industries that provide jobs even as automation destroys them. The
American private sector – from venture capitalists to kickstarter – are helping
to popularize entrepreneurship. Progress in the public sector seems less
obvious.
This week the Obama administration has a week-long focus on
innovation. Uber has recently made news for sparking riots in Europe. Uber uses
information technology to match people with cars to people who need rides. Uber
doesn’t need to buy cars, just offer a fee to drivers with cars. Taxi drivers
are losing market share to Uber and are protesting. Airbnb does something
similar, matching folks with a spare bedroom and folks who need a place to sleep.
These businesses don’t require more investment. They use the spare capacity of
existing investments. Obama is doing something similar to Uber and Airbnb,
opening up federal facilities to entrepreneurs.[9]
NASA wind tunnels and supercomputers are among the assets that could be used by
folks who could never afford to make such huge investments but could benefit
from their use. This could help to stimulate new businesses and products and –
given it requires no new funding - is a fairly ingenious way to work around an
obstructionist congress
This is nice but it isn’t much.
It is tempting to believe that de-regulation is one way to
stimulate entrepreneurial activity. And it’s likely true that – all else being
equal – a community that puts up fewer obstacles to starting a business will
have more startup activity. But one study of 150 successful entrepreneurs within
the US revealed that regulatory environment was mentioned as a factor by only
2%.[10]
More important was access to a talented workforce and customers and a community
they thought offered a high quality of life, typically measured by natural and
cultural attractions. (And quality of life didn’t just make a place desirable
for the entrepreneurs: it helped to attract and keep the talented workforce
they seek.) San Francisco and New York are two metropolitan areas that are not
only expensive but challenge entrepreneurs with expensive permits and require
payments to dozens of tax authorities. By one measure, San Francisco’s
regulatory environment is twice as onerous as Dallas. And yet, of course, San
Francisco’s entrepreneurial activity is booming. And New York is second only to
San Francisco in startup activity.
California’s Bay Area is not only number one in the US in
terms of startups but it is increasing pay at a time when pay across most of
the US is stagnant. In San Mateo County (located at the heart of startup
activity between San Francisco and Palo Alto) employees not only saw their
salaries go up by more than 10% between September of 2012 and September 2013
but within the IT sector, salaries went up over 100%. When Henry Ford doubled
wages to $5 a day in 1913, it rightfully got a huge amount of press; by
contrast, this doubling of wages a century later went oddly un-reported.
During the Industrial Economy, employees made products.
During the Information Economy they designed them. Now, in Silicon Valley at the
dawn of the Entrepreneurial Economy, employees are making equity. For a long
time, New York had the highest wages in the country because of Wall St. Now,
employees in high-tech – and venture capitalists on Sand Hill Road – have
shifted coasts for highest salaries. 3 of the top 4 top-paying counties in the
US are in California’s Bay Area.[11]
While New York County’s average weekly pay is double the national average, in
San Mateo County it is nearly triple (2.7X) the average.
There is another element as well. Invention depends on a
disdain for tradition and respect for what works for the individual. Places
like Santa Cruz, San Francisco, Austin, Texas and Boulder, Colorado lead the
nation in patents per capita and in startups. These are places with a liberal bent and a high degree of tolerance for what we might call non-conformists. It's not just entrepreneurs and programmers who are happy here but hippies, communists and transgenders. This suggests that a community
embraces innovation as package – whether it come in the form of same-sex
marriage or an app. Entrepreneurship is a form of social invention and social
conservatives who prefer the status quo aren’t comfortable with innovations
that disrupt the norms they’ve known all their life, whether those norms define
the role of women or how someone sends a letter.
In any case, de-regulation doesn’t seem like policy enough. It
certainly isn’t what is driving up wages and startup activity in California’s
Bay Area.
From The Fourth Economy: Inventing Western Civilization
|
||
Market Economy
|
Limit to Progress
|
Period
|
First, Agricultural
|
Land, natural
resources
|
1300 ~ 1700
|
Second, Industrial
|
Capital, Financial
and Industrial
|
1700 ~ 1900
|
Third, Information
|
Labor, knowledge
workers
|
1900 ~ 2000
|
Fourth,
Entrepreneurial
|
Entrepreneurship
|
2000 ~
|
It’s possible that a new, entrepreneurial economy is
emerging, a new economy limited by entrepreneurship in the same way that the Industrial
Economy was limited by capital. This new economy will be led by communities
most intent on popularizing entrepreneurship, just as the Information Economy
of the last century was led by communities most successful at popularizing
knowledge work. Popularizing knowledge work took a mix of public and private
sector policies and initiatives. The iniatives included social inventions
(e.g., modern universities and corporations) and technological inventions
(e.g., Information Technology from telegraphs to the Internet) that helped to
create knowledge workers and make them more productive. The popularization of
entrepreneurship will require a similar mix.
Judging from regions like Silicon Valley, the US seems to lead
the world in terms of private initiatives to popularize entrepreneurship. But
judging from stimulus policies like funding startups, the UK may well lead in
terms of public policy. It would be nice to get a blend of the two.
In any case, the attention paid to entrepreneurship is
miniscule in comparison to that paid to the more traditional tools of fiscal
and monetary policy. Google’s Ngram’s demonstrate how little mention it gets.
In this first graph, two of the most frequently mentioned
policies related to entrepreneurship are graphed since 1900. The great news is
that there has been a sharp upturn in mention of “promoting entrepreneurship,”
and “entrepreneurial education” in books in just the last few decades.
But to put things in perspective, here is a graph showing
those same terms compared with mention of monetary and fiscal policy. As you
can see, entrepreneurship barely registers.
Unsurprisingly, in Obama's
most recent annual report, entrepreneur (or entrepreneurs or entrepreneurship)
is mentioned only 6 times in 410 pages. One party largely ignores
entrepreneurship. The other thinks the simple solution to more entrepreneurship
is less regulation. In a country defined by polarized politics there seems to
be one thing the two parties have in common: both seem to believe that benign
neglect is the route to entrepreneurial success.
If entrepreneurship now limits progress just as capital did
during the Industrial Economy, it only makes sense that communities at every
level – from cities and small businesses to nations and corporations – and in
every sector – from private to public and non-profit – embrace every experiment
that promises to create more entrepreneurs and make employees more
entrepreneurial. It might be time for us to watch entrepreneurial activity as
closely as we watch the monthly jobs reports and quarterly GDP growth. Because
now, more than ever, jobs and GDP are going to be the products of
entrepreneurial activity. It’s not enough to hope that entrepreneurs will show
up. We need to become as intentional about creating them as we did knowledge workers
last century. And once we define the problem of economic growth that way, we’ll
find a thousand ways to solve it and to make progress – just as we did during the
earlier industrial and information economies.
[1] http://www.chicagotribune.com/business/sns-rt-us-imf-usa-20140616,0,6883507.story
[2] http://www.telegraph.co.uk/news/politics/10884632/Do-I-have-to-go-on-my-knees-grovelling-apology-from-IMF-head-for-incorrect-warnings-on-UK-economy.html
[3] https://www.stlouisfed.org/publications/re/articles/?id=2314
[4] http://www.federalreserve.gov/releases/h3/current/
[5] http://rwrld.blogspot.com/2014/05/spending-is-up-but-debt-is-down-this.html
[6] http://stats.oecd.org/Index.aspx?DataSetCode=TIMELY_BDS_ISIC4#
[7] http://startups.co.uk/start-up-loans-backs-10000th-small-business/
[8] http://www.entrepreneur.com/article/234426
[9] http://www.post-gazette.com/local/city/2014/06/17/Obama-to-tout-entrepreneurship-during-Pittsburgh-visit-today-1/stories/201406170142
[10] http://blogs.hbr.org/2014/06/deregulation-wont-improve-entrepreneurship/
[11] http://www.bls.gov/news.release/cewqtr.nr0.htm
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