Bigger is Better

It seems a requirement of modern politics that Democrats criticize big business and Republicans criticize big government.

There is one problem with these shibboleths, these tests of the faithful: they ignore how the interplay between big government and big business has made us prosperous. History suggests that any politician successful at impeding either government or business will effectively slow economic progress.

Some people know the amazing story of Elisha Gray arriving at the patent office just hours after Alexander Graham Bell with his patent application for the phone. Bell went on to fame and fortune and Gray to a life of anonymity. There’s more to it, though. Our founding fathers were intent on creating an accessible, affordable patent system. One might even say it was democratic. Fewer people know that the Italian Antonio Meucci had invented the telephone years – not just hours – before Bell but could not afford to patent it through Italy’s expensive patent system. Had Italy been more visionary about subsidizing the work of its inventors by making it cheaper to file for a patent, it may have hosted the myriad, great inventions that defined the decades around 1900 or had the equivalent of Bell Labs from which communication satellites and transistors emerged as catalyst for huge industries. Our government enabled invention.

In his book The Rise and Fall of American Growth, Robert Gordon shares this story of Bell, Gray and Meucci and gives a host of other examples of government and business interacting to create prosperity.

During the second world war, the federal government led initiatives to increase industrial capacity. The government invested capital equal to half the capital that existed at the start of the war, capital in the form of factories and machine tools (which doubled during the war). Even better was the problem-solving that resulted in better production methods. During the war, Kaiser initially took 8 months to complete a ship; they accelerated that to just a few weeks by the next year. A plane factory of Ford's increased its rate of 75 planes per month in February of 1943 to 432 per month by August of 1944. By D-Day, the Germans could launch only 319 aircraft; the US and its allies launched 12,837. American factories won the war.

After the war, the government turned all this over to private companies. Armed with these investments in capital and knowledge, these companies began making consumer products like cars and TVs. Before the second world war, the economy had lurched in and out of recession. After, it took off. Government regulations helped raise wages and government investment helped raise productivity. Workers both made and bought these new products.

Eisenhower had been a solider during the first world war and was part of a group transporting vehicles across the US. It took them 62 days to go from coast to coast. Head of the Allies’ conquering army, he experienced first-hand the German autobahn and was amazed at the contrast. The interstate highway legislation Eisenhower signed increased American productivity by tens of percent.  Like the railroads the government subsidized a century earlier, the highway system gave customers and producers easier, more affordable access to products and markets. Decades earlier, life expectancy had gone up as a result of similar, local efforts to build out the infrastructure that brought safe water into homes and piped sewage out, another initiative dependent on the cooperation of government and business.

Another outcome of the second world war was increased investment in research and education. In WWII we didn't just pump unprecedented amounts of money into research but FDR asked Vannevar Bush to institutionalize that, which he did with what become the NSF (National Science Foundation) and DARPA (the Defense Advanced Research Projects Agency). From DARPA we got the Internet which has enabled the creation of trillions in new wealth and millions of new jobs. The GI Bill was another product of the second world war and it led to a huge increase in college enrollment, creating a new generation of better educated, more productive workers.

Possibly the most important interplay between big government and big corporations comes in R&D. Research is hugely uncertain and most of it results in nothing. If it does result in something cool it may happen a decade or three later than expected. Also, not every cool thing becomes profitable. Because of this, corporations rarely finance basic research and it needs to be heavily funded by institutions like DARPA or the University of California. This research is crucial to corporations' later developments. "The parts of the smart phone that make it smart—GPS, touch screens, the Internet—were advanced by the Defense Department," as Mariana Mazzucato points out in her book The Entrepreneurial State. Corporations try to find a way to translate research that has taken one to two decades into development that takes two to four years. It's a great system and at its best we tax successful corporations to fund the next round of research which could be transformed into new products by corporations. Symantec and Qualcomm were among the new companies funded by The Small Business Innovation Research program - a program started by Ronald Reagan. Google's basic algorithm was funded with a NSF grant.

Of late, our policies seem less reflective of this interdependence. As corporations pay less in taxes the government has less money for initiatives that could help the next generation of companies and workers to prosper. Our productivity, wages and GDP were growing faster during a time when corporate tax rates were maxed out at about 50% and personal income tax rates maxed out at about 70%. The trick is to tax what is successful now to fund what will become successful next.

Government has an important job as a referee, a role Elizabeth Warren articulates well. Government has an important job of moderating wealth and income inequality. (Trump looked at the world with the biggest gap between rich and poor in history and concluded that the rich were not rich enough and the poor were not poor enough, giving the first a tax break and cutting assistance to the second. Few people would reach such a conclusion.) Those jobs of referee and moderator are important but over the long term, they are not as important as the job of collaborating with business and labor to create the next generation of technologies, products, industries and companies. It is in that direction that lies the kind of progress we had from 1900 to 2000 that increased real incomes by 8X and let us buy myriad objects like airplane tickets, personal computers and antibiotics that did not even exist at the start of the century.

The world is full of communities who would love our problem of big government and big business. Big projects are not done by small organizations. It should be a cliché to say what is too rarely said: progress is not a product of markets or democracies but rather their interaction. Strong companies and strong government go together in vibrant economies. Even within the US, the states that keep taxes and investment lower and have few big companies have lower household income and create fewer jobs. Big businesses and government agencies are not a sign that we’re off the rails. They are, instead, the way we got both the rails and the trains.

Your Money for Nothing - When Capital is Free

File under: things that mostly just fascinate me but really do affect everyone:
"$20 trillion of the $55 trillion in global sovereign bonds currently yield zero percent or less." From here.

Why does it fascinate me? In our new reality, money is free for countries.

Why does this affect you? It means that we're under-investing in infrastructure, education and most importantly of all, research. All of that can essentially be conducted by nation-states with zero percent loans. A return of even 1% on that investment covers the cost of capital. A lot of what passes for returns to capital now are actually winning bets on entrepreneurship. 

We're going to look back on the first decades of the 21st century as a lost opportunity for massive investments in projects - public sector and private sector (in the form of startups and corporate initiatives) - given that capital was free and we had more university graduates than we were fully employing.

Future generations' assessment of us will be that what we lacked in imagination we more than made up for in risk-aversion. And instead of funding grand projects, we used this free capital to bid up the price of art, stocks and other pre-existing assets.

Father's Day: How Dad and I Were Just Alike (and so very different) in Our Politics

In late January of 2009, I got a call from mom. Dad was in ER. About 90 minutes later, after midnight, I got up there.

I was chatting with mom after we'd been in to talk to him. I could not figure out what was going on. Finally, mom said, "I think your dad might just be having a stress attack of some kind. He can't believe that we have a black, Muslim socialist in the White House." At that I said, "Oh." And promptly drove back home, leaving him to his self-induced drama.

Growing up, I don't remember hearing about politics much. My parents had a lot of drama in their life and politics wasn't part of it. I read a lot and, as I got older, wrote a lot. It turns out that the combination of reading and writing resulted in a set of ideas that are little connected to my parents'. My dad and I probably cancelled each other's votes 90% of the time.

And yet I have become like my father in how I think about politics. Sort of.

Dad worked for Caltrans in highway design. In his last 5 or 10 years, he worked in traffic safety. They would simply identify dangerous sections of roads and highways based on statistics. On one section of road, accidents are 2X more likely. In another, someone is 20% more likely to die. And so on. They would analyze the data and then the section and redesign it so that accidents, injury and fatalities were less likely.

Police would identify individuals more likely to get in an accident. Lawyers would determine blame. That was not dad's job. His job was to make a section of road safer for everyone.

In that way, my sensibilities are very similar. I have a lot of conservative friends and even recessions they are likely to blame on individuals. I remember one conversation with conservative friends at the height of the Great Recession when the unemployment rate was nearly triple what it is now and they were discussing how someone's brother-in-law had taken a week's vacation (from looking for work) with his family in the midst of his unemployment. As if an outbreak of laziness somehow explained this outbreak of unemployment. They were the cops and lawyers, trying to figure out who was to blame and who to arrest.

I know that individual differences do make a difference. I just don't think those differences are very interesting or relevant. People worked 60 hours a week in 1900 and made about 1/8th of what we do. You might get excited explaining why one guy made 30% more than another in 1900 but that is incidental compared to the difference between that guy and his grandson who makes 800% more. That's fascinating. And relevant. And something you can aspire to "design" with a set of policies and technological and social inventions.

The questions that intrigue me are not the questions of the police about why someone got in an accident. My question is how we design the economy to lower the incidence of those accidents while still letting people drive faster. It turns out that even while I felt such a huge wave of relief to have Obama and Biden in to replace Bush and Cheney and my father thought it was a sign of the apocalypse, our perspectives are similar. (Well, his perspective on highways and mine on economies anyway.) 

This Sunday will be my sixth Father's Day without dad. It is a curious thing how every generation knows what they'll reject from the previous generation but takes longer to realize the ways in which they are just like them.

Planning D-Day

A little shout out to the economists for D-Day. We rightfully praise the brave men who stormed the beach that day. We pay less attention to the planners who set them up for success rather than tragedy. This from Michael Lind's Land of Promise.

In 1942, American policy makers were engaged in a secret debate about the feasibility of of a US-British invasion of German-occupied Europe in 1943. In a classified report for the War Production Board, two economists, Robert Nathan and Simon Kuznets, concluded that it would not be possible to produce the necessary material until 1944 at the earliest. The army's chief military supply officer, General Brehon Somervell was furious. He denounced "this board of 'economists and statisticians' .... without any responsibility or knowledge of production." He called for the suppression of the report, which should "be carefully hidden from the eyes of all thoughtful men." But the argument of Nathan and Kuznets prevailed, and D-Day was a success in 1944 instead of a disaster in 1943.
...
In 1944, the United States completed one plane every five minutes, launched fifty merchant ships a day, and finished eight aircraft carriers a month.
....
On D-Day, June 6, 1944, the Germans could deploy only 319 aircraft. The United States and its allies deployed 12,837.

P.S. Kuznets won the Nobel Prize for Economics in 1971.

Trump's Most Baffling Policy (Or, yet another chapter in Trump's on-going battle with the future)

We beat the Nazis because we had better manufacturing and research capacity. We invented the atom bomb before they did. We made tanks and planes faster than they could.

Near the end of the war, FDR asked Vannevar Bush to explore how wartime research efforts could be transformed into peace time efforts to create new technologies and jobs and to increase life expectancy. Out of Bush's recommendations, captured in Science, the Endless Frontier, came the National Science Foundation which has steadily grown since, providing funding for the basic research that is life-changing over generations.

Bush had great insight into the importance of research and how it is best conducted. Speaking of basic research that doesn't immediately translate into a new product, he wrote about how medical research could be supported within medical schools and universities.

Apart from teaching, however, the primary obligation of the medical schools and universities is to continue the traditional function of such institutions, namely, to provide the individual worker with an opportunity for free, untrammeled study of nature, in the directions and by the methods suggested by his interests, curiosity, and imagination. The history of medical science teaches clearly the supreme importance of affording the prepared mind complete freedom for the exercise of initiative. 

As the United States acted on recommendations such as Bush's, our country clearly took the lead in the creation of new technology, industries and companies. The National Science Foundation is both reality and symbol of our on-going support for research. Bush saw in research the basis for our economic progress as well: 

Where will these new products come from? How will we find ways to make better products at lower cost? The answer is clear. There must be a stream of new scientific knowledge to turn the wheels of private and public enterprise. There must be plenty of men and women trained in science and technology for upon them depend both the creation of new knowledge and its application to practical purposes.

As it turns out, support for research is non-partisan. Since its creation, leaders of both parties have steadily increased the amounts they've asked for to fund the National Science Foundation. Until now.

Trump is the first president to cut average funding from his predecessor. (Or more precisely, request that the average be lowered during his administration. Presidents make a request and Congress makes the appropriation.) Add to his list of leadership qualities, "Not a fan of scientific progress. Facts? I don't need research for that. I can make those up."

Among the institutions he's trying to erode is this most basic tool for progress. His desire to cut even research funding might be the most baffling of his attempts to retreat from the modern world.

Basic research matters. We rightfully pay attention to the Fed's policy when it comes to setting interest rates because that can change investment and spending. The National Science Foundation doesn't just affect investment but actually is an investment in intellectual capital, which is the basis for new technologies, industries, companies, jobs, and wealth. Research takes longer to work than interest rates, but has a bigger effect. I would argue that a slowdown in research funding results in a slowdown in productivity and wage growth. But of course something with a 20-year lag struggles to get much attention in this world of 20-second attention spans.

The amount we fund the National Science Foundation seems paltry to me. Even at its peak, it never even hit even one-tenth of one percent of GDP and it has averaged 4/100th of one percent of GDP in its lifetime. It seems to me that we could hardly err by making it larger each year. Much larger. But alas, the man who looks at our economy and concludes that the rich are not rich enough and the poor are not poor enough has also decided that we know quite enough already. That hardly seems the case to me.