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.

The "Done Nothing" Accusations Thrown at Obama

Obama has done nothing. Of course it has not yet been a year, but he has no accomplishments to point to except some arguments about how job loss would have been worse without his stimulus package (a package that included financial industry bailouts that began with the Bush administration).

The truth is, we don't know what Obama has accomplished. Or, rather, won't for some time. And simply judging from my own experience of life, I am actually assured by his apparent lack of progress. For now.

I've been blogging less and reading others' blogs less. The reason for this is simply that I've been diverting my writing energy into a bigger project. For now, it would seem obvious that I'm doing less. I'm not. But what I'm doing is higher risk. No one else may ever see it and it may amount to nothing.

I don't fool myself about my blog postings having any impact, but it is gratifying to hit the "publish post" button and have "done" something. I quite like that. The posts may have little or no consequence but my accomplishments seems obvious.

By contrast, the writing project I've been working on is far less likely to be published and even if it does, it is unlikely to have much more impact than my posts. I am doing something - more, even, then when I was at my peak of blogging. But there is little to report. I'm just working on the project. And will be for months - maybe a year. It doesn't sound very exciting but completing this project will be more exciting than anything I've done in the last decade or two. And it has the potential to have much more impact than the hundred-some posts I could publish in the same time. It will, in any event, be more consequential than a string of unrelated posts. For reasons like this, I believe that invisible progress is often the best progress.

So let's return to our president. He could do things to keep the 24-hour news channels happy, the equivalent of presidential blogging. Lots of little publicity opportunities, legislative initiatives and the like that generate news but probably won't change history.

Or he could take a big risk and put himself into a project like health care reform. He may not get legislation passed. Or it may be bad legislation. This is very high risk. But IF he succeeds, when history is written this will be an accomplishment as big as or bigger than that of any president in decades.

I have found that there is a negative correlation between how much I'm doing in any given week and what I can report at the end of the year. The projects that are worth talking about are few and take a long time. By contrast, if I "stay busy" I seem to inevitably wonder what it was I did later. Things that can be done quickly are generally disposable.

In a similar way, Obama's project is something that will look better at the end of his term than it does on any given news cycle. He's trying to do something big. To judge what he's done now is like a father grousing about how his son - in his second year at university - sure hasn't made as much money as the neighbor's kid who went right into landscaping. You've already given the man four years. Let him use it.

If I Had a Trillion Dollars

Congress is still waiting for the banks to ignite this economy with the $700 billion they've been offered. Last night, my wife Sandi and buddy Rick were making the point that money ought to pumped into actual projects. Rick thinks that infrastructure should be created (e.g., high speed train that links Vancouver, BC, Seattle, Portland, San Francisco) and rebuilt (e.g., crumbling bridges). This would create work twice - once for the infrastructure project and again for the business it would facilitate.

If you 1 trillion dollars to spray around at the economy like a kid trying to wake a sleeping dog, where would you direct it? What projects would you fund?

Bureaucracy Busting and a 2008 Presidential Proposal

“The British created a civil service job in 1803 calling for a man to stand on the Cliffs of Dover. The man was supposed to ring a bell if he saw Napoleon coming. The job was abolished in 1945.”- Robert Townsend

This is a third in a series of proposals I'd like to hear from presidential hopefuls.

Congress passes legislation after a series of debates, proposals, and counter-proposals. From that process emerge laws and government agencies. The problem has at least two dimensions: the legislation depends on un-testable propositions and it sets up bureaucracies that can easily outlive their purpose.

A movie is the product of a project. Someone has an idea for a script. A group is brought together to translate that script into an action plan (the producer, director, casting agents, etc., choose actors, location, etc.). Another group is brought together to make the film (actors, camera people, catering, etc.). Another group is brought together to market the film (advertisers, marketing, that guy who does the voice over on the trailers, etc.). These teams are assembled, do their job, and then disband. This is in stark contrast to a bureaucracy that exists day in and day out.

Some parts of the government will probably never become project-focused. We will always have mail service, for instance, and it is unlikely that we'll ever have a team assemble just to deliver mail to your house and then dissolve. But other initiatives could be done as projects. And this could tie in with adding a testable hypothesis to legislation.

My proposal is this. Legislation should be testable and result in project efforts rather than bureaucracies. For instance, if you are claiming that a certain initiative will reduce teen pregnancies, you need a clear proposition about how you will measure that and a prediction of how much you’ll reduce it.

In order to implement legislation, we should rely on project teams instead of new agencies. Do we really need a Department of Reduction in Teen Pregnancy? We may need project teams – one to come in to analyze, another to create educational materials and processes that could be incorporated into schools, for instance. Upon completion of their objective, the project teams would be disbanded.

There is no automatic bureaucracy. Further, the legislation itself expires if the data indicates that it was based on a bad theory. You thought that teaching abstinence to teens and doing away with Planned Parenthood centers that offered contraceptives would lower teen pregnancies but it actually increased it? Your legislation expires and we're back to the status quo - until new legislation can be passed.

Further, constituents would have a measure of the effectiveness of their representative or senator. It would not be enough to pass legislation. Constituents could compare the prediction and actual results of legislation their representative introduced or voted on. We'd introduce some feedback into the system that would create learning for Congress and a quality metric for their constituents. We would soon learn whose worldview was hopelessly out of touch with reality and whose actually connected to reality. And government growth would no longer be automatic.

This would, finally, offer a means to achieve accountability and rein in government spending. And what candidate could say no to that?