In the Long Run We Are All Rich: What Negative Interest Rates Mean for Good Policy

The Dutch have records that go back to the time of Martin Luther - 500 years. In that entire time, including the European settlement of continents, 30-year religious war, the end of knighthood, serfs, industrial revolution, the car, telegraph, telephone, TV, computer, modern medicine, introduction of democracy .... interest rates never went negative. Until about 2 years ago.

Now the Dutch, the EU, Japan and even the US (for the US still only briefly and after adjusting for inflation) have all had and / or have negative interest rates.

This is huge.

One of the things I've not seen anyone talk about is how valuable it makes investments.

Imagine that you start with $100 income. Each year that income grows by 5%. You want to price this income stream for the next 50 years.

If you assume that interest rates are +1%, then you discount next year's income by that amount. $100 next year is worth only $99 this year. You discount the amount by 1%. And of course the further out in time, the more you discount that income stream.

If you assume that interest rates are negative 1%, -1%, you actually increase next year's income. $100 next year is worth $101.

What is the price of a 50 year income stream growing at 5% a year when interest rates ....

are 1%? $1,903.

are -1%? $1,014,861,688

It's the difference between two thousand and one billion.

What does this mean? The lower interest rates are, the bigger the reward for investments now. What kind of investments will pay off long term? R&D. Education. Startups. Infrastructure.

As we come out of this incredibly painful downturn, we should invest money as if we were drunk or billionaires. This will do two things. One, it will employ a lot of people right now in construction of infrastructure, R&D, teaching and working in or managing startups. Two, it will generate future income that is worth more than it ever has before.

Negative interest rates signal a wonderful thing. It means that the future has never been more valuable and with capital so cheap, never a better reason to invest in this future. In a twist on Keynes, in the long run, we are all rich.

A Post-Pandemic Stimulus Plan to Quickly Create Jobs

Adding to the trauma of deaths, illness, layoffs, and social isolation, at the end of this pandemic we will find ourselves with tens of millions unemployed. Without quick, bold policy initiatives, the post-pandemic economy will create even more trauma. The millennials in particular – a generation that began its career in the aftermath of the Great Recession and now face this economic wreckage only a decade into careers – are going to be badly hurt by this.

Unemployment has longer lasting negative impacts than does divorce, being widowed, or being laid off.[1] It’s traumatic and ruinous to someone’s long-term economic prospects and any policy we need to adopt to address tens of millions who are unemployed has to account for this.

What would quickly employ people and stimulate wage and productivity growth? Doing for entrepreneurship what policymakers did last century for capital and labor. That is, invest boldly, at unprecedented levels.

Prices tell you what markets think is abundant and what is scarce. Capital and labor aren’t scarce. Entrepreneurship is.

Proof that capital is no longer scarce is simply this: the price of capital has gone negative. How unusual is that? The Dutch have records on bond sales that go back 500 years. In all that time they never had negative interest rates until just a couple of years ago. Growing affluence means that there are more investors than ever looking to build portfolios. (And hundreds of millions more reliant on markets through investments in pension funds.) Because of this, trillions in capital move around the globe in search of returns.

Education seems to also be providing a lower return than it did half a century ago. The price for college graduates is dropping. The Fed recently reported that a college degree no longer offers a wealth premium.[2] Which is another way of saying that market prices for education – like capital – suggest that it isn’t that scarce. And many millennials, struggling to pay for housing in cities on wages that aren’t terribly higher than those from a decade or two earlier are wondering when their return on a college investment is going to yield a return. It might not.

Once upon a time capital and education were scarce, though, and investing in them gave the country phenomenal returns. A look at what past investments in what was scarce did for wages and job creation suggests what could happen if we make similar investments in what is scarce today. That is to say, to get some sense of what a startup stimulus might do for the economy, we can look at what past investments in capital, education and research did for the economy last century.

In his book, The Rise and Fall of American Growth, Robert Gordon reports that output per hour between 1920 and 1970 grew 2.82% a year. Between 1970 and 2014, it grew only 1.62%. If wages had grown at 2.82% between 1970 and 2019, median income would have been $88,000 rather than the $48,000 it actually was. Compounded over a lifetime, a difference of 1 to 2% is huge. You don’t get returns without making investments, though.

During World War 2, the government invested billions in capital equipment for factories building wartime equipment. Between 1940 and 1945, consumption of capital rose from $19 billion to $116 billion[3], much of that coming from the government.  Additionally, it sent experts on production and management – consultants like W. Edwards Deming and Peter Drucker – to help companies make best use of this capital.

The result was dramatic. On D-Day, June 6, 1944, the Germans could deploy only 319 aircraft. The United States and its allies deployed 12,837. American manufacturing was more powerful than a Nazi blitzkrieg.

When the war was over, the government let companies keep the manufacturing and intellectual capital it had funded. Rather than make tanks and planes, they began making cars and TVs – at rates as impressive as the preparation for D-Day.

Next, the government invested an unprecedented amount in education. Between 1944 and 1949, BA degrees conferred rose from 126,000 to 432,000. The rapid rise in the creation of knowledge workers was essential to the emergence of the information economy.

Finally, the government spent more on R&D, funding agencies like DARPA and the NSF. The innovations resulting from this research – as varied as the internet, communication satellites, and genetic engineering –helped to create hundreds of new technologies, thousands of new products, millions of new jobs and trillions in new wealth. Most R&D investments fail to generate any return. The ones that do, though, continue to compound over time to create value that dwarfs the initial investment. (In this way, investment in R&D is very similar to investments in startups: most fail and the few that succeed generate great returns.)

A startup stimulus could do two things. It could quickly create hundreds of thousands – even millions – of jobs. And it could yield returns as dramatic as the long-term returns to education and research made after World War 2.

While the price markets pay for capital and education seems to be falling, the the price of entrepreneurship – wealth created by successful entrepreneurs – is high and still rising.

In 1987, when he was 31, Bill Gates became the youngest self-made billionaire in history. About a generation later, in 2008, Mark Zuckerberg became the youngest self-made billionaire at age 23. Investments in entrepreneurship could offer high returns.

Big investment in startups – entrepreneurship – will pose as many challenges as big investments in education, research or infrastructure did for past generations. Anyone who knows how difficult it is to identify good startup ideas or to launch a company from scratch will realize that a startup stimulus will be at least as difficult as figuring out how to ramp up production in 1944 to complete one plane every five minutes, launch fifty merchant ships a day, and finish eight aircraft carriers a month. Or land on the moon or launch communication satellites. It won’t be easy but it will yield a great return.

This is a big challenge that promises a big reward. A hundred billion dollars could fund 50,000 startups that employ 700,000 people for 18 months; a half a trillion would fund about 250,000 startups and create 3.5 million jobs. There would be no question about whether a startup stimulus would create jobs. It would be designed for exactly that. We could begin funding startups even as people still shelter-in-place and – depending on how bad unemployment is – adjust the scope of this startup stimulus up or down.

Americans hit by this pandemic could quickly return to work. Rather than a gap in their resume and a hole in their savings, they would get valuable work experience and savings. The trauma of long-term unemployment would be mitigated and their lifetime earnings, productivity and wealth would be greatly different.

What would we get for our return? Tens of percent of these startups will fail as soon as their guaranteed funding is gone, but they will have provided employment at a critical point in the recovery. Tens of percent are likely to continue beyond their window of guaranteed funding for another year or three. Many will become great, viable companies. A few will even become iconic companies, the GE, GM or Apple of their generation. Successful companies mean better products and services for all of us, higher wages and more wealth.

Additionally, all sorts of unexpected benefits came from aggressively investing in capital, education and research. The NSF didn’t start with the idea of genetic engineering or a computer smaller than a pocket protector. The same will happen with great investments in entrepreneurship. As more people become more adept at entrepreneurship, as more communities can at will create new companies able to create jobs and wealth, economies will become more prosperous and less subject to long-term sluggish growth that breeds cynicism and helplessness.

Bold investments in entrepreneurship will not only immediately create jobs but could trigger a steady rise in productivity and wages at least as strong as that of the American economy before 1970. The short and long-term potential of such policy is huge. So is the risk of doing anything less.

Ron Davison lives in San Diego County, wrote The Fourth Economy: Inventing Western Civilization, and helps team within Fortune 500 companies and startups to accelerate product development. @iamrondavison

---

[1] https://ourworldindata.org/happiness-and-life-satisfaction

[2] https://www.theatlantic.com/ideas/archive/2020/01/college-wealth-premium-collapsed/604579/

[3] https://fred.stlouisfed.org/series/A264RX1A020NBEA (in 2012 dollars)

TNT for HUD Program

I recently read more about the new programs inspired by the Cash for Clunkers program, the federal program in which the government buys cars and then kills them in order to stimulate car sales. I'm not sure why this is not getting wider reporting and am doing what I can to pass along the news to readers of R World.

(OOPs) Officials of HUD announced that their new surprise stimulus package for driving up housing prices was getting mixed reviews. People in construction and the real estate industry seemed pleased by it, whereas many home owners expressed dismay.

"They just came over and blew up our house," exclaimed Willoughby Wimmers. "I don't get it."

"What Willoughby and people like him fail to see," explained HUD Secretary Donovan, "is the bigger picture. Sure, Willoughby lost his house. And all his furniture. But we're going to methodically blow up from 1% to 10% of the houses in different communities, depending on a host of variables like local unemployment levels, change in home values, and the community's penchant for explosives - what we call the 'cool!' factor. As we lower the supply of homes, the price of existing homes will go up. Construction will pick up. Willoughby is just upset because his home was one we blew up. When the economy picks up and he gets hired, though, he'll see things differently."

"But I already have a job!" Willoughby protested to the reporters who were already following HUD Secretary Donovan to watch the next house explode.

In other news, California Governor Arnold Schwarzenegger is cutting budgets by releasing prisoners with a history of theft and robbery, predicting that the economy will be boosted by a surge in the sale of handguns, home security systems, and property insurance. "We will cut spending at the same time that we get more revenue from the taxes on increased sales and stuff," Schwarzenegger explained. "We might have finally reached a solution that leaves Democrats, Republicans AND California's economy pumped up." Or at least that is what we think he said. I can't be completely sure because someone stole his microphone. And my pen.

Double Dip Recession - Courtesy of California

This recession has one more dip in it before it’s over. The problem doesn’t stem from Obama’s stimulus package: California’s fiscal woes will be the cause.

If California were a country, its economy would be ranked 8th in the world – smaller than France and Italy and larger than Spain and Canada. All of the ten largest economies in the world have adopted aggressive stimulus policies. All, that is, but California. This is going to undermine Obama’s efforts to stimulate the economy.

Californians recently voted against taxing themselves more and will now start slashing programs. For instance, professors within the state university system will be put on furlough and lose about 10% of their income. Layoffs, program cuts, and discontinuation of services will hit every community. These, just as the economic numbers for the US are looking better.

California’s contraction won’t be enough to completely de-rail the recovery. It will, however, delay it by one or two quarters.

Governor Schwarzenegger now finds himself in the same position as Gray Davis – the governor he replaced in a recall election. The problem wasn’t Davis or Schwarzenegger. California is the only state to require a two-thirds vote in the Legislature for BOTH tax increases and budget approval. A small minority can hold the legislature hostage and the odds of finding agreement among 66.6% of the diverse population of Californians on anything – much less tax and budget – are close to 0.6%. Until this system is changed, California’s problems will continue and the requirement for balanced budget means that the state government will always exacerbate down turns and bubbles alike.

California’s budget problems are about to spill over into the rest of the nation. Expect the economic numbers to fall again in the Fall. And look for the cause in California.

Skewed News (my attempt to reassure the former readers of the Seattle PI that blogs are able to step into the void and provide trustworthy coverage)

It's an American tradition at least as predictable as airport congestion around Thanksgiving: horror films released on the Friday the 13th weekend featuring someone like Freddie or Jason coming back yet again. On a probably unrelated note, Dick Cheney appeared on "State of the Union" Sunday.

400 AIG employees will split about $165 million in bonus money. The word bonus is from the Latin for bonehead, as in, "in a series of boneheaded moves, AIG nearly took down the economy, then single-handed created a deficit the size that once required a Reagan-era tax cut, and then rewarded their deciders."

50 years ago, the Barbie doll debuted. 50 years ago, the Dali Lama fled Tibet. Had he been following trends, might have realized that even the young had become so precocious that they were unlikely to back anything that sounded so unsophisticated as "dollie." In order to get more support for the Tibetans, the Dali Lama is planning to be reincarnated as a 5' 10" blonde with double-D's. He expects that this will help to create more outrage should the Chinese government again invade. At that point, taking his lead from the popularity of Barbie, "she" will go by the name Lama Dal.

Airlines lost 40 million bags in 2007. Records just released indicate that this was not accidental. As part of the 2007 bailout plan, airlines were required to lose this much baggage as part of a subtle but quite effective stimulus plan: people forced to buy new wardrobes, luggage, and toiletries actually delayed the recession by over a year.

Obama has announced his intention to stimulate small businesses. This will be easier as we go further into the recession. Between layoffs and shrinking revenues, projections indicate that half of the Fortune 500 will soon become "small businesses."

Spending Our Way Into a New Economy

Conservatives argue that Roosevelt's Keynesian policies were ineffectual because it was not until the country mobilized for World War 2 that the economy turned around. The lesson that Christina Romer, the chairman of the White House Council of Economic Advisers, has drawn is that Roosevelt did not do enough. "The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem," she said. "This is a lesson the administration has taken to heart."

Roosevelt made a puny attempt at stimulus spending, whereas World War 2 did, and Obama will, make an heroic attempt at stimulus spending. This should hearten us.

What if the truth of the World War 2 economic recovery was more complex? What if it was not just a simple matter of spending more money but was from spending money in a particular way?

After World War 1, the Allies could not even make sense of German patents without German engineers and scientists. War with the Nazis, decades later, was a stimulus of a specific kind. Americans did not just spend money on factories and production. We spent money on research and development, higher education, and furthering fields like computers , cybernetics, production systems, and chemistry. Our reaction to the advances of German engineering and science was a specific kind of stimulus: it helped to usher us into the information age and helped to create the management and production techniques that helped to make American corporations dominant in the business world and the institutions most emulated across the world.

The deficit spending of World War 2 did not just save the world from tyranny. It helped to create a new kind of economy.

It is not that the U.S. is no longer an information economy. It is that the American economy is now a part of a global information economy. This has changed things enormously.

The point is not to stimulate the old Information Economy, stimulating domestic consumption and investment that it likely to go into foreign production capacity and goods in this global economy. The goal instead should be to help to create a new economy, just as we did during World War 2.

At the risk of sounding trite, it is not time to repair the garment that fits us and our time less well. It is time to create a new garment that we've grown into. It is not enough to stimulate the Information Economy; we need to create a new Entrepreneurial economy instead. We probably do need deficit spending to do this. But not deficit spending mindlessly spent on what worked in the 1930s and 40s.

The Entrepreneur's GI Bill

Obama's new plan will create a deficit of $1.5 trillion. This is the difference between taxes collected and money spent in just a single year. Outside of the US there are only 6 (six!) countries with GDPs that are bigger than this. This would be a mind boggling sum were it not so mind numbing.

I am going to repeat myself here. We're spending all this money in the hopes of a multiplier effect - in the hopes that the money spent by the government will trigger money spent by businesses and households - that will jump start the economy. But if that is the goal, why not go after it more directly?

I am having trouble letting go of the idea of a movement to fund new businesses that would be to our time what the GI bill was to the explosion of knowledge workers after World War 2.

If we are going to spend such a massive sum, why not be more direct in going after what we want? If we give households money, they are as likely to buy cars from Japan as wheat from the US. Even businesses are likely to subcontract work overseas. One of the problems rarely mentioned in this age of globalization is how much of a stimulus package might leak abroad.

We want jobs. Why not use the stimulus money to create companies that would provide these jobs?

The GI Bill really was instrumental in helping to create a new economy where professionals with advanced degrees did more to stimulate GDP growth than did captitalists and factory workers. People who would not have otherwise gone to college - who could not have afforded it - got degrees and careers that their parents could not have imagined. By creating so many knoweldge workers, the GI BIll helped to create the innformation age.

Why not look back in 30 years at the amazing companies that were started by the infusion of start up capital that triggered the creation of companies that found new industries and created new wealth? People who would not have otherwise started companies could become the new generation of entrepreneurs. This would not just stimulate consumption but two other things vital to a sustained economic solution to our current plight: new jobs and wealth. By creating so many entrepreneurs, this new stimulus package cold help to create an entrepreneurial age.

Ultimately, our twin deficits (trade deficits and government deficits) will not go down until we begin to produce more and begin to create wealth faster than we deplete it. Why not replace deficit spending with investment in our one remaining economic strength: innovation and entrepreneurship?

I love Biden and Barack. But until they can tell me why their plan of tax cuts and government spending is a better use of money we don't have, I'm going to wince every time I hear about their stimulus plan. As it now stands, it just makes me nervous.

Republicans Remind Country Why We Cheered At Obama's Election

If you ever wondered what it sounded like to hear a black man sing country, your curiosity was sated tonight. Obama sang the litany of woes common to jukebox country tunes. "You lost your job, your house, your student loan, your girlfriend," he told the nation.

To the man's credit, he shifted gears, finally sounding optimistic and hopeful after his seemingly obligatory notes of doom. I particularly liked the lines about "We don't do what is easy. We do what is necessary," and the inclusion of an actual pun: "a down payment on the principle that everyone deserves health care." And how refreshingly honest to finally include the cost of war in the budget after 7 years of treating it like an annual surprise?

Whatever qualms I had about his speech tonight were dissolved as I listened to Gov. Bobby Jindal deliver the Republican's rebuttal. He had the audacity to criticize Obama's plan by pointing to the Federal Government's response to Katrina? Seriously? Bush's incompetence is the best thing he can find to criticize about Obama? Have the Republicans loosened up on drug use for their elected officials? There are legitimate angles from which to criticize Obama and his stimulus package. Jindal instead just seemed to obliviously indict Republicans. In spite of their efforts to show color in their public face - first the new RNC head and now Jindal as spokespeople for the GOP - Republicans seem intent on hurtling towards irrelevance, almost as if they've all suddenly heard their own rhetoric about the evils of government and are suddenly embarrassed by their involvement in politics and are doing all they can to be voted out in massive waves.

The Republicans refusal to cheer the stimulus package reminds us that they've essentially placed a bet on continued economic downturn for the next four years. In order for their refusal to support the stimulus package to seem credible in 2012, the economy has to continue to limp along in spite of our spending another trillion (or two or three). This seems unlikely. And Americans will likely remember that the Republicans sat out the attempts to stimulate the economy - a sit in that could easily be illustrated by footage from tonight's speech when the Republicans sat mute during a standing ovation for Obama's package.

It would be so nice if the Republicans abandoned their commitment to idiocy. We could use a good alternative. But alas, the Republicans are as close to clueless as Obama is far from perfect. For me, it is still a no-brainer: I'll side with the guy who does the right thing poorly to the party that does the stupid things so well. No wonder my conservative friends are so angry when they talk politics. Who wouldn't be with that kind of party to represent your interests?

An Alternative Stimulus Package

I have finally come up with an alternative to Obama's stimulus package. (I apologize to my faithful readers for having taken so long to arrive at this.)

The point of any stimulus package, it seems to me, should be to create jobs quickly and then - longer term - actually expand the economy. Tax cuts and government programs might help with this, but these seem to me rather old school. As it is, we've pumped about a trillion dollars into banks and are wringing our hands, fretting that banks are not making loans. And some of the big programs that are being funded will not even start until 2010.

The finance industry has just lost hundreds of thousands of employees. These people need jobs. And, generally speaking, they are specialists in assessing the value of assets and translating business plans into funding. I say that we employ these people first and use them to create millions of jobs. Here's how.

Set up regional boards all over the country. Run competitions for business start up ideas. Bias the approval towards businesses that will create good-paying jobs. And start funding business start ups. Quickly.

Make the criteria a little different than the usual banker filter. Act more like venture capitalists than bankers. That is, don't worry so much about whether 95% of the businesses succeed and are able to pay back their loans at 10%. Rather, play it more like a portfolio, hoping that at least 1 out of 10 or even 1 out of 50 succeeds and goes on to become a big employer.

The businesses that qualify for these start ups would be ensured two years of operating expenses. After this time, they could either fold or get a new round of financing from traditional sources or simply be self-sufficient.

The GI Bill after World War 2 created a great many careers by funding education for people who would not have otherwise become professionals. Just think of how much bigger a deal this would be - a wave of businesses that might not otherwise get started continuing to employ citizens and generate returns for decades.

This would stimulate innovation, create jobs, give a boost to the economy, and provide unpredictable results - combining the best of government largess and market dynamics.

Rather than a stimulus package that funds banks to provide loans, why not go directly to the point of funding corporations to provide jobs? Why continue to funnel money through an intermediary that costs us trillions? And why just stimulate consumption? Why not production? Imagine a trillion dollars in new business financing - or even a mere $500 billion. Just think of the potential impact.

The original stimulus packages were bold enough to stimulate banking activity that would not have occurred without government financing or incentives (such as low interest rates). Why not stimulate corporate activity that would not have otherwise occurred?

It is a new century. It is worth considering the use of new techniques.

President (Does NOT Go) Ballistic

Already friends of mine on the right have given up on the notion of Obama offering anything new or better. This from the same people who gave Bush 5+ years to prove his incompetence.

I have confidence in the man for the following reason. Studies of how well people do managing complex systems have shown that the people who make decisions and turn them into action without further adjustment - people shooting cannonballs rather than guided missiles - do poorly. It seems simple but the real point is that your angle of departure matters less than your ability to adapt to found conditions.

I was able to catch just a portion of Obama's meeting yesterday in Florida. This seems to me democracy in action. This performance was not ideal - ideally, groups of average citizens could weigh in on the policy decisions behind this massive stimulus package - but it was refreshing.



Obama didn't just advocate a bill - he explained it. And more than that, he took questions. This seems so basic, but compare this with Dick Cheney.

I think that it may well be true that Obama has made some real mistakes in his first few weeks in office. Possibly more than Bush made in his first year. But I'm also confident that Obama will outperform Bush for the simple reason that this demonstrated willingness to listen and respond to real people suggests to me that Obama is not just shooting cannonballs. He's willing and able to be responsive and not just admonishing. This seems to provide every reason for hope.


On a related note, Obama's fresh approach may change punditry. Instead of Bush talking to pundits about the average person, pundits who then tell us average people what we thought and feel about what he said, Obama seems to go straight to the average person. And we learn that these average people are much more interesting and varied than are the pundit's abstractions of them.

Is It Too Much to Ask for a Sustainable Stimulus Package?

Shouldn't any policy have to be sustainable?

As Obama pushes for a stimulus package, it seems to me that the biggest concern is that we'll spend trillions - literally - on economic programs that simply defers the inevitable. Getting Americans to spend money we don't have to buy things we cannot afford is not a novel solution to our economic problems. I might even suggest that such an approach has helped to put us into this recession.

I love the idea of approaching alternative energy development as if it were NASA or the Cold War. This is great because it not only could create employment and help to stimulate the economy but it is a solution that can become sustainable - creating an entirely new industry that becomes not just self-financing but something that could more than pay back any investments made today.

I do not like the idea of subsidizing home purchases. Already home prices are too high and the struggle to finance these inflated prices helped to create the mortgage crisis that dominoed into the financial crisis. Home prices that are such a huge multiple of incomes are simply not sustainable and stimulating the housing market seems to me just a distortion of a natural equilibrium.

Some of the items in the stimulus package could help to create a shift. Others are simply sending good money after bad.

For me, the filter that ought to be applied to every item in this stimulus bill is this: will it help to create jobs and will those jobs eventually lead to something sustainable? This is the difference between using credit for shopping and using it to start a small business.

This is a great opportunity to create new industries, technologies, and products. It might be worth looking at this trillion dollar spending package as something transformative, something to position us for 2015 rather than an attempt to just get us back to 2006.

A Stimulus that Doesn't Cost Trillions - Raising the Quota for Foreign Workers

One of the ideas behind any economic stimulus package is that spending has a multiplier effect. If the government spends $100, the people who get that money will spend a portion of it on services and products that will, in turn, be spent again, and again, and again. The defense contractor gives his money to the restaurant owner who gives it to the flooring store who .... The $100 originally put into the economy might stimulate a total of $200 to $1,000 before its ripples fade into insignificance.

Communities can also get a multiplier effect from jobs that create goods that are sold globally. Engineers and manufacturers, for example, eat out, pay taxes that pay teachers, hire plumbers, and stimulate the local economy in various ways that are obvious when someone like GM closes a plant or office in a community.

We now are spending borrowed money in the hopes of stimulating the economy. Had our policy towards foreign graduate students and employees not become so xenophobic since 9-11, we might be getting more of that stimulus from high-paid professionals who are, instead, now living and working in places like Bangalore and Shanghai.

One of the most noticeable things about American high-tech firms is what a high percentage of their team members are foreign born. As a consultant, more than once I have been with development teams where I was the only American-born person. It is not unusual for about 90% of the team to be from either China or India. They are living and working here in the US but they had moved here either for graduate school or work.

Most Americans are unaware of how much work the nice couple from India or China brings into the area. When a high-tech company hires a software developer or hardware designer for a six-figure salary and his wife gets on at the local ER, making the same or more, these two stimulate the local economy in various ways. They spend money at local restaurants and bid up the prices of homes. They make it more probable that a book store will come into the area or that a college will offer MBAs to aspiring professionals. The plumbing company owner who makes even more than the engineering director can make that much because his clients make good money. Everything ripples. Surgeons in rich countries are rich and in poor countries are poor.

But if in a post-9-11 world this Indian software developer stays in Bangalore, so will the things he can buy. The bump in pay for the plumber, the expansion of the local MBA program, the steadier business for the restaurants ... all of this now accrues to Bangalore instead of Chandler, Arizona, or San Jose.

Since 9-11, it has been increasingly difficult for American companies to hire foreigners. Recently, I heard a director of software from a medium-sized company say that he doesn't even try to get work VISAs for foreigners and accepts that he just won't be able to get enough talent here in the US. Meanwhile, he - like so many managers I've talked to - tells horror stories about working with teams in Bangalore or Shanghai, trying to coordinate the definition of specifications and the execution on tasks across cultures, languages, and time zones. American companies would often rather have the talent here in the US but do not have that option. This doesn’t just make it hard on American companies; it makes it hard on American communities.

We live in a global economy and we may well be experiencing the first significant recession of this most recent wave of globalization. Today's report about the loss of half a million jobs last month makes it obvious that this is already worse than the average recession. I can't help but think that it has been made even worse by our nearly xenophobic policy towards foreign graduate students and professionals. After World War 2, we were the magnet for talent from around the globe. We had the technology and labs that could be found nowhere else. We had the capital and the big corporations. Gradually, that advantage has eroded. In the 7 years since 9-11, American politicians have consistently exacerbated this trend with their apparent fear of foreigners.

As American politicians consider radical measures like bailing out huge swaths of the economy with trillions of dollars, perhaps they could consider a simpler measure. Perhaps they could raise the quota for foreign-born workers to allow the American economy to enjoy the most organic and natural of stimulus packages: great jobs that help to employ the millions of teachers, doctors, dry cleaners, waiters, and plumbers whose salaries ultimately depend on the pay and productivity of their clients.

Sylvia's Stimulus Package

If only I could draw cartoons, this caption might have a home ...

Although it surprised her, Sylvia was oddly pleased by the stimulus package the Bush Administration sent out. She had not been expecting baby oil, erotica, and candles.

Time for Neo-Keynesian Economics

We're all Keynesians now."
- Richard Nixon

The Tipping Point for Crisis: When Actors in an Environment Become the Environment
When Long-Term Capital Management (LTCM) was formed, the founders were intent on making monster money. LTCM’s board included two Nobel Prize winning economists. For a few years, they had annual returns in excess of 40%, before losing more than $1 billion a month for about four months in 1998 and folding in 2000. It is not just LTCM that collapsed. UBS was founded in the mid-18th century; because of the money it lost betting on LTCM, it would have likely collapsed had it not “merged” with Swiss Bank. LTCM was so heavily leveraged that it hurt lots of firms when it imploded.

LTCM’s method depended on fairly complex algorithms and a simple idea: use historical data to determine fair spreads between, for instance, various kinds of bonds. Using this data, they bet on particular convergence trends. And they bet heavily. They had leveraged about $4 billion with about $120 billion in loans. (If you are confident that you can make 6% on money you borrow at 5%, the only thing that limits the amount of money you can make is the amount of money you can borrow.)

The problem was, they were successful. Not only did they grow, but others began to imitate them. Suddenly, LTCM had changed the environment they’d assumed to be stable. The historical trends and relationships had changed because LTCM and their imitators assumed that these relationships would not change. You might say that one ingredient for creating a crisis is for the actors in an environment to change that environment in ways that obsoletes the old assumptions. At a certain point, one is no longer weaving in and out of the slalom poles but is, instead, weaving in and out of other skiers who are also moving. To put it mildly, this changes things.

Managing a system depends on clearly distinguishing between the environment, the system, and the parts. In LTCM’s case, their system grew to encompass the environment and then collapsed. A similar thing might be happening with regards to economic policy; globalization has changed the line between the system (nations and their policies) and the environment (the global economy).

"
Time for Neo-Keynesian Economics
John Maynard Keynes defined modern economic policy. His ideas are still genius, but given that the system boundary has shifted from nation to globe, his ideas need to be updated.

Keynes made a small fortune trading stocks while having breakfast in bed. A recent college graduate, his response to missing questions on his civil service exam on economics was, "Hm. How odd. I must know more about economics than they do." And Keynes was the first to articulate a theory that explained how it was that the actions best for households or firms might not be best for the whole - the macro - economy.

Put simply, Keynes invented macroeconomics. Before him, there was only microeconomics, but no one knew it was micro. The pre-Keynesian view didn't really distinguish between what drove optimal behavior for firms or households and what drove optimal behavior for the economy as a whole.

His insight seems simple now. Indeed, like other brilliant ideas such as representative government and gravity, his insight now seems obvious. He pointed out that a slumping economy could make it rational for firms to spend less - saving money by spending less. However, when firms spend less, households have less income, so they, too, spend less. As households spend less, firms spend less. As firms spend less, households spend less. When everyone does what is good for the individual, the result is something that is bad for the economy. (Which is, of course, bad for individuals.) Keynes said that the government could reverse this by spending money, lowering interest rates, or injecting some cash into the system. As it should be, this has become accepted and is now common practice in most every country.

Keynes invention of macroeconomics arose from a distinction between the behavior of systems and their parts. He looked at the whole system and made conclusions that seemed counterintuitive at the level of parts.

Keynes, however, wanted limits to capital flows between countries. For him, the system of consequence was the nation-state; his definition of macroeconomics was a prescription for national economic policy. His system was the country.

And yet today’s economy is global. We live in a post-national economy. Many Americans are about to receive checks as part of a stimulus package that gained broad support among all parties in DC. This package will be financed by loans from China and will be used to buy goods from China. Keynesian economics might not work as planned.

Worse, all this teeters on top of global financial markets that no longer have proven mechanisms for stability – like the mechanisms created by Keynesians to stabilize national banking systems and financial markets during the last century. Given how tightly coupled markets now are – a crisis in Thailand can quickly create a crisis in Brazil’s stock market – any attempt to devise system-level controls and checks suggests the need for neo-Keynesian policies that directly deal with the global economy we’re in.

It’s time for a neo-Keynesian economics. This will probably be less a matter of formulating new philosophy than putting in place new mechanisms, agencies, and regulations that do for the global economy what Keynesian economics have done for national economies.

Stimulating our Over-Stimulated Economy

Bernanke and Bush agree that our economy needs a stimulus. (Pelosi, Clinton, and Obama have also called for stimulus.) Basically, the proposal is to add about $100 billion in spending to our roughly $13 trillion economy (an infusion of less than 1%).

One, as long as they're doing this, why do it through banks? Why not send out vans and just pass out money to the homeless? Seriously. They'd spend money if they had it. Instead of a trickle down, we could have a surge up.

Two, is a stimulus really what's needed? Unemployment is higher but, at 5%, it is not that high. Meanwhile, a big part of the bump we're feeling is from home prices settling a bit. I'm not sure that's so bad. Here in San Diego, median home prices topped $500,000 for a while. If they kept rising at 5% to 15% a year, about .001% of households could afford homes, eventually. I'm not sure who benefits from that. If dropping home prices hurts the economy some, I don't know how that's to be avoided. Stimulating the economy so that home prices stay out of reach might help speculators, but it's not obvious how it helps normal people who just want a place to raise kids.

Three, our problem may be less a matter of stagnating consumption than over-stimulation. We already spend plenty. Many countries have savings rates of 20 to 30% (China's is close to 50%) but our savings rate is not far from zero. (Last year, briefly, our savings rate was negative.) It may be that stimulating the economy now is like offering an exhausted, crying baby a rattle.

Instead of more macroeconomic stimulus, how about a better safety net for this age of globalization? Why not offer longer periods of unemployment coverage, more aggressively fund training, and adopt policies that make housing affordable rather than expensive? A stimulus package seems like such an expensive and vague way to address real and specific problems.

And besides, it's not as though no one in Washington has already thought to cut taxes and increase spending in the last 7 years. If that is really what we needed, it's hard to explain how we got here.