Economic Panacea: Start with US Private Sector and UK Public Sector Policies to Promote Entrepreneurship

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

Where Guns are Easier to Find Than Libraries and Museums

What Really Hurts: Odd Views on Pain

As late as the 1950s,  a Catholic theologian wrote that it was wrong to anesthetize pain, particularly in the sinner. It might interfere with his penance.

Up until the 1970s, babies often weren't given anesthetic even for procedures as traumatic as amputation. Doctors didn't believe that babies really felt pain.

* Quick facts from interview with Joanna Bourke, author of The Story of Pain: From Prayer to Painkillers, on the BBC's Start the Week.

Polarized on Polar Ice

Frequency with which polar ice and polarize is mentioned in books since 1900. It looks neck and neck.

Is It the Chicken or the Egg? Do Unhealthy Food Options Lead or Follow Obesity?

Steve Martin: I ordered a chicken and an egg from Amazon. I'll let you know.

In the last year or so I've made numerous trips to Boulder, CO. One thing I find remarkable is how easily I can get really healthy food in the vicinity of the hotel. There are a number of places that offer lots of vegan and vegetarian options, and even "traditional" fare is more likely to come with lots of healthy vegetables.

By contrast, once working with a client north of Indianapolis, every restaurant around made it easy to get plenty of fried foods but really hard to get vegetables other than iceberg lettuce.

Gallup has a listing of the metropolitan areas around the US, allowing you to sort them by factors like percentage of folks who are obese. Boulder, CO tops the list with only 12.4% who are obese. Indianapolis? It's more than halfway down the list with 27.4%. A friend who taught in a small town in Louisiana said that there were only two restaurants in the town and both served fried chicken; Louisiana is second only to Mississippi on the list of states with the highest rates of obesity.

It's hard to know whether restaurants and grocery stores lead or follow levels of obesity. Does obesity cause bad restaurants to spring up in an area or do bad restaurants cause obesity? Given the cost of obesity, it would be worth experimenting with various incentives and subsidies to determine how much a change in food offered could change waistlines. I'm convinced that I ate differently in Boulder than I did in northern Indianapolis; I suspect that I'm not the only one.

Growing Up to Be a Professional Inventor

How could you not adore this bright eyed inventor?

Bill Bishop on How the Real Failure of Leadership is That No One Follows Anymore

Presidential candidates and op-ed writers often lament the lack of leaders, as if entire generations of Americans were born without the skills of a Johnson, a Franklin D. Roosevelt, or a Dwight D. Eisenhower. There are, of course, just as many leaders as there have always been.  What the country is missing is old fashioned followers. The generations that emerged in the last half of the twentieth century lost trust in every vestige of hierarchical authority, from the edicts of Catholic bishops to the degrees of Free Masons to the stature of federal representatives. There haven’t been any new LBJs because the whole notion of leadership has changed – and the whole shape of democracy is changing.

- Bill Bishop from his book, The Big Sort

Baseball Player Salaries vs. American Presidents'

When a reporter asked Babe Ruth to justify making more money than the president (this at the dawn of the Great Depression), Babe replied, "Well, I had a better year than him."

Today, even an average baseball player is 8X as valuable as the president.

All This Growth And We're Still Short by 7 Million Jobs

If Haiti had GDP growth of 10% for five years, it would be reason for great optimism. Still, you probably wouldn't want to leave Palo Alto for Port-au-Prince. Improved is not the same as realizing your potential.

I remain optimistic about the future and am happy about the fact that we've had job growth for 44 months in a row. Still, this has been a slow recovery from a deep hole. We have yet to realize our potential.

Pew recently published this graph showing how far off of the steady incline we have fallen: we are 7 million jobs short.

The good news is that we have finally regained the jobs lost during the Great Recession. The bad news is that we've missed out on years of normal growth. There are about 15 million more working age people since the start of the recession, roughly half of whom would normally go into the job market. Had the economy been "normal" during that time, we'd have created another 7 million jobs.

Recovery 1.0 restored the lost jobs. Finally, that box is checked.
Recovery 2.0 will restore the 7 million jobs never created. Once that box is checked it will feel like a real recovery.

Today's Odd Fact: Americans Like Their Standard of Living But Don't Like the Economy

Gallup tracks Americans' perceptions. There is a curious gap between what people report about their own condition and what they make of the economy as a whole.

80% of Americans say they are satisfied with their current standard of living. 59% expect it to improve in the future. This 139% total is the highest since Gallup began to track this 6 years ago. So personally, Americans like the way things are going.

Meanwhile, only 41% of Americans think that the economy is getting better. 53% think it is getting worse.

Do the math. 59% expect things to get better for themselves but only 41% think the whole economy will: that is a gap of 18%. 80% of people are happy with their standard of living but 53% think things are getting worse: that's a gap of at least 33%.

This might be the product of the media. What do we know about 300 million other Americans other than what the media tells us? Or it could be the product of how we tend to have a higher opinion of ourselves than other people, assuming that while we're okay, they are not so okay.

For whatever reason, Americans are dismissive of institutions. And that disdain might extend to something as abstract as "the economy" along with institutions like church and state.

This tendency to be disdainful of institutions is becoming more pronounced over time but it's not the same as pessimism about life. Millennials have the least faith in any institutions, from church to government, of any generation. Interestingly, While 44% of millennials think marriage has become obsolete, 70% want to marry. We don't believe in big corporations but we will take their jobs and products. We hate government but have no compunction about calling the police or fire department. Congress we hate and our congress people we re-elect by a wide margin. And while we don't believe in marriage we're happy to say, "I do." Our personal economic situation is good but the economy is awful.

It's an odd and interesting gap between what we believe about others and we believe about ourselves. I don't really understand it and that might be one of the reasons I find it so fascinating.

Households, Government and Businesses Are In Position for a New Boom

The economy is in the best position it's been for all of this century.

Households have paid down debt and increased wealth, now positioned to comfortably begin spending again. That will show up as additional tax revenues for governments and additional sales for businesses.

The government has brought spending and taxes back within the normal range. This doesn't just mean a lower deficit. It also means that the government no longer has to drag the economy down through austerity measures that raise taxes and lower spending.

As households and governments return to business as normal, businesses will boom as well, which will feed back to the other two sectors.

The Government Has Recovered

The deficit has come down one trillion dollars in four years. This deficit reduction during  the recovery has taken 1% out of GDP growth during that time through higher taxes and lower spending, but that drag is likely to stop. Remarkably, we've gone from record deficit to normal within just five years.

In the graph to the left you can see two straight lines representing the average tax revenue as a percentage of GDP (the lower of the two lines) and the average federal spending as a percentage of GDP (the higher).

The line that raises above the band shows actual spending. The line below the band shows actual tax revenues. In 2009, they were both at their most extreme, taxes at 14.6% of GDP and spending at 24.4%.

Since then, austerity measures and the recovery have changed  this. At 17.6% of GDP, taxes this year are projected to run just above the average of 17.4%. At 20.4%, government spending will be just below the average of 20.5%. And reports so far this year suggest the deficit will be even lower than this projection.

Government spending will - at a minimum - now be a stabilizing force on the economy rather than a drag on expansion as it has been throughout this long recovery. Government austerity is one reason it took 6.5 years for the economy to create the jobs lost during the Great Recession. (The other, of course, being simply the massive number of jobs lost during this financial crisis, as can be seen in the graph below.)

Households Have Recovered

Last month the economy hit a milestone: total employment hit a new high, finally restoring all the jobs lost during the Great Recession. This is a big deal for so many reasons. Just as the government has finally brought taxes and spending to within normal bounds, this means that households are finally returning to something like normal as well.

For the first time since 2000, the economy created more than 200,000 jobs per month for four months in a row. These sorts of realities change how people feel about spending. Even people who have kept their jobs have been more cautious about spending or taking out loans when the economy was so bad. The improving labor market helps them to begin feeling more confident about spending. And households are, by some measures, in their best position to begin spending in a generation.

Last year household wealth rose by $10 trillion, finally restoring all the wealth lost during the Great Recession. The stock market is regularly hitting new highs. Home prices are up 20% in the last two years.  While assets have been appreciating, households have also been paying down debt. What households pay to service debt is the lowest it has been since the Fed began to track this in 1980, a generation ago. All of this suggests that households will begin to spend again and that is good news for everyone - from businesses to government to other households.

Businesses, Households, and Government Are Now Positioned to Boom

So imagine this combination.
Households feel emboldened by additional wealth and a healthier jobs market to spend again.
Government spending will begin to grow at normal rates again.
Businesses - facing increased spending from households and government - will begin to invest and expand.
The combination of household spending and business expansion will provide more tax revenues, allowing the government to spend more and to pay down more debt, putting more capital into financial markets.
The combination of household spending and government spending will mean more business for business, allowing them to hire more and pay out more to shareholders.
The combination of government spending and business expansion will provide more jobs and income to households.

For the first time this century, we will enjoy an economy in which all the pieces - government, households, and business - are moving towards full capacity without resorting to excessive debt.

It's been a long time.

And it could result in a boom that will be even more impressive than the ones we had in the 1980s and 1990s.

P.S. 10 June, I would add this graph of the ratio of unemployed workers per job opening from 538.

This shows that there are fewer workers competing for the same jobs, which is great news for job-seekers. That ratio is nearly back to pre-recession levels. Once it hits that level, I predict wages will again start to climb.

Job Numbers in Historical Context

Here are some graphs and a couple of tables to compare this decade and administration with those of the last few decades.

This first graph assumes that the monthly average for job creation during these first 4 years and 5 months holds through the rest of the decade. You can see that this decade's numbers aren't much different from the 1990s.

However, if we adjust the raw numbers to percent of population (you might think that a population of 300 million would be able to - and need to - create more jobs than a population of 200 million), you can see that this decade is so-so.

Here is a graph showing the cumulative job creation numbers during the last four re-elected administrations.

The ranking of administrations through month 64 - the most recent month for which job numbers have been reported for the Obama administration - results in this ranking.

Assuming that the effect of a president's policies won't be felt until at one year in (if even then, given the myriad forces at work on the economy, including Congress's tendency to at turns exacerbate or mitigate the president's plans), this graph shows job creation without the first year.

The ranking without the inclusion of that first year (a particularly favorable change for Obama given that during his first six months in office the American economy hemorrhaged 3.4 million jobs), Obama and Reagan trade places on the ranking.

It does look as though - Great Recession aside - this decade and Obama's administration are shaping up to be fairly normal in comparison to past decades and administrations. 

This Jobs Recovery Has Quietly Crept Up on the Record for Longest Expansion

Tomorrow's job report will probably extend the streak of months with uninterrupted job growth to 44, placing it 3rd among recorded streaks in these United States. (The data only goes back to 1939.) By the time July's numbers come in, this recovery should tie for second; by the time September's numbers come in, this recovery could hit its 4th anniversary and be tied for first.

The rate of job creation has been okay - only slighter better than the recovery in the mid-aughts. Everyone has been complaining about it the whole time. And of course it comes on the heels of the worst recession since we began collecting monthly data, making its gradual improvements seem paltry. But it is nonetheless quietly edging towards a new record. This recovery is not just long: it shows little sign of ending soon.

The global economy is steadily recovering from the Great Recession. Emerging markets from Africa to India show great promise. Europe's debt default talk has quieted. Abe's policies are waking Japan's economy for the first time in decades. All that will help the American economy.

\

Unemployment here in the US is still moderately high and inflation relatively low: this recovery has yet to show the signs of overheating that we saw towards the end of the three other long recoveries. The unemployment rate at the end of the runs in the 80s, 90s, and aughts was 5.2%, 4.0%, and 4.6%. At the rate our unemployment rate is dropping, it will take us another year or two to reach those levels, suggesting that we won't run out of slack anytime soon. In fact, our unemployment rate of 6.3% may well rise to 6.4% tomorrow. 

Of course this run of uninterrupted job gains could end next month. One thing that every one of the three other recoveries share in common? They ended in summer, in June or July. Perhaps summer is the time when the beach looks more alluring than a cubicle. But I think that's a beach blanket that won't be spread out until next summer, when this recovery is closer to 5 years old.

----------

Yes, it's a fool's errand to forecast the movement of something as unwieldy as an economy a year into the future. But what's the use of blogging if you can't do fool's work?

There is no Bubble in Venture Capital for Tech Firms.

In 2010

• Residential mortgages were $11 trillion, down $700 billion from the previous year.
• Consumer credit was $2.5 trillion, down $200 billion from 2009.
• Venture Capital Financing for technical companies was $17 billion, up $4 billion.

Mortgage financing is 647X as much as what we plow into tech startups. Outstanding consumer credit is 147X as much as the VC community puts into technology startups.

Since the start of the year, Facebook has spent more than $21 billion acquiring startups and Google has spent $4 billion. That's $25 billion in acquisitions for just two of the more prominent names in tech in just the first 5 months of this year. Meanwhile, VCs put only $24 billion into startups all of last year.

My own sense is that the venture capital market is still far from mature, perhaps where consumer credit was in the 1970s when the modern credit card was just emerging. 

There is a question about whether Venture Capital is fueling another bubble, akin to 2000. Based on this data, I don't think so. Not even close. It seems to me - given the importance and potential of new ventures - the ratio of financing for new ventures is - if anything - too low compared to mortgages and consumer credit. In a decade we might find talk of bubble in 2014 comical.

ANDERS OSBORNE - "47" (Live at Telluride Blues & Brews 2013) #JAMINTHEVAN

You don't have to be 47 to see that this song is relevant but I'm sure it helps. Plus there is the added charm of a band crowded into a small van. Maybe it'll give you 5 minutes of cheer on a Monday.

Only 3% of University Students Get These Six Things That Predict Future Success

Gallup asked students about their levels of support and deep learning during college.

These factors - from feeling supported by a professor to having work experiences that allowed them to apply what they were learning in the real world - more than doubled their odds of engagement and success after school. And yet only 14% of students get all three elements of support and only 6% get all three. (It's nice to see that nearly two-thirds encounter at least one professor who makes them excited about learning and nearly a third are on a project that lasts longer than a semester.) But all of these seems kind of random: just 3% get all six elements during their university education.

3% suggests to me that these results have nothing to do with the educational system and everything to do with enterprising students and professors who are working outside of the system. It's nice that heroic and enterprising students and professors are out there. It would probably be more effective if we actually designed universities to provide these experiences for students, making this sort of mentoring a part of professors' 30 to 50 work week (instead of expecting them to do this outside of their regular teaching and research) and making these sorts of work experiences a normal part of an education.

Who Would Have Believed that Obama Would be Worse at Communication than Bush?

About the time the US went from silent movies to talkies, presidents seemingly stopped talking and became images instead of leaders who provided a narrative.

Obama press secretary Jay Carney's retirement is a good opportunity to look at Obama's effort to communicate.

George W. Bush was able to initiate two wars, a department of Homeland Security, TARP, and a massive tax cut. His record of legislative initiatives was not as great as LBJ's list of Great Society initiatives, but at least he matched LBJ for the average number of press conferences per year. It didn't matter that he had a penchant for butchering the language, he put effort into talking directly to the American people.
Obama? Not so much.

Obama's average of 20 press conferences per year puts him below either of the Bush men or Clinton. Congress has made it clear that no issues are as important to them as obstructing any of his initiatives, but Obama hasn't exactly made extraordinary efforts to communicate directly to the American people. In this age of 24-7 news coverage, you might think that he could at least dictate the topic, if not the position on them. (I remember feeling so flabbergasted at George W. Bush's administration's ability to convince the American people that of all the things we could be focused on, Iraq was the one that deserved the most attention. As much as I opposed the war even then, this is pretty great example of what it means to control the narrative, to dictate the topics that receive attention.)

FDR averaged nearly as many press conferences per year as Obama has average per term. And he passed legislation at least the scope of Obamacare about once per year. Can you imagine what FDR would make of the incredible possibilities offered by continuous news coverage?

Just judging from the paucity of press conferences, it doesn't seem as though Obama believes that he can talk over the heads of Congress directly to the American people. I wonder what FDR would say to him about that?

Why Crowded Cities Provide the Space for Creativity

One reason that women migrate into cities is because they are more free to create their own lifestyle. At the extreme, you can think of the girl raised in a Taliban village who would be free to choose whether to wear a veil or jeans and t-shirt if she moved into the anonymity of a big city in the West. To a lesser extent, even moving from a small rural area where people don't just know you but also know your grandparents will make it easier for a young girl raised Amish, say, to pursue a career and buy a BMW without accusation of being pretentious.

Curiously, this freedom leads to innovation, both technological and social. It's not just personal lives that get invented within the anonymity of a city: a handful of cities generate more patents than the rest of the country combined. 

20 cities generate 63% of all patents in the US.

The research universities that are within these regions help to provoke a great deal of the innovation. They also tend to cultivate a spirit of openness and tolerance for new ideas and dis-respect for authority that fosters innovation. People in these innovative cities are more likely to be individualistic and are less family oriented than folks in less innovative cities. Innovation isn't something that gets neatly contained to work.

When you socialize with folks you know well -and who know you well - you are less likely to encounter new ideas. Job leads tend to come from folks outside of your immediate circle of friends. More than that, loose acquaintances are people with whom we're free to try on new ideas and new ways of being. Someone from a  small town who knows that you get your half grin from your grandpa are less likely to let you become someone new than an acquaintance in a city who barely knows you. This freedom not only lets the Amish girl wear lipstick but it lets the inventor explore new ideas The more varied our interactions, the more potential for novelty.

I have spent considerable time in 6 of the top 10 cities in the list above. They are characterized by what I'd call personality. Santa Cruz, Boulder, and Austin share a very similar vibe and the folks living there certainly don't match the description conservatives would give of capitalists. These are places that aren't merely tolerant of diversity: they celebrate it. The 6 cities I know lean left - to a considerable degree. They are places that are more likely to support people than judge them, less likely to require drug testing for welfare recipients than to legalize pot. It is in these milieus from which creativity emerges. It's not just that conservatives have very little support among creative types in the arts; conservative cities and rural areas have very little patent activity. When I lived in Santa Cruz in the early 1980s, it was the only city in the US with an openly gay, communist mayor. Austin has a campaign to "Keep Austin Weird." Yesterday I ate in Native Foods in Boulder, a place that more traditional communities might chuckle at for its unabashed embrace of organic, vegan food. It's little wonder that these communities are cradles to new ideas. It is, to me, no coincidence that 3 of the top ten cities in this list are in California's Bay Area, a place where people seemingly feel little compunction about conformity - whether in thought, dress, or lifestyle - a home to the Free Speech Movement that helped to usher in "the 60s." 

All cities - and some more than others - provide space for the individual to step outside of tradition. Unsurprisingly, being open to novelty is a package deal: whether you first open the door to social invention or technological invention, the disrespect for tradition is likely to spill into all walks of life. 

-------------

Graphs are from a Brookings report here. Claims about how people in different cities poll on topics like family or individualistic tendencies come from p. 143 of Bill Bishop's The Big Sort.

Superman Reveals the Most Important Super Power

Superman explains to young Timmy that the reason he has changed from using phone booths to using photo booths is because it's now about image, not communication, connection, change ... well, whatever it was about in the days of phone booths.

"It's more important to be photogenic than to change," he tells Timmy. "If you could wish for one super power, photogenic should be it," he continued. "If you don't look good on the movie posters, no one will ever come to the cinema to find out what else you can do."

And then, he tucked the photo booth under his arm, said, "I'm going to need this for selfies!" saluted Timmy, and flew off.

Covey's Lighthouse as a Symbol of Transition Rather Than Permanence

I used to work for Covey Leadership Center. Stephen Covey liked lighthouses. For him they were a symbol of stability. The lighthouse would faithfully stand there warning ships to stay away from the rocks, from danger.

For me, a lighthouse is instead a symbol of transition. It's not that people on boats can't come up to land. In fact, getting onto land is probably the whole purpose of the trip they've made by sea. The lighthouse instead of warning them to stay away signals that it's time for a transition. The lesson is, what has brought you this far won't work for the next stage of your travel. You'll have to get out of your ship and into a train or car or even onto your own two feet. You have options but the ship isn't one of them. You've reached land now and can't expect to float over this next bit.

This is what happens when you leave behind childhood for your teen years, when you leave the single life behind for the married life, become a parent ... well, so many transitions require us to get outside of ourselves and enter into something different, to become someone else.

Lighthouses aren't secrets. It's almost cliche to talk about how a life changes when you become a parent, or a grad student for instance. It's not hard to see a lighthouse. But the message of the lighthouse is not always so clear. Lighthouses don't warn you back to sea. They simply say that a transition is coming and you need to pay closer attention than you have. You even have your choice of new vessels; there are a variety of choices about how to navigate this new surface. You have a variety of choices but the vessel you've been in up until now is not one of them. Who you've been is no longer an option.

Financial Markets and a New Definition of Taking a Bath

Global financial assets are well over $200 trillion, doubling every decade since 1990. In 1990, total debt and equity outstanding was $50-some trillion. By 2000 it was over $100 trillion. By 2010, it was over $200 trillion.

Between 1995 and 2007, only one quarter of this additional financing went to corporations and households. This money is not being used to start or expand businesses or even to finance purchases by households of everything from refrigerators to university educations.

Every decade we double our financial assets but of late those assets are merely going into speculative sorts of enterprises as opposed to financing actual economic activity.

The result is something akin to water in a bathtub, waves sloshing about in a closed system. Financing is used to finance financial activity and it rushes in and then out, creating odd turbulence without actually flowing into anything new.

The problem is not the volume of financing. That's actually a wonderful thing. The problem is that our limit no longer lies in the quantity of financing; that financing is limited by where it can go. We still haven't created enough viable opportunities for that financing, from public to private sector ventures. Until we do, we'll keep trying to predict the movement of waves in a tub.

Is the Web Conscious?

Systems have characteristics that their parts do not. This emergent phenomenon defines them. Your car got you to work today. None of its parts could do that. Not the engine. Not the wheels. Not the drive train. Systems are defined by the interactions of their parts rather than the action of their parts.

Which brings me to global consciousness.

James Surowiecki, author of The Wisdom of Crowds, wrote an interesting piece in the New Yorker titled "The Collective Intelligence of the Web." The first example he uses of collective intelligence is of a project NASA began in 2000 to map Mars.

"There were two very interesting things about the results. First, although there was no financial incentive to participate, more than a hundred thousand people took part in the study, generating more than 2.4 million clicks. Second, and even more striking, the collective product of all those amateur clickers was very good—as a report put it, their 'automatically computed consensus” was “virtually indistinguishable from the inputs of a geologist with years of experience in identifying Mars craters.'"

He goes on to write about how Google ranks pages based on the actions of millions of users, and cites other examples. This isn't just about judgment. This is about creating. At one level this is not new. For centuries humans have been walking down trails that have been defined by the steps of thousands of people who have come before. But this capability of the Internet to knit together individual consciousness into something collective is something newly emergent, it seems to me.

Collectively, civilization can do what individuals can't. On our own, we really are just intelligent apes. But with one other person we can create a new human. With one million other people we can create a new community or set of institutions. And with billions of people online, maybe we can create a new sort of understanding that would be impossible for the individual or even any community within it.

It might just be that the web is enabling a new kind of consciousness to emerge, awareness and problem solving and project execution that would never be possible at the level of individuals or even teams traditionally managed. If so, it raises a fascinating question. Has the web developed consciousness yet? And if it was self-aware, would we be aware of it?

Happiness like a Heartbeat

Gallup tracks happiness in the US. It doesn't seem to be moving in any particular direction but there is a lot of movement. To me it looks like a heartbeat. For some reason that seems fitting and makes me happy.

Why The Rapid Recovery in Startups Might Not Be Enough

The good news is that the number of startups is rebounding to where it was in the late 1990s. The bad news is that because of economic changes, it takes more startups than ever to employ the same number of people. 

There has been a sharp uptick in the number of startups in just the last few years. (The bureau of labor statistics has reported numbers only through March of 2013.) 

In 2013, the number of companies less than 2 years old rose by 14%. 

The problem is not just that it is taking the rate of business formation a few years to return to normal. The problem is that startups don't create as many jobs. 

Software is now automating knowledge work just as machines have been – for centuries – automating physical work. While this raises productivity it destroys jobs.

It’s cliché – but still true – to say that the pace of innovation is obsoleting products, companies and jobs more rapidly than ever. As companies rapidly expand, shrink, and shift focus, they more rapidly create and destroy jobs.

Outsourcing is more common and that’s one reason that even successful entrepreneurs don’t need as many employees. The Kauffman Foundation reported that startups that needed about 8 employees in 2000 could support the same level of sales with only 5 employees today.

Automation, innovation, outsourcing and greater efficiencies contribute to an incredibly dynamic job market. In the second quarter of 2013, the US economy created 7.1 million jobs and destroyed 6.5 million. The net result was 603,000 more jobs than we had at the beginning of the quarter. That’s nice. But given the rate at which jobs are being destroyed, the economy has to create 12 new jobs in order to gain one. Compared to the number of entrepreneurs we’d need in a fictional world where jobs are created and kept for the length of a career, in this world we need about 12 times as many entrepreneurs.

The good news is that the rate of startups is recovering. The bad news is that it needs to be higher than it has ever been before in order to create enough jobs to bring back wage growth and full employment. 

The Politics of Location

Politically, counties are becoming more sharply divided. Between 1976 and 2008, the percentage of counties where the Republican or Democratic presidential candidate won by 20 points or more doubled from roughly 25% to nearly 50%. Increasingly, we vote like our neighbors.

Curiously, this tendency doesn't just define us as conservative or liberal. It's finer tuned than that. In the primary election between Obama and Hillary Clinton - two senators with nearly identical voting records - half the voters lived in counties where Obama or Clinton won by landslides. We side with our neighbors on differences large or small.

It seems that politics is like fashion, food and accents: it has a distinctly regional flavor.

Facts above come from Bill Bishop's interesting book The Big Sort, Why the Clustering of Like-Minded Americans is Tearing us Apart.

Republican Fondness for Conspiracy Theories

The folks at Public Policy Polling asked Americans about conspiracy theories. As it turns out we like them. And curiously, folks who voted for Romney are more likely to believe in a good conspiracy theory than are the folks who voted for Obama.

Here's a table showing the ratio of Romney to Obama supporters who believe in a particular conspiracy.

	Voted For
Conspiracy	Obama	Romney	Ratio
Believe Global Warming a Hoax?	12	61	5.1
Believe Obama is Anti-Christ	5	22	4.4
Believe in lizard people	2	5	2.5
Believe in New World Order	16	38	2.4
Believe Sadam was involved in 9/11	19	36	1.9
Believe UFO Crashed at Roswell?	16	27	1.7
Believe govt spreads chemicals thru plane exhaust	3	5	1.7
Believe pharma and med invent new diseases to make $	11	17	1.5
Believe govt controls minds thru TV	12	18	1.5
Believe in Bigfoot	12	15	1.3
Believe McCartney died and was replaced	4	5	1.3
Believe Vaccines Cause Autism	19	22	1.2
Believe in JFK conspiracy	47	54	1.1
Believe aliens exist	28	28	1.0
Believe govt adds fluoride for sinister reasons	8	8	1.0
Believe Moon Landing was Fake	6	5	0.8
Believe govt allowed 9/11 to happen	13	8	0.6
Believe CIA spread crack in inner cities	17	10	0.6
Believe Bush misled on WMDs in Iraq	69	18	0.3

Voters come together on a belief in aliens and the government adding fluoride for sinister reasons.

They are sharply divided over whether global warming is a hoax and whether Bush misled on weapons of mass destruction in Iraq. (Note that the question is not whether the science on global warming is dubious or incomplete: 61% of Romney supporters actually think global warming is a hoax that scientists are perpetuating at the expense of innocent oil companies, politicians, and talk radio personalities.) That seems predictable given politics.

It's less clear why Romney supporters would be about twice as likely to believe that a UFO crashed at Roswell or in lizard people.

The fact that Republicans are more likely to cozy up to a good conspiracy doesn't prove that the GOP platform is carefully crafted to appeal to the interests of average Americans while helping only a select few. Then again, if you could prove such a claim it wouldn't be much of a conspiracy, would it?

How Catholic Confession Has Created Sex Scandals and Driven Members Out of the Church

Before looking at the following graph, keep in mind that the Catholic Church has been around about 1,700 years. Had the church lost just 6 percentage points of its believers each of the last 17 centuries, it would now be effectively obsolete, making Catholics about as common as pagans. Again, losing 6 percentage points per century would have obsoleted it by now.

Which brings us to the precipitous decline of Hispanics who refer to themselves as Catholic in the US.

In just four years, the church has lost 12 percentage points. At this rate, within 25 years no Hispanics will be Catholic. In terms of the time the Church has been around, a quarter of a century is a rounding error.

It's a safe bet that the church won't dissipate that quickly, but it's worth asking how Pope Francis could slow this decline.

I have two complementary theories, one having to do with confession and the other with the modern emphasis on autonomy - the self-defined life that is at the root of democracy and capitalism.

Sex scandals have hurt the church. That seems obvious. Less obvious is the persistent role of confession in sex scandals.

Centuries ago,a young woman confessing to immoral urges was positioned on her knees before the priest, her arms on his legs in a penitent position. Even the most sincere young priest, looking into the face of a beautiful confessor gazing up at him, her face essentially on his lap, would find it hard not to be moved as she confessed to sinful thoughts or acts. So a long time ago, the church decided that a confession booth would both take some of the sexual tension out of this situation and possibly protect the identity of easy marks from rogue priests. Things got better.

Then, in 1910, Pope Pius X decided that children should confess. He thought it was a good idea for 7 year old kids to begin admitting they were sinners. (The list of serious sins includes being late for Mass. It's never too early for someone to start feeling guilty, apparently, even for things for which parents are responsible.) And while the previous practice was to confess once or twice a year, Pius thought confession should become a weekly practice. So about the time everyone else began to listen to weekly radio programs, priests were listening to weekly confessions from prepubescent children.

After this policy, reports of sexual abuse of children rose. It's a terrible policy.

One difference between a church and business is the respect for tradition. It takes a lot to change the policy of a previous pope because that pope was the mouthpiece of God. Even so, popes do change policies. It happens and if Pope Francis cares at all about halting the decline of Catholics, he'll reverse this decision to have children confess. Let children be children and wait until they are teenagers, at least, before beginning to make them feel guilty for living in a body instead of existing as a purely spiritual being, unencumbered by carnal thoughts. That's one policy change that could help to reverse the decline of Catholics.

The second policy change will be harder because it gets at the heart of the difference between Catholics and Protestants.

Authority seems to evolve through at least two stages. In the first stage of nation-states, for instance, the monarch was the ultimate authority. Louis XIV, who ruled France until 1715, famously said, "I am the state." That same century, Thomas Jefferson penned the words, "All men are created equal," and then helped to create a constitution that would replace the monarch as the ultimate authority in a country. At the first stage, authority resides in a person and in a later stage it resides in the written word.

Catholics and Protestants alike believe the Bible is the inspired word of God. The difference is, Protestants think the Bible is the ultimate authority whereas Catholics think the ultimate authority is the clergy (and their ultimate authority is the pope). Catholics warned original Protestants that if they were going to make the Bible the ultimate authority then anyone was free to offer a new interpretation and the result would be thousands of denominations; it turns out they were right. But even in the midst of the chaos of multiple theologies, there is a certain freedom and democracy in the Protestant option. It is not just, as Martin Luther said, "We are all priests." Any Protestant, from Mary Baker Eddy to Billy Graham, is free to be pope, to head his or her own religion. And the Protestant emphasis more closely accords with the impulse of the modern world, with each person defining his or her own life rather than turning to an authority figure for instructions.

Here, too, Pope Francis has a chance to articulate relevant policy. A pope who says, "Who am I to judge," is one that people defining their own life are more likely to love than resent. It would be huge - but honest - for the Catholic Church to acknowledge their role of merely informing rather than defining the individual's conscience. There is a very real difference between a church that helps the individual to define his or her own life and one that wants to define that life.

Hispanics make up nearly half of American Catholics. Their loss is not trivial. It would be absurd for Pope Francis to ignore this problem. The good news for him, though, is that this decline could probably be slowed with just a couple of key changes. It's too late to avoid radical change; the Church is going to either radically change in terms of its numbers or in terms of its policy. We will see whether Francis has more commitment to tradition or reality and which kind of radical change he'll accept. It's too late for the status quo.

Why The Country Isn't Ready for President Elizabeth Warren (And Why Culture Matters More Than Policy)

There's a fascinating study on cooperation that has been done around the world. I think it reveals why Elizabeth Warren - a policy maker I love - is not ready to be president. Or, more to the point, why the country is not ready for her to be president.

The study measures cooperation and a sense of the common good. Bostonians demonstrate the highest ranking. Here's how the study (the game?) works.

You and 3 partners start out with $20 each. You can choose to put all, some, or none of your $20 into a central pile. Whatever you put in gets doubled and split between the four of you. So, here are a couple of scenarios.

Everybody Wins:
You start with $20.
You put in $20, they each put in $20, and this $80 gets doubled to $160, which you then split.
You end with $40. (So do they.)
The group gains $80.

You Win:
You start with $20.
You put in nothing, they each put in $20, and this $60 gets doubled to $120, which you then split.
You end up with $50. (They get just $30.)
The group gains $60.

Some Win:
You start with $20.
You put in nothing, two other people put in nothing, and one dupe puts in $20, which gets doubled to $40, which you all split.
You end up with $30. (The dupe gets just $10.)
The group gains $20.

Nobody Wins:
You start with $20.
You put in nothing, the same as everyone else. Your nothing is doubled.
You end up with $20. (So does everyone else.)
The group gains $0.

Now curiously, this game has been played in cities around the world. In some cities, people cooperate to create more wealth. In other cities they don't. The culture changes from place to place.

In Boston, the average contribution per round is close to $20. Massachusetts is one of the richest states (3rd as measured by per capita income) and as befits a region dependent on a highly developed market economy and a mix of public and private sector initiatives, people have developed high degrees of interdependence and trust. Copenhagen is close to Boston on this ranking.

On the other end of the spectrum is Athens. In Greece you're the dupe to put your money into the pot and the culture there suggests that people are trying to avoid becoming the dupe. The average contribution per round in Athens is closer to $6, meaning that game participants create about a third of the wealth. (It seems little wonder that Greece has such trouble with public financing and tax collection.)

The good people of Boston demonstrate the highest levels of cooperation and trust in creating a common good of any city studied. And without that sort of culture, two things are difficult to create: economic progress and, more broadly, a progressive agenda. It's not clear that Elizabeth's policies would seem credible outside of certain areas like Boston, California's Bay Area, Austin, North Carolina's Research Triangle ... essentially places with highly educated work forces working in technologies and industries where cooperation is key. It's one thing to articulate policies that create a common good; it's more difficult to know how to create a culture supportive of such policies. It's easier to know what policy initiatives would help the folks in Boston than it is to know how to change Athen's culture.

There is nothing absolute about the efficacy of policy. Whether particular policy works "depends." A policy rarely works in any condition or culture. Curiously, culture change gets talked to quite a lot within corporations but rarely within nations or neighborhoods. Maybe it's time we changed that.

The Price of Loyalty to the Tribe

Imagine generations ago, a member of a tribe realized that praying to the god of irrigation didn't make any difference but actually digging trenches from the nearby river did. He even worked out when the trenches should be dug and when they should be closed off, who would do the work, and how much this predictable irrigation would increase crop yields. This benefit would of course make the tribe healthier, support more children so the tribe became larger, and make this irrigation pioneer one of the great men in the tribe.

But of course his great insight was just as likely - perhaps more likely - to have left him alone on the plains, ostracized from the tribe for questioning the beliefs that held the tribe together.

Innovations might make life better but being in the tribe makes life possible.

It's kind of a miracle that anyone has the courage to speak out. Because being right is a consolation prize when you're standing out on the plains, facing the lion alone.

The Dow Set a New All-Time High Yesterday And That's No Big Deal

Imagine that you put $1,000 into a savings account that paid 1% a month. (An obviously fictional example.)

At the end of month one, you'd have $1,010. At the end of month two you'd have $1,020 and some change. By the end of the year, you'd have $1.126.83. 

Every month, your savings account would set a new record. It would hit a new, all-time high every single month. That's what happens with a steady rate of return.

Which brings us to the market. For the first time this year, the Dow has hit a new all-time high. Analysts are making noise about whether this means the market has topped out, wondering where else to go with their money.

Whether or not the market is poised for a sell-off has little to do with whether or not it is at an all-time high. In a world with less volatility and no business cycle, the market would be hitting an all-time high every month. Just like your savings account. This is what investments do. 

Today's April Jobs Report Adds to the Promise of 2014

This is the jobs report I prematurely forecast last month for March. It took a month longer to happen than I thought, but this ~300,000 jobs report is good news.

288,000 jobs created in April plus the numbers for February and March revised upwards by 36,000 means that a total of 324,000 new jobs were announced this month. We may actually have a year in which monthly job creation numbers average more than 200,000; if so, it will be only the second time since 1999.

The unemployment rate, after being stuck at the same rate for four months, sharply fell. The unemployment rate for April in the last five years leaves little doubt that we're experiencing a real recovery. And it actually seems to be accelerating, 4+ years in.

Spending is Up But Debt is Down. This Might Be the Start of a Sustainable Boom

Last month consumer spending rose 0.9%, its largest uptick since April of 2009. That alone is good news. Even better, families are in a much better position to be spending now.

In April 2009, the economy was beginning to hemorrhage jobs and households were spending between 12 to 13% of their disposable income just to service debt (including mortgage and consumer debt). Just 4 quarters before, household spending on debt had peaked and it was only gradually coming down. Consumer spending was high, which was nice. But it was financed with a lot of debt, which wasn't sustainable.

The Federal Reserve reports the percentage of disposable income that households are spending to service debt here. Their numbers go back to 1980. As you can see, there has been a sharp and steady decline since 2007, just before the crash.

At its peak, households were taking on mortgage and consumer debt that their incomes couldn't justify. It's been hard on the economy as households paid down that debt - and as banks refused to offer credit so liberally - but the result is a much more stable position from which to launch a recovery. The bad news is that making this adjustment has been yet another drag on the economy since 2007. The good news is that now we're in a better place.

It's notable that in spite of households rapidly paying down debt and governments at every level shedding jobs, the economy has continued to create jobs during the last four years. Imagine that over the next four years households stop paying down debt and start spending again. Or even optimistically begin to take on more debt. That could be a huge boost to the economy. Consumption is 70% of GDP. Whether households are acting cautiously or spending optimistically makes a huge difference in economic growth.

There are have been a lot of mixed signals in the economy of late. Most notably, this week's report that GDP had grown only 0.1% was particularly disappointing. The economy has made a few false starts during its slow rise during the last four years, has posted a few quarters that suggest the possibility of a boom. It's hard to predict when it might actually take off but one thing is true: the conditions for combustion are the best they've been in nearly twenty years.

Households are spending again but at much lower levels of debt. This could be the start of something sustainable.