Growthology

The Best of Bill Gates

Presumably, you all know about Bill Gates' retirement from MicroSoft (at the tender young age of 52). I have been hoping to write something fitting, but now it is crunch time and I thought it might be best to outsource this one: a round-up of some of the best commentaries on Gates we've found so far. My brief commentary follows.

• Best essay goes to David Warsh (recommended by Bob and myself)
• Overview/resource page, go with FORTUNE
• Definitely check out the pieces in WIRED
• Cringely's insights (very critical and very well-informed)
• The 7-minute "last day" spoof video (hat tip Kedrosky)
• And here's a good collection of pieces responding to Bill's call for creative capitalism

My assessment, based on studying this man's life story for over 20 years:

Bill Gates is easily the world's greatest entrepreneur in half a century, by measure of simple value added if nothing else. For what it's worth, let me just say that Bill Gates changed my life in two very big ways. First, he inspired me as a college student with the knowledge that America remains fundamentally a meritocracy with unknowable opportunities. Gates embodied the entrepreneurial spirit by taking on icons of corporate capitalism (and winning) and, I think, reinvigorating the spirit of entrepreneurial capitalism. Second, when my pals and I bootstrapped our little software startup in 1995, we almost failed multiple times, and one of the reasons we survived is because Microsoft was the rock upon which Neocor was built. Many afternoons, we talked about it, painfully aware that without Microsoft we would have simply folded. Not enough can be said about the brilliance of Bill Gates' strategy to nurture third party software developers, something that its competitors strategically chose not to do. It set a standard, and the whole world has been enriched. Bill Gates is an imperfect human being, and many of my closest friends really dislike him and his company's aggressive tactics, but no one should lose sight of his achievements as an engineer, an innovator, and now as a to-the-hilt philanthropist.

Where is Cringely Now?

One of my fondest memories from the first start-up I co-founded is coding in our “office” (Jim Coyer’s studio apartment in San Diego) all day and night. One day in mid-summer 1996, Jim showed Ken and I a video tape of a PBS documentary called “Triumph of the Nerds” which was and remains hilarious.

Cringely used the same material for his excellent book, Accidental Empires: How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can't Get a Date, which was a national best-seller. The interviews with Steve Jobs, Bill Gates, and dozens of other interesting tech folks are priceless. Can’t you still hear Ballmer bellowing “K-locks!” and “Ride the Bear!” Jim?

When Occidental College asked me to design and teach a class on entrepreneurial economics, I couldn’t find a good textbook, and decided to use Accidental Empires instead. I would do it again, especially as a supplementary text. But I wonder: what’s a good entrep text nowadays? Hopefully the pickings have improved.

But I also wonder whatever happened to Cringely? I hold him in high esteem as a smart and funny tech journalist. Not quite the Mark Twain of our time (that nod goes to WaPo’s Joel Achenbach), but close. What is he up to now?

He’s blogging, of course. Even nerds can be hip.

Speaking of Jobs …

We don’t ordinarily promote Kauffman-funded or originated work on our blog, But in light of recent concerns about rising unemployment and Tim’s own recent blogging about jobs of the future, a recent report by John Haltiwanger, Steve Davis and Ron Jarmin about the continued churning in our job market is well worth reading.

The authors are three of the nation’s best experts on productivity and the labor market. They highlight the important, if not well appreciated fact, that in a dynamic economy, there will also be lots of “churn” – growing businesses that are adding workers, declining or struggling businesses that are shedding them. Indeed, one of the reasons for America’s strong productivity performance over the last 15 years (until recently) is that our labor market is so flexible.

To be sure, this is not to dismiss concerns about cyclically rising unemployment. There is and should be no joy in that. One of the more amazing things about the recent financial/economic turmoil is how quickly both the Fed and the Congress/Administration reacted to the initial signs of weakening in the economy. While such swift action may not avert a recession – the economic indicators seem to get worse each day – it surely already has moderated the slowdown.

The longer run challenge for Washington policy makers is not to adopt policies aimed at slowing the churning process (turning back the clock on trade policy, is one example) that is inherent in a growing economy. Stop churn, and you stop or slow growth.

Better that more attention is paid to policies -- like wage insurance -- that facilitate and indeed encourage workers’ transition from one job to another.

Noisy Externality

Fascinating piece on tech externalities:

Modern cities can be so noisy that ornithologists have found birds warbling at the top of their lungs to be heard. Nightingales in Berlin have been documented singing up to 14 decibels louder than their counterparts in woody environs, in an attempt to make their songs audible above all the background noise. Yet the cacophony of modern life is hardly confined to metropolises like New York or Cairo, Egypt, where you literally have to shout on the street to make yourself heard.

New technology is noisy: car alarms, cell phone ring tones, and the must-have suburban leaf-blower. After you read the whole Salon article about the increasing level of noise in modern society, tell me what you think can be done.

Bigger picture: As an entrepreneur, problems that others tell me are impossible look to me like a fun challenge. While as an economist, a lot of problems that people tell me are incredibly complex actually look pretty simple to me. But the solution is never what they want to hear. If something is bad for society (carbon emissions, noise, crime), then raise its price. Done. Just cut the Gordian knot, people. Next?

In the simplest terms possible, a mayor or legislator might find herself incredibly popular by proposing a tax on any product sold (or registered) with an internal combustion engine. Flat tax of $30 for a car or an edge trimmer. Yikes, there goes my political career ... did I just say t-t-t-t-tax?

Yes. Although raising taxes is probably as politically incorrect as can be, it is probably up to our generation (Sorry, Greatest) to clean up the Boomers' national debt extravaganza. And when the time comes to balance the budget, we should aim to tax the bad things (noise, gasoline, trash, violent crime, evil foreign dictators) and untax the good things (homegrown profits, employment, innovation).  Other ideas?

P.S. So Greg, can I join the Pigou Club now?   

My Summer Reading ... Web App

I'm really trying to read everything worthwhile ever written, and just limiting myself to non-fiction, graphic novels, and tech blogs ... but there seems to be a conspiracy of writers who incessantly put more and more stuff on the sales rack. This has got to stop. Maybe I should save my kids the frustration and just tell them books are for dummies. Or maybe ...

... introduce them to Goodreads.com. I've been playing with some other bookish versions of Friendster -- the name for such web technologies is a "social cataloging application" (wiki link). A year or so ago, I actually toyed with the idea of creating a site like this, but punted when I discovered LibraryThing, which has almost everything I dreamed of and a few ingenious things that went beyond my imagination. Very cool. I've skimmed some others, including shelfari.com and Facebook's iRead app, and all of them have uniquely great features, but so far nothing compares to GoodReads.com. 

This may be a risky experiment, but I'm going to try it anyway. If anyone reading growthology.org is interested in seeing my reading list at GoodReads, check this link. Let me apologize in advance: I may get overwhelmed by the millions of you who try to friend me (this means you, Mom), but I'll give it a try.

FYI, this post was spurred by a biographical sketch in the NYTimes today on John Kao, author of Innovation Nation. Kao, 57, is a leading thinker on innovation and entrepreneurship, and I have not made up my mind whether his insights are worth the price of admission -- some things are right on target, others seem like PR buzz. Want my overall opinion of the book? You'll have to check my GoodReads page / alert in a few days ... after I finish reading it!

Unemployment & Tech Boom, Passing in the Night

Like ships passing in the night, two big economic stories of our time are the continuing tragedy of rust-belt stagnation - epitomized by Michigan's high unemployment rate - and the resilient national economy thanks to the buoyant effect of technology. Two stories today symbolize the disconnect.

First, Michigan in BusinessWeek:

Michigan, once the center of America's industrial heartland, now holds a more dubious distinction: It leads the U.S. in joblessness. The state's unemployment rate hit 8.5% in May. That's up 2 percentage points from April, and compares with a figure of 5.5% for the whole U.S. in May. ...

One of the bright spots, if you can call it that, for Michigan is the health-care industry. With baby boomers aging and their parents living longer, hospitals, nursing homes, clinics, and medical laboratories have the most jobs to offer in Michigan today. But the cruel irony is that there is a shortage of trained professionals. So Canadian nurses, for example, have to be imported from the other side of the Detroit River.

Second, Technology Sector booms in 2006

Recent data show the tech sector is "climbing back to 'pre-bubble-bursting' levels of employment and activity," Hansen said. The bubble of the late 1990s was the product of "an exuberance of investment" in companies that often lacked solid fundamentals, but the current growth is being driven by a more stable industry that has become integrated into the broader economy, he added.

Wages in the tech sector are 87 percent higher than average, and the big problem is a shortage of qualified applicants (Ed: those two facts may be related, huh?). Sadly, in a few cities the tech sector is shrinking, including Detroit.

Before you get totally depressed, check the Atlantic's great story on the Volt. Despite the stereotype of big companies being too bureaucratic to innovate, GM seems to be doing something truly radical, and not just the car, but the whole strategy of openness as development and PR. Jonathan Rauch has written one of the finest business articles in years:

Perhaps most audacious of all was a decision to allow unusual public access to the Volt program. The industry’s standard procedure is to develop new products, especially risky ones, out of sight, unveiling them only when proven. GM decided to do exactly the opposite. The PR department flung open the doors. GM executives discuss the program’s progress as publicly as if it were a bill in Congress. They show off photos of batteries under development. They promise to let reporters ride in test cars. They lead them through the labs and design centers and even into the wind tunnel. They run ads, for instance in this magazine, touting the Volt in the present tense, as if it already existed. By earlier this year, expectations were so high that President Bush was commending the car, and it had developed a national grassroots following. This article is itself a product of the fishbowl strategy.

Will Michigan get it right?

Jobs of the Future: The Answer

What are the jobs of the future? Repeat that every night as you drift to sleep.

During the 2001 recession, the U.S. economy lost 3 million manufacturing jobs. Most economists think those job will never come back. It’s not because they were shipped overseas (one of the stupidest mental images ever … you can’t put a job in a box and transport it). The real reason is that manufacturing output is higher than ever. Our factories simply produce more product using less labor. The entrepreneurial / technological spirit has squeezed efficiencies onto the factory floor while squeezing people off it.

There were 17 million payroll employees in manufacturing before the recession, and now there are only about 14 million. That’s a 20 percent decline in less than ten years. Do the math and tell me how many manufacturing jobs will still be around for the next generation …

Clearly, the time is now to figure out what occupations and sectors will replace the physical production of goods. While we all know the answer in the abstract is “service jobs,” in fact that answer is useless in its breadth. Too many people fear that service jobs is shorthand for menial, dead-end jobs. Fight that notion with this test: run through ten people you know best, and figure out which of them is NOT in the service sector? Pilot, soldier, radio show host, writer, fire fighter, professor, secretary, architect … keep going.

In my years of research on this topic, a one must-read piece stands out: the 2003 annual report of the Dallas Fed. This 1800-2000 time series chart of the percentage of the American workforce in 3 sectors is worth at least two thousand words:

Material production is becoming so automated that service consumption is the key to understanding future employment in terms of service production. So if you really think that everyone in the future will be flipping burgers, then you also have to believe that everyone will be consuming nothing other than burgers.

The trends show that major increases in consumption will be in health care, education, entertainment, art, and even the movies. (That was a joke, Troy, I honestly do think your movies are art …).  And that's where the jobs of the future will be: health care, education, entertainment.  More pro sports, more physical therapy, more nurturing of younger and younger children, more training, more video games.

What do you think?

Unintended Consequences in the War against Poverty and Crime

One of the stubborn, but unfortunate, facts about American life is the persistence of poverty – and crime – amidst a land of plenty. After a “War” on poverty in the 60s and repeated efforts to reduce it, we have made limited progress at best.

In the 1990s, the Clinton Administration tried a bold new approach to the challenge, and it wasn’t welfare reform. The idea was to tear down some of the nation’s worst public housing projects and instead give rental vouchers to the residents to enable them to live where they wanted. The major hope: that middle class values and stability would somehow rub off on the former residents of the projects. And remember: this was one of the classic centrist ideas – using free-market (i.e. conservative) principles to achieve humanitarian (i.e. liberal) ends – over the skeptical resistance of both partisan extremes.

Well, guess what: it doesn’t seem to have turned out that way. As Hanna Rosin documents in a compelling, if depressing, piece in the July/August issue of The Atlantic, this “Section 8 rental voucher” program instead appears to have exported crime from city centers where public housing has been demolished and into the lower-middle class suburbs. Indeed, Section 8 may be the most important reason why crime – and murder in particular – seems to be rising at an alarming rate in many mid-size cities (like Memphis and Kansas City). A sample:

Nobody would claim vouchers, or any single factor, as the sole cause of rising crime. Crime did not rise in every city where housing projects came down. In cities where it did, many factors contributed: unemployment, gangs, rapid gentrification that dislocated tens of thousands of poor people not living in the projects. Still, researchers around the country are seeing the same basic pattern: projects coming down in inner cities and crime pushing outward, in many cases destabilizing cities or their surrounding areas. Dennis Rosenbaum, a criminologist at the University of Illinois at Chicago, told me that after the high-rises came down in Chicago, suburbs to the south and west—including formerly quiet ones—began to see spikes in crime; nearby Maywood’s murder rate has nearly doubled in the past two years.

In short, what seemed like a good idea at the time came with unintended consequences. The big question now is: what to do now? Were the centrists wrong? And if concentrating the poor in public housing is a bad idea, and dispersing them is a bad idea, what else possibly might work to reduce hard-core poverty and crime?

At Kauffman, we are working on some thoughts, but I ask you dear readers, for yours – hopefully after you read the article….

Best Newspaper Story Yet (99% excellent)

The best story on the newspaper saga so far is Mark Bowden's article in the Atlantic. This qualifies as literature, and I'm not being ironic:

He may be awful, but he is rich and awful, smart and awful, powerful and awful, and while he may well be crazy to still believe in the future of print, he is determined and crazy. Murdoch might be the last person The Journal would have chosen as its savior, but newspapers may well be down to last hopes.

My only objection is this next paragraph, the apparently obligatory hand-wringing about the the demise of objectivity as if it were a 20th century dinosaur struck low by asteroid Murdoch. Sigh.

Instead, the Web gives voice to opinionated, unedited millions. In the digital world, ignorance and crudity share the platform with rigor and taste; the independent journalist shares the platform with spinmeisters and con artists. Cable television and satellite radio have taken broadcast journalism in the same direction, crowding out the once-dominant networks, which strove for the ideal of objectivity, with new channels that all but advertise their politics. When all news is spun, we live in a world of propaganda.

This (the weakest) section suggests that consumers cannot distinguish signal from noise, that they have no taste. A short introduction to the choices in the neighborhood grocery aisle might be in order, or any of these by Virginia Postrel.

But the larger issue that Bowden hints at is this: reputation matters, now more than ever. Does this carry over to the net? Consider Rapleaf. Or check this story in WIRED. Will bloggers neglect to seek the objective truth?  Ask Dan Rather. Finally, has this guy not heard of the Discovery channel, C-Span, or Animal Planet? All spin, Mark?

Now back to Bowden's 99% excellent essay:

It would be hard to imagine Murdoch coloring TheJournal’s crisply intelligent editorial pages any more conservative than they already are. But he can expand the number of pages devoted to opinion, as he has already done, and he can build TheJournal into a more general newspaper, broadening its coverage into the arts, religion, education, sports, and politics—areas where TheTimes is the dominant tastemaker and trendsetter. Murdoch sees TheTimes not just as a paper with primarily liberal politics but as a bastion of cultural elitism that wields a disproportionate influence over all aspects of American life. He wants his Journal to reflect another point of view, and to give people another choice.

Entreps Solving Global Warming

It's amazing to see how entrepreneurs have changed the old world (electricity, vaccinations, powered flight), but even more amazing to turn 180 degrees toward the future and see how they are tackling current challenges with breakthrough technologies. Bob Litan has an infectious optimism in the power of future entrepreneurs to create the breakthrough innovations against world poverty, entitlement crises, global warming, and so on.  So, Bob, this one's for you:

“Ten years ago I could never have imagined I’d be doing this,” says Greg Pal, 33, a former software executive, as he squints into the late afternoon Californian sun. “I mean, this is essentially agriculture, right? But the people I talk to – especially the ones coming out of business school – this is the one hot area everyone wants to get into.”

He means bugs. To be more precise: the genetic alteration of bugs – very, very small ones – so that when they feed on agricultural waste such as woodchips or wheat straw, they do something extraordinary. They excrete crude oil.

Read the whole thing in today's The Times (hat tip: Arnold Kling)

The Key to Human Capital? Edison Knew.

Upon my first arrival in Japan, freshly minted college degree in hand in the summer of 1990, I was highly attentive to what the secret was to that nation's economic growth miracle. I found it before I had finished descending from the aircraft.

First, realize the timing: 1990s Japan was both a great ally of America and also our economic rival. I always found the economic paranoia a puzzle, but I was also fascinated by the mysterious Japanese. So imagine my surprise when the airport had no arrival gate but instead a rickety set of mobile stairs pushed up against the hull of our jet. What's this? No chrome escalator? The whole place looked rough around the edges, a cheap copy of a middle-tier American city airport circa 1964, not LAX 1990.

But there it was. Or he was, rather. Outside the entrance which we would shortly transit was a little man in overalls and a cap, and he was brooming. And it wasn't a nice broom with uniform nylon bristles, more like the broomstick stolen by Dorothy from the Wicked Witch of the West. And this guy was pumping it like an Olympic brooming champ, as if his was the single most important task between civilization and the barbarians.  And maybe it was ...

That moment cemented in me an understaning of economic development. Even after two decades, that man symbolizes to me why Japan became a growth miracle. Human capital is more than what we traditionally use to measure it given our data limitations -- health and education. Human capital is ultimately how much effort is made by individuals, given the potential of health and education.

Read more about the relationship between effort and success in this interesting 2006 essay by David Dobbs:

This new discipline - a mix of psychology and cognitive science - has now produced its first large collection of expert reviews, the massive Cambridge Handbook of Expertise and Expert Performance (Cambridge University Press, 2006, ISBN 052184097X).

The book essentially tells us to forget the notion that "genius", "talent" or any other innate qualities create the greats we call geniuses. Instead, as the American inventor Thomas Edison said, genius is 99 per cent perspiration - or, to be truer to the data, perhaps 1 per cent inspiration, 29 per cent good instruction and encouragement, and 70 per cent perspiration. Examine closely even the most extreme examples - Mozart, Newton, Einstein, Stravinsky - and you find more hard-won mastery than gift. Geniuses are made, not born.

FYI, I am on bit of David Dobbs kick after reading his excellent NYT Magazine essay on collaborative review.

If you could time-travel, what five things would you bring?

What five innovations will spur economic growth in 2009? New solar power tech? A cure for cancer? Cheap desalination?

One way to help think about this question is to ask another (sillier) question. If you could travel back in time, What five things would you bring?  Let's imagine we are travelling to meet Augustus Caesar or Marcus Aurelius, one of those relatively calm Roman Emporers. 

An interesting and related dialogue on time travel was started recently by Tyler Cowen at marginalrevolution.com:

You might think that knowing economics, or perhaps quantum mechanics, will do you some good but in reality people won't even think your jokes are funny.  Even if you can prove Euler's Theorem from memory no one will understand your notation.  I hope you have a strong back and an up to date smallpox vaccination.

Tyler is a time travel pessimist, but plenty of folks think a typical modern would thrive in a pre-modern economy (see his comments). I agree that we moderns lack practical skills that local economies tended to instill ... subsistence farming, slaughtering, hunting, digging a well, basic metallurgy and carpentry. Despite that and the loss of all our electric tools, I think our modern background knowledge is underappreciated: knowing that heat kills germs, the crudest sense of saving and banking and lending, optics, a horse collar. We also underestimate our IQ relative to the dunces of old (they with little nutrition and less literacy). If you travel back in time, you will be surrounded with ignoramuses and idiots, meaning the situation would be ripe with danger and opportunity all the time.

So Tyler thinks you would be lucky to survive. True. But once you survive the first 60 days, I say it would be difficult to avoid becoming a very important, wealthy, and celebrated person. 

But to me the more interesting question is what five things you think would make the biggest impact on pre-modern civilization? Keep in mind, there is no wrong answer, but I'm pretty confident there is a most insightful answer ...

More SSRN in the NY Times

Following my scoop on the Jensen interview, this little paper in Manhattan ran a story on them, too:

Time was that if you were a professor at a prestigious university you were, by definition, among the most read authors on a particular subject. And you would play a similar gatekeeper role through reviews of who else should be read on that subject.

Compare that with the Social Science Research Network’s principles, as explained by Mr. Jensen. Anybody, anywhere in the world can put up a paper, he said.

In all seriousness, this is a fine article by the New York Times. But it only touches on the possibilities SSRN offers.  So here's a question: does SSRN itself face any threat from potential competitors? Some say that Wikipedia (created in 2001!) will take over the world, and all publishing venues will fall to its completely free, completely peer-produced model. Will it take over SSRN's infomediary role?  Will something else?

Ch-Ch-Change...

Perfect essay by Brian Wesbury in the WSJ on economic change we can believe in:

But if it's the economy [the presidential candidates are talking about], it's hard to imagine that change could happen any faster. In fact, the U.S. economy (really, the global economy) is transforming at an absolutely astounding rate. We're living in Internet Time, where policies and their consequences travel the world at the speed of light. The normal human reaction to such a rapid pace of change is to be overwhelmed, stressed out, anxious and fearful. As a result, it is probably true that when voters listen to talk about change, what they really hear are promises of "no change," which would be a huge difference from the status quo. They just want things "the way they were."

Jobs of the Future: The Question

A dynamic economy means that job losses and job gains are happening simultaneously, a pattern which is unfortunately hidden beneath the monthly payroll numbers announced every month which measure only the visible "net" growth (or loss) in jobs. But even when net job gains occur, a nagging suspicion remains that jobs have been lost. They have. Americans understand the idea that the new economy will have new types of jobs in the abstract, but when you get that pink slip, somehow the abstract is not very comforting.

I started thinking more deeply about creative destruction in labor markets a decade ago when Professor Garey Ramey used this book (Job Creation and Destruction by Davis, Haltiwanger, and Schuh) in a grad school course at UCSD. In fact, a good reference to this literature is Garey’s syllabus for an advanced topical macro class.

But the issue became a lot more personal when I was, to use the vernacular, between jobs. Nothing focuses the mind like necessity! And watching friends endure months and years unemployed (and underemployed) is also harrowing. Yet my faith remains resolute that creative destruction is essential for the growth of prosperity. I’ve learned a lot by pondering this in recent years, writing about it, and especially talking about it in public.

Numerous times during the jobless recovery of 2003-4 and even 2005, I had the opportunity to debate the U.S. economy on radio and TV. Almost every time I participated in a radio debate, a caller would tell us about their personal dilemma – the joblessness of the home’s primary breadwinner – and ask this question: “What now, Mr. Optimist? What job will replace the job my spouse lost?”

It is a tough, tough situation to take that call live on the air.

The first time I was challenged on it, I don’t know that I responded very well. I felt like a medical doctor with a mother asking how to cure a sick baby. Economists aren’t trained with much bedside manner or the laying of hands. Way too real.

And I’ll be honest, the question has haunted me … What are the jobs of the future? Repeat that every night as you drift to sleep.

This is a topic I will return to again and again (note the category). But before I share my thoughts … What do you think?

Humble Origins of Entrepreneurs

Class envy is an unfortunate centerpiece of politics in the most propserous nation in history.  So it is even more important to remember that most wealth is self-made, not inherited.  More to the point, a common tendency is for extremely successful capitalists to come from extremely capital-starved origins.  Today's story at CNN.com is a great reminder:

Scan the Forbes list of the world's richest people and you'll come across moguls from startlingly humble origins. How did they get their impressive empires off the ground? Sweat, savings, schmoozing, creativity and a dab or two of good fortune.

So get schmoozing!

It's a V

The evidence is in, and according to the public, the U.S. will experience a V-shaped recession.  Here's the story on CNN/Opinion Research Corp polls:

The poll shows that 78% of respondents believe the state of the nation's economy is poor or very poor. Only 19% think the economy is somewhat good, and a mere 3% say it is very good.

However, when asked what economic conditions will be like a year from now, 46% of respondents expect conditions to be somewhat good, while 6% expect very good conditions.

Nice to see that the American public maintains it's upbeat outlook, despite the drumbeat of doom they hear. Ironically, post-election years tend to be when recessions come home to roost.  Can you guess when this was written?

Similarly, nine out of 13 recessions since 1929 have begun in the first year of a presidential term, seeming to support the theory that presidents try to get bad news behind them as quickly and as early as possible in their term.... Last May, Congress passed a $350 billion tax cut to boost the economy. In addition, spending continues to rise, creating an estimated $480 billion budget deficit this year.

That was James Pethokoukis, circa 2004.

Paul Krugman Kindles My Faith

I’m tickled that Paul Krugman is enjoying a revolutionary new technology product, Amazon’s Kindle:

The download thing is great. It works — and it means getting books when you want, without having to trek over to Barnes and Noble or wait for a delivery.

Congratulations, Paul. I am envious, and look forward to getting a Kindle or Sony Reader Digital Book someday soon (Hint to family: Christmas is on December 25th this year!).

Krugman has a reputation as a Cassandra glass-half-empty pundit, but he’s also a great economist. I assigned his books to my students, and I learned many deep lessons from his textbooks and journal articles as a grad student. But I am happiest about Krugman’s new purchase because it shows that even a macro bear is enjoying the fruits of technology during a recession. Think about that.

I don’t see his position as a contradiction, or hypocrisy, indeed I applaud Krugman for acknowledging the good as well as the bad. But I do see it as a validation. Growth and technology win out in the end. Or to paraphrase another great economist, “In the long run, we may be dead, but our progeny will be much better off than we can imagine.”

(Note: Krugman blogged again on the Kindle today ... I'll comment on that shortly)

Is the Recession U shaped?

On a day when the unemployment rate spikes by half a percentage point, we may be past questioning whether a recession in the U.S. is here. A month ago, Noriel Roubini framed the question smartly:

In principle, the US recession could end up being shaped like a V, U, W, or L. Which of these four scenarios is most likely? The current consensus is that the recession will be V-shaped – short and shallow – and thus similar to the US recessions in 1990-91 and 2001, which lasted eight months each. Most analysts forecast that GDP will contract in the first half of 2008 and recover in the second half of the year. I expect a longer and deeper U-shaped recession, lasting at least 12 months and possibly as long as 18 months – one of the most severe US recessions in decades – because today’s macroeconomic and financial conditions are far worse.

Now on the spectrum of macroeconomic analysis, growth sits on the long-term end of the spectrum, whereas recession-watching is on the short-term end. This is my way of saying, growthology.org really shouldn’t be commenting on the recession stuff … too small ball. So here’s my justification:

1. I’ve published on this topic recently. My little model - the employment recession indicator – says the recession probability is in the 50% range. It will go higher (and I’ll believe the recession has spread from financial markets to the real economy) once initial jobless claims rise above 400,000 consistently and unemployment goes to 6.0%. That may happen soon, and when it does, count me among the bears. But UI claims remain too low for a recession, and they tend to be early warning signals.
2. The specter of the Great Depression haunts any public conversation about economics, which includes this blog. And lest we forget, momentous shifts in popular and professional thinking occurred during the 1930s. In particular, the breakthrough work of our patron saint (Joseph Schumpeter) was notoriously overshadowed by the breakthrough work of JM Keynes.
3. I dislike historical parallels such as “This recession has signs of becoming another great depression” because (here’s a Kane mantra) Growth Trumps All Historical Parallels.

No, America is not analogous to a new Roman Empire. No, the housing meltdown is not akin to 1929’s great crash. Technological dynamism makes modernity so different from previous eras that no parallel really works. To clarify the larger posturing, ask yourself this: what is more important to contemporary affairs: hegemony, terrorism, or technology? Answer: technology. What’s a bigger deal in the sweep of history: asset bubbles or technology? Answer: technology. Point being, I doubt the upcoming political debate of 2008 - which will focus on short-term economics and the War on Terror - will address the most important issue of technology acceleration and its implications.

Remember when the NASDAQ crashed and the media said, “The New Economy Was an Illusion.” They were wrong. The Internet’s still here, folks, bigger than ever. The bottom line is that changes wrought by technology are VERY real, with both good and bad consequences. It is the topic that no grand strategist, or politician, or pundit should be allowed to ignore.

Now, Roubini might agree with me on all that. But I was still skeptical about the recession ever being called, until this morning's employment report. My best guess remains that it won’t be V or U or L or W shaped. I’m looking for letters on my keyboard to represent my prediction. Ah, here it is:

0 (as in null set)

I think aggressive Fed action on interest rates will be very effective in the short term (albeit inflationary). I doubt housing assets have declined enough to shake the lifecycle consumption smoothing habits of Americans, meaning GDP and the real economy will stagnate but not recess. I do worry about oil prices, but anticipate/hope/pray for that commodity speculation to pop. And ultimately, I think innovative entrepreneurship and consequently potential GDP are accelerating. My worst case scenario has a deep U-shaped recession that masks productivity growth for a year or two, followed by a booming catch-up to potential GDP in 2010-12 … plus lots of inflation.

Hat tip: RealClearMarkets

Interview with SSRN's Founder

Economic growth happens because of technology, we all know that. But technology happens first and foremost in the inventor's brain. And the inventor's brain is operating at the scientific frontier. Or is it?

We can speculate that some of the greatest inventions were invented hundreds of times, and we can document that many were invented more than once (hence the need for patent offices to document the exact timing of applications). The redundancy and overlap can be eliminated, and research energies focused more efficiently, if everyone has access to knowledge at the actual frontier instead of their perceived frontier.

Any lag between research completion and its diffusion is effectively a growth retardant. The policy challenge is to increase the speed of knowledge diffusion. Traditionally, research was published by peer-reviewed printed journals or at infrequent conferences. Printed journals remain a vital sign of quality, and we can imagine they will proliferate in a networked knowledge economy. Regardless, since the advent of the Internet, the ability to review research in rough draft or "working paper" format through an online community is creating a revolution.

One of the leading online research communities is the Social Science Research Network (SSRN), created in 1994 and summarized here on wikipedia. Michael Jensen, SSRN's co-founder and a successful financial economics professor, spoke with me today and I thought you might be interested in some of things we talked about:

TK: Why did you start SSRN?  What motivated you and what did you expect?

MJ: I was an accidental entrepreneur, actually.  Wayne Marr originally suggested we start something he called the Financial Economics Network, and I said yes, and that eventually became SSRN.  When he moved on to other projects, I'm left holding the bag (laughs).  Actually, I was motivated by my own experience as a long-time editor of journals. In fact, I co-founded the Journal of Financial Economics, and was familiar with the pluses and minuses of it. It was one of those experiences that helps you see your own blindness. In the 1970s, I began to receive quite a few papers challenging the efficient market hypothesis. The referees rejected them and I rejected them. Any one of these articles standing alone could be rejected, but I began to feel that as a package they cannot be ignored.  The authors were onto something, even if we didn't see it. Sometime around 1975, over the objection of my referees - many of them close friends - we published a special issue with a collection of those papers.  That was controversial but proved to have great value. Subsequent to that, behavioral financial economics evolved. 

In creating SSRN, I envisioned an alternative distribution vehicle.  No peer-review, of course. But papers must be part of the world scientific discourse. The only way to do this before was through academic working papers, which I had organized at the Simon School in Rochester years before, and they were clumsy, slow, inefficient. The Internet allows us to share working papers without all the cost and time of mailing printed copies. The idea of SSRN was to change the way research gets distributed and to thereby change the way research gets done.

In my own field, I was part of a very small group doing cutting-edge work in the early days of modern finance, and I noticed that elites in all fields were 2-3 years ahead of other scholars just because they knew about research that took so much time to get distributed widely. The Internet allowed everyone to see the frontier.

TK: What has been the reception and impact of SSRN?

MJ:  There are around 650,000 papers downloaded a month from SSRN, which is a conservative count based on 1.4 million actual total downloads per month, some going to multiple downloads by the same person and others to automated bots and so forth. There are half a million registered members at SSRN, and around 96,000 authors. We have had an impact.

SSRN was our baby, and we knew it should be successful. But it took a bloody fortune to get there. There were no revenues for quite a long time. Still, the VCs were interested in making a deal early on, but they would have wanted to do things we were not ready for, and I suspect SSRN would not have survived the dot-com crash if we had gone that route.

TK: Will you be upgrading or adding new features to SSRN?

MJ: We are always investing in improving SSRN. There are many different activities going on  right now, including working through a complete redesign of the site.  This will be the third time.

Citation analysis is the main tool we are working on, which will be like the ISI index.  Measures of downloads are valuable, and SSRN currently shows which papers and authors have the most downloads of all time, per year, and so on.  Measuring downloads is highly imperfect, but does say something about popularity.  Once we engineer a citation analysis system, we can assess impact.  My belief is that we can create reputation systems that help people find important work, and where papers can rise and fall in reputation as they warrant over time.

The citation analysis we are developing also provides a powerful research tool. It provides a way to click backward through a paper's references to find research that it was based on, and a way to click forward in the citations to a paper to find those papers which referenced this paper. To accomplish this we are in the process of scraping millions of references from archived papers, something like 3.7 million references so far with 1.3 million citations to SSRN papers.  I've already discovered how powerful this can be when in debugging the system I found a dozen papers directly relevant to my interests by following the links to papers that cited my paper.  I would have never known about them so easily without this technology.

We are releasing a recommender system this summer, where you will see on most abstract pages the 3 to 6 papers that were downloaded by others who downloaded this paper. This will soon be available on SSRN in beta. We now release most of our new developments to our Beta Labs before launching them in the regular site. Registered users can use these features by clicking on the Beta tab which appears at the top of every page where we have released a Beta version of some feature.

Another feature we are working on is the ability to comment on and rate papers. We are hosting a conference this fall that will use a Beta version of it, and it will probably be ready for beta testing in late 2008 or early 2009.

An important caution to innovating too quickly with a system like this is that people's reputations are at stake, and we have to be wary of people gaming the system. The overall idea is to keep improving this parallel system to peer-reviewed journals. We will get some things wrong, but will also continue to learn and to get better. 

TK:  Thanks very much, Professor Jensen.

MJ:  It's an honor. Thank you, and good luck with growthology.org.