Growthology

Carl Schramm on "Joe the Entrepreneur"

Carl Schramm's non-partisan commentary on "Joe the Plumber" at CNN.com has many tell-tale nuggets about our state of thinking at Kauffman right now.

Today, roughly one-third of our GDP growth is attributable to about 1,000 high-growth firms created every year. Even though there are fewer than 30,000 such firms, they account for nearly all the job growth in our economy. Whatever we do, we cannot afford to scare off those who would start these companies.

Yet that may be what's happening. Nearly half of our survey respondents reported seeing entrepreneurial opportunities in the current economy, but only a little more than one-quarter said they would consider seizing them within the next five years, down from 35 percent when we asked this question in December.

Seventy-one percent said that in today's economic climate, it has become more difficult to start a business. That's a statistic we should all worry about.

Here's why: If, instead of 1,000 new high-growth firms starting next year, we only start 500 or 250, the lost gain from this shortfall will never be retrieved.

Read the whole thing here.

The Slippery Slope to Socialism

I learned yesterday that the presidential election has renewed a conversation in America about socialism. It is good that none of the candidates are embracing the moniker of socialism, but you would be surprised how easy it is for a people to slip into a socialist mindset, regardless of what we call it. Even the most hard-bitten capitalists might lazily think in such a way. Even a blogger you know ...

In my last post, for instance, I wrote "Look, if it is in the national interest to save these companies [GM and Chrysler], then taxpayers should have a say in how the money gets spent."

Minutes after publishing the post, it hit me how easily I had fallen into the trap.  Sounds a lot like socialism, doesn't it? 

In socialism's purest form, the government would take outright ownership of firms, manage them, establish wages, and so forth. Few would be so brazen. We instead need to be watchful for the slippery alternative form of socialism wherein the government acts as a "lender" rather than an owner. You might recall this was the approach suggested by Bernanke and Paulson, initially, until numerous voices suggested the taxpayer deserved some upside (e.g. a sliver of ownership) in distressed assets. Or warrants - a fancy way of getting ownership with upside. I'm afraid this mindset may have become a default consensus framework. But it is the next step is where we get into real trouble.

The next logical step following taxpayer's role as lender/owners of distressed firms (or indeed any firms that "voluntarily" accept government rate funds) is this: conditions. It is exactly the logic I followed earlier. Take public money = take public conditions on how your firm is operated.

The trouble hinges entirely on what conditions the government should, could, and will establish. For many people, conditions include limiting executive pay, minimum wages for each occupation (i.e. privatizing Davis-Bacon rules), mandates for health insurance, dental insurance, and so forth. If the federal loans are to banks, one would imagine these conditions would be extended to all small firms borrowing from those banks. FDIC insured lenders?  Sure, them too. How about rules that force firms to buy American components? -- very popular in some Republican as well as Democratic circles.

In the GM case, I think it is pretty clear that the conditions should involve bankruptcy-like realignment of unsustainable contracts with the unions -- including the infamous policy of paying workers to sit around and do nothing. In other words, the conditions I envisioned would lower costs, not raise them. But who is to say what policies will become part of the consensus rescure template?

Who is to say, indeed.

One final thought. You may notice that my initial statement calling for conditional lending included a qualifier. "... if it is in the national interest to save these companies  ..."

That is a very big if.  I will try to make it clearer next time.

The Bankruptcy Option for GM

Can Washington help the economy grow by bailing out General Motors and Chrysler? A sobering article by Steven Pearlstein suggests bankruptcy makes more sense. Keep in mind that Congress already approved $25 b in loans to retool factories in Detroit, but the auto companies are seeking more immediate financing of $10 b.

GM and Chrysler would have the Treasury invest $3 billion directly in the newly merged automaker in exchange for preferred shares with warrants, as with the banks. The government would take over $3 billion of the company's pension obligation. To deal with the industry's short-term liquidity problem, the government would also commit to buying $4 billion in commercial paper issued by the new company.

All that for two companies whose market values today are each less than $4 billion.

Look, if it is in the national interest to save these companies, then taxpayers should have a say in how the money gets spent. For decades, Detroit's big three have been avoiding tough restructuring in their core business model, abetted by the unions and local politicians. Pearlstein outlines a pre-negotiated bankruptcy that would force tough love and maybe just save the American aut industry from the slow, subsidized decimation that has been the status quo.

Ph.D. migration reveals innovation patterns

This may be old news, but a paper by Dr. Paula Stephan in NBER's Innovation Policy and the Economy, Vol 7 (2006) just came to my attention. I count at least two very interesting observations derived from the analysis of Ph.D. migration patterns in the U.S.

1. Confirmation of what I call the Broadway Joe Problem. (i.e. QB Namath was not from New York)

Indeed, seven of the top 20 institutions education PhDs to work in industry are located in the Midwest. ... The state stay rate for PhDs working in industry is now 37 percent. ... Purdue's PhDs now overwhelmingly leave the state [of Indiana] to take employment elsewhere .... It is risky as a nation to continue to rely on the "kindness" of Midwestern states to publicly educate the high-quality S&E workforce that heads out of state upon graduation.  ... [A]lmost one out of ten new PhDs going to work for industry heads to San Jose.

2. R&D focus underemphasizes entrepeneurial innovation.

Only ten of the top 20 R&D firms appear on the top 20 hiring list.

Finally, our data suggest that small firms play a larger role in innovation than R&D data would suggest. For example, while the top 200 R&D firms expend more than 70 percent of all R&D in the U.S., they hire only 39 percent of all new PhDs.

New Kauffman.org website

My colleagues at the Kauffman Foundation have been working on a cool new main website at Kauffman.org and just published it. The new site looks great and has lots of multimedia. There is a lot of great stuff there - notably all the research and policy advice from our small team in the R&P wing.

Kudos to Keith Mays and his team on the site design. (For new readers, Keith is the guy who runs the ops at growthology.org as well).

Tsunami on Main Street?

This Minneapolis Fed paper may be the most cited (or at least the most viewed, read, mentioned, talked about, celebrated ...) of 2008.  It is easy to read, with many fine graphics.  My favorite:

Kudos to the authors.  Full citation is:

Myths about the Financial Crisis of 2008
V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe
Working Paper 666
October 2008
Federal Reserve Bank of Minneapolis
Research Department

Entreps for Congress

Eleven challengers get some good exposure at CNNMoney.

Startups and the 2009 Recession

The question many of us at the Kauffman Foundation are getting is this: "How are startups handling the financial crisis?"

The answer is that startups are probably facing tough times. In terms of financing, both ends of the venture lifecycle are dire: entry and exit. Exits are practically dead, because both the IPO market and acquisition opportunities are inactive. And liquidity events are essential to the entry of venture capital, which leads one to explore the status of startup entry financing. Most of the early stage investors we talk to are much more cautious -- deals are fewer and smaller. And bank loans are tougher to get and more expensive.

As Arnold Kling says,

If you invest in startups, your exit comes either from going public or being acquired, neither of which looks very likely with stock prices in the toilet. To the extent that there is any venture funding going on at all right now, the assumption must be that in two or there years the market will come back. I hope the market does come back, but efficient markets theory says that the best guess about where it will be three years from now is where it is now, plus a few percent. Venture funding is a whole lot riskier today than it appeared to be a month ago.

But how important is formal funding for innovation? Some new research by my colleague Alicia Robb indicates it is much more important than conventional wisdom suggests. I am from the "Bootstrap School of Entrepreneurial Thought," so am skeptical of the importance of formal funding, but I am eager to share Alicia's research as soon as it becomes available. I tend to believe that invention will continue apace, perhaps even accelerate, among inventors whether they are in basements or in cushy office parks. At a minimum, the recession of 2009 will be a perfect real-world test of the relationship between innovation and venture finance.

From a finance perspective, the venture industry is bound to face another shake-out, and may even experiece an existential turning point. The business model that relies entirely on liquidity events is inherently unstable (boom and bust). But there are value venture investors which have focused on companies that can build positive cash flow and long-term profitability regardless of exit. Those firms and the startups they back are going to shine in the next couple of years. 

American Dreaming

Uh-oh.  Some scientists have determined that the American Dream is actually impossible to achieve. The neuro-science is solid: people cannot achieve happiness through material abundance. Unfortunately, that science is being badly misinterpreted and then further misapplied as policy advice for reforming our economy. The problem is that many otherwise intelligent people don't have a firm grasp of either economics or history, specifically that the "American Dream" is not a culture of greed, but a culture of personal independence that stood in stark contrast to class distinctions in Europe.

This zeitgeist is being generated by Peter Whybrow, head of the Semel Institute for Neuroscience and Behavior at UCLA and author of American Mania: When More Is Not Enough. Whybrow's argument, to the extent not evident in the book's title, is that the American culture is founded on self-satisfaction, and worse, a strain of competitive consumption, fueled by irresponsible credit. WIRED summarizes the Whybrow critique thus:

Our built-in dopamine-reward system makes instant gratification highly desirable, and the future difficult to balance with the present. This worked fine on the savanna, said Whybrow, but not the suburbs: We gorge on fatty foods and use credit cards to buy luxuries we can't actually afford. And then, overworked, underslept and overdrawn, we find ourselves anxious and depressed.

You might agree with Whybrow. I certainly agree, and strongly, with some of his points. But not his conclusions. Whybrow is making a mistake of confusing the effects with causes. The American Dream is not material prosperity, but the system that gives people the opportunity to prosper. Miss that nuance, and you do not understand America. So when Whybrow confuses these two, he is contributing to 21st century cultural amnesia: Americans are forgetting who they are.

Historically, one could point to the Declaration of Independence as the origin of the Dream, which laid out the principles of equality and unalienable Rights, notably the Pursuit of Happiness. But as a phrase, "American Dream" was coined in the 1931 book Epic of America by James Truslow Adams. Adams wrote:

The American Dream is that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position." (emphasis added)

So even at its first muttering, the idea of The American Dream was literally and pointedly not about materialism, but about the means of individual liberty, free of class, caste, and race. People who say otherwise are committing cultural libel. Seriously, if the American Dream is a fiction, somebody better tell my grandfather, because he must have been mistaken when he died happy (and poor) because he lived as a free man in a humble home.

Unfortunately, the wayward thinking doesn't stop there.  It just starts there.

Again, as summarized by WIRED:

The answers aren't easy, Whybrow cautioned — but they do exist. People can think creatively about jumping from the treadmills of bad jobs and unmeetable needs; and even if this isn't always possible, they can teach their children to live modestly and within their means. Urban engineers can design cities that allow people to live and work and shop in the same place. Governments can, at the insistence of their citizens, provide the social safety nets on which social mobility, stagnant for the last 50 years, is based. And we can — however much it hurts — look to Europe for advice.

Look to Europe for advice? Do they mean us to emulate Italy, where women don't want babies anymore or do you mean France where entrepreneurs face extinction because the labor laws are so extreme (and the lower classes riot in the streets because they cannot find jobs)? Europe is a diverse place, and the countries with the most economic freedom are the most prosperous. End of story.

Social mobility is stagnant? This is drivel. If it mean that the same percentage of people are going from rags to riches each decade, that is not stagnation.  It means social mobility is stable. Different adjectives.

Urban engineers? Right now, if people want walkable cities, they can move to them. Supply and Demand. And happily, this is happening -- the free market is already radically reshaping cities.

Bad jobs? Show me the evidence that people do not like their jobs in the U.S.! Sure, I like to mock cubicle culture as much as any Dilbert fan, but I bet mocking salt mine culture, serf/peasant culture, and hunter-gatherer culture were even more hilarious.

Living within their means. I am all for this, and it's where I find myself agreeing with Whybrow. The instinct for short-term gratification is too often indulged. And yet, the solution is not to erode America's long-term growth miracle embedded in property rights, free markets and trade, and democratizing finance. Whybrow seems to think that credit is the evil here, as if taking out loans causes overconsumption. Why not a cash economy?  Because giving poorer people access to credit is one of the great equalizers in U.S. (and world) history. We can all agree that predatory lending is bad, but to conclude that any lending is inherently bad is frankly pretty foolish. Has Whybrow not heard of microfinance?

Whybrow has an interesting interview on his homepage, and I think the most intriguing meme he is pushing is that the American people are not just culturally, but genetically distinct. The immigrants who moved here voluntarily, and those who thrived, were humans on the less risk averse side of the gene pool. He then draws numerous fantastical conclusions from this idea, suggesting that Americans are more prone to stock market bubbles (!), mental sickness, etcetera. I am inclined to agree that our culture is different, but two questions. Isn't cultural diversity a good thing inherently? Is it clear in any empirical research that Americans (or entrepreneurs) are more materialistic/greedy than others?

It just seems like Whybrow is telling Eagles they could be much happier without their feathers. 

Six Faces of Innovation

What is innovation, exactly? There is an unresolved tension whether the source of innovation comes from big firm R&D or small firm entrepreneurship. I'm particularly fascinated with the question whether breakthroughs or incremental innovations matter more to growth. And there are unresolved questions about what policies would enhance technology-based growth: industrial targeting or ecosystem optimization or research subsidies.

A May 2008 research paper (available at SSRN) written by Roger Miller and Marcel Cote titled The Faces of Innovation offers an exciting synthesis of many of the issues, and directly challenges the popular notions of "best practices" for business innovation and centralized public innovation polcies.

To be honest, at first glance this paper struck me as it may strike many of you - another glib mumbo-jumbo framework on innovation with buzzwords and checklists. On the contrary, the six-part framework is both insightful and well-organized. The authors define innovations along two axes: (1) market-creating versus in-market (MC and IM) and (2) the typology of product, process, or platform (my own abbreviations).  Here's a graphic showing the six faces or "games" (as the authors describe them) of innovation from the paper:

I've copied three interesting paragraphs from the paper, adding my own bolding:

[N]ew entrants displacing complacent incumbents and rendering old ways obsolete, is still a central theoretical tenet. There is also an almost mythical belief in the critical role of entrepreneurs as agent of rejuvenation, and by extension, in venture capital supporting them. But as Schumpeter argued late in his life, large firms with R&D are significant innovation agents, as scale matters when it comes to R&D. That view led to a strong association in public policy between R&D and innovation. Indeed, the most popular indicator of national performance on innovation seems to be Business expenditures on R&D as a percentage of GDP, (BERD).

...

A central feature of the synthesis that came out of the MINE survey is thus that innovation has many faces, each representing a distinct logic of innovation, requiring different strategies and practices. This view goes against the widely held belief that there are universal best practices to stimulate innovation. Indeed, the generalization of a unique set of "best practices" could trap entire sectors in negative-sum competition with low innovation, low growth, and low profit.

...

Government innovation strategies tend to focus on a limited number of areas strongly supported by special interests: university and industrial research, university-industry collaboration, intellectual properties, venture capital, etc... Looking at innovation from the perspective of the six games suggests different priorities, and more importantly, a much more parcelled approach.

Very highly recommended.

Technology and the Recession

A recession has a curious effect on technology development. First, tech vendors react by lowering prices which helps "trickle down" faster diffusion of new consumer technologies. Tim Bajarin, writing at PC Magazine, observes

"Couple this with an interesting trend that potentially impacts tech spending during a downturn: cocooning. This basically means that if money is tight, consumers will spend more time at home instead of going to movies and restaurants, or taking long vacations. One area that gains from this is HDTVs. People will justify the cost of a high-definition TV by thinking of it as the center of their cocooning entertainment. Also, with the analog broadcast cut-off date just around the corner, retailers tell us that they still see strong demand for HDTVs—albeit for the less-expensive models. However, they still see HDTVs and even surround-sound audio systems selling well this holiday season.

"Another area related to cocooning is gaming systems. Nintendo has already said it should have a large supply of Wii consoles in place for the holidays, and Microsoft's recent price cuts on the Xbox will help sales this fall. Demand for gaming software for consoles and PCs should remain strong as well."

And even with the slowdown, Tim notes in another column that forecasters expect a level of demand growth that other industries would kill for: "Market research firm Forrester reduced its prediction for growth in technology spending in the U.S. next year to 6.1 percent, and Gartner believes worldwide spending will grow only 8 percent this year."

But that's just the market side. The introduction of new technologies that have been in the pipeline for years should continue unabated. Despite the financial turmoil, just consider the new products unveiled yesterday:

Apple's "sexy" new aluminum-and-glass MacBooks.

Toyota's new iQ mini-car (WSJ story, WIRED story).

Anathem

I don't know how I missed this, but Neal Stephenson published a new book last month and I am just now getting a copy in my hands. I should properly read it first and then comment, but I feel that you all should get a copy of your own and read it ASAP. Thanks to old pal Jim "Shibumi" Coyer for the tip.

Stepehenson's Anathem has its own website here.

As background, I have read roughly everything Stephenson has published, even the once hard to find first novel, The Big U. Stephenson didn't want to re-publish it for many years because in his opinion, it wasn't much good. And in fairness, he was right. But it's still priceless for the scene with the cheetohs-mashing role-game player in duress.

Why is Neal Stephenson so important? In my opinion, he is the most insightful writer working today. He opens your mind with a literary crowbar. You can never see the future, or the present, the same way after enjoying SNOW CRASH or DIAMOND AGE.

Here's how I would rank order his books:

1. Diamond Age
2. Snow Crash
3. Cryptonomicon
4. The Baroque Cycle
5. In the Beginning Was the Command Line
6. Zodiac

But I am not sure I would recommend either of the first two to readers who are not familiar with SF. Cryptonomicon is accessible by anyone since it is more historical with powerful elements of war and spy novels. I look forward to discussing Anathem with you soon.

Nuclear Slideshow

CNBC has a factoid-rich slideshow on nuclear power. This point is worth repeating:

Dr. Patrick Moore, one of the original founders of Greenpeace who once wrote nuclear energy was "synonymous with nuclear holocaust" has changed his tune and come out in support of it.

The role of nuclear power in America will undoubtedly rise in prominence in the next decade.  A new President, a new Congress, oil prices and instability, and the consnensus that carbon-based energy is harmful to the environment will turn America towards nuclear power. There are plenty of other alternatives to get excited about because of their future potential, but nuclear is the only alternative energy source that can make an impact immediately.

Growthology in the LA Times

A story in today's L.A. Times features lengthy quotes from yours truly:

Older entrepreneurs have experience, resources on their side

Success more often finds those with assets such as experience, cash and contacts.

By Cyndia Zwahlen, Special to The Times
October 13, 2008

A new wave of baby boomer entrepreneurs likely to be unleashed by the current economic turmoil will be an important force in eventually pushing the economy onto safer ground, some experts say.

A late-September poll by the Kauffman Foundation, which promotes entrepreneurship, showed that 70% of respondents agreed that the success and health of the economy depended on the success of entrepreneurs; 80% agreed the government should encourage more entrepreneurship.

Though many people think of entrepreneurs as twentysomethings laboring in their garages on the next Silicon Valley success, the reality is that people age 35 and older have higher entrepreneurship activity rates, a separate Kauffman study found.

"People in the older age brackets are much more likely to successfully start companies than younger people," said Tim Kane, economist at the foundation and co-author of the organization's Growthology blog.

My first thought: whoever owns growthology.com is probably getting some good traffic off this.  Second thought: did I really say ... this?

"A recession forces a reallocation of jobs and resources, it sort of reshuffles the deck," Kane said.

"Most of it is painful and difficult, but most of that is good and necessary. When we get things sorted out again, you do find this entrepreneurship activity has a payoff."

I hope I did not give the exact quote here, but maybe I did. Cyndia was very nice to call back and confirm a few things after a lengthy first interview. But I hope what I said is that the overall reality of reallocation is a good and necessary part of free-market capitalism. But make no mistake that a recession involves a great deal of reactionary and pointless layoffs.

"Close to Obsolete" recession dating data

Robert Hall's speech about the NBER's dating of the current turmoil as a recession at the NABE conference - as reported on the WSJ blog - including the interesting statement that

... the other indicators the NBER has used historically are “now getting close to obsolete,” Mr. Hall said, and the committee has “pretty much dropped” its use of retail sales and industrial production in favor of economy-wide indicators such as GDP and employment.

This is inside baseball, I know. But if you're a fan of the unemployment rate (as I am), it's more exciting than Star Wars.  (Okay, that's a close call ...)

Under water or on fire?

According to a comprehensive story in the Wall Street Journal (with some great interactive graphics) roughly 1 in 6 U.S. homeowners are under water:

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

So are prices going to stabilize on there own, or would it wise for the federal government to intervene directly and shore up home values by restructuring the foreclosure rules?

I've said a number of times that a modernized federal morgage intervention is a good and probably necessary action, if and only if it rescues troubled residents who are underwater without rewarding them. Let's remember in the days ahead: The innocent victims today are renters and homeowners who didn't go on a spending binge in recent years but are being asked to pay the price for those did.

Big Picture agrees in his analysis of this WSJ article, and also reports some surprising good news in the housing markets this morning, citing the National Association of Realtors:

Pending Home Sales Index, a forward-looking indicator based on contracts signed in August, jumped 7.4 percent to 93.4 from an upwardly revised reading of 87.0 in July, and is 8.8 percent higher than August 2007

The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.

The earthquake may indeed be over.  But I am reminded of the great San Francisco earthquake of 1906, which was only the beginning. The fire that raged afterwards is what consumed the city. So the real question is: Can Ben Bernanke prevent the fire (financial panic) from burning out of control? I think so.

Pay Teachers More!

We have an incessantly shallow debate about education in America - one side calls for more money, the other calls for structural reform. Whatever you believe, one central breakdown in public schools is the quality of teachers: bad ones can stay indefinitely while good ones often (not always) get frustrated and leave the profession. The heart of the problem is articulated in this New York Times essay by teacher Christine Gralow:

When I see promising teaching colleagues quit because they simply can’t afford to live in Manhattan on their salaries, and I see staff shortages and inexperienced teachers at the city’s highest needs schools, it’s clear a new model is needed. So far this school year, I’ve seen one good teaching colleague quit to pursue a higher paying job. Teachers realize we’re not going to become wealthy when we choose this profession, and low salaries may in some way be a test for those truly committed to the job, but there’s no doubt that low pay also keeps a lot of well-educated, talented Americans out of the classroom. Good teachers also regularly leave the city for higher paying jobs in nearby counties, and low teacher pay has created serious teacher shortages in math, science and special education, particularly in low-income communities.

Christine's essay is inspired by a wonderful initiative to pay teachers $125,000 at a new charter school in New York. The principal will make just $90,000 and there will be no vice principal. So refreshing.

After visiting the school’s Web site and reading a New York Times article about the school, I realized it was not only legit, but potentially revolutionary in terms of education reform. So this school year, in addition to my regular special education teaching job, I’ve decided to get involved in the creation of this new school.

The Equity Project Charter School (TEP) will open in September 2009 in Manhattan’s Washington Heights community, and it will aim to enroll middle school students at risk of academic failure.

We should remember that if we want to pay teachers more then we have to ask where the money will come from.  What are the opportunity costs? Cutting down on counselors, trainers, district administrative staff is the most likely answer. Are there any examples of schools that have tried the high-pay for teachers approach?

Litan, Blood Pressure, and the Real Economy

Bob Litan was quoted by WaPo's Joel Achenbach in a good story about how the "real economy" is getting hit by the credit crisis.

"Basically, the blood in the person is money -- it's money and credit. You need money and credit to flow, otherwise the patient dies," Litan said.

The clotting of credit hasn't been uniform across the economy from one industry to another, or even among different auto companies and the different makes and models they're trying to sell. It's still quite possible to get a car loan, even with less-than-perfect credit. But ....

Achenbach goes on to describe how new car sales are down from last year by 30 percent. People are buying, but the cars being sold are no-frills. A sadder side of the story is the repo work being done in even the best of neighborhoods. "'People living beyond their means.'"

Just keep Bob Litan's macro blood flow analogy in mind. That's the difference between the Great Depression and what will happen in 2009. Back then, the Federal Reserve decided that the remedy for low economic blood pressure was higher quality blood, i.e. less blood. Instead of fainting in 1930, the U.S. and the world had a heart attack. Fed Chairman Ben Bernanke won't make that mistake.  There will be plenty of liquidity this time around, but Corpus Economicus is going to be anemic for a while.

Energy Independence: Brazil Leads the Way?

Everyone seems to be preoccupied with the question of energy independence. It's a bipartisan issue, heightened ever since the cost of a gallon of gas rose over four dollars this summer. Even though the price of a barrell of oil has fallen by nearly half, I doubt anyone feels truly calmed.

Too many people are looking for a solution from Washington D.C., the Corn Belt, or Silicon Valley.  But few are looking to Brazil, the world's largest producer of sugarcane ethanol, and they should be. 

A new working paper out of NBER by economists, Marc D. Weidenmier, Joseph H. Davis, and Roger Aliaga-Diaz suggests that Brazil might offer a solution to America's energy crisis. I quote from the abstract,

The recent world energy crisis raises serious questions about the extent to which the United States should increase domestic oil production and develop alternative sources of energy. We examine the energy developments in Brazil as an important experiment. Brazil has reduced its share of imported oil more than any other major economy in the world in the last 30 years, from 70 percent in the 1970s to only 10 percent today. Brazil has largely achieved this goal by: (1) increasing domestic oil production and (2) developing one of the world's largest and most competitive sources of renewable energy -- sugarcane ethanol -- that now accounts for 50 percent of Brazil's total gasoline consumption. A counterfactual analysis of economic growth in Brazil from 1980-2008 suggests that GDP is almost 35 percent higher today because of increased domestic oil production and the development of sugarcane ethanol. We also find a notable reduction in business-cycle volatility as a result of Brazil's progression to a more diversified energy program. Nearly three-fourths of the welfare benefits have come from domestic oil drilling, however, as rents have been paid to domestic factors of production during a time of rising oil prices. We discuss the potential implications of Brazil's energy program for the U.S. economy by conducting historical counterfactual exercises on U.S. real GDP growth since the 1970s.

Our research assistant, Charles "Atlas" Johnson, heard Weidenmier speak a week ago about energy independence and left pondering this statement by Professor Weidenmier on efficient sources of energy. "When you want energy, you turn to sugar, not corn. Every college student knows this."

Unfortunately, Congress has passed tariffs against sugarcane ethanol that all but kills it from hitting the pumps near you. Hey, no one ever said that the jobs of future would be "American only" or that Congress would understand their importance.

Should We Have Bailed Out the Tech Sector in 2000?

Peter Thiel, founder of Pay Pal, wants to know in Fortune Magazine.

The heads-down, can-do entrepreneurs, and libertarian-minded financiers who populate the tech industry aren't typically the sorts to long for a government handout. But in the wake of the Treasury Department's $700-billion-plus rescue plan, Peter Thiel speaks for many when he asks a simple question: "What happened to the dot-com bailout?"

Thiel's not serious - at least not entirely. As founder of hedge fund Clarium Capital and VC firm Founders Fund - with early investments in Facebook, Slide, and LinkedIn, among others - he doesn't need anyone's charity. But as far as bailouts go, his point is that rescuing the Valley would have at least sent a positive message. Even the most vapid online pet-food delivery business looks benign next to arcane financial instruments designed to line the pockets of investment bankers. "It is an odd reflection on the priorities of our society," Thiel says, "that we value finance over technological innovation."

The article moves on to considering the tech sector in the wake of the financial crisis, which tends to create some of our good jobs.

This shouldn't surprise us as anecdoctale evidence suggests that people want to be in jobs that seem more "secure"

Renee Rogers, a technology-recruiting manager at Manhattan-based Connections, said that the influx of Wall Streeters into the tech sector accelerated after the collapse of Bear Stearns.

"Younger people used to want the name Goldman or Lehman on their résumés," she said. "But things have changed. Now it's places like Google."

Another New York finance recruiter added, "Of course some people are looking to get off Wall Street.

"When your workday consists of worrying about whether you'll have a job the next day, a lot of options start to sound good."