Growthology

The Value of Bernanke's Reconfirmation

Federal Reserve Chairman Ben Bernanke is up for a reconfirmation vote in the Senate tomorrow. He will likely be confirmed, and that's good news.

A perceived surge in populism is roiling both the Democratic and Republican parties, and a strange combination of all the political tension somehow fell on Ben Bernanke. And it was bipartisan. Politicians got the message that voters were angry: angry at Wall Street, angry at Washington policies, angry at elites wherever they may be. So Ben Bernanke, the calm-voiced Princeton professor and author of macro textbooks, became the fall guy for all those who really contributed to the subprime mortgage-induced recession. There's been a drumbeat of attacks on his stewardship of the central bank. But a funny thing happened on the way to guillotine. A majority of Senators seem to have decided to reconfirm.

In our view, Chairman Bernanke has been creative when others were dogmatic. He was decisive when others were silent. For that reason alone he should be praised, as Time magazine has done, certainly not condemned.

Second, what too many fail to understand is that for millions of Americans the U.S. recession is not over. There is no certain destiny for a recovery, strong or weak, in the coming year. And the biggest danger remains the fragility of the global financial system. The Chairman has demonstrated that he understands that danger. We need him now as much as we needed him in September 2008 when things looked much darker.

The third value in reconfirming Bernanke has hardly been noticed, but here it is. In a city drowning in partisan rancor, the bipartisan victory of the chairman reconfirmation will emerge as an invaluable island of sanity, and perhaps point the way toward more bipartisan, constructive action ahead. Let’s hope.

SIGNED

Robert Litan and Tim Kane

Fred Wilson and the Venture Capital (Non-)Cartel

When a capitalist says that he is pleased to see his industry shrink and calls for his competitors to cut back is that a cartel? How is it different from the CEO of, say, Honda, gloating about the elimination of other auto companies, and then asking the remaining companies to hold the line on prices?

All these questions came to mind in reading some of the more entertainingly outraged comments to venture capitalist Fred Wilson's post today about the venture capital diet. Echoing my paper from last summer that called for the venture industry to shrink by half, Fred points to the latest industry data and says that we're pretty much there, with annual outlays touching $17-billion. He goes on to worry, however, that Q4 of 2009 saw outlays tick back up to an annualized $20-billion, and suggests people need to pull back.

So, is Fred calling for a cartel to contract VC spending? I don't think so. Fred is one of the good guys, and my position here is public: We need to shrink to have a healthy venture capital business. We have an industry that hasn't delivered a multiple above 1.0 on invested capital since 1997. We have an industry that, as of end of year 2009, sunk to a negative ten-year IRR, with the bubble exits finally falling off the sheet. This is a sick business, and that is understandably leading to fewer investors wanting a part of it, which means outlays are shrinking. Eventually the industry will shrink back to a point where it delivers competitive returns -- and it may even be there now.

Now, two points. First, some may say that venture can fix performance by making better investments. It doesn't need to shrink: We have can have our capital, and our startups too. Fine, but history doesn't bear that out. The modern venture industry has never delivered competitive returns with this much money under management, and you can't point to deals that, had they been invested in, would have fixed that. Yes, absence of evidence isn't evidence of absence, but the heavy-lifting must be on the side of those who would argue the venture biz can deliver compelling returns at higher levels of capital outlay.

Second, others may argue that it really doesn't matter. Venture capital provides a valuable societal function -- job creation, innovation, economic growth, etc. -- and we can't hold venture back when we need all three of those so badly. I understand the inclination, but a venture capital industry no longer tied solely to delivering competitive returns to its investors is newly a quasi-governmental entity, an expanded regional economic development agency, albeit one with your pension money at risk.

Finally, is  it possible that venture is just so badly broken that we have no idea what the right amount of capital is? Yes, it is possible that we could see 10x as many startups and find that it is a distribution with many local maxima, some of which are much more attractive than the current level of investing. Good luck making that case, however, to burned limited partners who have just watched an expanded venture industry deliver the worst returns in its history.

The End of Poverty

Some thought-provoking new research argues that, absent catastrophe, and despite continuing population growth, we will never see a billion people in poverty worldwide:

World poverty is falling. This column presents new estimates of the world’s income distribution and suggests that world poverty is disappearing faster than previously thought. From 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa. Barring a catastrophe, there will never be more than a billion people in poverty in the future history of the world. [Emphasis mine]

 

More here.

Blow Your Mind Study of the Day

A study published yesterday by the Kaiser Family Foundation finds that American kids are, for better or worse, entirely absorbed in electronic media. Kids 8-18 years old spend an average of 7 hours and 38 minutes consuming media content, 7 days a week. This is a 1 hour, 20 minute increase from five years ago. And, final fun thought, the study was initiated before Twitter existed.

It's an easy study to skim, chock full of good charts and tables. Things that stuck out for me are (1) low correlation with bad grades and media consumption habits, (2) an amazing percentage of teens who are allowed TVs in their bedrooms (which is considered bad parenting here at growthology, right guys? Or am I just expressing jealousy hangover from my teen years with my cruel, cruel rents?), (3) the rapid rise in DVR penetration, (4) music consumption is the big gainer, which should cheer the icy hearts at music labels.

Meta-lesson that maybe only I find interesting: Losing Touch is Lost
So here America stagnates in the teeth of the worst recession in modern times, and yet a report shows an explosion of media consumption. Life is worse for these kids how? The growth of virtual consumption is not appreciated by standard GDP metrics, but I think Plato was right. Humans are a social animal, and we derive unmeasurable value from social networks that have become instantaneous in speed and global in reach.  In a nutshell, can you imagine being a high school student today and have no sense of ever losing touch with your friends?  Losing touch. Losing touch is a non-operative concept in their world.

Corporations and Elections NEWSFLASH

"The censorship we now confront is vast in its reach," Justice Anthony Kennedy said in his majority opinion, joined by his four more conservative colleagues.

U.S. politics changed dramatically today, and in a much, much bigger way than the election of a Republican from Massachusetts.

The Supreme Court ruled today (5-4) to overturn limits on corporate involvement in U.S. elections. It is a decision ripe for simplistic interpretation, as if the "conservative" justices are allowing big business to run the legislature. In fact, the law has been badly confused ever since campaign finance censorship started growing in the early 1970s.  Even then, the Supreme Court ruled that one aspect of free speech was sacrosanct: individual voice.  In electioneering terms, the Court has consistently ruled that individuals are free to spend as much as they want in favor or against any candidate. Period.

Here is where it gets tricky. These independent expenditures must pass all sorts of litmus tests -- no coordination with a candidate committee, no affiliation with other individuals, organizations, etc.  And biggest of all, it must be individual expenditure, not a corporation, union, club, etc.

But does that make sense in a lawsuit happy society?  What if a someone, anyone, files an FEC complaint against your expenditure?  Without the protection of limited liability that an LLC or Corporate structure affords, you are on the hook.  Can you say chilling effect? 

The net result of corporate finance law was not cleaner elections, but a stranglehold of partisanship as the Two Party Duopoly and its attendant pro-incumbency bureaucracy stifled all opposition. It has been bad for progress, bad for new ideas, bad for economic growth.

So this ruling is unadulterated good news. It might just be the fix America needed for her broken politics.

What wouldn't you sacrifice for Haiti?

A lot of people around the world are sending donations to Haiti.  Kauffman, which is a philanthropy and employs many charitable souls, has multiple ways for staff to send help on our internal website. Very heartwarming.

But I have felt a bit like Paul Krugman in not saying much here on the blog about Haiti because it all seems so obvious.  But maybe saying the obvious, especially the insensitive obvious, needs to be said because it so rarely is said. Haiti was a disaster long before the earthquake. I suspect that absolutely no one believed or believes the people there (or any good people in such a place) would be able to escape the poverty trap that Haiti has long defined.

Haiti is the poorest nation in the Western Hemisphere.  It did not get that way by accident.  Centuries of abuse, neglect, and massive internal corruption have doomed the poor people born there. According to the 2009 INDEX OF ECONOMIC FREEDOM, Haiti's economy is  50.5 percent free, ranked 26 out of 29 in the region, ranked #147 in the word, and about the only thing it ranks well on is "Government Size" which is only because it essentially has no governance. Apparently the new 2010 Index is slated to be released tomorrow, and I suspect the score will not have changed. I made a quip the other day that it is hard for many Americans to fathom a place like Haiti because it simply is not a nation in the conventional sense. It is just a place, understood more in terms of what it lacks institutionally than what it has.

So here is the question: what would you be willing to sacrifice for the people of Haiti?  Most of us would send money, but what if that won't help?  What else, creatively, would you be willing to give?

There are 9.4 million Haitians.  Would you be willing to give them citizenship? Would you be willing to offer them statehood?  A new protectorate status, something like Guam or Puerto Rico? Would you allow President Obama to build a U.S. joint forces military base there, adjoining a new city chartered under U.S. law, with all tax revenues from the city to be shared equally with the people of Haiti, but under protection of the U.S.?

Surely, the people of Haiti could turn down these offers.  I just wonder what you be willing to extend?

It is worth noting that Paul Romer has already written a powerful comment on this topic at his chartercities.org blog, rather strongly against the notion of a charter city. Read the whole thing, but let me cite some key lines here:

Contrary to what some have suggested, a charter city in Haiti is simply not an option at this time. A charter city can only be created through voluntary agreement. Under the current conditions, the government and people of Haiti do not have the freedom of choice required for any agreement reached now to be voluntary.

In 2004, most knowledgeable observers concluded that the crisis in Haiti met the stringent criteria required for a humanitarian military intervention. A UN dispatched a force of 7000 soldiers and 2000 police officers. It made real progress, particularly after 2006. It reduced kidnappings and established a police presence in areas where criminal gangs had been so strong that Haitian police could not enter. The UN also paid for the expansion and training of the Haitian police force.

On top of its enormous human and economic cost, the earthquake has setback these efforts at strengthening the Haitian government. The case for a foreign military presence is now much stronger. The number of foreign troops is increasing rapidly. They are likely to stay much longer.

In the current circumstances, any attempt at creating a new city in Haiti under foreign control would turn a humanitarian military intervention into a humanitarian military occupation. This approach is fraught with risks that the concept of a charter city is designed to avoid.

Paul is right that this is not the ideal setting for a "Charter City" as he has carefully defined it.  However, I think it is more than ideal for something radically different than humanitarian aid. The outline of what I would recommend the U.S. President offer to the government of Haiti is this:

1. With your approval, we will build a new transportation hub and commerical territory on a section of unoccupied land (compensating whatever landowners have title to that land now). The U.S. will have a 49-year lease on the land and be given authority to manage it under U.S. law. At the end of those 30 years, full sovereignty will return to the government of Haiti.

2. The U.S. will commit to constructing an air and sea port on this land. it will be a hub for humanitarian aid over the next year and into the future.  Adjoining space will also be parceled out for commerical purposes. Commerical sovereignty will be shared and the government of Haiti will receive 50 percent of all property and sales tax revenues.

3.  On the issue of free choice, no Haitian people will be required to work here, but all Haitian people will have the right to work, visit, and live in this new territory if they choose to.  All people in the territory will be suject to the U.S. laws governing the territory, as well as the police and courts of the territory.

New Paper on Firm Formation

Why is the annual number of new companies so constant? Read it here.

How Do Entrepreneurs … ?

Fun with Google search auto-complete, this time asking about the entrepreneurs. In short, Google tries to complete your query based on the most common questions people ask of the form you’re positing.

Happy Binary Day! 1.10.10

We will have a lot of them this year. 

Of course, that's only if you count the pre-Y2K way with 2 digits for the year instead of 4.  But 1.10.2010 doesn't have the same ring to it.  Too bad I missed symmetry day which was 01.02.2010.  So what time of day would have been the perfect time to celebrate?

Update: Cautionary tale, don't trust your watch. 1.11.10  Hey, it's still binary day!

Jobs Report for 2009: A Depressing Year

In an quirk of accounting fate, the beginning of the Great Recession started in the last month of 2007, meaning that forever more the historians would note it as the "recession of 2007-2009" or maybe "2007-2010" or maybe ... well, let's not go there (we can hope).

Rarely recessions last longer than 12 months, and the longest in 70 years was 16 months long.  That means we usually mark them as the recession of a single year (2001) or double years (1980-81). After today's jobs report, this one now looks to be a triple, maybe even a home run.  To torture this analogy, the American worker is on defense. George Bush was the starting pitcher, and Barack Obama is the reliever. But by now we all know there isn't much relief.

Last month, the payroll number finally recovered from big negatives to mere stagnation. The report out today was expected - certainly hoped - to show the first job gains (+4000) in December 2009 in a long time. Instead, the report shows a resumption of decline (-85,000).  Without adding 200,000 payroll jobs every month, economists anticipate the unemployment rate can't decline.

But wait a minute, the unemployment rate held steady in December 2009 at 10.0 percent.  What gives?  The real shock in the latest report is not the unemployment rate, rather the exodus of people even looking for work. Those Americans are not counted unless they actively sought work in the last 4 weeks, even if they want a job. Such "discouraged" workers are a normal part of the labor force, and their numbers never go to zero even in the best of times. But this month report shows a sickening acceleration in discouragement.

Look at the raw numbers and you will see the number of officially unemployed Americans actually declined from November to December by 73,000.  However, the number of employed Americans declined by more than half a million, or 589,000 to be exact. Added together, the civilian workforce declined by 661,000. Over the course of the year, nearly four million citizens gave up on working in America. There are other ugly statistics to prove the point, but it is probably overkill at this point.

The lesson is that the recession of 2007-2010 is proving to be long and bitter. The scars of joblessness are becoming permanent. For those looking for a bend in the curve of unemployment, keep an eye on jobless claims. I looked at the latest weekly report out yesterday morning, and the new jobless are still rolling in at a pace in excess of 400,000 a week, or 450,000 moving average to be exact. Until that fever line of 400k breaks, there will be no health in the aggregate figures. If I had to forecast from the hip, I'd hazard the unemployment rate will hold steady over 10 percent all year long. The reason is that even if job creation picks up, it will likely just draw back millions of unofficially unemployed people into the official counts. We may even see the U-3 unemployment rate rise as things get better.

I wouldn't be surprised if the recession is declared officially over in January 2011. The 7-11 recession?

Paul Romer's Errors

This is an overdue summary of the presentation Stanford's Paul Romer gave at the signature growth panel at the Atlanta AEAs ...

Romer started by observing the divergence of international incomes has been a powerful and vexing trend. Despite the ever-widening gap between developed and developing economies, he also noted research showing how life expectancy across countries has converged. This bodes well for the future, and suggests to me a stepping stone to convergence in other things.

Second, Romer made a fantastic point that the workhorse model of gains from trade (globalization) is comparative advantage, but it is a story that should be updated with new goods. Instead of the two trade goods being fish and apples, for example, we should talk about trade in cholesterol pills and blood pressure pills. The first implication seems to be the consumption benefits of trade are too often neglected. The implication Romer was making is that trading in recipe-driven goods represents an inefficiency. We should imagine a globalized economy where production is localized and IP is licensed, rather than one where final goods (physical objects) are traded.  In his words, "globalization should be a flow of ideas, not goods."

But the real insight offered in Romer's talk was when he called out the "two errors" of development thinking. He got to them by sketching out a few growth equations, starting with the familiar 

Y = A * F(K,H,L)

and then expanding the A term as a function of technology and rules:

Y = A(Technology,Rules) * F(K,H,L).

Understanding the importance of rules is the key insight. Private property is a kind of formal rule governing social interaction. We have other rules for marriage, educational advancement, and so on. Technology is the conventional way economists thought about the growth equation and includes hardware like computers, phones, and printing presses.

When thinking about how to accelerate economic development, the first error people tend to make “Technology cannot change.”  The given tech level of a country is given. The second, and more important, error is that "Rules can change with stroke of a pen.” While there is a growing consensus that rules are the most important factor in permanent changes in a developing country, Romer forces us to accept that rules are very difficult to change.  Nations in particular, even when its leaders recognize the need for rules to change, have difficulty making them happen.

Here in America, there is tremendous acrimony about new legislation of almost any kind. Witness the current fight in the U.S. Congress over health care reform. So why do we imagine it would be trivial for another country to change its laws, let alone norms, customs, cultures?  So the real challenge for development practitioners is how to make rule-changing easier.  Any thoughts?

QOTD: "Though some kinds of future, I fear, can only be found in the past."

That's from Paul Collins' look back at Omni magazine over at Slate.com.  I never read Omni, though judging by the demographic description and timeline, I should have.  I guess all my allowance was going towards comic books and baseball trading cards back then. Heck, I can still remember when I heard a college physics professor talk about an "unstopable force meeting an immovable object" and I thought, Wow, he read X-men #137. Impressive.

Samuelson: What are the economic scars?

Bob Samuelson poses an interesting question in a WaPo op-ed today, summarizing the challenges and importance of entrepreneurship (and citing Bob Litan):

One insistent question at the start of a new decade involves the lingering effects of the old: What scars will the Great Recession leave? We are already seeing some. Americans are moving less than at any time since World War II, reports demographer William Frey of the Brookings Institution. People are tied to existing homes, can't get loans for new ones and won't move without job commitments, Frey says. Only 1.6 percent of Americans are now moving across state lines, half the rate of a decade ago.

With a grim job market, the young also seem more cautious. A new survey by Fidelity Investments found that a quarter of workers ages 22 to 33 want to stay with their present employer until retirement; in 2008, that was only 14 percent.

...

Some harbingers of growth look unpromising. In 2009, disbursements by "venture capital" firms -- investors in start-ups -- to first-time recipients hit an all-time low since statistics were begun in 1995. True, VCs support only a tiny fraction of new firms, mostly high-tech start-ups. But "angel investors" -- friends and family of entrepreneurs who support many more -- have also suffered huge losses in stocks and homes. They, too, have less to invest.

There's a warning here for the Obama administration: Complex regulations or high taxes may discourage start-ups and job creation. As for broader questions, the answers may remain murky for years. Has the mix of economic trauma and aging made us prudent -- or merely fearful? Has economic resilience survived -- or given way to a stand-pat society?

Great summary piece, and I wonder how many of the issues raised will cut for or against growth.  As we've mentioned here many times, an aging society should generate more, not less, entrepreneurship. Likewise, I tend to think the asset value shock makes angel investing look comparatively safer, so I hope the investments into startups aren't being hit as hard as other asset classes. And ultimately, I cam confident that the rate of invention is resilient, and the rate of innovation will catch up in spades.

Is Economic Complexity Fragile?

In response to Dane's fine post on the rising complexity and fragility of an advanced economy, I have to wonder if the original essay by historian Bryan Ward-Perkins (see Financial Times op-ed) is confusing complexity with scale.

Complexity is a fascinating field, and I think the robust comments the post received are testimony to that (superb discussion!). Also, I adore the folks and research at the Sante Fe Institute, the capital of complexity studies, But the word "complexity" has become woefully trendy, and calls to mind the overuse and abuse of otherwise interesting topics like dolphins or innovation or Eastern religions. And in this case, I think it has been misapplied.

Let me quote both Ward-Perkins followed by Dane here:

"The more complex an economy is, the more fragile it is, and the more cataclysmic its disintegration can be."

Ward-Perkins' main point that complexity increases fragility, is wrong.

Keep in mind that Ward-Perkins is analogizing the current U.S. economy and recession to the British fringe of the Roman empire after the sack of Rome in 410. Rome v America is an interesting comparison, but Ward-Perkins' analysis is shockingly off target in linking 410 to 2010.  I say shockingly because his book on the collapse of Rome is perhaps the single best accounting of hard evidence on Rome's demise that I've come across.

If you are interested in the fate of large nations, you study Rome. And if you study Rome, you need the facts, which is what Ward-Perkins does better than anyone.  Fact number one is that the collapse of Roman civilization was real and terrible. His book destroys the trendy revisionism that suggests the post-Roman world was a gentle evolution and that no "civilization" was lost. This cautionary tale can not be overemphasized because it must be understood that systemic collapse could indeed happen again. Unfortunately, my admiration for Ward-Perkins' masterful documentation of the effects of Roman collapse do not extend to his attempt at causes.

Fact number two is that the collapse of Rome was not sudden. Ward-Perkins knows this, so why make the complexity argument?  It sounds good sure, but it doesn't fit. The demise of scale economies is better understood as a consequence, not a casue, of collapse. Besides, the basic causes of Rome's weakend economy are not so mysterious. Bruce Bartlett wrote an excellent essay on this years ago (worth digging up). But the key point is that bald economic ignorance by its rulers set up Roman civilization for epic failure. It wasn't their fault, in one sense, because nobody knew economics then. Nonetheless, the city fell in 410, but that was preceded by more than a century of ... let's just list the key factors ... violent political strife, hyperinflation and currency debasement, regulated labor market rigidity in the extreme, slavery and the exhaustion of its supply, and the ultimate walling off of the outside. Any one of these is a better explanation for unsustainability and collapse than "fragile complexity."

Rome, like China, ultimately walled itself off from the world, became insular, became stagnant. talk about a non-entrepreneurial economy!

Indeed, the one idea I would like to push into the minds of modern policymakers is that economic growth relies precisely on the concept of scale. With scale comes labor specialization. This was the insight of Adam Smith (and an insight the Romans lacked).  Scale can be increased externally by openness to other economies -- through trade, immigration, investment, and ideas. But scale can also be enhanced internally. Smart pro-growth policy recognizes both. Internal scale rises with bigger, better transportation networks. Scale rises with better communications technology. Indeed, the revolution in scale spawned by the internet and other digital technologies is the key reason to have confidence in a coming long boom.

Is economic scale fragile?  I suppose it can be, but that is a much deeper question. Networks, as Dane describes, can be strong or weak. A strong network (think cellular telephony) can lose one or more nodes and still function. A weak network (think of local plumbing) needs all of its nodes to be up for the system to function. Overall, the modern economy leans much more towards the strong network. Consider, for example, what happens to all the other cities in the world economy when one is incapacitated. Not much. As tragic as Hurricane Katrina was on the lives of millions of Americans, the economic lesson was a surprise. The national economy was robust in the extreme -- economic growth barely flinched at the loss of a major port of trade, even the destruction of huge amounts of oil refining.

Checking in from the AEA conference

Here we are in Atlanta, host of this year's biggest annual meeting of economists from around the world, the AEAs. I had the fortune of bumping into David Warsh at the beginning of the one star-studded panel on growth, and we sat together near the back to list to Paul Romer, Daron Acemoglu, Dani Rodrik, and Philippe Aghion discuss "Growth in a Partially De-Globalized World."

Each presentation was interesting, but somewhat narrow I thought, aside from Romer.  Romer is a big thinker's big thinker, and his concept of a Charter City can, in my opinion, truly change the world. Overall, the lack of panels on growth is a bit disappointing. Certainly, a great deal of attention is focused on macro and basic discussions of the near-term prospects for the U.S. and world economy. But I get the sense that growth is a bit stagnant again, in a kind of rut that it was almost 20 years ago before endogeneity shook things up.

The full listing of panels and some of the papers available for download are at this link:
http://www.aeaweb.org/aea/conference/program/2010_AEA_meeting_papers.php

Not to slight Acemoglu (his co-authored paper is a cautionary note about the possible negative correlation between rising militarism and declining trade openness -- a first stab that seemed somewhat obvious while at the same time historically myopic ... was WW1 really about the "end" of globalization or rather just a pause?) or Rodrik (his presentation focused on China and the dilemma of its currency manipulation, pretty interesting but I honestly didn't learn anything that changed my worldview, not that it wasn't impressive) or Aghion (his heterdox call for a smart industrial policy did not go over well, but his comments on other presentations were solid), but Paul Romer's presentation really merits extensive notes.  I'll post those next...

Mean, Median, and the Trouble with “There’s No Angel Money”

Brad Feld at Foundry Ventures has up a superb post on the trouble with the way people collect and analyze venture data. Among other things, it biases people to believe that little angel is investing is being done, which is simply untrue. At core, this is about statistical blinkers, with most analysts not understanding the difference between means and medians, as well as wanting to believe a few impossible venture-related things before breakfast.

Read the whole thing.