The Road Less Traveled

Robert Frost's poem rings true when considering the current divergence of policies between Europe and the United States. It goes:

Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.

One by one the European Union states have decided/considered to go on a spending diet. The era of debt and spending came to a sudden halt. Please view an old speech that warned of the impending debt crisis:




Austerity measures were instituted from Great Britian to Greece. Keynesians were worried that reducing government spending during a recession was ill timed and could slow the economic recovery. Even Nouriel Roubini, an economist who has been predicting financial disaster due to unsustainable debts, has hedged his bets by saying that he is concerned that European government's may be cutting back too much, too soon. Across the Atlantic, however, the United States passed a large tax cut. In a compromise that tried to please everyone--concessions on improving the welfare net (extension to the unemployment insurance) met with trickle down economics (tax cuts for the wealthy) at the finest. The cost would be a staggering $800 billion. Which method will win out needs the benefit of hindsight.

Reducing taxes for two years continue to leave uncertainty. Most business plans of large institutions look farther out that two years. After all, for example, if the payroll taxcut (a measure of the bill) is supposed to increase hiring--you as a business know that two years later it may not exist. Are you seriously going to spend months looking for a worker because of the payroll tax cut or are you going to hire because you really need a worker?

So what does this tax cut accomplish? Reinforce that model--it wants Americans to continue to spend more, save less. The concept of saving, leaving money on the "side lines" as opposed to in the equity markets/risky investments, or pushing off a purchase for another day is unacceptable. Unfortunately, as the old saying goes, someone's got to pay the piper. This unsustainable model needs to be changed through investment and well managed, decentralized industrial policy.

First, our educational system is failing us. Every day the news is filled with fears (some exaggerated) that we are not graduating enough math and science students. The shortfall in primary care physicians in the coming years is just one metric to measure this. Why don't we provide incentives, a cornerstone of behavioral economics, to influence a high school graduate's decision to take harder math and science classes? A public-private fund should be setup where any student who maintains decent grades, plans on studying math or science, can apply for a large grant as long as he/she maintains certain criteria through college. Again, this should be driven solely on merit. I recently read an article talking about how a business in Michigan is having trouble hiring mechanical engineers to build electric batteries, wind turbines, and other futuristic technologies. These businesses should be given large tax credits for setting up scholarships to attract students into the "hard" science classes. Google, for example, has been bringing students into their offices to ignite their fascination for technology. Intel has science competitions that are very popular. All these are efforts are in the right direction, but must be scaled up. However, it needs a boost from the government.

Second, we need to promote exports. Currently, a handful of mega companies are the largest exporters. Small and medium size businesses don't consider exporting their goods. This is in part due to the difficulty of navigating other economies. After all, why would anyone want to invest in expanding in another country's economy when they are home to the largest economy in the world? BUT -- with the rising middle class in the emerging world, opportunities abound. Many people often mistakenly think that other countries rising in wealth is a threat to America, in effect a zero sum game. However, with our industries geared towards meeting the needs of these consumers we can develop a virtuous cycle of dependence that in the long run may prevent disastrous consequences.

Take Singapore, for example, --a government agency is devoted to helping its companies export goods--whether it is navigating the legal issues in other countries or having the proper paperwork done. A similar system, again public-private, should be set up where any small/medium business with ambition can get low cost services and set them up for exporting to another country. After all, the "American" brand is still coveted around the world. Imagine being defined by numerous American companies instead of just the usual gold arches, swoosh tick mark, or a mermaid selling coffee. Though the commerce department has offices trying to promote that a more active effort that makes exporting cost effective for a mom and pop down the street should be, in my opinion, an eventual goal.

Third, government should promote basic research. Industrial policy is often controversial. The last thing I want is a million bureaucrats dictating which industries should get funding. BUT--if highways were not built by the government to make it easy for companies to ship their goods and people to move around--would we have such a prosperous country? If the internet was not funded by the government, would so many businesses have benefitted from building on it? Amazon and Google may not have existed! A conscious effort to deal with large scale projects should be considered:
- dealing with our aging electric grids
- improve our bridges and roads
- utilizing both fossil fuels and alternate technologies to reduce our energy dependence. To get both sides of the political aisle together, why not for every kilowatt of energy produced by a nonrenewable resource a kilowatt of renewable resource should be produced?
- increasing access to broadband

Lastly, access to small business credit should be much easier. Currently, the best route to attracting venture capital funding--for example--is by initially proving your success. This means that if I want to start a business, I first need to attract "angel" investors or be independently wealthy. This is very difficult. But why not have more hubs of entrepreneurial activities by having a public-private partnership where loans are given out to those with good ideas. Now instead of setting up a large government agency--the money should be given to local banks, venture capitalists as well as large banks with the explicit purpose of funding companies. The institutions decide what rates to charge, but the barrier to entry should be lower. Obviously, many of those companies will fail. However, those that succeed will serve as engines of economic growth. After all, we just need one Google or Apple to have a dramatic effect on the lives of numerous Americans. More broadly, even if one or two companies succeed for even eight or ten failures--ambitious businessmen know that they can get access to credit in an easy way. Obviously, issues of moral hazard as well as how the funds will get dispersed should be worked out. But this will in effect scale up the silicon valley model to hopefully a silicon valley nation that produces great American companies.

I concede that I simplify these broad issues and may even have missed major issues with some of these ideas. And while I understand change can be a good or bad thing, it is imperative we break our bad habit of spending too much and reverting back to the entrepreneurial, risk taking, hard working formula that has defined our decades of success.