THE INNOVATION INITIATIVE
* This post was written in 2011 before Mr. Roche founded Monetary Realism, a post-MMT school that was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought. For more info on the difference in views please see here. For more on MR’s views please see here.
In a story on his blog today Mark Cuban discussed an idea to get the economy going. Mr. Cuban cites the fact that the US government is essentially borrowing money for free today. Now, we know that an autonomous nation with endless supply of currency in a floating exchange rate system never needs to borrow money to “fund” itself, but the implications of negative borrowing rates are important from a political/logical perspective. It highlights the fact that the USA should essentially be trying to benefit from this odd environment by leveraging itself up on free money. Cuban says the US government should offer loans to corporations willing to hire. This is pretty similar to the MMT jobs guarantee except that it uses the private sector to leverage the government’s resources. I think we should go even further.
America became great for one simple reason. We combined a democratic government with a capitalist economic environment that unleashed creativity, innovation and an unmatched entrepreneurial spirit. We are known for our great innovators. The combination of democracy, freedom and capitalism created an environment where outside the box thinking is rewarded like no other place on earth. What is missing in all of this though is an understanding of how our monetary system could be used to leverage this great system.
The recent market turmoil and extremely low borrowing rates on government bonds only prove one of the basic tenets of MMT – that an autonomous nation with endless supply of currency in a floating exchange rate system never needs to borrow money to “fund” itself, but we have fooled ourselves into believing that we are bankrupt due to the flawed monetary system of Europe or due to misconceptions that lead households to believe that a government balance sheet is somehow analogous to our own. And in believing these destructive myths, we are not actually bankrupting our own government, but we are bankrupting our society by neglecting it of one of its most powerful resources – the government that was created by us for us.
As an autonomous nation with limitless supply of currency in a floating exchange rate system there is no such thing as the USA “running out of money”. But I am not going to convince everyone in the USA of this overnight. And that’s where Cuban’s idea comes into play. This political environment where rates are negative might just be the right environment to convince people that we should be doing more to help this great nation of ours by taking advantage of the fact that we are essentially being paid to lend money to ourselves. It makes perfectly logical sense. Any sensible businessman would agree with the idea that, when people pay you to borrow money from them, you should leverage that loan up.
While Cuban is right that we need more jobs in this country, I think he is missing the key component in the jobs story. We are suffering from a cyclical economic problem that is a balance sheet recession. That can only be fixed by reducing private sector debt levels and getting aggregate demand back to normal levels. And that’s what most businesses are seeing today – a lack of domestic demand. So they’re protecting their margins in an uncertain environment and not leveraging up. Even those corporations who have been taking on extra debt at super low rates have not been turning around to invest because the demand just isn’t there. So, I don’t see why the government lending money to corporations would change any of this to any large degree. We need to get out of the balance sheet recession first.
What I would propose to the US Congress is an Innovation Initiative. As I’ve said before, the structural problem in the US economy isn’t JUST that we’re shipping our jobs overseas. The other side of the coin is that there aren’t more Apple Corps. Let’s create more Apples. And let’s use one of our most powerful resources to do so – the US government.
I believe the Federal Government should allocate ~$50B per year from the Federal budget into what would essentially become the world’s largest private equity firm. While it would be government funded, it could be entirely managed by the private sector. And its focus would be entirely based on increasing private sector output and productivity. I would propose that we hire 10-20 private equity firms to manage the program on behalf of the government. In return, they would get an equity slice in any of the companies that are approved for the Initiative.
I would break the program down into several sectors – energy, environmental, infrastructure, technology, defense, healthcare, etc and allocate a specific amount of funding to each sector via monthly awards ceremonies. We would reward private sector entrepreneurs, start-ups or existing corporations with funding to go out and create new companies, new jobs and capitalize on their vision. I would promote the program vigorously. The key here is to get the creative juices flowing. I want college students sitting in their dorm rooms dreaming of winning this month’s contract. Or boardrooms at major corporations bouncing ideas around about how they’re going to obtain this month’s ~$500MM energy contract. The key here is that we are creating a specific entity funded by the government, run by the private with one sole purpose – to unleash a whirlwind of innovation on the world.
I am sure that much of the money would be “wasted” (at least we’re paying people to do real work as opposed to collecting a paycheck sitting on their couch), but for all the failures we might just look back and say, “wow, that program helped put a man on Mars and helped contribute to solving the energy crisis”. Besides, most new businesses fail. We can’t expect all of these to be winners. Call me crazy, but I see this making an incredible lasting impact on the country despite what ideologues would likely describe as another big government failure….
The USA might be suffering a short-term balance sheet recession, but the problem facing our economy today is much larger. We are suffering from a shortage of Apple Corporations. And we have the resources, talent and entrepreneurial spirit to fix it. We’re just not utilizing the resources and organizing our efforts in a way to benefit from it all because we choose to let politics and ignorance of our monetary system stand in our way….It’s like we’re sitting on a winning lottery ticket and we just refuse to cash it in….
I’d love to hear some thoughts about how insane this idea is or how it could be improved upon….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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http://www.marketwatch.com/story/buffett-bearish-on-currencies-holding-value-2010-05-01
OMAHA , Neb. (MarketWatch) — Warren Buffett said Saturday that he’s bearish about the ability of all currencies to hold their value over time because of massive deficits being run up by governments in the wake of the global financial crisis.
“One concern is that governments will print lots of new money to pay debts, undermining the value of currencies and triggering a damaging bout of inflation”
So he believes “printing” is inflationary though if you accept MMT’s claim that inflation is not possible if there is unused capacity (output gap in the economy). Since I’m not an academic, is the assertion that inflation is not possible accepted in the economic community or “anecdotal” proof by example (US and Japanese as an example)?
Venture capitalists spend money only after an idea has been somewhat proven. It turns out the real risk money is private savings. If we want a thousand fields of flowers, our money needs to be a store of value, and not slice off so much for itself.
Credit money will always slice off for itself and vector to the issuers. Within our current credit money environment (full disclosure, I prefer 100% reserve systems), we could use Cullens idea to fund new flowers and see which ones grow tall (best ideas). That government money HAS to enter the money supply outside of the Private Banks. In this way the new money buys down our Balance Sheet problem, and serves the secondary purpose of improving innovation. Essentially the government money idea is accusing credit money of misbehaving.
Cullen, you can also direct spend with 100% reserves and encourage entrepreneurship, plus money itself becomes a better store of value. But, within the framework of our current system, and our current reality, it is a good idea.
This idea of thinking outside of the box and innovation is grand but what scares me is do we actually have the young people to execute this plan? There is a general sense in US that the status quo is mediocrity and blending in is more important. Do we blame our young people for this, no, they been dressed and cloned by the Gap, Old Navy, Aeropostale etc. there entertainment is based on reality or alot of way out fantasy e.g. “Harry Porter”. Furthermore a big part of their lives is spent in idle nonsense e.g. Twitter, Facebook, Video games, You tube etc.etc.
This whole post reminds me of when Fonzi jumped the shark
Good starting idea Cullen but you may have to try harder..with big tax breaks to re-patriot foreign profits and more.
Intelligentsia in USA is looking at int’l world through 5 star hotel glasses, thinking ‘USA is so much better a place to live and work so why wouldn’t Corporations want to hire here?’
Overseas nations are getting the foreign direct investment non-stop…jobs growing constantly.
We have been waiting a long time…and still no one waking up.
USA is very stupid as a country and we are headed for big trouble.
The Pickens plan is a good idea too…but not much enthusiasm in Washington.
Natural gas for more cars and trucks nationwide could have been started years ago and we would have all that OIL money still in USA.
I think we’ve moved beyond “The Wealth of Nations”. What really matters now is “The Wealth of Firms”. Invest in firms and the jobs will go to the low-cost provider. How do you compete with countries that have plentiful cheap labor and that allow you to dump pollutants into the air and water?
http://money.cnn.com/2009/11/11/news/international/global_american_wages.breakingviews/index.htm
Americans are overpaid
For the global economy to rebalance, the pay gap between Americans and the rest of the world must shrink.
“the pay gap between Americans and the rest of the world must shrink.”
Correct.
“Americans are overpaid”
False. The “rest of the world” that the article cites are paid slave wages. You must also take into account that most other industrialized nations have benefits like health care paid for by government. If anything, the rest of the world’s wages need to rise. It’s the income inequality gap that needs to close.
more government welfare.
more government inefficiency.
more graft and corruption.
why should the government pay the private sector for what they’re doing anyway?
I’ll wade in late with a few thoughts. An anecdote:
Two friends and colleagues, both scientists, both excellent. Both moved to the USA to pursue academic opportunities, both took their wives. Both had children in the USA (two kids each) and now both are looking for an opportunity to leave. On the one hand, the research being done in the USA is second to none, stimulating and academically rewarding. On the other hand, the standard of living is in decline, schools suck, the healthcare system is a mess, wages for publicly funded scientists are terrible, there are an awful lot of really crazy people running around and it’s becoming harder to get by day by day. When these guys put their research first, the USA wins, if they put their families first, they’re on the first plane out.
Go into American research facilities and you will find loads of people with surnames like Yang, Gupta or Maciej. Education in the US is hideously expensive, the reason why the USA produces fewer graduates per capita than most other OECD nations. America’s edge is supported by imported scientists, mathematicians and engineers, allowing the US economy to benefit from the fact that some other economy paid for those peoples’ training. While career opportunity might be incentive for younger more naive thinkers, it doesn’t pull the more experienced thinkers who understand a thing or two about what i means to actually DO thinking work in America, so if the USA wants to keep pulling the best talent, then it needs to address the core social problems that plague the nation. Front-and-centre, excessive income disparity that is increasingly pushing the middle class (of which sci/eng/math are members) into the gutter.
I’m not talking about massively increasing the pay of scientists and engineers or offering them big cash prizes for delivering outcomes. Such things don’t work for primary R&D. I’m just talking about improving the situation for thinkers so that they spend less time researching which private health insurance policy will rip them off the least, and more time actually applying their brains to something useful.
Finally, I recommend reading the following paper produced by none other than the Federal Reserve. Empirical evidence demonstrates that increased pay leads to increased performance for manual jobs. For thinking jobs (including finance), increased pay improves performance up to a point (as worrying about basic needs is removed), but beyond that point, it has the opposite effect. Remember that next time you hear some executive justifying large bonuses: it’s a lie.
http://www.bos.frb.org/economic/wp/wp2005/wp0511.pdf
So if America wants to see a surge of innovation, one great way to start would be to give the FIRE class a 95% pay cut to improve net performance, and redistribute that money to productive people who are wasting time worrying about getting by day to day instead of applying their brains to innovation.
“One great way to start would be to give the FIRE class a 95% pay cut to improve net performance… ” Amen. Get Wall Street off welfare. You could give a trained chimpanzee access to ZIRP liquidity in the billions of dollars and he would become superrich on the carry trade, because when that trade eventually crashes he’ll be bailed out anyway. Wall Street is full of phonies who claim to be geniuses but who are really on welfare courtesy of the Fed.
Well first of all Cullen, necessity is the mother of invention. Sorry for sounding patronizing and cliche, but it seems that we as a species need a fire under our collective assets in order to actually get down to designing fireproof underwear.
That said, create a fire of some sort to rally around. Pick a cause. Then pour energy into working it out.
Plentiful free/cheap energy creation and storage would be a very good cause in this age of increasing marginal energy cost. For example, I read a while ago that in Denmark they already had invented a stable, solid hydrogen storage in ammonia salt. This story is still dead in the water. I wonder why.
21st century transportation infrastructure could be another cause.
So the government could pick something like that. Then pour the focussed effort into the creation and maintenance of incubation chambers.
I truly, sincerely have no doubt that a Eureka company like Apple would spark on the fringe somewhere like the last one did when we were all learning Fortran in a dingy lab in the sub-sub-basement of the university.
I like the idea though. It’s time that governments all over the world make it easy and supportive for incubation chambers for innovation for the next generations. God knows, they’re going to need it. I believe though that this is already happening, though, with ‘national’ (read: security) and not altogether altruistic interests in mind.
As far as finding money for that kind of thing? Corporations are currently sitting on piles of cash. Waiting to put it to use.
The problem I see with private equity investment is that most companies don’t
have the long term focus to solve many of the sticky problems we now face. (Energy Independence, Environment). As many have pointed out, we’ve done better by picking an audacious public policy goal and putting our resources against that (Manhanttan Project,Space Race).
I don’t think anybody doubts we have a huge output gap (we’ve got a vast amount of underutalized human capital which is on the sidelines due to a dysfucntional money system).
The national debt problem can be solved through MMT applied to monetary reform.
http://www.youtube.com/watch?v=Rq8s0JShs7o&feature=relmfu
Get rid of the debt based money system and free up the government’s ability
to invest for the future (constrained by some statuory limit).
I like the concept. Demand would probably increase in every industry if people believed they had a shot at getting rich. Hope and Change? Hope is lost and the “change” is not the what most expected.
Short of a debt Jubilee, Cuban’s on point.
“The Republican/ Tea-Party approach to job creation is to cut taxes. The theory being that more money in the pocket of individuals will cause people to spend more money in the economy thereby creating more jobs. Nope. Not happening. Why ? Because individuals have too much debt. Any money they get goes to pay credit cards, student loans and for the smart and fortunate into savings.”
Looks like some very tough choices ahead if Phil is right, just read this posting:
philstockworld.com/2011/08/13/problem-solving-101-republicans/
Politics aside, this is very scarey stuff. Though, it does make a very, very good case for higher taxes and certainly leads me to conclude that the economic trauma that America is currently going through would disappear overnight if Americans would pull up their socks and make the wealthy pay more tax.
The problem with innovation is that first time entrepreneurs (founders) typically give away 50%-70% of their business value (to VCs) in order to receive the funding and support needed to bring a new business public.
The second time around, Entrepreneurs usually leave out the VC world until absolutely needed in order to retain as much of their original IP (business) value as possible.
On top of that, the potential for increasing regulation costs and income tax burden means that American entrepreneurs will lose 50% or more of the remaining value they are able to keep out of the VCs hands.
Where’s the incentive to innovate?!
What we need is smaller government in the form of reduced regulation (costs) in order to bring back entrepreneurs. There are too many barriers to entry in most industry segments anymore. Very little room for the little guy to get started without significant funding and backing.
AAAS Speaks for Science as U.S. Debates Federal Budget
We all know the challenges to the United States in addressing the debt and reinvigorating the economy. We also know that federal research and development (R&D) funding is vital to continuing advances in innovation necessary to spur economic growth. AAAS has been very active in arguing for the continued support for the full array of science and engineering research fields.
As one example, as the U.S. House of Representatives prepared to debate the Commerce, Justice and Science appropriations bills for fiscal year (FY) 2012, AAAS led a consortium of more than 150 scientific societies and universities to express their support of the federal R&D budget of the National Science Foundation, which is unique in advancing multidisciplinary research. The letter, dated 11 July and routed to key lawmakers, noted recent “attempts to trivialize specific research grants and to challenge the scientific merit review process” and argued in support of the peer-review process as the appropriate vehicle for awarding grants. The intersociety letter strongly opposed “defunding individual grants or entire scientific disciplines,” a tactic that has had an impact on the NSF and the National Institutes of Health over the years. (See News, below, to access the full letter and the list of signatories.)
AAAS has a long history as a leader in promoting strong science policy and robust investment in scientific research. Since 1976, our R&D Budget and Policy Program has provided timely independent analysis of federal funding trends and budget legislation. The weekly AAAS Policy Alert e-newsletter supplies budget and other Congressional and Executive Branch news in areas of concern to the science and engineering community. Annually, our comprehensive report on the Administration’s budget request includes special analysis by theme, major agency, and discipline. You can access “AAAS Report XXXVI: Research & Development FY 2012″ and the current status of appropriations legislation, listing bills with funding tables, at http://www.aaas.org/spp/rd/rdreport2012/
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