State of Innovation

Patents and Innovation Economics

Welcome to the Global Financial Meltdown

With the roller coaster ride of the stock market as well as the S&P downgrade of U.S. government debt there are a variety of pundits weighing in on the direction of our economy and the stock market.  For instance, Steve Forbes on FOX news suggested that U.S. economy and stock market is poised to explode, especially after the 2012 elections.  There have been a number of pundits suggesting or speculating whether the present situation is analogous to the market crash in 1987.  Others have suggested that since the debt crisis of 2008 we have just kicked the can down the line.  They use the analogy of a hurricane and suggest 2008 was the leading edge of the storm and that we have been in the eye of the storm recently, but we are about to enter the trailing edge of the storm.  Most of these pessimists see this trailing edge of the storm as likely being worse than the leading edge.  So who is right, the bulls or the bears?

First, it is clear that we have not dealt with our debt problems.  The initial solution to the 2008 debt crisis in most countries was to nationalize the debts of major banks and provide no cost loans to multinational companies from the central bank.  The follow up solution in the U.S. was to increase government spending by 50% in a single year and use this as the new baseline.  As the debt crisis spread to the PIGS of Europe, the solution has been to provide more debt to struggling countries.  This debt has really been used to shore up German and French banks that loaned money to the PIGS.  So far all this spending has failed to result in meaningful economic growth or job creation.             Second, it is clear that the U.S. does not have the political will to cut spending or entitlements that are driving spending.  Optimists point to the fact that the U.S. had a similar debt to GDP ratio in 1946.  However, in 1946 we did not have eight decades of increasing entitlement programs and unfunded liabilities.  Our unfunded liabilities exceed our assets.  Total U.S. government spending as a percentage of GDP has grown from around 21% at the end of World War II to almost 40% today.  No country has been able to spend this much of their GDP and have sustained, vigorous growth.

Third, the proposed solutions by the present political leaders is based on Keynesian ideas of spending more government money and additional loans to prop up failing governments/banks.  These ideas have been tried not only for the last three years in the U.S., they have been tried around the world at least since the 1930s and they have failed every time they are tried.  Keynesians point to World War II, but the reality is that Roosevelt changed course on his economic policies when he saw WWII coming.  He appointed pro-business advisors and quit attacking businesses.

In order to achieve sustained growth, we need to not only cut government spending, but we need serious regulatory reform.  The present regulatory structure is completely biased towards more regulation and more intrusive regulation.  We need a mechanism that changes this bias if we are going to have sustained growth.  One potential solution would be a Regulatory Bill of Rights.

All real per capita growth is the result of increases in our level of technology.  In the U.S. this means we have to create new technologies.  There are a number of things inhibiting start-ups that created new technologies.  First Sarbanes Oxley and Dodd Frank make it almost impossible to go public today.  It is easier to gamble away your money in Vegas than invest in a technology start-up company.  Second, we have consistently weakened our patent laws, which are property rights in technology.  As a result, it takes years to obtain a patent and then your rights are much less secure than 15 years ago.  As a result, the major asset of technology start-ups has been weakened.  Third, we have one of the highest marginal and effective corporate tax rates in the world.

Last, we have a completely dysfunctional tax system.  The total federal revenues being collected from all sources at the federal level is about 14% of GDP.  We have over 3000 pages of tax laws with mind numbing complexity to collect this small percentage of GDP.  Clearly, a number of politically favored people pay almost nothing, while the rest of us are taxed at exorbitant rates.  Arthur Laffer has proposed that a 12.1% flat tax would bring in the same revenue as all our federal taxes.  This would save trillions in compliance costs.

 

1987 or 1930?

Is the better analogy for today 1987 or 1930?  Well our fate is not foreordained, but we have huge number of problems to overcome.  In 1987 the U.S. was following basically sound economic policies.  Warren Buffet made a fortune buying stocks in companies in the late 70’s and early 80’s, but if Reagan and the country had not changed course, Buffet might have just as easily looked to be the biggest sucker instead of a brilliant investor.

The odds are much more likely that 1930 is the better analogy for where we are today.  A global financial meltdown is likely to start in Europe or Japan and spread to the U.S.  The U.S. is in no position to weather this storm and is unlikely to take serious measures to withstand the meltdown even if fiscal conservatives were to have majorities in all branches of the federal government.  The most likely situation is a global financial meltdown before the U.S. can get its act together.

Welcome to Global Financial Meltdown!

 

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August 13, 2011 - Posted by | -Economics | , , , ,

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