Nobel-prize winner, Joe Stiglitz says the stimulus should invest in the innovations that can power our future, and not just breathe life back into the industries and economic patterns of the past (via Mark Thoma).
“I’ve been a bit astonished that all the discussion around the private-sector stimulus has centered on infrastructure … Bailouts, too, are aimed at correcting mistakes of the past, so they are backward-looking. We would be much better off spending our money forward-looking. If we spend $700 billion on new technology and innovation, we’d have a stronger, new, real economy. Up to now, the discussion has focused on the sectors that have been mismanaged rather than the sectors that are creating our future.”
I agree wholeheartedly. But, infrastructure broadly construed is critical in creating the demand required for new industries to develop and new innovations to spring forward as my University of Toronto Chris Kennedy notes. Innovation expert Christopher Freeman long ago argued that innovations continue during crises but tend to bunch up due to insufficient demand. The way out of crisis is to reset the market by opening up new patterns of demand and broad new patterns of lifestyle and consumption. This requires changes in economic geography, in the physical landscape, and the ways we work and live. This is essentially what post-war suburbanization did in the United States, what the canals and railroads did before that, and what propelled London after the great fires of the 17th century. So it’s more than investing in the innovations and technologies of the future. And, in fact, politics can badly skew these kinds of investments – as is evident right now with the bailout – because older, failing industries wield considerable political power, as Mancur Olson long ago identified.
History seems to suggest that broader public investments and regulatory and rule changes which spur new modes of transportation create new development patterns which intensify the use of land and the built environment, and set in motion new patterns of demand and consumption required to reset the economy for long-run recovery and growth.
So when and where do we have that conversation?
January 4th, 2009 at 11:01 am
“older, failing industries” – more labor-intensive, lower wage?
“sectors that are creating our future” – Internet, alternative energy, agribusiness?
January 4th, 2009 at 11:39 am
We are suffereing a similar problem in Spain.Both of them, the Central and the Regional Governments are putting into motion a public investment scheme adressed to spend public money, no matter in which sector or infraestructure are invested. This lack of strategic thinking could led us to a longer reccesion than it was initially forecast,and our unemployment ratio is close to 14%…and growing…
January 4th, 2009 at 8:28 pm
Infrastructure spending is necessary anyway so it only makes sense to spend on accelerate already planned infrastructure improvements to stimulate the receding economy. But when we talk about spending $1 trillion dollars, we’re talking about game-changing spending tantamount (since it’s playoff time again) to an NFL franchise using 5 years worth of draft picks in one year. If those picks are bad, the future will look atrocious. If the picks are good, the future looks bright. We are about to reset our economy, for better or worse; and not just the US economy but the global economy. If it is not done properly, intra-world and inter-world wars could ensue as the global economies collapse. So we should all be anxious to see what this $1 trillion dollars in spending actually entails.
Beyond obvious infrastructure projects, the goal should be getting dollars into the hands of the talented younger would-be entrepreneurs so that we seed the next generation of global companies. Assets can be re-shuffled and re-organized but the talented must have a means (the capital) to re-organize what exists and bring new things to life. And also into seeding businesses in the new burgeoning fields. A new commitment to NASA and science and technology generally would also be a fantastic first step.
January 4th, 2009 at 11:29 pm
The devil is in predicting what are the technologies of the future. The best bets in 1970 might have been mainframe computers. If several billion government dollars had been poured into improving mainframes, would it have short-circuited the micro revolution?
The most important infrastructure right now is probably the internet, and making it faster is probably a good investment. But some whiz kid may come up with a better technology for doing it after we’ve heavily committed to an old one.
And innovation comes in different forms. Steve Jobs built a better computer and operating system. Bill Gates built a better business model. The technology solution didn’t win the computer market.
One of the points in the article is that America is great at failure, our economic system fails and learns from it — and generally the cost of failure is borne by investors. But if the government bets heavily and loses, the political recriminations will be tremendous.
So yes, infrastructure of various kinds. And maybe innovation, but carefully.
January 5th, 2009 at 5:39 am
In the UK, there is talk of proposed bailouts of Land Rover/Jaguar are being conditional on massive increases in R&D on green automotive technology.
This is fine, but as Richard points out, will be a waste of money if there isn’t the demand for it: if electric cars need power points to be charged, and there are no power points (for example) then it’s a waste of money if the research just focusses on the cars.
Legislation can also stimulate demand – keeping with the same example, the EU is talking about a massive fine on the UK for persistently failing to tackle poor air quality in cities. The incentive of local authorities to avoid fines that will inevitably be passed on from central government (and then onto individuals) may come at the right time to stimulate demand for electric vehicles.
January 5th, 2009 at 6:24 am
How about $1 trillion spent on electric and water solar panels on private and/or public buildings all across the southern USA? Lots of manufacturing, distribution and installation jobs, together with huge long-term savings in green-house gases.
January 5th, 2009 at 9:31 am
But then if it was state investment, who would sell the power? If the state set up its own enery company, what would existing energy providers have to say about that?
Would the state then sell its investment? And then whom would they sell it to and who could afford such a massive outlay, or who could be able to raise enough credit at the moment?
And if you’re talking about solar panels on buildings, surely it’s far more efficient to just build massive solar fields in the desert, as that reduces sunk costs in infrastructure, reduces maintenance liabilities and the headache of having to get indemnities from every single building owner that the state wants to put a panel on.
Further compounding Mike’s quick fix solution (although it is a good one, I’m only playing devil’s advocate!) is who on earth has $1 trillion worth of solar panels hanging out in their warehouse? If competing solar panel manufacturers new there was $1tr of demand for panels in the US, but they were excluded from it because the US government was setting up its own manufacturing company to build them, then they’d be pretty gnarly – after all, you set up a power company from scratch, you invest in R&D, you attract talented staff and then whoops the US government pulls the rug from under you and bypasses all of that talent, time, investment, energy, resources…
January 5th, 2009 at 10:07 am
Carter should have let Chrysler fail. Talk about the law of unintended consequences, GM & Ford probably would be better off. I want to reiterate that we should NOT be bailing out the automakers (and by extension the dinosaur unions), or loaning them money they never will be able to repay.
The car industry is a dieing sector, we no longer have any untapped markets in the developed world, we are simply in replacement mode. As for that matter, any R&D is wasted as long as it is used for anything other than developing electric battery cells.
January 5th, 2009 at 11:24 am
Michael, great piece. That’s why I say do the obvious things (bridges, light rail, selective roads) and then put the SBA programs on steroids so that the entrepreneurs can do their thing. We will never know how many Apples and Googles never started because the visionaries of the companies that never came to be could not find access to capital. Government should provide the means to the solutions, not the solutions themselves.
Investing in NASA is different however because the technologies and scientific breakthroughs will echo through the economy and be used in new ways. I don’t think it’s any accident that the whole tech revolution that this country led in the 70’s and 80’s followed the commitment to NASA during the ’60’s and ’70’s. And yet, here we sit, without a next generation space-shuttle or space-station. How much innovation on the economic level has been lost due to the failures to re-invest in those space programs. America has always been propelled by the quest to be pioneers and our commitment to space should be the same. Indeed, the super-power space competitions between the US and USSR probably propelled all of society several decades ahead on the technology development frontiers.
January 5th, 2009 at 1:22 pm
I still think the best “stimulus” would be to put payroll taxes on hiatus for a few quarters. It would benefit both workers and their employers. Recent economic research shows that tax cuts have 3 times the stimulative effect of spending, so we would get a lot more bang for the buck. Of course, then the politicians don’t get to pick the winners and losers. There is no “pay to play” with tax cuts. Blagojevich gets nothing. Richardson gets nothing.
Regarding the internet, I would be very wary of putting public money in that field. What would be better, what would be game changing, would be to open all the spectrum that is being freed by the transition to digital television, and make it unlicensed, just like the 900MhZ and 2.4 GhZ bands.
Think about it. What has had more impact on society? Unlicensed spectrum that is used by wi-fi and cordless phones, or, say, licensed spectrum used by the cellphone companies to provide internet services (like 3G).
I don’t think that there is any question that, as cool as 3G is, wi-fi has had much more of an impact. What would wi-fi on steriods (which could be done with the television spectrum) do for our society? Those frequencies travel much farther than the existing ei-fi frequencies. You could build out pervasive wi-fi networks with a lot less equipment.
January 6th, 2009 at 8:06 pm
At the very least the money should not be spent on roads and highways, which will only make things worse when gas prices go back up in a year or two. The money should be spent on public transit, or the electric grid modernization that Obama talked so much about, or other future technologies, not an outdated system of highways that only encourage sprawl.