
A Capitalist’s Dilemma, Whoever Wins the Election - iProject
http://www.nytimes.com/2012/11/04/business/a-capitalists-dilemma-whoever-becomes-president.html?pagewanted=all
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jwallaceparker
> The Fed has been injecting more and more capital into the economy because —
> at least in theory — capital fuels capitalism.

Free markets fuel capitalism.

The Fed's market manipulation is abhorrent to pure capitalism; it throws the
elegant system of free competition and trade horrifically out of balance.

~~~
guylhem
I'm a libertarian and I love the free market and pure capitalism.

OTOH, the great depression made a strong case for an intervention by
governments at the macroeconomic scale - if only to smooth out bumps that
could certainly sort themselves out in the long run, but which could still be
uselessly painful for tens of years.

Fiscal policy is IMHO wrong, but monetary policy is not that damaging,
especially since it doesn't do much damage to real assets (like say gold)

~~~
bennesvig
The government helped create and prolong the great depression, from my
understanding.

Great book on the subject: [http://www.amazon.com/FDRs-Folly-Roosevelt-
Depression-ebook/...](http://www.amazon.com/FDRs-Folly-Roosevelt-Depression-
ebook/dp/B000XUBEL6/)

"As already noted, major factors bringing on the Great Depression were the
severe monetary contraction that the Federal Reserve presided over, unit
banking laws that made it almost impossible for small-town banks to diversify
their portfolios, high-wage policies that made it more expensive for employers
to hire people, the 1930 Smoot-Hawley tariff that throttled trade, and the
1932 tax hikes that took money out of people’s pockets."

~~~
sageikosa
Banking, education and healthcare: all too important to be left in the hands
of government, if for no other reason than they are too important to each
individual to be left to the whims and ignorance of the general electorate
and/or their representatives.

------
richcollins
_It’s as if our leaders in Washington, all highly credentialed, are standing
on a beach holding their fire hoses full open, pouring more capital into an
ocean of capital. We are trying to solve the wrong problem._

Perhaps this is the cause of the problem and not just a poor solution to the
problem.

~~~
001sky
One issue people continually fail to grasp is that low rates are setting a low
bar for capital investment. The result is shitty
assets/investments/businesses.[1] People will only jump as high as the bar
requires.

Think of the analogy of your Kid: Would you set the bar low and expect the kid
to excel and get into Stanford? No. Thats now how it works. Without coaching,
encouragement, benchmarking, and measurement, success is the exception not the
rule.

Why is this so hard for DC to grasp? The empirical datapoint on this is
clearly Japan in the 1990's. Ultra-low interest rates, and ultra-cheap capital
might spur investment, but not <profitable> investment. Twice as much
investment at 1/2 of the return on capital is not moving you anywhere.

That's a major part of the problem. USA have been facing this since the
Greenspan stimulus following the Dot-Com crash in the early 00's.

_______

[1] This might work OK in a short run, of 6 months or a Year, but not over
3-5-10 years -- then you are talking entire capital investment life-cycles.

~~~
guylhem
I'm sorry but that seems to go again the currently admitted way the IS/LM
model works <http://en.wikipedia.org/wiki/IS/LM_model>

A high interest rate means firms reduce their investment spending to avoid
high interest payments ; or said otherwise rising interest rates lead to
crowding out of private fixed investment.

Look at the IS curve on <http://macrotutor.weebly.com/2-is-curve.html>

(but I might be wrong - I'm quite new to macroeconomics)

~~~
001sky
_I might be wrong - I'm quite new to macroeconomics_

IS/LM and is not something that I would hang my hat on, here.[1] The reason is
that the performance evelope of the firm must be considered micro-
analytically. Ie, you need to take the perspective of the firm as a composite
of capital investment projects. The aggregate value of the projects will be
the value of the firm.

What impacts the decisionmaking of the firm? The spread between the cost of
capital and the return on capital. For a fixed opportunity set of projects, a
lower cost of capital will result in _incremental_ investment provided that
capital is available and capital projects are available that exceed the cost
of capital.

How does one get these projects? In the real world, these are "hunted" like
big game. These projects are either invented by engineering (new widget X) or
they are extensions of current product (widget Y) that are sold to new clients
(Z) by sales or bus dev.

Internally, the "green light" for these hunting parties is a hurdle rate (set
to an average expected return-average cost of capital=some threshold level).
Because there is uncertainty[2] in these big-game hunting expeditions, over
time they will converge to the least amount of work necessary to clear the
threshold. So, by this logic, the quality of projects will decrease over time
as the threshold of project quality declines.

On the other hand, the external environment will also drive down this
potential. Other companies will be increasing their hunting parties,
increasing competition and reducing the probability of success.

The combination of these two factors, will over time decrease the performance
envelope of the hunter/gatherer parties (be they engineers or sales/bus-dev).
The issue is that this decline may have persistent effects (ie, learning by
doing cuts both ways.)

________________

[1] See my footnote earlier. The IS/LM model assumptions and general
methodology will not capture the recursive and inter-temporal effects on the
opportunity set of projects that will follow from interest rates approaching
zero artificially (ie, by _fiat_ stimulus).

[2] And not insignificant cost.

~~~
guylhem
Very interesting. The "innovation" during low interest rate periods would
still happen, but as you say would be a lesser kind of innovation, and with
lasting persistent effects.

This could explain the current divergence in the GDP per capita curve (usually
log linear) if we follow the idea that a continuous pace of innovation is
necessary.

A quick wolframalpha graphing of the GDP per capita curve and federal funds
rate shows in fact that the GDP per capita curve has inflections when interest
rate quickly fall or go below 2.5%.

But considering that interest rates are used by the fed to try and fix the
economy and thus highly correlated with high and lows, I don't know if there
is a good way to check for this hypothesis.

It could also have bad consequences, since it predicts that countries with low
interest rate (currently EU, US, JP) will experience a lesser form of
innovation with lasting effects - and unfortunately I don't see interest rates
going up, not with the current focus on low inflation.

It still is a very interesting concept. I would like to know more. Is there a
name for the model you are describing? (or some links)

------
chubbard
Man this article has created all sorts of strange discussions. I've watched in
on G+, Facebook and now here, and eventually they get soooo derailed talking
about odd ball stuff not really related. I guess this means Mr. Christensen is
onto something stirring up this much discussion.

One thing is common among all of the discussions which is the fixation on the
tax proposal, but I think it was just a swag at what a policy might look like.
I thought the real interesting part of his observation is that we are
rewarding efficiency innovation too much and transformative innovation almost
nothing. Try and develop a new power system not based on fossil fuels and see
how much money people want to give you when your time horizon is 10-20 years
out. It is the transformative innovation that recreates jobs for the jobs lost
through efficiency innovation. I think that is the more important discussion
over a regressive capital gain tax. Remember, most entrepreneurship would
qualify for preferential capital gains taxation (except for ISO options oddly)
because even the efficiency innovation takes more than 1 year to payback.

His tax would mostly affect wall street and the trader mentality: HFT, ETFs,
day traders, etc. Remember people buying or selling securities don't actually
give companies money directly. Companies only get more money when the issue
more shares (or hold their own shares). If I buy a share for 1 day or 10 years
the company doesn't benefit at all from my action.

If you look at the green energy movement a few years back was going to be very
transformative, but VCs backed off when it was hard to turn a profit as
quickly as information technology. It's that kinda of calculus that needs
changing if we really want to do what Christensen is outlining.

------
dmritard96
1\. Part of this article reminded me of Jacque Fresco talks
(<http://en.wikipedia.org/wiki/Jacque_Fresco>). Well at least the part about
efficiency and the effect on jobs. I am probably just being an annoying
futurist but honestly, I don't see employment problems going away. Manned toll
plaza's -hah. Self checkout - more and more common. Vending-machine-like fast
food chains - not yet but wouldn't be a surprise. Self stocking
shelves....blah blah blah. This will take a while but what are we going to do
when low to mid skill jobs are less and less needed?

2\. I hate to be the consumerism party pooper but I think pointing out that it
has been 60 months and we still are not at prerecession levels to be a good
thing (ducking for cover). The reason we were at those levels is partly
because we were operating unsustainably - spending more than we had (or at
least more than we should if we want retirement savings) and giving out
mortgages and loans to people that couldn't afford them (obviously there are
many more reasons...).

~~~
cynicalkane
There is no such thing as _spending more than we had_. The housing boom didn't
consist of houses borrowed from a cosmic banker, whom we now have to pay. A
nation cannot spend anything it doesn't "have" except by trading with other
nations, and trade does not remotely explain the deficit.

As Friedman might say, monetary unsustainability is purely a monetary
phenomenon. Even Keynesians know this and in fact that is why they tend to
call for higher inflation.

~~~
dmritard96
_"The housing boom didn't consist of houses borrowed from a cosmic banker,
whom we now have to pay. "_

We don't have to pay because people foreclosed and filed for bankruptcy
protection.

 _A nation cannot spend anything it doesn't "have" except by trading with
other nations, and trade does not remotely explain the deficit._

When did we start talking about the deficit and why are you suggesting the
deficit is related to the economy collapsing/recovering (not saying it isn't)?
To be fair, when I mentioned retirement savings I wasn't really thinking
_public_ programs, probably should have been more specific.

I think many would agree that irresponsible loans were given to people that
didn't have the means to pay them off, especially if (when) the adjustable
rates adjusted. If housing prices don't get back to prerecession levels for
instance - well I think thats a good thing. People where inflating the markets
that they really had no business being in and banks gave them mortgages for
these markets wearing a grin...

------
stretchwithme
Capitalism is a system where bad ideas and companies fail. They aren't propped
up by government.

The Federal Reserve has been shoveling money into large banks, literally
lending trillions of dollars to them at times. Interest-free, of course. Then
they lend it the US Treasury. Or leave it in their Federal Reserve accounts
and collect interest there.

With such a sweetheart deal, anybody could make a profit. How is it these guys
deserve bonuses?

One can only conclude that our government has been completely captured by
these guys.

------
rzreik
An empowering innovation we can expect int he next 5 years is a shared value
business model. One that will free up a lot of the corporate cash of today and
bring better returns for business and society. Michael Porter of HBS has been
working on an academic framework.

------
guylhem
The ideas are interesting, but there is one really big suggestion: "we should
instead make capital gains regressive over time" - this is the single best
idea I've heard recently!

It would encourage self-sustaining growth instead of fly-by-night profits,
made in the present at the expense of the future - ie let the market sort out
which sectors are more likely to bring better long term outcomes, considering
the current focus on short-term is a negative externality that should be fixed
by government intervention.

The author also properly acknowledges that increasing tax on the top 1% will
only be redistributive, and increase consumption - which might certainly have
better effects on consumption than leaving that money to the top 1% who might
keep saving it while there is no current shortage of capital.

But that is only a mechanical property of the progressive tax scheme (lower
tax for lower incomes), which makes the redistributed money more likely to be
spent instead of saved (or paid in tax) - yet as the author points out trading
consumption for consumption is pointless given the current state of the
economy.

It's quite a interesting time.

It seems like the current situation is not just a demand shock which can be
treated with Keynesians stimulus, but a new kind of shock based on a slowdown
of the progress of technology - especially of the "empowering kind".

I wonder how this will make us reassume the traditional models such as Solow
(technology drives long term growth) or Romer (technology and education),
since it now seems there are different kind of technology and education that
we should invest in - and some that we should consider as negative externality
(like humanities - I have nothing against such studies, but they should not be
on the taxpayer dime)

Introduction to Solow model :
<http://en.wikipedia.org/wiki/Neoclassical_growth_model>

Introduction to Romer model :
<http://en.wikipedia.org/wiki/Endogenous_growth_theory>

~~~
jacques_chester
> this is the single best idea I've heard recently!

Taxes aimed at changing behaviour are generally considered to be bad taxes.

Firstly, you may not like the outcome. Changing the entire time-and-capital
structure of an economy is Serious Business and is going to be utterly
unpredictable (if it were predictable things would be more stable. They're
not).

Now, suppose it turns out to be a dumb decision. For example, say that some
unforeseen feedback loop pops up between overdraft facilities and capital now
sitting long-term because of tax changes. Suddenly overdrafts become even more
difficult for small businesses to obtain and voila, new cash crunch.

Even if it does more harm than good, you've created a powerful constituency
for it. Bond market funds, index funds etc are now all in favour of the new
tax rules and will lobby with great vigour to keep it.

Now, this is true of every tax ever. But the reason economists counsel against
taxing _for non-revenue policy purposes_ is because every tax has
externalities that are unrelated to the direct incidence of the tax. You want
to minimise those as much as possible.

Incidentally, the tax system already has consequences. For tax reasons that I
simply don't understand, Australian corporations tend to be keen on paying
healthy dividends and American corporations focus more on driving up the stock
price.

> But that is only a mechanical property of the progressive tax scheme (lower
> tax for lower incomes), which makes the redistributed money more likely to
> be spent

The Australian experience has been that instead of spending the money,
Australians are using it to pay down debt. Fine as far is it goes, but hardly
the pump-priming that everyone was hoping for. There has been a seismic shift
in debt/spending preferences across the population.

> but a new kind of shock based on a slowdown of the progress of technology

The long term trend of American GDP is stunningly linear[1] (edit: log linear
-- actually exponential, I fail graph-reading forever); the only real
deviation in the past century has been the Great Depression and WW2, a pair of
connected economic earthquakes. We're talking about the 120 year period which
included the widespread use of radio, television, highway systems, air travel,
computers, the internet, modern medicine including antibiotics ... the list of
literally _revolutionary_ changes that quickly become blasé is very long
indeed.

Yet what we see today as monstrous fluctuations are within trend. Perspective
matters (cue someone talking about the past 5000 years ...).

[1] [http://skepticlawyer.com.au/2012/10/27/the-ever-
sharpening-c...](http://skepticlawyer.com.au/2012/10/27/the-ever-sharpening-
crisis-of-capitalism/)

~~~
guylhem
I don't think with the [1] graph that use a _LINEAR LOG SCALE_ for the Y axis
we can talk about a _LINEAR_ growth of GDP per capita as you do.

It's more like an _EXPONENTIAL_ increase!!

Also, if you look at the trend, the recent decline is totally unprecedented -
except maybe just before the great depression (the small cut over 1914) and
during the great depression.

Considering the decline happened even with a very strong stimulus - and was
_NOT_ fixed by the stimulus, I guess we have many reasons to be worried about
this slowdown in the pace of growth (and technology).

A tax change may not usually be a good idea - just like a keyneysian stimulus
looked weird and was even initially though to be damaging during the great
depression.

Desperate times call for desperate measures. We are not there yet, but at
least having a refreshing new proposal (regressive tax based on the duration
investment spending is kept) is IMHO valuable, if only to have another tool we
can use besides the traditional "progressive tax+redistribution to increase
consumption".

BTW the Australian example you give is quite interesting. May I ask you for
some links ?

~~~
jacques_chester
Links to what?

------
brucehart
What are some empowering innovations that we can expect to see developed in
the next few years? The only one that immediately came to mind for me was 3D
printing.

------
jacques_chester
If I may use a single data point, US fiscal and monetary policy is broken.
Compare the US experience with Australia:
[http://skepticlawyer.com.au/2012/10/29/time-enough-for-
succe...](http://skepticlawyer.com.au/2012/10/29/time-enough-for-success/)

