Christian Fong

Battling Recessions - Debriefing 2011

The rating agency and economic studies group at Fitch published an analysis of the impact of battling the recession.  (I received this from them via email, and it is likely available on the Fitch website.)  Their findings are notable, and worth “remembering for next time.”

 - The [studies] indicate that stimulative fiscal policy contributed approximately 2% to GDP growth over the past 12 months, but at the cost of rising U.S. budget deficits, which have equaled roughly 9% of GDP over the past few years.

 - The impact of low policy rates and asset purchase programs were roughly comparable, with each contributing about 1% to GDP over the past 12 months (according to the Oxford simulations).

My reaction to this is that the Federal Reserve’s actions are so much more effective as to make the idea of massive deficit spending, per Keynesian economics, questionable.  This is in keeping with other economist’s more theoretical findings, that suggest the same.  Whether the Fed should have been so involved is a separate question, and one that is especially politically interesting.  Adopting a utilitarian perspective, I think it is too soon to tell if the Fed has the knowledge and discipline to be able to hit the brakes with substantially tighter money policy.  Effectiveness in the recession may be linked to profligate and extended easy money policy; a disaster in the end.  But from an economist’s view of simply comparing the effectiveness of competing tools in the Great Recession, the results are pretty clear.

Remembering Columbine

A break from blogging over the past month, as I have been up to my neck in venture capital “roadshow” mode.  Worth breaking from it today to remember the tragic murders at Columbine (CO) High School, on a sunny day on April 20th, 1999.  Some have used the word ‘senseless’ to describe the events.  I believe that the redemptive power of the actions of the victims and their families make that word impossible to ascribe to the day.

It makes sense that regular kids, trained to lead and protect by caring communities and loving parents, would put other people’s well-being before themselves and turn into heroes.  It makes sense that teachers, who had already given their careers for the sake of kids, would shift from educator to protector.  The most famous of the victims might be Rachel Scott, a young girl, whose diaries later revealed was struggling with loneliness and a lack of friends.  She turned toward faith and an inward spiritual journey that culminated in a journal entry about the personal cost of her commitment to Jesus, written exactly one year before, “it’s all worth it to me…if I have to sacrifice everything I will.”  When she lay wounded from the initial spray of gunfire, the murderous students returned for her, one grabbing her roughly by the hair and demanding “Do you believe in God?”  She answered, “Yes.” He put the gun to her head, and killed her.  Her courage to stand for what she believed, despite the loneliness that many young people experience, made sense because of her faith.

Senseless?  Evil perpetuates itself by having us believe that we live in pain, in darkness and in hurt that has no sense.  Columbine High School taught us otherwise.  Even in pain, there is redemption.  Even when evil forces its way in, light shines through.

Demographics and the Economy

Is the combination of youthful ideas and powerful money/business interests the ultimate regional economic powerhouse?  That has become an established understanding among many economic development professionals.  But why should it be true?  (Wanting it to be true is not enough, of course.)  An in-depth study of how demographics impacts economic growth was published in the most recent Financial Analysts Journal adds scientific rigor to this theory.  Specifically, the authors can scientifically link specific age groups to specific economic outcomes.  None of them should be a suprise:

Children: Do not add or subtract to GDP.  That is, they encourage parents to produce as much as they consume.  Imagine a young family spending their full paycheck, and working hard to keep food on the table and tires on the minivan.  They aren't getting ahead, but pouring themselves into their young kids.

Young Adults (25-40 y/o): The undisputed driving force in GDP growth.  Regions that are losing their young adults, especially the risk-takers, the educated and the skilled, are sacrificing future wealth. 

Middle-aged adults (40-55 y/o): The engine for wealth creation.  By this age, they have acquired the tools of productivity (great ideas, venture capital, relational networks, and business skills) and can turn it into wealth.  Innovation without wealth cannot last long.  Eventually innovation will flow to regions that CAN turn it into wealth.

End-of-career / retirees (55+ y/o): Harvesting phase of an economy as this age actually grows wealth by "eating the young".  GDP falls, even as they create wealth for themselves and they take chips off the table (i.e. monetize production assets, rather than reinvest into future growth).

Implications: Perhaps this becomes an obvious driver of successful regional economies: Some cities have youth and innovation: Cambridge, MA, Boulder, Palo Alto, Iowa City, and Durham/Chapel Hill.  They pair with a larger business sector that has established wealth and older demographics: Boston, Denver, San Francisco, Cedar Rapids, and Raleigh. The combination of youthful ideas with business/money becomes the ultimate regional economic driver.  It also drives home why the parallel concerns of Brain Drain and an Aging Region are two sides of the same coin.

Link to article here.