Christian Fong

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.

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.

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.

Are we intentionally building a Brain Drain Economy?  Someday a case study may be done for why Iowa's economy seemed to be built with the sole objective of maximizing Brain Drain, despite our plentiful natural and cultural assets.  The Industrial Age is still is full swing here in the Heartland, and only a couple of regional economies have begun the transition to the modern Innovation Age.  Don't get me wrong, the word "innovation" is being swung around like a baseball bat in Des Moines these days.  And trumpeting bits of data that point to economic recovery is part of the political game.  But we must judge the results by the numbers, not the rhetoric.

The numbers for the first year of Gov Branstad's administration are not promising:

Iowa Population: +0.52% (source: US Census Bureau)

Iowa's Jobs: +0.56% (source: IWD)

When jobs are being added at the same pace as population, there is an equal chance of being out of work today as their was a year ago.  "But the unemployment numbers went down," the government might say.  Sure, because the workforce itself has shrunk, as people give up and either stop searching for a job, or as the Generation Iowa Commission (GIC) found, begin looking outside of the state.  That latter result is troubling, and accelerated by the types of jobs being added and lost.  GIC reported extensively to the public, the Governor's office and the Legislature that the key to Iowa's brain drain problem was in a particular segment of our population: those who get college degrees and enter professional, "Information Age" and finance careers.  That is, the highest earners, the future executives and the most educated are leaving, as policy and regional activity continues to promote blue collar manufacturing jobs.  How are we doing the last year?

Professional / Finance / Information Jobs: -5000 jobs, or -2.0% of sector

Manufacturing: +11,800 jobs, or +5.1% of sector

There is absolutely nothing to complain about in adding manufacturing jobs.  They are great jobs, in great places, filled by great, hard-working Iowans.

High pay and productivity are the key "first derivative" factors of economic development, predicting the pace of growth.  Innovation is the key "second derivative" factor, affecting the growth of growth, or the long-term trajectory of an economy.

Much has been written about the cycles of innovation and our new "Creative Economy" era.  Regions exhibit long-term, accelerating growth when its economy and labor markets exhibit the characteristics of innovation.  A simple metric that macroeconomists follow to measure whether innovation is taking hold in the business sector is The Labor Income Share. It could simply be called "The Innovation Index" because of its long-term correlation with the evolution of an economy to less labor-intensive, more efficient markets. How is Iowa doing, relative to the US?  Not well, but Iowa's cities can be ranked in an Innovation Index to see how various cities are doing. (Click through for rankings and commentary.)

Michael Porter, the Harvard-based foremost authority on regional growth, has pointed out that long-term growth and regional health is driven by a primary factor, "Resources flow to the areas that excel in productivity."  Productivity is the single best measure and predictor of where resources ("best and brightest" people, money, new factories and production assets, leadership attention) are placed. 

Newly available data from the 2010 Census can now identify which Iowa cities are the most productive, on a "per job" basis.  That is, I do not penalize a city for a higher unemployment rate, or those who are out of the workforce by choice.  Instead, when the average worker goes to the office, the factory, the worksite, how much value do they produce each year?  Here's the new ranking of Iowa's Most Productive Cities: (Please click through for graphs and data)

The two best places to make a living are Iowa's Creative Corridor (Cedar Rapids / Iowa City) and the Des Moines / Ames metro.  Recently released data shows that Des Moines has Iowa's best paying jobs among its top ten metros, according to recent US Census and Iowa State University data.  But their lead is slight, with Des Moines' major suburban twin, West Des Moines, and Cedar Rapids trailing only slightly behind.  This data matters.  In a state that wrestles with Brain Drain, particularly from its rural and small city areas, the Generation Iowa Commission found that salary was far and away the top reason a young, mobile professional moves to a city after finishing school.  (Click through for data / graphs)

I'm reading a fantastic document from the Council on Competitiveness, sent to me from SourceMedia CEO Chuck Peters, with whom I've had the pleasure to collaborate on regionalism efforts in the past.  It lays out a 21st century blueprint for civic leadership that transcends 20th century borders.  Recommended for reading, downloadable to your favorite e-reader: here

The role of civic leadership given as the following:

1) Tell the region's story (the same story, consistently, repeatedly, with the "main character" the region)

2) Get the right people to the table (the people who by personality and passion are driven by outcomes, not process)

3) Produce regional value (Porter: Focus on measuring, rewarding and growing productivity.  This is contrary to normal behavior of rewarding asset / capital control)

4) Build an innovation ecosystem (Made possible by a non-hierarchal culture and a network of fast-moving investors with capital capacity)

5) Establish new regional rules (The rules of respectful and open coop-etition)

6) Establish metrics (You get what you measure)

Not your typical how-to document.  This emphasizes rusults over process, but calls out the habits that destroy either and highlights concrete cases on how regionalism has succeeded.

Every primary and each caucus forces those that did not finish with the most votes to withstand the question, "Is it time for you to get out of the race?"  There are times when that is a legitimate question.  A campaign might be broke with a strategy that precludes any path to victory.  There might be a clear overlap between two or more candidates, with it clear that a segment of the population is reacting with an "either-or" decision.  The Republican contest is not at that point, and none of the remaining four should be facing that question.  For three reasons:

First: All of the candidates indeed have a "path to victory" or a strategy that does not require it.  Here's my rundown...

Pundits can talk about the demise of America, and opine about why we are no longer great.  Media elite can talk about the post-America geopolitics of the world.  But though it makes for good press, preying on our fears of decline and the loss of the American way, the numbers tell a different story. 

America is still the land of opportunity.  It is still where the world's best and brightest come to improve the lives of themselves and their children.  The numbers don't lie.  Where are they coming from?  Graph of the day...

For the past century, a politically independent central bank has proven, at worst, "the least bad thing" for long-term economic stability.  A reading of monetary policy history, in particular Friedman's work, gives an appreciation for both why and how it works.  We can thank the Fed for keeping borrowing rates predictable.  The low volatility leads to lower rates, as the imbedded option prices are lowered.  The lower rates then keep inflation at bay, even as the Fed pumps up the money supply like a weather balloon, right?  And low inflation keeps the stock market and broader economy from a downward spiral, right?  That's the traditional argument, anyhow. 

But this is where a pair of economic findings in the last few days step in. The first link started the discussion a couple of days ago, showing the link between inflation and the stock market since the beginning of 2008 (i.e. during the Recession).  The second link, from a blog posting this morning, broadened the study to the beginning of 2003 ...

Five things I think I learned from yesterday's Iowa Caucus:

1) Iowa as Presidential filter.  Every four years we are reminded that Iowa does not consider its role as "kingmaker."  Once again, the message from all corners was that Iowa could support various candidates that had a unique message, 50-state viability, or great retail-politics dedication.  The intense face-to-face scrutiny we give the candidates as individuals exposes flaws that no camera or stadium event can.  Ignoring Huntsman (as he ignored Iowa), as of this morning, it looks like four candidates will move on.  Iowa does its job well, and deserves to keep it.

2) Media Rules, but Social Media rises:  The traditional media made the rules, through its debates that were masterfully scheduled like a fall prime-time television, reality-show series.  Both Santorum and Gingrich were the beneficiaries of strong debate performances, and Perry ("Oops") and Bachmann ("I'm a serious candidate!") had media/debate gaffes.  But there was little doubt that Ron Paul ruled the social media debate, in keeping with his youth-dominated base, and I think it propelled him to his strong finish.  Does media rule the process?  Yes. But the shift to social media is real, and Iowa showed that either can provide a winning media strategy.

3) Romney is not inevitable.  By Thanksgiving, I suspected Romney would "pop" in the late days, due to his 20% support base, the strong Romney vs Obama polling, and the sense that the up-and-down polling meant that others were being considered and rejected.  I was wrong.  Romney never did "pop", and his caucus support was just about the same in 2012 as in 2008.  I talked to many people who said, "I don't really know who Santorum is, but I might as well."  Really?  The Romney campaign will spin, but it is clear that Romney is having trouble connecting with GOP voters.  Going forward, a smaller field gives someone the opportunity to consolidate support. He's still the front-runner, and time will tell if it's a fatal weakness.

4) Negative politics still rules Iowa.  Gingrich stayed positive...it didn't work.  What works?  Millions of dollars of attack ads.  Forget the polls, the focus groups or the polite Sunday conversations.  Iowans have been trained to speak kindly and talk about sportsmanship and loyalty, but dig a little and one might find Iowa is more Roman than Greek: they prefer blood sport in the arena to polite discourse on Mars Hill.  (Santorum stayed positive, but did not face the attack ads...he will now.)  By the way, I lived for five years in New England...it isn't much different up in Yankee country!

5) Gingrich as McCain?  The parallels are impossible to ignore: Santorum as Huckabee, Gingrich as McCain, Romney as Romney.  Gingrich and McCain?  Both carry a bit of maverick unpredictability.  Both had campaigns left for dead, only to come back for decent 4th place caucus finishes.  Both had national viability, strong name ID and broad support, leading to a lower need for an Iowa win.  Plenty of reasons to reject this comparison: 1) McCain put in a minimum Iowa effort in 2008, while Gingrich worked hard in 2012, 2) Ron Paul is still very much in the mix and 3) McCain is about to endorse Romney.  Still, the similarities are hard to ignore.

Bloomberg News reported on the $586 Billion "bailout" program executed by the Federal Reserve, with terms that make it impossible to track who got the money.

The report is here.

Ah, the problems with a secret half-trillion dollar public program are many.  Increased chance of fraud.  Too little public accountability.  Lack of public knowledge about which institutions needed it (most of us would care if our personal savings were in a bank being propped up by the Fed).  But consider this basic Free Market reason:

Consider a system with two banks: One, SafeBankCo, offers products to the market at a slightly higher price, required by ultra-safe banking practices.  RiskyBankCo does the opposite, and offers lower prices through much of the economic cycle.  When times get tough, RiskyBank goes to SafeBank to transfer risk, and must pay the higher price to do so.  The system not only can accept the two levels of risk, but over the long run there should be an equilibrium by which RiskyBankCo has more market share (i.e. lower prices attract more customers) but transfers profits to SafeBankCo during tough times.  In fact, there is nothing inherently wrong with either business model.  SafeBank foregoes profits during the boom years, then makes it up in recession years.  RiskyBank knows it will have to pay excessively high prices for protection during a recession, but with proper management has reserves built up during boom years to do so.

Nothing is wrong, that is, until the Fed sets up a secret $586 billion program.  Now RiskyBankCo has no need to go to SafeBankCo, and instead gets propped up at continued "cheap money" rates.  SafeBankCo, realizing that their business model is obsolete has no choice but to take risks at the same pace, in the same practice, as RiskyBankCo.  The existence of the secret bailout programs creates a race to risk for both banks.  In our example it is just two banks, but the same holds true for an example of two hundred banks.

Public "bailout" at least has the reputational cost associated with taking bailout money.  Secret bailouts do not.  By removing a business reason for any bank to adopt the SafeBankCo business model, the entire system is made more risky.  Who bears the risk?  The people, the currency, and the system itself ultimately must pay the price for the risk, though almost always by pushing the price into the future.

It bears repeating: There is something grossly immoral about a system that externalizes costs onto the future to pay for the systemic fiscal addictions of today.

Four years ago the generational divide might have been best captured by whether one had a social media account.  Today, that divide is better measured by whether one can get a job.  The recession has been brutal on young people.  Surprised?  Politically-savvy economists wouldn't be, since the political ruling class is bound to value the predictable votes of older people rather than the transient youth.  But it is going to be hard to imagine a youthful tidal wave of support for any incumbant politician tied to the inabilitily to turn energy, education and effort into progress.  Just how bad has it been? 

Since November 2007, about 6 million people are out of work.  But the picture has brightened recently for older Americans.  The younger ones are still taking it on the chin, especially those who have just entered the workforce.  Imagine a new family or a fresh college graduate, with no back-up assets, a new baby on the way, college debt and just trying to get going.  The numbers from October-11 to November-11:

Age 16-19: +18,000

Age 20-24: -145,000

Age 25+: +405,000

Remarkably, jobs lost by teens were 25% of the jobs lost in the Great Recession, despite them being just 3% of the workforce.  So we told them, "Stay in School!  Go to college, as the economy has changed."  Now they are graduating from community colleges, some from four-year programs.  Just in time for...nothing.  Fewer jobs for this generation means the Generational Divide continues, unabated by recovery for the rest.

See the graph at the blog "Political Calculations."

With all due respect to the other GOP candidates, the final 5 weeks before the Iowa Caucus are suddenly looking like Newt Gingrich and Mitt Romney.  I took a moment this morning to find their economic plans, because it is coming time to drop the charade of "politics as entertainment" and think long and hard about who will make the best President and CEO of our country.

The Gingrich Jobs and Prosperity Plan

Romney's Plan for Jobs and Economic Growth

Which one makes for the best plan in our economic crisis?  I'd suggest reading them with an eye toward similarities first, because the media surely focuses on the differences. After spotting the similarities, then look through for differences.   Finally, take the differences, and look for which of them are done through Congressional action (less likely) and which through executive action (more likely).