Tag Archives: economy

Education Trumps Entrepreneurship

There is a growing trend among universities to devote resources to studying entrepreneurship. This trend is primarily focused in the business and engineering departments, but it is spreading inexorably across campus. It seems as if everyone wants to create a new class of entrepreneurs. This impulse is understandable; after all, if you are the university that graduates the founders of the next Google, there are big donations in your future.

But this focus on entrepreneurship doesn’t come without costs. Universities generally don’t have limitless budgets, so if increased resources are flowing to entrepreneurship studies, that means resources aren’t flowing into other departments. At my alma mater, Stanford University (see below), our alumni magazine seems to be constantly writing about new initiatives to train entrepreneurs, but it almost never talks about a new program in English or history. I think that universities’ movement toward entrepreneurship has gone too far.

Not that entrepreneurship is a bad thing. If people want to start companies, that’s great. I’m happy that companies like Google exist. And Amgen, and Hewlett-Packard, and even General Electric, all of which were started by entrepreneurs. But notice that none of those companies were started by people who had studied entrepreneurship. In fact, they were all started before this trend in teaching entrepreneurship had even begun. It’s not as if this country had a serious lack of entrepreneurs before universities started training them.

But more important to me is the fact that there is more to a university education than just training for a future job, whether as an entrepreneur or engineer or ethicist. College is also about producing well rounded people, who can analyze life in a variety of ways, who are prepared to be good citizens of their country. And I’m not the only one who thinks that way. Thomas Jefferson founded UVA with the goal of “elevating the views of our citizens generally to the practice of the social duties and the functions of self-government.” John Adams thought that education was so important that he put it in the Massachusetts constitution:

Wisdom, and knowledge, as well as virtue, diffused generally among the body of the people, being necessary for the preservation of their rights and liberties; and as these depend on spreading the opportunities and advantages of education in the various parts of the country.

If people want to start companies, they will certainly do so. They always have. So let’s not waste their four years of college making them “better entrepreneurs,” as if we even know what that is. Let’s just make them smart, well-educated people, and the entrepreneurship will inevitably follow.


The University Isn’t Going Anywhere


There is a lot of talk going around about how universities are broken, and Silicon Valley is going to put the Ivy League out of business. Certainly change is afoot, and continued tuition hikes at twice the rate of inflation are ridiculous. Online universities like Udemy and the Miverva Project are interesting, and may even succeed, depending on whether success is measured in teaching students or in making tons of money. But if success is measured in pushing the existing elite universities out of their current position, don’t hold your breath.

Kevin Carey wrote a piece in The New Republic saying how the roster of leading companies has completely changed over the last century but the roster of leading universities has not. American Cotton Oil is gone, but Harvard remains. Carey states that this is unsustainable; education should be as prone to disruption as business.

But there is a deep flaw in Carey’s analogy. Companies go out of business mostly because people no longer want their products. When was the last time you bought cottonseed oil, or film for your camera? But people still want what universities are offering, especially elite universities. Is education still valuable? Yes. Is a Harvard degree still valuable? Yes. I don’t want any cottonseed oil, but I sure want my kids to get a Harvard education and diploma. And as long as the desire for education and prestige remains (ie. as long as human nature still rules), the elite universities will remain so.

The Myth of the “Job Creator”

A key Republican talking point is that the wealthy are “job creators” and that any tax on these job creators will cause them to fold their cards and go home, hurting the economy in the process. This is clearly ridiculous, and I have challenged before the concept that tax rates diminish incentives to build companies, but here is a great essay from an entrepreneur and investor (a successful one — he is clearly in the 1%) describing how people don’t create jobs, the economy does. And the economy is made up of regular folks — the 99% — who need to buy the products produced by the entrepreneurs. Without a successful consumer class, nobody will be a job creator.

Data on Taxes

With President Obama recently saying that he plans to let the Bush era tax cuts expire, it seems like a good time to clear up some myths about US taxes. Fortunately, Pulitzer Prize winning tax journalist David Kay Johnston did exactly that in a long article printed in a variety of weekly newspapers. You can read it here, or read Felix Salmon’s summary here. Two brief tidbits:

  • The bottom 90% of wage earners saw their income grow by 1% from 1980 to 2008. Not 1% per year. One percent total. Folks in the top percent of wage earners saw their income double during the same time.
  • The federal income tax is less that half of federal taxes and only 20% of taxes paid at all levels. Social security, medicare, unemployment, sales taxes….they make up the other 80%.

Sarah Palin Gets Schooled on Economics

Alan Blinder wrote a column in Monday’s Wall Street Journal defending the Federal Reserve’s new quantitative easing (QE) policy. This policy has come under attack from many directions, including foreign ministers (worried about declines in the dollar) and Republicans (worried about inflation). In the latter camp was Sarah Palin, who criticized the policy, and then got her facts wrong about inflation, and then misquoted the Journal to defend herself.

Blinder is an economics professor at Princeton, and he takes a professor’s approach to the issue, explaining that the current bout of QE is pretty much the same as what the Fed normally does (printing money to buy short term Treasury bills), except that this time the Fed is buying long term securities. Blinder also notes that inflation is currently below the Fed’s target rate of 1.5-2%, so we have a ways to go before inflation becomes a problem, and the Fed can unwind this policy well before inflation gets out of hand.

Now some economists tend liberal, and some tend conservative, and Blinder is on the liberal site of the line, although not nearly as liberal as Paul Krugman. Yes, he also defends Keynes in the same column, and points out that the Republican phrase “job killing spending” is ridiculous. But Blinder is also a highly respected economist and co-author of one of the standard introductory texts, which I used in college. So if I had to choose who to believe on the likely effects of a Federal Reserve policy, I would choose Alan Blinder over Sarah Palin every time.

Green Movement Drives Innovation in Materials

The West Coast Green conference took place in San Francisco last week, featuring three days of speakers and panels and over 300 exhibitors on the trade show floor. The conference tag line was “green innovation for the built environment.” In other words, a focus on new approaches to green buildings.

One of the themes that emerged from the show was a profusion of new materials, or new uses for old materials. The green movement seems to be spurring tremendous innovation and creativity in the area of “stuff:” stuff for filling, for coating or for building. This innovation usually operates in one (or more) of three green dimensions:

  • The material itself is more environmentally friendly;
  • The material makes a building more energy efficient; or
  • The material lasts longer, and so over time a building requires less resources.

Some of the materials at West Coast Green were fairly high tech, like the coatings produced by Evolution Surfaces. These coatings use nano-particles to protect surfaces from moisture, mold, UV or other assaults. The nanocoatings are biodegradable and last longer. Also in the high tech world were the foams produced by NCFI Polyurethane. These foams provide the insulating power of fiberglass while providing an airtight barrier, making a home more energy efficient. Rinoshield’s ceramic encapsulated paint and Timbertech’s plastic decking boards were other high tech materials.

A medium tech approach used by some innovators was to apply technology in order to recycle existing waste materials. For example, Nyloboard takes old carpet fibers, processes them and applies a resin to create a water, rot and termite resistant faux-wood for decks. Icestone makes a kitchen counter material out of recycled glass and concrete.

Finally, there were folks who were taking existing materials and reusing them in innovative ways. Restoration Timber takes wood from old barns and other buildings and repurposes it into flooring and paneling. Oregon Shepherd and Bellwether Materials are both taking the wool from sheep that is currently discarded (90% of the total amount sheared!) and using it as building insulation to replace fiberglass.

In all of the examples above (and plenty more not mentioned), entrepreneurs were focused not on solar, water purification and the other usual suspects of green building, but on the mundane stuff of which buildings are made. Even here, the market opportunity of green is driving innovation.


Economists: Incredibly Stupid for Smart People

The New Yorker recently (I am perpetually 4-6 weeks behind in my New Yorker, so I consider the March 1 issue to be recent) profiled Paul Krugman, the Nobel Prize winning economist and NY Times columnist. A section of this article made me realize that economists, despite being generally very smart and well-educated, are just incredibly stupid. And I say this as someone who was an econ major in college and very seriously considered going on for a Ph.D.

Krugman was exploring why there were geographic specialties in business: carpets produced in Georgia, cars in Detroit, technology in Silicon Valley, etc. This was an outgrowth of his work on international trade, for which he won the Nobel. He saw that once a company started in a place, an entire ecosystem built up in that place. Trained workers, relevant support businesses (eg. lawyers), and transportation infrastructure – all this tended to create an economy of scale which drew similar businesses to the area.

To this you undoubtedly say, as I did, “duh.” That theory just describes common sense. Which Krugman admits: he explained this idea to a non-economist friend “who replied in some dismay, ‘Isn’t that pretty obvious?’ And of course it is.” But Krugman was the first to mathematically model this common sense phenomenon. Before that, “because it had not been well modeled, the idea had been disregarded by economists.”

So just to be clear: even if a phenomenon is so obvious that my 16-year old nephew could figure it out, mainstream economists, all with Ph.D.s from Ivy League schools, choose to ignore it because a model for it doesn’t exist. No wonder the country just went through a financial crisis. We all knew there was a housing bubble. It was obvious to me and everyone I talked to that Starbucks baristas and migrant farm workers and cocktail waitresses can’t afford $750,000 homes. But the economists at Treasury and the Fed who were supposed to be watching this? Their models didn’t incorporate these sorts of housing hijinks, and so they ignored the gathering storm.

Economists: smart enough to understand Bayesian math, but too stupid to realize that meth heads can’t afford houses.

Taxes and Small Business

With tax day taking place last week, I’ve been thinking about the impact of taxes on the economy, and in particular about the conservative talking point that lowering taxes on small businesses will unleash growth and create jobs.

This is related to, but different than, another classic conservative point: that lower income tax rates will create more tax revenue. Regular readers know well my disdain for this theory (the Laffer Curve), which has never been supported by any research. Read my posts here and here to see more of my laughing at Laffer.

In the case of small business taxes, I decided to build a little model and see what impact reduced taxes would have. You can see the results below:

Reduced taxes on small business

In this case, we have the same small business generating $1,000,000 in annual revenues and $250,000 in annual pre-tax income. Right now, at a 40% tax rate, this business delivers $150,000 to its owner. If taxes were cut in half, to 20%, the business owner would make $200,000 instead. Now, our business owner might be forward thinking, looking to invest in his business, and use the extra $50k to hire a new worker. But more likely, he is going to use that extra $50k to put an addition on his house, or buy a new car, or pay his kid’s college tuition. In short, tons of small business owners are not going to use their tax break to hire people and expand, but rather to buy stuff.

Financial Regulation Does Not Hinder Growth

David Wessel of the Wall Street Journal wrote a column today in which he proposes that the US has to choose between economic stability and economic growth. I am usually on board with Wessel, who does not follow the Journal’s usual slash and burn libertarianism, but in this case I think he’s wrong. His dichotomy is false.

The regulation that Wessel is discussing is financial regulation to curb the boom and bust cycle that we have just lived through. He asks whether “wise government rule to prevent market excesses” would also prevent the dynamic innovation that fuels economic growth. I answer emphatically NO.

As I noted yesterday, financial innovation is unrelated to business innovation. In yesterday’s post, I pointed out that the companies driving recent growth – the Googles of the world – have not depending on the innovations coming out of Wall Street. But today I will go even further. Between World War II and the S&L crisis, we had a long period of mostly financial stability, without the crises we’ve seen since then, and with a regulatory regime that had general consensus on Wall Street and in Washington. That long period of stability didn’t hinder economic growth; in fact, as the graph below shows it was one of the greatest growth periods in our nation.  Notice how much higher the growth is (the red lines) before the S&L crisis in the mid-1980’s.

Growth in GDP

Growth in GDP after WWII

I would argue that not only did financial stability and economic growth coexist during this period, but that the stability was actually helping the growth. After all, it’s a lot easier for companies to plan and budget if the financial markets are not booming and busting. And potential entrepreneurs are more likely to take the leap and start a new business if they aren’t worried about their retirement savings disappearing in a Wall Street flame-out.

So let’s not worry about financial regulation slowing down growth. Let’s focus on smart regulation that will spur growth.

Paul Volcker on Financial Regulation

Speaking of reasonable voices when it comes to financial regulation (see my post below), Paul Volcker is coming out strong for a much more rigorous set of regulations. Volcker ran the Federal Reserve before Alan Greenspan, and was considered a guru while Greenspan was still ladling Ayn Rand’s soup on Saturday nights.

Here is a link to an interview Volcker gave to the WSJ, and here is a link to a New Republic article by Simon Johnson about that interview.

The money quote from Volcker: “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy.”

Again, that is a voice of reason. We all agree that capital markets are important to the economy, and that some financial innovation is a good thing. For example, developing ways for big companies to hedge their raw materials risks can help the economy. But developing ever more complicated derivatives and securities which are backed by securities which are backed by securities which are backed by assets?  How do those innovations help the economy?

This last point is the one that puts the lie to free market ideologues. They say that financial innovation is key to fueling the American economy. But financial innovation has nothing to do with the economy outside of Wall Street. Think about the great engines of American growth that these ideologues love to mention: Wal-Mart, Apple, Home Depot, Google or Tommy Hilfiger. They all grew large and hired thousands of people without building their business on credit default swaps or mortgage backed securities. None of them care about the hundredth of a penny reduction in spread that dark pool trading creates. Real innovation in the American economy is disassociated with Wall Street. The only thing that Wall Street innovation drives is Wall Street pay packages.