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Private greed, public innovation, by @DavidOAtkins

Private greed, public innovation

by David Atkins

Mariana Mazzucato makes an excellent point about the “public debt is hurting growth and innovation” rhetorical scam:

Is government debt slowing economic growth, if not impeding it? The world-wide economic crisis that began in 2007 has kept that question alive, despite the fact that it was private debt that caused the crisis in the first place. But attempts to curb the crisis have also led to an explosion of public sector expenditures like bank bailouts and unemployment insurance that have ballooned debt levels. At the same time, lower tax receipts due to falling incomes have prompted even more borrowing.

Yet amnesia and dogma have conflated the public debt that helped cure the crisis with the private debt that caused it. The Reinhart-Rogoff saga seems to have ended with evidence winning out over ideological fiction. That’s because the government debt threshold these noted economists supposedly discovered — surpass a 90 percent ratio of debt-to-GDP and you’re screwed — seems to have been based on statistical error. But despite the correction, countries across the globe are still being asked to slash spending in hopes of kick starting economic growth.

My own work shows the utter foolishness of such a strategy. What matters is not the absolute size of debt, but what that debt consists of. Throughout history, strategic government expenditures have played a key role in spurring economic growth. Indeed, by forcing the world’s weakest economies to cut public spending — in key areas like education, research and health — their potential for long-run growth is weakening. Spain, for instance, has cut its research spending by 40 percent since 2009. Will this help it create the kind of goods and services the world might want to buy — and be as competitive as its Nordic neighbors? It seems wildly unlikely.

The key question is simple: what causes GDP growth? And the answer from economists is that, at the very least, spending on education, human capital, and research are tightly related to it. Indeed, Robert Solow, who won the Nobel Prize in Economics in 1987, found that close to 90 percent of growth is not explained by the usual suspects, capital and labor. They account for only 10 percent. So Solow called the unaccounted-for 90 percent the “residual.” And what drove the residual? It had to be technology. And how is technology fostered? More often than not, down through history, by government investment, from the roads of ancient Rome to the Internet of modern America….

I have been pushing a very different view, as embodied in my recent book “The Entrepreneurial State: Debunking Private vs. Public Sector Myths.” I argue that businesses are typically timid — waiting to invest until they can clearly see new technological and market opportunities. And evidence shows that such opportunities come when large sums of public money are spent directly on high risk (and high cost) technological missions. This raises debt of course, but also GDP, keeping the ratio of debt-to-GDP in check.

These missions are expensive precisely because the government does much more than just solve market failures. It intervenes in both basic and applied research and even provides early stage seed finance to private companies. Indeed, Small Business Innovation Research (SBIR) grants have funded a higher percentage of early stage seed finance than private capital. This is because private finance is too risk-averse — afraid — to engage with industries characterized by high technological and market risk. The fear explains why we have seen venture capital entering, in industry after industry, only decades after the initial high risk has been absorbed by government.

Mission-oriented public investment put men on the moon, and later, lead to the invention and commercialization of the Internet, which in turn has stimulated growth in many sectors of the economy. Indeed, as I describe in the longest chapter of my book, the U.S. government has been a leading player in funding not only the Internet but all the other technologies — GPS, touchscreen display, and the new Siri voice-activated personal assistant — that make the iPhone, for example, a miracle of American technology.

The public invests in medicine and technology, and the private sector ends up reaping the rewards.

This isn’t all bad, mind you. One needn’t look farther than the Soviet Union to see that purely centrally planned command and control economies don’t run efficiently or as planned. But what it does mean is that when the private sector reaps the benefits of public investment, expanding the pool of both labor and capital while refining those innovations, it needs to pay back into the system to allow for more innovations as well as to make sure the government can fill in the many gaps of society that the private sector and charity cannot hope to cover. That’s how the system is supposed to work.

The Right has totally bought into its own press clippings that the private sector is the economic and technological innovator. Conservatives have broken the economic and social contract that made the system work.

To be fair, globalization and mechanization were going to destroy that system regardless by increasing productivity and profit exponentially while reducing jobs and wages. But conservatives have hastened the system’s demise.

So what comes next? If not the old style of planned command-and-control economies that have already been proven not to work, either, then what? For now, the answer must be to regain the balance that prevailed during the middle of the 20th century, when labor was the equal of capital, and capital feared the power of labor. We’ll have to cross the globalization and mechanization bridge from there.

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