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Reconnecting with Economics

Posted on Sunday, Mar 1st 2009

I haven’t spent as much time thinking about economics since college, when my second major was the subject on every mind these days. I have dedicated the last 15 years primarily to my first major, computer science, and my first love, entrepreneurship. But that has changed in the last six months.

I was invited by Tim Kane and Bob Litan of the Ewing Marion Kauffman Foundation, the world’s largest foundation dedicated exclusively to the cause of promoting and fostering entrepreneurship, last week, to a small conference of economics bloggers in Kansas City.

About 30 of us spent a stimulating day, and two dinners, discussing the current crisis, cause, effect, path forward, policy issues, and a variety of other topics, including one that is currently on many minds: the future of media.

I am going to try to synthesize some of the ideas that I thought were particularly interesting and constructive, seen through the lens of my own personal bias, of course.

Chief among the questions I have been wrestling with is the concept of bail-out. We’re bailing out banks that behaved very badly. We’re bailing out homeowners who should never have bought homes in the first place. It seems like we’re rewarding bad behavior and irresponsibility on a grand scale.

Experts like Ben Bernanke tell us it needs to be so.

I have been listening. Studying. Trying to bridge the gaps in my understanding, while also listening to my own instinctive negative response to the decisions President Obama is making.

To that quest, the Kauffman conference added a couple of interesting points. Brian Carney of The Wall Street Journal asked the question that resonated with me the most: Why don’t we let the big banks fail, and reward the smaller ones, perhaps some of the regional banks, that have been performing well, and can, in fact, attract private investment, instead of the TARP money?

This morning I read Maria Bartiromo’s wonderful interview of Jim Rogers on the crisis and the business of bail out in Business Week. Rogers validates every single instinct I’ve had at the raw intuitive level. He also underscores one of my main concerns about Obama – the complete lack of business experience, and consequently, a colossal lack of business instinct. The other concern, for the record, is Obama’s basic philosophy of socialism and welfare economics, something else that drives HIS instincts, in radical opposition to mine.

Rogers asks the same question: Why are we rewarding bad behavior?

Business Week’s Michael Mandel says that the reason we’re bailing out banks is because the creditors who would really be in trouble if we didn’t are the Europeans. Brian asked, “Why is that our problem?”

I’m not totally clear about this issue, and don’t know enough to be able to assess. But it certainly provided some good pointers for research.

Tyler Cowen has a good piece in the NY Times today on the banking and regulation issue. Mark Thoma, professor at the University of Oregon, a monetary policy expert, provides links on a regular basis to related writings – one of the best-edited sets of additional pointers to economics writings on the web.

Bob Litan tried to assess the issue of regulation: more? less? desirable? undesirable? effective? ineffective? The consensus was, that more effective regulation is desirable, but the likelihood of what the government will be coming up with being effective is nominal.

To this, I had a suggestion: When we design a system – software or hardware – we tend to put it through thorough testing. We explore all the corner cases. Why don’t we follow a ‘system design and stress testing’ approach to designing the future financial system? Why don’t we systematically debug?

The answer was, It ain’t going to happen.

Why not?

Don Boudreaux who writes Cafe Hayek, and chairs the economics department at the George Mason University, is another person who shares my instincts. His More Unalloyed Arrogance is a must-read post from yesterday.

As the government tries to assess what might stimulate entrepreneurship, I don’t see many “practitioners” of true entrepreneurship – the entrepreneurs – represented in President Obama’s advisory counsel. You are very familiar with my Bootstrapping: Weapon for Mass Reconstruction thesis. Who represents the voice of the bootstrapped entrepreneur in the government? Who understands the extreme cash-strapped conditions under which (s)he operates? Without understanding, how can they design an effective system?

Arnold Kling, a fellow MIT alum, shares my observation on bootstrapping, as do some others. Yet, we’re constantly wrapped around the axle of venture capital as the primary driver for entrepreneurial growth. Very, very frustrating!

I will write an additional piece on the Future of Journalism discussion, which I thought was very interesting. Stay tuned.

But before that, a big thanks for Tim and Bob for organizing this excellent forum. I generally dislike conferences, unless they’re very small, and are structurally designed for brainstorming. This format, thus, was just perfect!

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Sramana,

Very nice to meet you in Kansas City. I like your style (and instincts)!

Don

Don Boudreaux Sunday, March 1, 2009 at 1:39 PM PT

Likewise, Don. Look forward to keeping in touch.

Sramana Mitra Sunday, March 1, 2009 at 1:44 PM PT

Sramana –
It was great to have your voice in the mix at the Forum. Thank you for taking time out to meet up. I’ll second Don here — we need to build up a chorus of voices to get policy-makers focused on the young NON-venture firms that will create future jobs, not old firms with billions of sinking capital hungry for bail outs. I liked Mark Thoma’s point about the two types of macro policy: stabilization and growth. He’s right, but all the politics are focused on stabilization. Keynsianism for recovery? Maybe. Growth? No.

Tim Kane Sunday, March 1, 2009 at 7:12 PM PT

Great post Sramana! As an economist and practitioner myself, the issues you bring up do reinforce my worries about policymaking today… Still, I will do my best to light a candle rather than curse the darkness. My partners and I will gladly add our voices to your chorus. We are planning to develop an Innovation Policy Study Retreat for experts and policymakers to come together, off the record, and try to address key questions & dispell misconceptions/myths.

Mike Snyder Monday, March 2, 2009 at 11:00 AM PT

Sramana; Thank you for raising this, as you know, 4 in 5 entrepreneurs start by creating their own job first (as did I), and in my work now in the federal government small business arena, I see little focus on enabling/supporting that decision making. We hear much about small business importance, but neither Congress or the new Administration (yet) seem to recognize that first step economic chance that Americans take, as the most critical. Self employment by necessity is what many will now turn to, and most will not want external financing, at least initially. We do need this voice in the mix in the new Administration. Thank you. Bill Elmore

Bill Elmore Friday, March 6, 2009 at 4:48 AM PT

[…] About 30 of us spent a stimulating day–and two dinners–discussing the current crisis, the path forward, policy issues and a variety of other topics. (Read “Reconnecting With Economics.”) […]

An Entrepreneur Stimulus Plan - 5WPR Friday, March 6, 2009 at 7:00 AM PT

Re: Obama’s Business Instinct / Experience

Obama knows EXACTLY what he is doing.
Obama is simply following the notions of Alinsky, Lenin, Marx, etc.
Capitalism is the root of all evil and suffering in the world. And the USA is Mr. Capitalist No. 1
Ergo, destroy the existing social order and implement your notion of society.
Communists welcome and foment chaos because it enables them to assume greater powers. This is Obama’s plan.
You may think I’m crazy, but there is ample historical precedent for this; in which a country was totally destroyed so that and individual and/or party can assume total power.
Lenin did exactly this. It made no difference that millions died. All that mattered is that he assumed power and foisted his world view on Russia.
Castro destroyed the Cuban economy – one of the strongest in Latin America in 1959 – when he took over. He did not care, nor did he ever care, that the populace there was worse off under his policies. What mattered was that he, and his ideology prevail.
Mao murdered 70 million. He did not care as long as he had power. Ditto for Kim Jong.
Chavez in Venezuela is well on his way to destroying that economy. He could give a rat’s ass. As long as he has total power, that is all that matters.
Obama is no different. He must proceed slower and more cautiously; but make no mistake about his ultimate goal.
Germany was one of the most learned, literate, advanced countries in the world in 1914; look what happened there by 1945.
It can happen here and Obama is setting the stage for it to happen here.
He is a dangerous, radical socialist who hates the US Constitution and all it’s “negative rights.” (his words, not mine).
What does it say about an individual who believes that “it would be a shame to let a crisis go to waste.”

ARealist Saturday, March 7, 2009 at 5:03 PM PT