Reconnecting with Economics

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!