The Economy

http://blog.samaltman.com/the-economy

by dmnd • 12 years ago

224 254 12 years ago

blog.samaltman.com

mdlm• 12 years ago

Q1 2014 GDP growth was -2.9%. There's no minus sign in front of 2.9% in item #1 in the article (I'm using Chrome).

The defense budget has gotten smaller as a total percentage of the economy since WWII, but the economy was smaller and the entire country was mobilized.

We currently spend over a trillion dollars a year on defense and intelligence. "Entitlements" are not the problem.I love how they are entitlements even though you pay for them...in fact, let's start calling it the social safety net instead.

The main problem is that the wealthy, corporations and individuals, don't pay enough. Cut defense by half and stop letting the wealthy walk all over us and all of a sudden you don't have a crisis.

doyoulikeworms• 12 years ago

I thought that they were called entitlements precisely because we pay for them.

moblahbl4hblah6• 12 years ago

They are called entitlements to make people think that some undeserving class is getting over...they think they are "entitled"...is the way that is put. It was done on purpose by conservatives. Its a dog whistle.

josephschmoe• 12 years ago

It looks like it's mostly medical costs. Social Security and other such things haven't increased much.

DINKDINK3• 12 years ago

The problem with entitlements/social safety net programs (how ever you want to spin it) is that they're policies that are predicated on the old generation being funded by a larger younger generation. That's policy that isn't fault tolerant to population decreases nor medical black swans.

cc438• 12 years ago

I wouldn't say spending on entitlement programs are an issue, they're more of a symptom. IMO, the root cause of our economic stagnation is our government's inability to create policy that is efficient, thoughtful, and timely. The inherently conservative features found in the structure western-style democracies are increasingly becoming an anchor on societal progress. Our governments aren't "conservative" in the ideological sense but in the slow, methodical manner in which change is meant to flow through the system.

I keep getting stuck on what I've learned of "lean" manufacturing principles and how hard it was for businesses to adapt to a more responsive and adaptive model of operations. Industrial behemoths could plod along, surviving off the enormous inertia they'd built over the decades. Some fell while others are still plodding along, yet unchallenged by efficient competitors that can't clear the entry barriers of the market, time will still come for them.

Governments are behemoths of a much more impressive scale. Their size lets them wield tools that no business is large enough to hold (monetary policy, "monopoly of violence"). Unfortunately inertia will always be overcome by time and friction in the form of a century of inefficient policy.

The fix isn't going to be found in dropping all forms of welfare or by jacking up tax rates to cover the continuing expenses of such programs, it will be found through guided reform. We need to base policy on facts and economic "facts" aren't universal, they're marginal and we need much more information and real world date to find those margins.

In my opinion the US needs a few big picture changes in order to start making informed policy reforms:

- States need to be given the room for experimentation that was intended our nations founders. The scientific approach to any problem requires a control group and when the federal government attempts to monopolize control at every level there's no room for comparison.

- To that point, there are many problems that can only be approached at a national level. The areas of defense, common natural resources, border controls, and interstate disputes of all types were wisely enshrined in the constitution as the domain of the federal government. While I'd like to hand as much power to the states as possible and others would like to handle things like healthcare at a purely national level, I think the wise approach would involve studying the international picture before jumping to any conclusions. Looking internationally we'd find that universal and mixed systems can be equally successful. Universal national systems (NHS), regional systems (Canada's provincial system), privately weighted mixed systems (Malaysia), and publicly weighted mixed systems (Germany) are all able to produce better outcomes than our attempt at a mixed system. So we must study, experiment and design, maybe we'd find that a provincial system would work best, maybe a national single payer system would work but despite years of debate we've ended up arguing over ideology. Ultimately we must have a system of reasoned debate and a legislative process capable of enacting the well-validated policy.

- Our electoral processes have resulted in a deeply divided, highly ideological country. There's no structural roadblock standing in the way of implementing well-researched policy as I've described, there are only political barriers. I can't think of a quick fix capable of changing millions of minds but I know that any slow shift like this degradation of political discourse can be reversed at the same slow pace. The solution is something that should have always been in the federal domain and that's our disjointed, uncoordinated redistricting processes. Centuries of gerrymandering have resulted in a map of districts engineered entirely for the purpose of furthering a party's political machine. The bent geography necessary for ensuring the "safety" of congressional seats is just a hair above the line of credibility if we are to consider our government "representative". The lack of fair demographic representation boxes us all in to neat little bubbles of ideology where few of us are allowed to express our political will in the face of an overwhelming majority opposition. We're the only country where districts are drawn by the interested parties and this needs to change. I believe it will push people out of their bubbles and hopefully bring about a stronger culture of political debate.

I have a few other ideas that are much less feasible but my tl;dr is that we need to start fostering a less divisive culture that will be receptive to taking a scientific approach to policy. Otherwise the lumbering dinosaurs called western democracies are going to fall so behind the curve that failure will become the only option.

klunger• 12 years ago

He just suggested a basic income for everybody.

I just wanted to point this out in case people missed it when skimming.

johnward3• 12 years ago

" Personally, I think that current levels of entitlement spending are ok (thought maybe the spending should be distributed differently), and we should probably do more. But I think we need to plan for it. In addition to thinking about new sorts of jobs to replace lost jobs that aren’t coming back, we should probably think about things like a basic income."

moblahbl4hblah6• 12 years ago

A basic income is a great idea...it would also be a good idea to completely remove the profit motive from health care. A social safety net that includes a living wage, guaranteed higher education, and retirement is completely possible if you don't spend so much on defense and intelligence.

sp3324• 12 years ago

You can't remove the profit motive from health care.

johnward3• 12 years ago

I'm no economist but at some point aren't we going to become so productive that there won't be enough need for workers. Are we maybe at that point now? If every single person wanted to work there would not be enough jobs to support that. So what happens in the future? Some people have jobs and are rich while the rest are in poverty and can't eat? I don't think society could function with that many people not having an income. If it came down to it and I had to kill you for my family to survive then I'd hate to tell you which one I would choose.

bmj• 12 years ago

guaranteed higher education

How about "guaranteed job training?" That way, if you wish to pursue a career that does not require a post-secondary degree, you can prepare yourself for that career just as well as the white collar worked who spends four years studying post-modern poetry.

N.B.: I have degrees in philosophy and writing, so I'm criticizing the study of the liberal arts.

crazy1van2• 12 years ago

it would also be a good idea to completely remove the profit motive from health care.

If I had a fatal disease with no known cure, I want a system that makes whoever finds the cure filthy rich. That's my best chance at survival. If anything, I want a system with even more profit motive.

zo1• 12 years ago

Ah yes, the old "it'll work, we just need more money, promise!". We've been hearing that one since the beginning of the democratic form of governance. Guess you haven't looked at the recent graphs of US budget spending, otherwise you would have figured out that "more money" doesn't necessarily solve the problem.

Hint: Most, if not all, the additional money gets eaten up by newly created bureaucracy.

oniTony• 12 years ago

The actual quote was

In addition to thinking about new sorts of jobs to replace lost jobs that aren’t coming back, we should probably think about things like a basic income.

So not necessary "basic income", and certainly for everyone. The reality is that many of the emerging economies are better (as in "cheaper") able to fulfill low-skill/high-labor positions, and not everyone will be able to transition into higher skill jobs.

VLM4• 12 years ago

Another thing to think about is eventually the higher skill jobs are leaving. There's nothing inherently American about, say, programming, and there's a heck of lot more of "them" than "us".

The only real hope for natives is high skill service jobs perhaps ER doctor.

sama2• 12 years ago

oops, i accidentally published an earlier draft. i added a bit more of my thinking here--my sense is that it would probably lead to less waste than current systems.

i'm also not sure it's the right approach, but i haven't heard any better ideas yet.

chillingeffect• 12 years ago

any better ideas yet

Progressive tax on incomes >$1,000,000. This won't slow anyone down except the ultra-wealthy.

As of 2009, it's 236,883 people. That's less than 1 in a thousand. With more income in a single year than most people in the U.S. earn in a lifetime, they'll certainly still be much more than quite comfortable.

gautambay4• 12 years ago

i prefer universal essential services (healthcare, education, etc.) over a guaranteed basic income.

with basic income, you run the risk that the receivers spend it on shiny objects (especially in an economy like ours with rampant consumerism) instead of things that benefit them and their families long-term.

of course, what constitutes "essential services" can be the subject of a lengthy debate.

jbellis• 12 years ago

Some interesting thoughts on better ideas here: http://bleedingheartlibertarians.com/2014/06/why-living-on-t...

baddox• 12 years ago

What surprising or remarkable about that? Basic income has been an extremely trendy topic lately.

larrys• 12 years ago

I actually missed that because I essentially scanned this.

I didn't know Sam had any particular expertise in economics something that confounds people with pretty deep intellectual understanding and academics. That have been observing things for many many years. It's a black art.

And I tend to pass on anything that starts to mention facts and figures which can be made to achieve any point you want.

I did note that it ended with this of course:

"I think the path from our troubles will involve finding a way for economic growth to continue." Obviously a rising tide lifts all boats. But finding "a good lawyer" (to go all cliche here) is the problem.

at-fates-hands3• 12 years ago

I'm wondering at point do we stop relying on the government to provide us with everything we need.

What happens when we have too many unfunded liabilities and the government runs out of money and all the millions of people who suddenly depend on government from everything from medical care, income, employment, and other forms of support?

All you have to do is take a good, hard look at countries like Greece and Argentina for examples to see what happens when countries go bankrupt.

marincounty• 12 years ago

When the government stops making it illegial, or charging fees for---Living. If Jesus Christ reappeared; what would his first few days look like? He couldn't fish without a license. He couldn't hunt without a license. He couldn't light a fire without a permit. He couldn't sleep unless in a sanctified Homeless Shelter. He would probally get a loitering ticket while preaching to the masses, or worse-- thrown in jail over inciting a riot? So, we live in a society where government regulates pretty much everything we do; until they back off--they need to help the people who can't "work" in their system. (God--please forgive me, I was just trying to make a point. I didn't use your name in vain.)

wslh• 12 years ago

Argentina did pretty well after it defaulted its obligations in 2001 and the commodities prices significantly increased. The issues in Argentina are more related to poor infrastructure (transport, Internet, mobile, financial) and corruption.

There is a saying in Argentina that we should stop stealing for at least two years [and the country will flourish].

crassus2• 12 years ago

Basic income is a potentially unlimited liability without any government control over fertility. If the needs of the portion of the population that are net consumers grow quicker than the surplus from net producers, an economic apocalypse happens sooner or later.

In a world of dysgenic fertility, this is guaranteed[1].

[1] http://charltonteaching.blogspot.com/2014/06/dysgenics-is-mo...

Tossrock• 12 years ago

The entire premise of this completely unsubstantiated blog post is refuted by the well-substantiated Flynn effect: http://en.wikipedia.org/wiki/Flynn_effect

fokinsean3• 12 years ago

Does anyone think we are heading towards an economic collapse?

zenogais• 12 years ago

Seeing as how "natural economic growth" is not infinitely sustainable (I'm operating under the assumptions that there are finite quantities of natural resources and human ingenuity is not infinite and infallible). It's probabilistically inevitable.

fokinsean3• 12 years ago

Yeah I agree, I guess what I meant to ask is if we are going to experience one in the near future (within 10 years)

sliverstorm• 12 years ago

Natural resources are finite, but so long as we can improve our efficiency faster than some rate N, we will never run out of a given resource. Thank you Zeno's Paradox.

(Recycling also plays a part, though I don't know if it should be considered increasing the supply, or increasing our efficiency)

The only one that is a real problem is energy. Thanks to the laws of physics, we may not be able to forever increase our energy efficiency, and energy cannot be recycled.

richcollins2• 12 years ago

It seems unlikely to me that we're anywhere close to diminishing returns from technology. More likely we're seeing what happens when a system is full of perverse incentives that reward unproductive / destructive behavior.

michaelochurch2• 12 years ago

True economic collapse, in which ammo becomes more valuable than money? No. Depression? Quite possible. I'd give it a 50% chance in the next 20 years (read my post on this thread, I explain some of why.)

The very long term outlook is positive; the short-term outlook is dismal. The global elite and the middle class have been at war and the latter is losing.

fokinsean3• 12 years ago

Just read it, very interesting. I just have a fear of the economy and dollar collapsing and life as we know it going to shit since the whole world is so dependent on us. I don't have a very solid basis for this fear, but that's the nature of many fears (I saw someone on Maury with a fear of pickles). Just hearing bad news all the time about the direction this country is going makes it loom in the back of my head.

thaumaturgy3• 12 years ago

Collapse, no. But I do think we're going to see, in our lifetimes, a mostly-global economy that is very different from anything that humans have had in the past, and that the transition to that is going to sometimes look disastrous.

I can't say much about the intricacies of how economies are managed, because I don't know much about that. But there are a few trends happening today that are unique in human history.

For one, we've entered an age where the economies of most of the countries in the world have become interconnected to some extent. Just 100 years ago, this wasn't the case. The mismanagement of an economy in one country can have serious repercussions in other countries now; I think it's inevitable that we'll see a world economic governing body develop. This sort of already de facto exists, but if it doesn't meet the needs of the lower and middle classes, it's going to become more political.

For another, we have begun to impose some serious limits on our resource demands. In the past, one way to combat a sluggish economy was to get bigger; if you had the money, you might try to establish a colony somewhere, grow your territory, or put more natural resources to work in the form of industry. But now, we've seen the effects of that on our natural environment and mostly collectively decided to limit our use of resources. Now, the name of the game is greater and greater efficiency, doing more with less, consuming less.

Meanwhile, a common trend around the world, and especially in the "west" (incl. Europe and Australia and the usual suspects), is that people want more leisure time. Workers are tired. The economy has been particularly hard on the lower socioeconomic classes, and they can get burnt out just like anybody else. They largely have crap jobs -- "bullshit jobs" as one economist puts it -- they can't expect loyalty from their company so they aren't loyal to it either, and they don't make enough money to get to enjoy the perks of life that, thanks to a massive global communications system, they get to see everyone else enjoying. You can't go to the store anymore without seeing a travel magazine with a beautiful front cover staring you in the face.

So, I don't think most people are looking to work more. In fact, I think that if it were possible for a lot of people, down to the poorest classes, to give up just a little bit more to be able to gain more real leisure time, they'd do it.

Simultaneously, production technology keeps getting better and better, so we can have more and more stuff for less and less money.

And, there's a massively adversarial relationship now between the worker classes and the wealthier classes. I think a lot of people intuitively recognize a lot of this, and they feel like the only thing keeping them from having the life they want is unfairly low wages mostly set by people who have a lot more money.

There's always political unrest somewhere in the world; I think a lot of it in the west is going to focus on economic issues. People are going to keep agitating to get their basic needs met, so that they're less reliant on jobs that they feel are both demeaning and fundamentally unfair. As hard as it may be to believe, especially if you rarely leave the Silicon Valley scene, I think we're going to see more of a movement towards spending less on material goods. I think the developing world is where almost all of the economic growth will be for a while, and I think the economies in the developed world are going to continue to be sluggish until there's a big breakthrough in either energy (e.g. fusion) or exploration (Mars).

I also think there's a possibility this could all lead to an amazing modern Renaissance. Never before in history have so many people been so close to having as much free time as they desire to create, build, or learn about anything they want; we truly have no idea what kind of art, engineering, or science might come from that.

Unfortunately, until a new social contract is developed between the economic classes, the poor are going to have a very hard time of it.

gone354• 12 years ago

For one, we've entered an age where the economies of most of the countries in the world have become interconnected to some extent. Just 100 years ago, this wasn't the case.

I don't blame you because this is the kind of conventional trope that everybody parrots and just feels right, but economic historians agree on that the extent of globalization 100 years ago was in fact just as high as it is today in many respects --and in some respects such as labor mobility, it was even higher then [1,2].

In fact, it was only after the collapse of the transoceanic European colonies after the wars that nationalism and the Great Depression gave rise to isolationism and trade protectionism as the natural state of affairs; only to be gradually re-dismantled towards the end of the twentieth century. But if you think about it, the technical and institutional elements of globalization --efficient mechanized shipping, industrialized commodities production/extraction, global electronic communications, settling/clearing institutions-- were all there then.

[1] http://groups.csail.mit.edu/mac/users/rauch/misc/globalizati...

[2] http://eml.berkeley.edu/~eichengr/research/brooking.pdf

moblahbl4hblah6• 12 years ago

"Entitlement" is a dog whistle that is used in place of "welfare".

http://rationalwiki.org/wiki/Entitlement_program

moblahbl4hblah6• 12 years ago

I realize that it's biased but it also explains the point very well. It's a dog whistle.

snowwrestler2• 12 years ago

Arguing about terminology is a great way to avoid arguing about tough fiscal realities.

thenmar• 12 years ago

I think it's worth mentioning. Propagandistic terms such as "entitlements" frustrate discussion and make it even more difficult to communicate. It belittles and trivializes the opinion that poor people are entitled to things like healthcare or food, making people who hold that opinion unwilling to discuss it.

nkohari2• 12 years ago

In the United States, the term "welfare" is typically used to refer to need-based social programs like SNAP (food stamps), as compared to things like Social Security which are available to all citizens after a certain age. Politicians across the spectrum use the phrase "entitlement programs" to refer to all social programs offered by the government.

neuromancer2701• 12 years ago

So what is the reasonable response to the future we have at hand. Most answers are the sky's the limit(stock will just keep going up) or zombie apocalypse.

I would prefer more of a negative income tax.

api3• 12 years ago

I have gradually become convinced by mountains of evidence from many quarters that the Keynesians are right-- we are in a demand constrained economy.

One of the problems I think is that economists and politicos tend to always be fighting the last war. In the late 1970s to early 1980s -- the last time the economy seemed this systemically bleak -- the problem was insufficient capital available for investment combined with high inflation. This resulted in "stagflation," something classical Keynesians thought impossible, and thus resulted in a widespread discrediting of classical Keynesian and economic liberal thought.

Thing is... in the late 70s the supply siders may well have been right and the Keynesians wrong. We were in a supply limited economy, and stimulus and other liberal policies just made everything inflate.

But now I think the situation has reversed. Today looks a lot more like the 1930s, albeit not quite as viscerally nasty. There's a huge amount of capital available but few good investments. Wages are stagnant, savings are down, pay and wealth inequality are utterly massive, etc.

So today I think the Keynesians may well be right again. Hopefully it'll come in the form of something less destructive than a war. I'd personally suggest a massive program to electrify all transport, huge investments in both renewable energy and next-generation nuclear power, a medical "war on aging," and a campaign to establish a permanent human settlement on Mars. All that taken together would probably end up costing about what WWII did, and so might be enough. The war on aging would have the added follow-on benefit of helping with our demographic problems. (As would a more liberal immigration policy.)

Meta question: perhaps there's a new insight here... do modern industrial economies actually tend to oscillate between demand constrained and supply constrained failure modes? Perhaps the Keynesians overcorrected for the great depression, resulting in the 1970s, and now the supply siders have overcorrected for the 1970s resulting in today. In that case maybe we oscillate between periods when Keynesian demand-side policies work and periods when Friedman-esque supply-side policies work.

Edit: the reason I don't think we're hurting as bad at the street level today as we were at the depths of the Great Depression is simply because we've grown so far beyond subsistence level. Today the amount of economic pain required to cause visceral physical pain among large numbers of people in the developed world -- starvation, etc. -- would be quite a bit larger than what it took in the 30s. To lead to that kind of thing we'd need the 2008 financial crash times ten at least, combined with a major political collapse and some kind of technological train wreck. A mega-sized solar flare or a sudden "oh crap" worst case peak oil cliff coming to pass might do it.

But compared to a non-slump timeline -- compared to what should be happening given the technological growth we've experienced -- we are in a depression. We should be colonizing Mars, conquering aging, pretty much doing all the things I suggested as stimulus. Instead we are building apps like Yo while people go bankrupt in underwater houses with underwater student loans. (Not blaming the authors of Yo either... during the depression a lot of people took up whittling sticks and other little time-passing pursuits for lack of good work to do.)

kaonashi2• 12 years ago

A large component of 70's stagflation was just supply shocks for oil. Why this never gets brought up, or is just brushed aside casually is beyond me.

do modern industrial economies actually tend to oscillate between demand constrained and supply constrained failure modes

This is probably a pretty good way to look at it. The solution is something like http://en.wikipedia.org/wiki/Functional_finance

The meat:

1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.

2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.

3. If either of the first two rules conflicts with principles of 'sound finance' or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2

api3• 12 years ago

True, and I'm sure the fact that we've likely passed peak conventional oil is a contributing factor to the current malaise.

In both cases there was probably a physical underpinning, but economic policies could indeed have helped. In the case of the 70s oil shocks, having more investment capital available allowed more investment in new capacity. Today having more consumer capital available would spur adoption of electric cars, rooftop solar, LED lights, and other consumer next-generation energy technologies that are required to help us shift consumption away from being so dependent on oil.

In other words I think today's energy problems are -- paradoxically -- also a demand problem. We need more demand, not less, to drive the adoption of alternatives.

abledon• 12 years ago

A large component of 70's stagflation was just supply shocks for oil. Why this never gets brought up, or is just brushed aside casually is beyond me.

This is how David Graeber starts his book "Debt: The first 5000 years"

TheOtherHobbes• 12 years ago

A large component of 70's stagflation was just supply shocks for oil. Why this never gets brought up, or is just brushed aside casually is beyond me.

It's politically expedient to forget it - just as it's politically expedient to forget that the people causing the oil shocks and the people who benefited from them politically seemed (and continue to seem) to have some interesting relationships.

Keynes is in danger of being written out of history, in the same way that dissidents like Henry George were.

I'm not sure how many people realise the extent to which anti-Keynesian narratives were deliberately promoted and funded after WWII, especially in Chicago.

The fact that Keynes is no longer considered an orthodox policy source is not an accident.

dageshi2• 12 years ago

My view on Keynesianism is that it's basically been bastardised to the point where it's unworkable. I say that because my understanding is that Keynes originally proposed a system where the government ran a surplus during the "good times" and then ramped up borrowing and spending during the "bad times". This actually makes a great deal of sense because during a recession investors are usually falling over themselves to park money with the government at very low interest rates.

But no modern government seems capable of running a surplus for any length of time. And modern Keynesians have basically done away with the surplus requirement so that you can borrow in the good times and borrow more in the bad...

I'm sure they have academic studies that back up that being possible, the issue is the general public don't believe it and the general public elect the politicians who'll have to implement it.

On the other hand if governments did run a proper surplus during the good years, I think there would be much wider acceptance in the general public for significantly more government spending during recessions. The "Keynesian blast" so to speak.

Given all that, any Keynesian response by modern governments will always fall short of what's required for it to actually work because the voting public don't trust the modern incarnation of it.

dnautics5• 12 years ago

But no modern government seems capable of running a surplus for any length of time.

Can you name any government, ever, that was capable of running a surplus indefinitely (say, until it was brought down by plague or war)?

nhaehnle8• 12 years ago

Running a surplus isn't even a positive goal for governments. In US history, periods of federal government surplus were always followed quite rapidly by recessions or even depressions.

There are even good, clean, mathematical accounting truths behind this. If you sum up all monetary assets and all debts, the net must be zero just as a matter of accounting. So, if individuals are to build up savings (which most people would probably agree is a good thing), somebody else must go into debt. This somebody else could be private firms doing investment, or it could be government.

If you want government to be in surplus or at least netting zero as well, then firms must necessarily be in ever growing debt, which is probably just as unsustainable.

(Note that, as long as you look at a single isolated country, a third option is that foreign countries become indebted. But since we live in a closed system and the net over all countries is zero, this is not really a workable option either.)

nerfhammer2• 12 years ago

Thing is... in the late 70s the supply siders may well have been right and the Keynesians wrong

Keynesians were definitely wrong since at the time sustained stagflation was considered basically impossible. Which is why what is today colloquially called "Keynesian" is different from Keynesian as it was then because important parts of it were disproved.

dnautics5• 12 years ago

I take a very very dim view of Keynsianism prescriptions, although their analysis may be correct (sometimes).

Let's agree that we're in a demand constrained economy (I am not sure but it may be the case).

1) Why should you believe that governments are good at readjusting the economy to "unconstrain" it from demand? From Halliburton/Iraq to Solyndra to Fisker to 38Studios (https://en.wikipedia.org/wiki/38_Studios) to Telacu (http://capoliticalnews.com/2014/02/21/construction-firm-tela...), time and time again, we see governments at all levels (local to federal) reallocate funds to cronies instead of in the "interest of the public".

2) Why should we do anything to stoke demand, at all? Doesn't consumerism and the impact it has on the environment (among other aspects of society)? Why should we presume that there is a 'correct' amount of consumption that society ought to engage in? How does one measure it, and why should we be incentivising individuals to abandon what they think is right for them based on their localized information?

api3• 12 years ago

Your first point is a deeper problem that goes far beyond economics. We do have a government corruption problem.

As for #2, the problem is that economic demand and economic activity means doing anything at all, including fixing environmental problems.

Imagine there's no growth. Why adopt solar power then, and who's going to pay for it since there'd be no investment capital? Nope, just run those coal burners forever. No need to upgrade if there's no growth.

The deflationary road leads to the dystopia portrayed in The Hunger Games: one or two massively advanced cloistered cities for the mega-rich, and vast feudal slave classes feeding them with coal and other should-be-obsolete things.

marcosdumay2• 12 years ago

Well, first, Keynes created an interesting theory, where time couldn't change anything, and real wealth don't actually appear. It's no wonder people want to ignore it, yet it successfully teaches how to solve one kind of problem.

Our current problem is that, since we learned that one piece of tech, we started applying it to every economical problem we saw. Thus since the 40's no economical crisis could by solved by keynesianism; if it could, there wouldn't be a crisis there.

001sky3• 12 years ago

US GDP growth in real dollars is low (and trending down). It was 2.9% for Q1 2014 after the second official revision [1]. If it’s down again for Q2, we’ll be in a recession.

Just a nit, but to be clear...

1Q 2014 GDP #s (revised) growth rate was negative 2.9% (-2.9%).

The second sentence in the quote also implies as much, so I think the quoted text has an oversight/typo.

http://www.cnbc.com/id/101787838

tdees402• 12 years ago

I'm not clear on how any of this will lead to a recession. Why will high Debt-to-GDP or government spending send the economy into a recession?

Q1 GDP numbers were clearly affected by dismal weather (although still bad), but labor markets are improving markedly, and there are reasons for optimism. I don't see this as a very convincing bear case.

For the bull case, see this post, from a guy who's been right about everything since the mid-2000s.

http://www.calculatedriskblog.com/2014/06/the-future-is-stil...

sama2• 12 years ago

i am a bull. i just think that we should talk about what the problems are. ignoring them is not a good way to fix them.

sachinag• 12 years ago

Debt to GDP isn't a problem: http://www.peri.umass.edu/fileadmin/pdf/working_papers/worki... (very widely circulated paper, given that they lowered the boom on Reinhart/Rogoff)

joelhaus• 12 years ago

You missed the trend of growing inequality. I think this is important because the marginal propensity to spend for someone low on the income scale is much higher than the wealthiest.

Otherwise, good points.

toomuchtodo2• 12 years ago

What if growth in the US is being prevented by technology innovation? If I replace 100 jobs with 1, and no further jobs are need for those 99 people, and that's the core of what technology does, growth in the traditional sense isn't possible.

I agree that a basic minimum income may be necessary; I don't believe it'll fix the growth problem though.

lmg643• 12 years ago

i think the only point in here that represents a potential risk to startup investing is #1 - declining GDP. Basically, if we run into a recession, the risk is that asset values decline based on negative projected growth. when asset values decline, startup values decline even harder, since they are a risky/"high beta" asset.

The rest of these charts are basically the background on the decline-and-fall of america, and I would say only tangentially relate to the startup ecosystem.

the most important chart that you left out was the stock price of Facebook, which is riding/causing a wave of investor (and corporate) enthusiasm for all things social, which in turn benefits the startup eco system because they buy lots of companies, and drive the hype that a given company could be the "next" facebook or sell to them.

Facebook (more so than google) seems appropriate for ecosystem barometer because:

* they do the most audacious acquisitions, with due diligence that consists of weekend meetings eating strawberries - $17bn for whatsapp, etc.

* Facebook is valued at $170 billion dollars, based on selling ads which I've never seen (because i use adblock+) and peddling to brands i also never engage with (because i only use FB to keep up with friends). that seems unsustainable IMHO.

coob• 12 years ago

Labour markets/Employment figures tend to lag other indicators.

jwgur• 12 years ago

The financial press often defines recession as a technical term, meaning any two sequential quarters of negative GDP growth. NBER has a slightly different definition [1].

[1] http://www.nber.org/cycles/recessions_faq.html

yahelc• 12 years ago

Agreed.

Further, there's little evidence that Debt-to-GDP over 100% (despite "feeling" meaningful, because, 100%!) has any kind of predictive value for the long term direction of an economy, particularly one that has unusually low interest rates. If Debt-to-GDP were a problem for the US, you'd expect higher interest rates, not lower ones, as investors would be demanding higher returns on US debt.

The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.

jeffdavis7• 12 years ago

The thing that worries me about our debt is that it's not like the rates are locked-in for 1000 years. After bonds mature, we need to issue new bonds to pay for them. And if the interest rates are higher at the time, the new debt will have a higher interest rate (I guess, technically, the bonds will sell for a lower price, which has the same effect).

Paying our current level of interest on our debt is not crushing. But it's not hard to imagine the rates tripling (or more) considering how close to zero the rates are now. Then we are over $1 trillion/yr in debt service (if my calculations are correct).

Combined with what seems like a structural deficit, I don't see any good way we'd get out of that.

In other words, we're not falling off a cliff now, but it seems like fragile situation.

pingburg3• 12 years ago

The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.

With respect, I don't think it's accurate that the fact that bond rates remain low correlates to evidence that there's no major macroeconomic problem. Just take a look at the Federal Reserve's balance sheet that was relatively stable for many years has quadrupled in 5 years.

Reference: Chart: http://research.stlouisfed.org/fred2/series/RSBKCRNS

Reference: Balance Sheet: http://www.federalreserve.gov/releases/h41/Current/

DINKDINK3• 12 years ago

The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.

Not necessarily. If you have to ask yourself what the country had to do to keep those rates from changing. The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact. For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates.

Also high debt to GDP ratio makes printing money as a solution more attractive for a government. Inflation is a theft from everyone.

richcollins2• 12 years ago

Why will high Debt-to-GDP or government spending send the economy into a recession?

Do you agree that it is a problem at some point? If so then why not at current levels?

epicureanideal• 12 years ago

If you think about this in a more general context it's easier to see that "Debt-to-GDP" ratio alone isn't enough to determine that there is a problem. You need a combination of debt level and interest rate.

For example, I personally could have $100 Trillion in debt but with an infinitesimally small interest rate and an infinitely long repayment period, I would not be concerned.

What matters is Debt-Payment-to-GDP ratio. There is certainly some level of that ratio at which I would be concerned.

001sky3• 12 years ago

"Why will high Debt-to-GDP or government spending send the economy into a recession?"

You're confusing the short run and the long run. In the long run there are more degrees of freedom. In that context, this quote simply seems to show a lack of imagination. Entities that extremely indebted lack strategic operating flexibility (countries and businesses alike).

MarioSpeedwagon• 12 years ago

Even though you qualified it, the weather is not worth mentioning when we are talking about an incredible and unacceptably low rate like -3%.

It takes a whole mountain of suck to create that type of suck sandwich.

Humjob• 12 years ago

If government debt grows high enough then an increasingly large percentage of federal spending will be devoted to paying interest on that debt rather than on arguably more useful areas which create future prosperity, such as education and scientific research.

After a certain point this becomes unsustainable and bad things start to happen, ranging from total political & economic collapse (Germany in the 1920s) to hyperinflation (Zimbabwe) to, in the best of the worst case scenarios, a large default/restructuring and subsequent downgrading of a country's debt to junk status (Argentina in the 2000s).

As F.A. Hayek, Milton Friedman and numerous other economists have written, government spending tends to be more inefficient than the free market because the government isn't constrained by profits and losses, which are society's way of indicating whether a company is producing goods and services that are valuable and desired. Of course, there are some goods and services that only the government can provide well, and the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient. However, it's undeniable that at a certain level (almost certainly a level below our current level of spending in my opinion) each marginal dollar the government sucks out of the economy is used less efficiently than it would have been used if it remained in private hands.

AJ0073• 12 years ago

Something to consider is the difference between debt denominated in a countries' own currency verse that of another country.

In 2010 Germany finally repaid debt it had raised to pay its World War I reparations. The reparations never were paid in full but you damn bet the US dollar denominated debt was.

If a country borrows money in a foreign currency they may have bills due for an incredibly long time unless the creditors says "ok, you can pay less than you owe us." The EU members are in this position because the bills they owe are not in their own currency.

Generally this seems to have the biggest impact on tiny countries. One of the most interesting opinions I've heard recently is from James Rickards who was a negotiator for the Long Term Capital Management bailout in 1998. His opinion is the risks in the banking system have increased, not decreased, and when the next failure happens the US government will not be capable of a bailout largely due to the Federal Reserve's balance sheet leverage (which puts Lehman's leverage to shame) and a lack of political will to write a multi-trillion dollar check. What will happen is debt issued and denominated by the IMF, the only bank in the world left with a good balance sheet.

muzz4• 12 years ago

Here is a chart of that percentage over time:

http://research.stlouisfed.org/fred2/series/FYOIGDA188S

jeffdavis7• 12 years ago

"the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient"

I disagree. It's more about a notion of "fairness": whether you think that the government can improve fairness, in what situations, and at what cost of efficiency.

dragonwriter2• 12 years ago

the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient.

Its often presented that way -- almost exclusively by people on the right, however -- but as I see it the left/right debate is less about fact questions (even somewhat fuzzy ones like the efficiency question you propose) and more about the ethical/moral/value issue of what is the purpose of government.

phkahler• 12 years ago

> I'm not clear on how any of this will lead to a recession.

Here are some reasons: 1) if government spending is half of GDP that means any increase in non-government economic activity will only have half the effect it otherwise could (with zero govt contribution) this works both ways though, but more importantly it means government spending is critical to the economy. 2) Debt is high, so there is a LOT of pressure to reduce govt spending, which would directly (negatively) affect GDP in the short term - see 1, gov spending is 0.5 of GDP. 3) Any rise in interest rates will result in 2 (the alternative is to just increase the debt). To spend more in interest, you have to spend less elsewhere. 4) If we get inflation (and they're trying really hard) they'll want to keep it low by raising interest rates, resulting in 2 (see 3).

Paul_Dessert• 12 years ago

Two consecutive months of negative "growth" define a recession. The "dismal weather" argument has been used to death. We've had very cold winters before, it's nothing new. Labor markets are not improving as you might think. Most of the job growth is in low wage positions.

Regarding the link, the argument is that by 2020 (6 years from now) more people will be working. and more specifically, the paragraph below, is flat out wrong.

"But that is medium term - in the near term, the reasons for a pickup in economic growth are still intact:1) the housing recovery should continue, 2) household balance sheets are in much better shape. This means less deleveraging, and probably a little more borrowing, 3) State and local government austerity is over (in the aggregate),4) there will be less Federal austerity this year, 5) commercial real estate (CRE) investment will probably make a small positive contribution this year.

TheCowboy• 12 years ago

I think the responses you're getting are ignoring the key question: How will high debt-to-GDP or government spending send the economy into a recession?

Many have been forecasting complete collapse and hyperinflation for these reasons, and it hasn't materialized. It seems there is something flawed with the models people are trying to use to make their economic forecasts, or their reasoning doesn't apply to this situation.

One reason government spending would be bad is that it is crowding out private investment by driving up rates. But he indirectly recognizes this isn't the case due to rates being low enough that they should be encouraging investment.

He doesn't say how government debt should be reduced, and where government spending should be cut. He also glosses over the point that we're at a zero bound. The post is basically a bunch of graphs while expressing concern about government spending and debt. He doesn't really connect these to the GDP and go into detail about the reasons for that quarter. I could go on.

adventured2• 12 years ago

The sole reason the US avoided disaster - temporarily - from occurring due to the massive increase in public debt, is the Fed began buying the radical majority of the government's debt after China let up on its buying.

When you have to rely on your central bank to fund your government's debt burdens with magic fiat, you're in a perpetual downward spiral scenario already. These are the good years, the deficit is set to explode dramatically higher again soon, and there will be nobody to buy except the Fed.

Who else can eat $500b to $1t per year in junk paper? China can't afford it any longer (having just taken on a mountain of debt the past five years). Japan hasn't been able to afford it for a very long time, they can't even afford their own debt.

Now it's merely a question of time. The Fed is pulling its programs because it can't sustain them any longer without running inflation through the roof. They know the US economy is weak, they see the data that led to the -3% GDP print. It's not like we're producing 500,000 full-time jobs and 200,000 manufacturing jobs per month.

autokad2• 12 years ago

I don't think the writer ever said that a high Debt-to-GDP / government spending will send the economy into a recession. it means the government's ability to fight a recession if one comes will be extremely constrained; furthermore, having high debt prior to a recession makes the pains of having the high debt extremely painful as revenues will decline significantly.

rplst8• 12 years ago

This. Especially when some economists recommend recession spending as a way to fight it. We've already spent the money, maxed out the "credit cards" and currently interest rates are poised to go up.

If another recession does take hold, it will be a nasty fight.

nhaehnle8• 12 years ago

The US federal government budget is not like a household or the budget of a firm. Households and firms are USD users, which means that they can only make payments in USD if they first obtain those USD (whether as income or by loan).

The US federal government, on the other hand, is the issuer of USD. If it wants to make a payment in USD, then nothing can stop it.

This means that the debt-to-GDP ratio is an entirely meaningless measure as far as the government's ability to fight a recession is concerned. (It may have play a role in other consideration, such as questions about equity and distribution of wealth, but that's a digression.)

mathattack2• 12 years ago

The issues of debt relate to a Minsky Moment. http://en.wikipedia.org/wiki/Minsky_moment

It happens when the assets can't pay their interest payments any more.

For now interest rates are low, so the government can pay it's billed. Unfortunately, we hold a lot of short denominated debt. We should lock in these rates while the going is good. If interest rates spike up, the government will have to cut programs, borrow a lot more money, or increase taxes. It's a very negative spiral.

The reality is that nobody has been in our exact situation, so there is more speculation. Are we becoming more like Japan? Or Europe? And how might aggressive immigration help us?

danielweber3• 12 years ago

The US can't just "lock in" rates by deciding to do so. Most of the world treats debt very different than the US consumer is used to on credit-card and mortgage loans.

The US issues debt and the market bids on what it will pay, nearly always charging higher rates for longer terms. And the US can't pay it down early; it has those rates for the entire term of the loan.

If I read http://www.bankrate.com/rates/interest-rates/treasury.aspx?e... right, the US can borrow for 3 months at 0.025%, but for 10 years at 2.63%.

One reason the US does so much short-term borrowing, among other reasons, is that it's so cheap to do so.

adventured2• 12 years ago

The US is already in a recession. The two quarters of negative growth is not a good means of showing the shape of the economy.

You could have two quarters of -0.5% growth, and that would mean recession. Or one quarter of -3% growth, and that doesn't mean recession, despite being worse than the two quarters. It's a silly way to calculate the state of the economy. Besides that, inflation is intentionally understated, GDP is contracting at a worse rate than stated in the headlines. 2% GDP growth is a recession in this environment of intentional central bank inflation schemes.

Not once post WW2, has the US economy shrank by more than 1.5% in a single quarter and then not entered a recession (or already been in one).

Housing has begun to tip over, as the Fed pulls its asset inflation program. Corporate earnings growth is anemic at best, most blue chips are struggling to grow at all (MCD, KO, IBM, WMT, etc). The vast majority of growth in the stock market has come from multiple expansion, not from earnings growth. Full time jobs are still far under where they were in 2007, while simultaneously welfare benefits are dramatically higher, including labor problem indicators such as SS disability (and of course labor force participation is at 35 year lows).

This all with 0% interest rates. If you can't grow an economy with 0% interest rates, you're in for a very, very bad time.

Stocks tend to hit new record highs just before a recession begins. This happened with both of prior Fed asset inflation parties, in the late 1990s (2000 peak) and early 2000s (2007 peak). They repeated the same inflation recipe, trying to fake a wealth effect, and turned it up several notches. The same result will occur again on the backside, for obvious reasons.

argumentum• 12 years ago

A recession is two consecutive quarters of negative gdp growth. So if the economy shrinks this quarter we are, by definition, in a recession.

dragonwriter2• 12 years ago

A recession is two consecutive quarters of negative gdp growth.

That's a common rule of thumb, and apparently (per Wikipedia) the official definition in all states in the EU. But the US is not the EU, and the closest thing to an official definition in the US is that a recession exists whenever the Business Cycle Dating Committee of the National Bureau of Economics Research decides that a recession exists.

anigbrowl2• 12 years ago

Quite. It's entirely rational for the government o maximize borrowing when interest rates are low, because treasuries are fixed-income securities, whose coupon (regular payment of interest to bondholders) does not fluctuate with the interest rate. Now if rates go up and borrowing does not fall, that would be a huge problem. But when rates are historically low it's completely rational to load up with as much debt as you can carry if the economic gain > the interest payment. My main beef with governance (by both the parties rather than one alone) of the last few years is that we didn't borrow enough and what we did borrow was mostly spent on transfer payments, instead of a massive (and necessary) overhaul of our infrastructure that would have created more employment and arguably had a greater money multiplier effect even at sub-optimal levels of economic efficiency.

AJ0073• 12 years ago

A much better thing to look at is how much GDP growth do you get for each additional dollar/currency of debt?

If we borrow $1 and get $2 of GDP growth, great. If we borrow $1 and get 10 cents of GDP growth, big fucking problems ahead. Considering that the debt is going cost more than we borrowed, that benefit red line is pretty far ahead of $1.

Demographics are another trend to look at. Shrinking population generally means the GDP is going to end up going the same direction. On a micro-level we could examine Detroit, on a macro-level Japan. Both are returning developed land to farmland; quite a paradigm shift for someone who grew up watching fields turn in to suburbs. A country, or city, with a rapidly growing population needs to borrow money to build infrastructure. One that is shrinking may face a crises even with a much smaller debt load.

Thinking about recessions or perhaps even depressions is a bit simplistic. Both are bumps in the road. A more valuable idea is to look at the multi-decade trends where countries fall in and out of power or even cease to exist.

lkrubner• 12 years ago

I just submitted the Calculated Risk article to Hacker News. That is a very good article.

tdees402• 12 years ago

It's a fantastic blog. Lots of data, minimal bloviating.

danelectro• 12 years ago

Ask not how you can avoid recession, ask what you can do for the rest of the country to emerge from recession that they are still suffering from.

Look at that GDP "Growth Rate" and of course you can clearly see as a derivative it's a "Shrink Rate of Growth Rate" and the trend line itself is more meaningful than you would think, especially the greater number of decades you have experienced to correlate with the patterns.

The right-hand y-intercept is fixed by the present day, but the left hand y-intercept would vary related to what year in the past you choose to begin your data series. Good choice anyway IMHO to use ~1950 on the left since so many in the USA who have economic experiences before that time are no longer with us, or seriously retired from productive service even though passive incomes for some survivors of earlier times are doing quite well for now.

Remember that this is corporate growth, and so many corporations depend so much on growth that anything which stands in the way will be disposed of, if a situation of zero real economic opportunity becomes significant, then growth (or reduced shrinkage as a last resort) will be extracted from the citizens either by passing on the costs directly or through government lobbying.

So look at area under the curve or in this case area over the curve which I believe are two different things.

Sharp or extended spikes below the trend are devastating to both corporations & citizens, but corporate shareholders are compensated by the eventual return of growth above the trend, since costs are passed on, the consumers do not share in the prosperity like they share in the devastation.

Anyway, experience has shown that a negative spike like the one in about 1981 will devastate maybe 10% of consumers at least, and for them there will be no recovery for about 25 years at least. Later on in the early '80's a different larger portion of consumers are neutralized. The 1990-91 ruin is still largely with "us" if you were one of the unfortunate ~10% there, otherwise you may not even notice, this is by design. Early 2000's there is a little downward noise, lots of dotcoms and their dependents, but 2008-09 were the worst thing since the Nixon Recession, a huge new group whose futures's ruined for decades to come.

Since each significant spike destroys a different block of consumers, this is adding up, estimate totalling up to almost a majority of consumers who are not just compromised but ruined by now.

And that's not all, Nixon was so incompetent that the currency had to be sacrificed too and that does not appear on the chart. This was huge.

Surprises are in store if you have not yet felt the wrath from 5 years ago. There is nothing more for currency to contribute, loss of property values since then has not extracted its toll proportional to negative area so something else will have to give, and it will have to be big.

gregoryw2• 12 years ago

Corporate savings are high across a broad basket of companies like the S&P500 because the earnings of multinationals are parked in Luxembourg, avoiding US taxes. We've all read about the Double Dutch and other IP licensing schemes that avoid taxes for Google, Apple and others. I personally feel these funds are waiting for a US corporate income tax holiday, perhaps under the guise of creating new jobs and investment domestically. The stock price of companies like Apple has their cash balance as "money good", meaning the market doesn't believe they'll pay tax on the $150 billion parked overseas.

Sam's zero interest rate point is the most salient to the startup world. It forces accredited investors to chase asset classes like technology startups for yield. You also see it in the midwest in oil, gas and other natural resource drilling/mining. These are long term 10 year investments for these investors to park their cash.

saym• 12 years ago

So, the 0% interest is a catalyst for startup investment? Do institutional investors or big banks directly fund incubators and the like?

I read somewhere recently that global bank income was up 29 billion from last year, does any of that profit come from startup success?

gregoryw2• 12 years ago

Institutionals and investment banks are higher up the chain. Accredited investors serve as front-line angels that fund would-be entrepreneurs, and then the aforementioned parties provide them with liquidity (distribution and marketing of the company's other shares to more sophisticated investors).

kaonashi2• 12 years ago

The first sentence prophesies 'collapse', but then reading on you see a recipe for a continuing mild recession.

Where does the collapse come in? (if it's nebulously caused spike in treasury rates, I'm not going to be convinced)

michaelochurch2• 12 years ago

It's a dismal situation. Low interest rates mean cheap money in theory, but the "people" best equipped to take advantage of it are corporations. It's not like average people are able to start businesses just because the interest rate is low. However, low interest rates mean the penalty (to companies) for hoarding and for general risk aversion is also low. This means that lousy executives don't get a lot of investor pushback (companies don't have to do much to beat the risk-free rate) and can stick around indefinitely. The only thing that changes is that their exorbitant salaries go up (as do housing prices, college tuitions, and healthcare costs).

Meanwhile, for the 99%, this debt/poverty cancer just keeps growing inside the country, making it weaker every day: it's not just government debt-- although that is a real problem-- but student debt and credit cards as the replacement for Fordist wage increases.

The macro picture is bad, but the micro picture is even more dismal. Corporate management is becoming more self-serving and corrupt, internal policies of corporations are becoming more mean-spirited (many companies now require employees to use vacation when sick, and open-plan <50 SF allotments of office space are becoming the norm). When you see the reality of work life for most Americans, you realize that the corrosion is organic, inevitable, and really quite deserved. Our country has become a patchwork system of slapped-together corporate garbage, whether you're talking about its healthcare coverage or the way most of us have to work. What used to be a country is now a phalanx of uninspiring, mean-spirited organizations not worth caring about.

I think that startups and venture capital will continue to do well.

Ouch. Sorry to disagree, but... what's pushing people into startups is not that this VC-funded game is so great (it ain't) but that corporate employment has become such a raw deal. Now that big companies have ceased doing the right thing when it comes to investing in their employees, avoiding layoffs unless absolutely necessary, etc., we've reached a point that shoestring long-shots called "startups" look like a good idea in comparison. The startups haven't improved. (In fact, they've become worse.) The alternatives, however, have gone to shit.

VC-funded startups are notoriously cheap, and stinginess leads to mediocrity. For example, they don't pay relocation, don't pay for education, and usually involve 80+ percent "employee contributions" on health insurance. Some even make people take fucking vacation days to attend conferences. If you look at it honestly, "we're a startup" is usually just used to justify being a terrible company.

Now, the proper strategy is either to bet big on someone, or not hire that person, and (in general) to be very selective. (If you're not willing to pay full relocation, you shouldn't be hiring that person at all.) The problem is that these VC-funded startups are so weak in terms of technical talent that "hire a few strong people and bet big on them" isn't a viable strategy, because they can't get the first part down. So they have to hire large (as in, a large number of people... like 30 before they even launch) and so they offer crappy salaries, dogshit equity, and nonexistent perks in the hope that one of the clueless 22-year-olds who takes their offer will be an undiscovered talent. Occasionally, it works out that way. Most of the time it doesn't. Hence, the high failure rate of VC-funded startups.

VC has been, and will continue to be, an underperforming asset class and there's a clear reason why. The main players aren't optimizing for the performance of their portfolios but their careers (and, to be fair, I can't blame them; I'd do the same in their shoes). Their career goals push them to over-collaborate (read: collude) and that creates that disgusting culture of co-funding. But as soon as you have important decisions made by committee, mediocrity is a result because you're now biased in favor of mediocre/never-offends-anyone people instead of high-variance people who actually do the fucking work.

Personally, I think that innovation and new technology is what will save us.

Eventually, yes. But I think we're going to see things get a lot worse before they start getting better. I don't think that the US or the world economy is in terminal decline, but I think we have another 10-15 years of ugliness before things start to improve.

VLM4• 12 years ago

Your analysis is good WRT "VC has been, and will continue to be, an underperforming asset class" as an isolated group. However, it is relevant to consider as a class, they're competing against large corporations, the home of Dilbert and TPS reports... Beating them as a class should be fairly easy.

Like the story about two guys running from the bear, you don't have to run faster than the bear, you just need to run faster than the other guy, and Dilbert doesn't exactly have an ultra-marathoners physique.

yuhong• 12 years ago

(and, to be fair, I can't blame them; I'd do the same in their shoes)

Why?

pchristensen• 12 years ago

Just to be clear, pretty much every point you made about startups directly conflicts with the sample of ~10 SF/SV companies I talked with during a recent job search

- base salaries at funded startups are good. Equity could vary greatly depending on how much salary you asked for - insurance is 100% paid for employees and 50%+ paid for family - I didn't discuss relocation but I was relocated to SF 2 yrs ago by a startup - Very, very smart and capable co-workers - Vacation days were untracked or 15+, and there was a separate allotment of sick days - Most teams were < 10 developers well after launch - Much easier to find jobs as an experienced senior developer than a junior developer

The one point you nailed is all open-plan offices, everywhere, all the time.

I don't know what you're basing your statements on, and maybe it's different in other parts of the country, but in SV/SF right now, if you're a demonstrably good developer, you're in extremely high demand and many, many excellent companies are competing fiercely to hire you.

lexcorvus2• 12 years ago

In this context, I hope at some point sama has a chance (if he hasn't already) to read the post "Sam Altman is not a blithering idiot" by Mencius Moldbug:

http://unqualified-reservations.blogspot.com/2013/03/sam-alt...

The basic problem with our society is a disconnect between consensus reality and actual reality. We actually have no shortage of natural leaders. But they cannot actually lead us anywhere. They are operating in consensus reality rather than actual reality. Their joysticks are not plugged in. When the consensus is nonsense, sober good sense is nonsense. Nonsense is no use to anyone.

It's a long post, but if you're interested in examining the problems we face from a fresh and unusual perspective it's worth reading the whole thing.

ef47• 12 years ago

It's also critically wrong in understanding technology:

"one run of a time machine, with a printout of Wikipedia, would be pretty much all the real 1950 needed. Send the technology back to 1945, and you'll have iPads by '55 at the latest. Those guys got things done."

That kind of thinking betrays a common misunderstanding. The limiting factor on what we can build at any given time is very rarely ideas. In 1950, people already knew enough physics to build an iPad. The idea of integrated circuits had already been proposed. The first one was demonstrated in 1958 -- only three years later than Moldbug's alternate history.

And yet no iPads in 1960. Because there's a vast global capital structure that needed to evolve first. Technology is not an external factor. It makes no sense to argue whether society is better after factoring out technology, because technology cannot be factored out. It's all part of the same web of interrelationships.

Edit to add:

I had to add this, because it's so wrong it's perverse: "At the base of the pyramid are air, water and food. How does 2013 do at supplying oxygen, hydration and nutrition? How did 1950 do? Just fine. Gentlemen, a draw."

Only if you limit yourself to the wealthiest 10% of human beings. Out here in reality, global food security for everybody else is dramatically better than it was in 1950. Much of the developing world is starting to worry more about obesity than starvation. Moldbug is simply ignoring the biggest economic story of the last 40 years, presumably because it didn't happen in The West.

yxhuvud• 12 years ago

Not only capital structure, but lots and lots and LOTS of various minor improvements in all areas.

They would not be making iPads, because simply having one around doesn't automatically create the production technology to create it. That would still take a whole lot of work. It may well be that it would be more efficient to send them a bunch of C64's if you simply wanted them to improve faster, since the gap between the technologies are lesser.

lexcorvus2• 12 years ago

One way to see how technology can be factored out is to consider a time when it changed more slowly. For instance, technology in ancient Rome hardly changed between, say, 180 A.D. and 400 A.D., at least by 21st century standards, and yet there's no doubt that Roman civilization declined precipitously during that time.

One of Moldbug's claims is that similar declines in the last two centuries or so have been masked by technological improvements. For example, in the 1960s many people routinely left their cars unlocked, often even leaving their keys in the ignition. [1] Meanwhile, technological improvements in the intervening ~50 years have made it much harder to steal cars. The way to factor out technology in this case is to imagine what would happen if modern cars had no alarm systems, no LoJacks, were easy to hot-wire, etc., and if people routinely left keys in the ignition of unlocked cars. It's not even hypothetical—you could actually do this as a real experiment. The result would, I predict, show that (at least in this narrow respect) American civilization has declined in the intervening years.

[1] http://www.vdare.com/articles/why-hasnt-crime-fallen-further...

rhizome• 12 years ago

Ah yes, the old "actual reality" ruse.

pyfish• 12 years ago

I agree technology will save us from the mad max scenario that we repeatedly have read about over the last 5 years. However, it will be interesting to see how the "Technocracy" plays out.

josephlord• 12 years ago

The private debt levels are just as critical as the public debt levels and much higher (although down from their 2008 peak still I think). What is particularly is the total rate of change for public and private debt which heavily dictates the growth levels. When the economy suddenly switches from growing debt at accelerating rates to reducing debts is when the major crash happens.

plaxis• 12 years ago

But it's not a bad economy VC/PE. It's basically loads of 0% money and no tax via carried interest. If you disagree, come see the number of entire floor apartment renovations happening on 5th ave.

<3 NYC

danielweber3• 12 years ago

This comment section turned out about the way one would predict: politics.

thathonkey• 12 years ago

This comment section turned out about the way one would predict when so few of the participants have ever studied economics.

danielweber3• 12 years ago

Unfortunately there seem to be two distinct groups that each think the other has never studied economics.

It's possible to have good discussions about this, but it requires a lot more moderation than HN wants to do (rightly, in my estimation). And probably a different format: the threaded discussion format leads to all sorts of weird tarpits.

ZenPro• 12 years ago

This ^^ +10

georgemcbay• 12 years ago

How could it not? Macroeconomics and politics are inseparable.

firstOrder• 12 years ago

Some of the figures Altman gives are important. There are some more:

http://monthlyreview.org/2008/12/01/financial-implosion-and-...

If you read that article and consult the (mostly government) sources, you'll see:

* It's not just government debt that is high - household, business, and especially financial debt is high

* The financial sector has been growing much faster than the "real" economy

* Less and less of the GDP goes to consumers in wages and salaries

* Industrial capacity utilization goes down and down and down (so why invest in new capital?)

* Since the 1980s, profits have been an increasing share of GDP, while investment has been going down

Macroeconomic collapse on the scale (or greater then) it happened in the 1930s will, I believe, inevitably happen.

pkaler• 12 years ago

Almost any argument that relies on GDP numbers to back up its claim is specious at best.

For example, you could have a tornado destroy a town and the disaster recovery spending would increase GDP. You could build a teleportation device that puts all delivery drivers out of work. GDP would decrease but there would be an overall increase in wealth and quality of life.

Thinking about economics through the lens of GDP is just the wrong way to think about the economy.

Here's a great Planet Money podcast on the invention of "The Economy" and on GDP: http://www.npr.org/blogs/money/2014/02/28/283477546/the-inve...

penguindev• 12 years ago

Yep. Heart attacks, perpetual 'diabetes treatment', borrowing a million (or a trillion) dollars you can't pay back and spending it, promising unrealistic pension benefits, and depleting natural resources (wood, water, energy, overfishing, selling your seed corn), fighting losing wars (is there ever a winner?), paying other people to raise your kids, all grow "gee-dee-pee'.

DINKDINK3• 12 years ago

Additionally none of this is population normalized. https://www.google.com/publicdata/explore?ds=a7jenngfc4um7_&...

Additionally, the first GDP chart conflicts with what it's reporting: Title "United States GDP Growth Rate", Subtitle "Percent change in Gross Domestic Product". Additionally, percent change relative to what?

quadrangle• 12 years ago

Perfectly stated. We need to get to where we truly reject the whole GDP concept. It is corrupt, manipulable, and destructive.

Shivetya• 12 years ago

You would think with all the social spending we do that things would be better by now for people in this category but its not really. There needs to be a concerted effort to reduce the number of assistance programs to a single digit number so that funds are not lost to paying the workers to administer the programs. There are thousands of assistance programs just at the Federal level, sure that is not an ideal way of getting help to those in need.

nostromo• 12 years ago

We need to find the next big growth engine. Like "the internet" big, or its baby brother "mobile" big. (Imagine what the US economy would be like without those growth engines. Even with them, their effect on the US GDP growth chart in the article is unnoticeable.)

I have a hard time thinking of things that could be so dramatic in terms of growth. AI, radical life extension, space elevators, renewables... I'm not sure.

The sad thing is we only have one Google. Very few other well-monied companies are taking big moon-shot risks. We need a dozen Googles and a hundred Elon Musks to find the next growth engine.

But instead we have billionaires buying NFL teams, the government taking money from STEM to fund entitlements, and corporations too risk-averse to make any big bets.

fchollet• 12 years ago

Although Google has done a much better PR around its research efforts, IBM and Microsoft are both investing much more in R&D. Microsoft is the tech company with the most research investment.

throwawaymsft• 12 years ago

I'd caution using R&D investment as a metric. Historically, it seems the huge game changers (Google, Apple, Facebook, etc.) came from motivated individuals and not corporate research labs. Microsoft's early and enormous investments did not help them catch/contribute to the search/social/tablet/mobile wave which generated much of the value in the tech economy the past decade.

ThomPete2• 12 years ago

I actually think the the Block-chain could be such growth engine.

It basically holds the promise to potentially take out any middlemen from server to bank, from company to nation which in itself would cause a major shift in the economy.

diafygi• 12 years ago

I nominate cleantech, energy efficiency, and renewable energy.

Over the next 30ish years, the entire globe will have to transition from fossil fuels to sustainable energy. The amount of growth that needs to happen is probably bigger than what we experienced in the internet boom. Already in California, green jobs outnumber Hollywood jobs, and solar is now profitable without subsidy.

These are the areas that are going to have the largest growth and innovation over the next few decades. The next Google is going to be an energy company.

gfodor• 12 years ago

I don't know how you can qualify this as growth. The transition to renewable energy should be applauded, but at the end of the day it is a displacement of the fossil fuel industry, which is massive. It seems less like a wealth creation engine and more like a "we will destroy the earth otherwise" necessity.

d4vlx• 12 years ago

I'm not trying to be snide but imo hoping the economy will improve by someone finding a growth engine is wishful thinking. I would like to see tax policy and government spending formulated for sustainability based on domestic consumption and have any potential innovation income as windfalls.

Hinging the economy on the creation of new grown engines is a risky strategy and I don't think the government should be in the business of making bets, at least at the macro economic scale (hell yeah on research spending).

MaysonL3• 12 years ago

The next big growth engine could and should, if the Congress were to choose to emprace it, be a large infrastructure and public works budget (especially given the current low interest rate environment, and the large number of people unemployed and underemployed). Our bridges and highways and air traffic control system could really use it. Of course, keeping the waste, fraud, and abuse in that budget down to a minimum would be difficult, given current Congresspeople and their priorities and agendas.

Tycho• 12 years ago

I think the most likely next big growth engine will be drones. However the opportunity will probably go to China, who will make up for lack of innovation with deregulation, meanwhile western countries will be too anxious about terrorism to allow drones to fly about their cities/countryside making deliveries, spraying crops, etc.

chrishynes• 12 years ago

That's easy: cheap energy, particularly thorium reactors. Driving down the cost of energy creates a defacto boom, not to mention the industry to build out such infrastructure.

uptown• 12 years ago

Another interesting chart: https://twitter.com/hblodget/status/483577150805901312

natural219• 12 years ago

There's a specific mental trap -- I'll call this "scientism" -- that a lot of comments here are rapidly falling into. It's in treating macroeconomics as a "solved" problem, or putting too much faith in specific studies or sentences.

That's not at all the proper way to look at macroeconomics. Our economy is unimaginably complex -- it's full of hundreds and millions of moving parts, with each single part (the human brain) driven by an even more complex system with hundreds of billions of parts (neurons). All of these parts are re-orienting themselves with new data in real time.

What Sam is trying to say here, is that we don't know if these trends are "good" or "bad", or if they'll lead to bad outcomes or not, or in what time frame this will occur. All we know now -- and this I agree with -- is that something in our economy has changed permanently. And this should be a good cause to worry, or at least, should be taken as a call to arms to economists everywhere to try and figure out why our models aren't working as well as they used to.

    "Too large a proportion of recent "mathematical" economics are mere concoctions, 
    as imprecise as the initial assumptions they rest on, which allow the author
    to lose sight of the complexities and interdependencies of the real world in a 
    maze of pretentious and unhelpful symbols." - John Maynard Keynes

seoguru• 12 years ago

I wish everyone (or at least Sam Altman) would read "The Seven Deadly Innocent Frauds": http://goo.gl/6a22pX less than 2 hour read. read it with an open mind and your worldview may change.

watch Stephanie Kelton and Warren Mosler talk about gov debt and deficits: (2 hours!) https://www.youtube.com/watch?v=ba8XdDqZ-Jg

Randall Wray on Job Guarantee vs Basic Income: http://www.economonitor.com/lrwray/2014/01/27/lets-compare-t...

Mosler's current prescription: 1) A full FICA suspension, which raises take home pay by 7.6%, and, for businesses that are competitive, lowers prices as well, restoring sales/output/employment in short order 2) A $10/hr federally funded transition job for anyone willing and able to work to promote the transition from unemployment to private sector employment ...

privatedan• 12 years ago

A simplified example of what happens when trade deficits occur over a long enough period of time:

Squanderville versus Thriftville (Warren Buffet) - http://www.freerepublic.com/focus/news/1053684/posts

lukasm• 12 years ago

It's intriguing that US economy is slowing down since WWII. What are the reasons?

1. No significant improvements like agriculture.

2. Increasing regulations

3. Big middle class that have no strong motivation to advance further or have "enough money" for good living (modulo individuals)

4. Growth in domain which GDP doesn't capture e.g. Open Source

5. No obvious investments opportunities e.g. Highway

humanrebar• 12 years ago

6. Retirement of the baby boom generation.

7. Low birth rates.

scoofy• 12 years ago

I'd say it's probably just the world slowly but surely becoming less dependent on the U.S. economy after the entire world economy was destroyed in a War.

And, yes, birthrates and longer retirement are probably relevant.

magoghm• 12 years ago

"On the positive side, but as you’d expect with near-zero rates, US equities are at record levels." I'm no so sure this should be on the positive side. Those equities are artificially inflated by central bank (indirect) manipulation. Those prices might not reflect the real value of the underlying assets and could collapse, which would once again put the whole financial system at risk.

rogerbinns• 12 years ago

I believe tax breaks don't show up as government spending. If for example Boeing is given a billion dollar tax break, then the government has a billion dollars loss and Boeing has a billion dollars more. But that won't show up as a billion dollars going to the government, and then spent on Boeing, even though that is exactly what is happening.

I suspect that if tax breaks were accounted for, then government spending would be higher. It looks like US corporate welfare is around $200bn/year, although there are many larger estimates out there (eg count the banking bailouts). I haven't seen numbers for personal tax breaks, but adding them will make the number larger.

gadders2• 12 years ago

I'm confused - Sam who held a fundraiser for Obama is now saying the economy is screwed?

gadders2• 12 years ago

To expand further - is there not a certain tension in a) saying the US economy is screwed, and b) holding a fundraiser for the man that has presided over it for the last 6+ years?

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