October, 2011

Economics On The Ground in Silicon Valley

The economy appears to be on the minds of magazine editors these days and no wonder.  With the stimulus running out the economy appears to be headed south again.  This contradicts my experience last week in Silicon Valley where the CEOs I met with said they were,

1)   Raising more money, not because they need it but because it’s cheap and the VCs are having a hard time finding good late stage investments.

2)   Readying for market new offerings aimed at specific segments that may have been under served before.

3)   Desperately trying to hire people.  The people I met with have openings whose sheer numbers astound you.  The CEOs I met with told me the could easily double their sizes in the coming year if only they could find 50, 100 or 200 qualified people.  At Dreamforce Marc Benioff said his company has about one thousand openings.

These and many other CEOs know that they have to hire ahead of the demand curve and demand is brisk.  To be sure, the jobs we’re talking about are not aimed at the unemployed factory worker — at least not the one who hasn’t been retrained.  That brings up a difficult discussion of how we as a society respond to changes in the marketplace and the value of our educational system.  This piece is not intended to be a deep dive on either, merely an observation.  But back to the magazine editors.

On the flight home I managed to read almost the entire October 1 edition of The Economist it’s the one with the cheerful picture of the universe and a black hole.  Superimposed on the blackness are the Halloween-ish words “Until politicians actually do something about the world economy…Be Afraid”.  Inside the issue takes aim at politicians on both sides of the Atlantic and the lead editorial ends with something so succinct I see no reason to attempt to paraphrase it and so I quote it in full:

“Lacking conviction and courage

In the aftermath of the Lehman crisis, policymakers broadly did the right thing. The result was not a rapid return to prosperity in the West, but after such a big balance-sheet recession that was never going to happen. Now, more often than not, policymakers seem to be getting it wrong. Their mistakes vary, but two sorts stand out. One is an overwhelming emphasis on short-term fiscal austerity over growth. Fixing that means different things in different places: Germany could loosen fiscal policy, while in Britain the reins should merely be tightened more slowly. But the collective obsession with short-term austerity across the rich world is hurting.

“The second failure is one of honesty. Too many rich-world politicians have failed to tell voters the scale of the problem. In Germany, where the jobless rate is lower than in 2008, people tend to think the crisis is about lazy Greeks and Italians. Mrs Merkel needs to explain clearly that it also includes Germany’s own banks—and that Germany faces a choice between a costly solution and a ruinous one. In America the Republicans are guilty of outrageous obstructionism and misleading simplification, while Mr Obama has favoured class warfare over fiscal leadership. At a time of enormous problems, the politicians seem Lilliputian. That’s the real reason to be afraid.”

That “collective obsession with short-term austerity across the rich world” and getting it wrong generally, were the subjects of another economists life’s work.  John Maynard Keynes lived and wrote in the first half of the twentieth century about times that are increasingly looking like our own.  In a well written and very useful article by John Cassidy in the October 10 issue of the New Yorker, Cassidy asks the essential question — What would Keynes do?

In practice Keynes would do nothing as he was never an elected official but he did advise them.  His prescription would have been to increase aggregate demand — that sounds like complicated economicese but it really boils down to stimulus.  Get people working and paying taxes and while we’re at it lower taxes to make spending more attractive.  That means the government as buyer of last resort.  As the economy recovers those policies can be trimmed and the debt incurred by the government can be repaid.

All this stands in sharp contrast to The Economist’s observation that an “overwhelming emphasis on short-term fiscal austerity over growth” is causing harm to the global economy and no good aside from giving politicians the chance to strut for increasingly tiny fringe audiences in advance of an election.

The politicians in California are safely sequestered in places like Sacramento and HP where Meg Whitman who recently ran for governor now presides.  The Silicon Valley economy is by all measures thriving.  What do they know that we should?