Saturday, May 5, 2012

I Don't Really Think So

Rajan writes in Foreign Affairs the following:

Rather than attempting to return to their artificially inflated gdp numbers from before the crisis, governments need to address the underlying flaws in their economies. In the United States, that means educating or retraining the workers who are falling behind, encouraging entrepreneurship and innovation, and harnessing the power of the financial sector to do good while preventing it from going on track.

Now let us examine this set of words:

1 educating or retraining the workers who are falling behind 

The problem is that the problem with the economy is that is has become more technical and the population is such that technical people are NOT trained, the must work hard and have a modicum of intellectual talent and personal dedication to perform. Yes, math is tough, and engineering is hard, which is why we have so few Americans in the field. As I have noted many times it was Norbert Wiener in the early 1950s who foresaw this change, and gave much warning as to what would happen.

Thus Rajan is missing the point. What will we do with more lawyers, macroeconomists, sociologists, and the like. They are for the most part non productive. We clearly do not need any more Romer types whose predictions are consistently worthless. They cannot agree and do not produce anything of value. But alas students go there and find jobs repeating the mistakes of the past. This all the while when the Chinese produce the scientists and engineers, as does India.

The problem in the US today and for the next generation is we facilitate the "education" of non-producers. The goal of having everyone college educated is truly foolish. First, they are just not equipped to do so. Second, we need plumbers and electricians, I can do the latter just in case.  We do not need more political scientists and fine arts majors. We should not fund such efforts. Also we eliminated Teacher's Colleges. Namely educating just plain old teachers. It was cheap. Now we educate English majors at ten time the price. Why?

2 encouraging entrepreneurship and innovation

Entrepreneurs will exist even in Hell. Entrepreneurs manage to work around Governments and Governments, this current one especially, has set up so many challenges that the entrepreneur will go elsewhere. Governments do and can do nothing to facilitate the entrepreneur. They have a lifeblood different from most others. I set out to 20+ countries to start a business with nothing but my plane ticket, my credit card, and a clean suit! My Government really did nothing to assist. Nor did I ever expect it to do so. In fact every time I dealt with any government it was placing roadblocks. Except strangely in Russia!

Thus again Rajan misses the point. Governments are just a pain, they are useless, other than keeping one safe and protecting property rights. Which the current Administration has done a great deal to destroy. Just look at the bond and shareholders in auto companies.

3 harnessing the power of the financial sector to do good while preventing it from going on track

Financial markets do create liquidity. Liquidity is good. Financial markets may at times facilitate the raising of capital. Note that I say facilitate. It is incumbent upon the entrepreneur to pitch their ideas and the financial market just has the black book of contacts. I have never met a banker who added any value beyond the contacts, and yes they have value.

Now I miss Rajan's point of Government harnessing the power of financial players. Just what does that mean? Government should prevent them from taking risks with people's money. The solution there is say a "death penalty" approach, you lose money you pay, you lose lots of money you really pay! There must be a downside risk, a personal fear of abject terror, personal terror, which makes the financial markets stabilize.

You see the concept of Hell and eternal damnation did have a purpose. But if we cannot get a new Inquisition for the Financial Institutions and their ilk, then we need to have Government take action, that is a Lockean role of protecting property. It is a classic example of externality. If I hold assets and some greedy fool takes action that destroy the assets the bloody  fool should pay, and in the most extreme form possible, and the bloody fool should know that ab initio.

That in my view is the only way to regulate what is otherwise the wild wild west.