Tuesday, September 20, 2011

The government as customer vs venture capitalist

One of the persistent problems the economics profession is the crackpot idea that will not die.  And at the head of this list of crazy ideas is one attributed to Jean-Baptiste Say who supposedly taught "Supply creates its own demand".

Now supposedly Say didn't actually say this.  A defender describes Say's position:
In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply. A central element of Say's Law is that recession does not occur because of failure in demand or lack of money.  
The more goods (for which there is demand) that are produced, the more those goods (supply) can constitute a demand for other goods. For this reason, prosperity should be increased by stimulating production, not consumption.
Of course, anyone who actually experiments with Say's "law" by going into business will quickly discover that you can produce exquisite products and superb services and still go broke because you cannot find enough customers.  And on the trip to the bankruptcy court you will notice that almost everyone who makes anything is likewise saddled with staggering amounts of unused productive capacity.  In some ways, Say's "law" is just a Producer Class wet dream.  "Don't worry where you will find customers," claim the Say popularizers, "just make a quality product and folks with beat a path to your door."

If you build it, they will come

It turns out that the worst line in movie history is actually a misquote.  The Field of Dreams trivia specialists claim the line was "If you build it, he will come" as if that was some huge improvement of a mad voice instructing a farmer to turn a cornfield into anther baseball diamond.  After all, the movie's tagline is: If you believe the impossible, the incredible can come true.  And so after a decade of calamity for the real economy, 1989 would feature a movie that claimed everything would turn out just fine because Say's Law wasn't really dead after all.

If only a bad Kevin Costner movie could sink the foolishness of Say because that bogus "law" was now associated with mad folks who acted on voices in their heads.  No such luck.  "If you build it, they will come" became the covering rationale for a million projects since then that include a Rock and Roll Hall of Fame in Cleveland and aquariums in every city the size of Duluth and up.

In some ways, the recent failure of solar panel manufacturer Solyndra is just another example of bastardized Say's "law" gone bad.  Thin-film solar panels show a great deal of promise and there is NO reason why someone shouldn't try to fill that niche.  But Solyndra thought they needed to build a $500 million-dollar fab plant and hire 1000 employees to create production to meet a demand that they could not prove existed.  You've got to sell an awful lot of solar panels to pay for a $500 mil fab plant.  If you build it, they will come, indeed.

If instead of guaranteeing a loan for a $500 mil fab plant, the government stimulation was a promise that if Solyndra actually produced panels that met certain specifications, the government would buy the first $500 million worth of production at a fair price to solarize the millions of government buildings that really NEED an energy upgrade, Solyndra could have taken this promise to a thousands banks for financing of their fab plant.  Kind of reverse Say—if there are customers, production will rush in to fill the demand.

The latest attempt to drive a stake through the heart of Say / supply-side foolishness is brought to you by the chairman of Google.  I find it telling that the main thing successful entrepreneurs have in common is their respect for the importance of consumers with money to spend.

Google CEO Schmidt Admits It's DEMAND That Creates Jobs
By Nicole Belle  September 19, 2011

It's ironic that the CEO who is expected to defend his company against anti-trust allegations this week is the only person on the Sunday shows being honest about how to get Americans working again.

AMANPOUR: But you say significant stimulus. Obviously, this is a political environment where the only real conversation is about cutting. Do you see any expectation or possibility of a climate for more stimulus? 
SCHMIDT: Well, that's a political question, but the current strategy is ludicrous. You have a situation where the private sector sees essentially no growth in demand. The classic solution is to have the government step in and, with short-term initiatives, help stimulate that demand. If they do it right, they'll invest in income and growth-producing things like highways and bridges and schools, new opportunities for the private sector to go then build businesses. Today not only is there no demand coming out of the government, but because of the housing crisis, nobody sees any improvement in their own liquidity, so nobody's buying anything. 
AMANPOUR: So this is a pretty dark picture that you're painting. Add to that no confidence from the consumers and businesses sitting on something like $2 trillion worth of profits which they're not going to spend, apparently. Is the president -- does he have a material problem with the business community right now? 
SCHMIDT: The real problem is not the business community. The real problem is the Democrats and the Republicans fight for one point or another in a political sphere while the rest of us are waiting for the government to do something concrete and predictable. What business needs is predictable, long-term plans. We need to know, where is government spending going to be; what are the government programs going to be, and off we go. Business can create enormous numbers of new jobs in America. All we need to see is more demand. What's happening right now is businesses are very well-run; they have a lot of cash; they're waiting for more demand. At the moment, business efficiency allows them to grow at 1 percent or 2 percent, which is what we're seeing today. They don't have to hire more people. And until we solve that problem, people are going to sit idle, and it's real tragedy. 
Wait, what's that? Businesses are not holding jobs hostage because they're waiting for more tax cuts? It's because there's not enough demand for products and services to justify hiring new workers? Why, that's dirty liberal talk! 
You know, Republicans are absolutely right that uncertainty is keeping corporations from hiring. But they have it 100 percent back asswards as to why. It's not because they fear taxation. Hell, most corporations effectively pay no taxes at all. It's because THERE'S NO DEMAND FROM CONSUMERS. These perennially wrong supply-siders are missing that this uncertainty is stemming from the demand side: People don't know if they'll be employed next year. People are living with upside down mortgages. Their real wages have remained stagnant, unlike these CEOs and hedge fund managers. In short, consumers are nervous and unwilling to spend money they think they might need for the rainy days ahead. And the Republicans in Congress, with their obstructions and filibusters and holding the country and economy hostage for partisan gain, THEY'RE the ones creating the uncertainty. more
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