The Real Problem With The Economy: Misallocation Of Capital?
from the gov't-tinkering dept
Andy Kessler has one of his standard thought-provoking opinion pieces discussing the economy of the past decade, suggesting that the real lesson learned from the past decade is the dangers of bad gov’t policies leading to misallocated capital. Starting with bad telco regulations in the 90s that drove a bubble in unnecessary and misguided investment in infrastructure, some of which overflowed into a ridiculous dot com gold rush:
The late ’90s Internet love fest was crazy enough, driven by former FCC Chairman Reed Hundt’s misguided telecom reform that had the effect of keeping data rates artificially high. This created a gold rush to install fiber and build applications that didn’t make economic sense (though electronic commerce, online banking, as well as wireless and broadband deployment would eventually prove productive over the next decade). Bad policy meant capital got overallocated and too quickly, as momentum mutual funds (momos) and day traders furiously drove up stock prices of every company with dot-com in its name for no fundamental reasons. Wall Street trading was broken.
But, he notes, there was a core of a good idea in there. What made the investment in the internet and new technologies make sense was that it actually did drive productivity. The proper use of such tools increased productivity, decreased costs and opened up new markets. But with the flood of misallocated money, a lot of that got obscured in chasing sock puppets selling pet food.
Following this, there was a combination of bad policy decisions — Greenspan flooding the system with money out of fear of a Y2K problem, combined with Enron freaking people out and leading to Sarbanes Oxley — and a new mess was created:
Instead of finishing what the dot-com era started to deliver–a productive, wealth-producing economy–capital was seduced into the financial lair of private equity and real-estate mortgages. Trillions were pumped into unneeded housing stock. Fannie and Freddie fanned the flames, and then fizzled and failed. And leveraged buyouts reigned. Even in 2007, one Blackstone private equity fund raised almost as much money as all of the venture capital industry.
The key point here is that venture capital tends to (though, certainly not always…) invest in real innovation, nurturing concepts from idea to market and beyond. Private equity, however, is more about just moving money around and looking for quick hit opportunities to get increasing returns. One grows the economy. The other does not. But, by punishing the capital markets that fund real innovation and company growth via Sarbanes Oxley, money that used to go to venture investment went towards the east coast private equity world, where it was shuffled around, rather than invested productively. And, tragically, it doesn’t look like anything the government is doing is designed to fix this:
Today, we are still left with almost no initial public offerings. While private equity fund-raising was down 68% in 2009 to $96 billion, venture capital barely raised $13 billion.
Capital gains taxes are set to return to 20% on Jan. 1, 2011. And worse, investing is as uncertain as ever. No one wants to fund health care, medical devices or even much biotech if they can’t figure out how they are going to be paid via reimbursements from ObamaCare. Energy investing is also a mess. And while “green” investing is booming, with few exceptions that is about efficiency rather than productivity. There’s a big difference: You can make the Post Office more efficient while email makes us more productive and wealthier.
Big regulated oligopolists control our communications infrastructure. Startups are nowhere to be found. Few are willing to take the risk of true venture investing.
It’s been 10 long years since the economy has created real wealth, as opposed to easy-credit induced real-estate or paper wealth. Amidst all the current confusion over health care and tax rates and energy and banking reforms, maybe it’s time that the market transitions back to investments that drive productivity and increase living standards rather than just paper profits.
Reaching back to our economic parables, it’s a question of whether or not our government has been making a giant broken window fallacy. It’s not working on plans that fund actual productivity and economic growth. The government is focused, instead, on getting money moving around again, and all that means is it will move into another unproductive bubble, until we align the incentives properly again.