How to Save Capitalism - Part 6

REINDUSTRIALIZE
by Eric Janszen

Eric Janszen is president of iTulip, Inc., and formerly was a venture capitalist and a CEO of technology startups. His last article for Harper’s Magazine, “The Next Bubble,” appeared in the February issue.

Here, in brief, is the state of the Union. Home sales and prices have declined more in the past year than in any year during the Great Depression. Credit contraction has spread to corporate borrowing and student loans. Unemployment is rising in every state in the nation—except for tiny declines in Arkansas, Oklahoma, and West Virginia, which benefit from higher energy and food prices but together account for only one fortieth of the U.S. population. Unemployment in California, the most populous state, reached 7 percent in June, up from 4.9 percent just two years ago, at the peak of the housing bubble. Debate continues over whether the United States as a whole has been in recession since the GDP contraction during the fourth quarter of 2007. But data ranging from retail sales to declining tax revenues serve as clear warnings that the recession may be ongoing. Evidence of economic contraction has been obscured, ironically enough, by the rising inflation that has been spurred by record energy prices.

For twenty-five years, our economy has been dominated by asset bubbles in the finance, insurance, and real estate (FIRE) sector. But now the FIRE-economy era is over. Within two years, the United States will be in the grip of a modern inflationary depression. Look around and you can already get a sense of how it will go: rising unemployment, falling wages, rising prices. This is what happens to countries that become dependent on foreign borrowing to fund current consumption and the operations of government and that rely too heavily on asset-price inflation to produce income. As the system winds down, demand falls and purchasing power is lost. Consider what happened to Argentina: its per-capita income was once higher than that of Japan and Italy and comparable to that of France. But its economy collapsed, in part from the weight of decades of fiscal profligacy—in particular the country’s dependence on foreign borrowing to finance government. Fortunately for the United States, our debts are long-term and owed in our own currency; our creditors, now largely foreign central banks rather than private institutions, can merely manage the dollar down, as has happened since 2002, with the dollar depreciating more than 39 percent. Call the process Argentina Lite.

Rather than allowing our government to engineer another bubble (all our bubbles since the 1980s have involved the government creating—through tax subsidies, loan guarantees, and loose regulatory policy—an initial market for speculation that then metastasizes), we should use the government to lay the foundations for a reindustrialization of America. We can do this in two ways. First, get government out of the way of progress by removing subsidies for uncompetitive companies. We can’t expect private capital to compete with, for example, the current proposed $95 billion tax break for the dinosaurs of the American auto industry. Second, and more important, we should remove government subsidies of FIRE industries. This means not just ending the mortgage-interest deduction but also breaking up Fannie Mae and Freddie Mac into parts and selling them on the open market. By removing our structural support for the FIRE sector, we would free up billions of dollars of capital for both the private and the public sectors.

That capital, in turn, could be invested in American infrastructure. We need high-speed railways, ubiquitous high-bandwidth wireless, and nuclear energy, but we currently have a dysfunctional market dynamic that is stopping us from making these improvements. It’s a chicken-and-egg problem: private industry can’t bring more efficient cars (say) to market without significant infrastructure funding to build alternative fueling stations, but meanwhile the delay in these technologies prompts the government to lavish ever more money on the old, inefficient industries in order to preserve jobs. To break that cycle, we need government to actively envision the infrastructure projects we need and then arrange their funding by private investors as well as by public money. The right approach here is one that has already been used to great success in Europe: “public-private partnerships”; i.e., corporations owned partly by private investors and partly by the government, created for the purpose of developing and executing largescale public works. For each major project announced by the federal government, multiple public-private partnerships could bid competitively for the business (much like prospective Olympic host cities do). Progress on projects, public information reported quarterly, would create incentives for efficiency through the stock price. The best PPPs would be rewarded with the highest stock price for producing the best infrastructure “product” on time and on spec.

Once a bid was accepted, individuals could invest money in the partnerships directly, in a fashion similar to how the Treasury Department and certain states (Massachusetts and California) currently sell bonds to Americans over the Internet, cutting out rent-levying banks. Moreover, citizens’ federal taxes could be deferred, up to a limit, so that they could purchase infrastructure securities. These securities would become a bedrock investment for federal and state governments, as well as for foreign governments, which at present have trillions invested in U.S. Treasury bonds: these infrastructure securities would earn a better rate of return at only a marginally higher risk, and a shift toward them would allow the United States to pay down its debt more productively.

Finally, funding of these infrastructure projects would enable thousands of new private companies, whether bootstrapped by entrepreneurs or backed by venture capital, to develop new technologies. New, organic light-emitting diodes that produce as much illumination as current sources with one tenth as much energy; ceramics that allow next-generation nuclear reactors to run safely; biotech-modified microorganisms that convert nuclear waste into harmless materials; nanotech paints that reflect sunlight to make the insides of cars cooler—the list is endless. Such new American technologies would be in demand worldwide, exports would boom, and within ten years the U.S. current-account deficit would reverse. Instead of creating asset bubbles, the nation that invented the Internet—with the help of government,
as one must always remember—would finally invent a New Economy deserving of that name.