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Innovation/Global Crisis Blog

A Modest Proposal for Responsible Fiscal Stimulus

By Shlomo Maital

   Frankly, having taught the course for 40 years, there is not much real value in Macro Economics 101.  Macro-economists, even superb Nobel Laureates like Joe Stigler, have very little to say about how the world can get out of its current mess.  Stiglitz, writing in the Financial Times, says the good news is…it could have been much worse.  And that, my friends, is about all he has to say.  The good news is, there might have been more bad news. Lovely.

  Here is a modest little idea that comes straight from the pages of Macro Economics 101.  It is called the Balanced Budget Multiplier. It was discovered by MIT Nobel Laureate Paul Samuelson, the greatest economist of his generation.  Here is his theorem:

    If governments increase their spending by $X b.,  and at the same time increase their tax revenue by $X b.,  the net effect on GDP is precisely  + $X b.  No deficit increase, but significant fiscal stimulus.

    Why? How can this be true, if the government absorbs $X b. in taxes and then just puts it back?  The reason is this:  If people kept the $X b. in income, they would spend only a part of it.  But the government spends ALL of it.  We know there is a pass-through or multiplier effect:  if people spend “c” percent of their income, the ‘multiplier’ is  1/c – i.e.   $1 in stimulus creates  1/(1-c) in new GDP;  if c is 0.8,  then the multiplier is 1/0.2 or 5. 

    So the net effect of a balanced-budget stimulus is  what the government spends, $X, minus what people would have spent with the $X in taxes, or  (c)$X,  or (1-c)$X, times the multiplier 1/(1-c),  which is  …. $X.    


   Attention Tea Party advocates, including Rick Perry, Texas governor and probably the next Republican Presidential candidate (watch Mitt Romney fade).   You CAN have your cake and eat it too.  Raise govt. spending.  Raise tax revenue by closing loopholes (technically, NOT a tax increase).  Balance new spending with new revenue.  Avoid raising the deficit. And yet, at the same time, stimulate the economy and create jobs. 

    This idea comes from Robert Shiller, NYT July 23.  Shiller is a rarety, a truly creative macroeconomist with a great many cool ideas for resolving the current crisis.  He has a new book coming out soon that is eagerly awaited. 


Innovation/Global Crisis Blog

Leaders of the World: Benchmark Brazil!

By Shlomo Maital

  I truly love the delicious irony in the following:  For decades, America lectured Brazil and its leaders on how incompetent and worthless they were, ruining their currency with runaway inflation, incurring enormous short-term debt and generally behaving irresponsibly.

   Ah, how lovely. The shoe is on the other foot.  President Obama should get on the next (Air Force One) plane and visit Rio.  He would learn a great deal about effective leadership from the Brazilians, and not solely from its legendary former president Lula.

    Here is what he would learn: 

   ●  From Jose Graziano da Silva, now incoming head of the FAO (UN Food and Agriculture Organization), previously father of Brazil’s lauded “Zero Hunger” program:   (Wall St. Journal, July 22-24, “Marketplace”):   Zero Hunger integrated 50 policies, involving everything from direct financial aid for small farmers to low-cost restaurants, in order to feed the poorest and alleviate extreme poverty – the root cause of hunger.  “To eradicate hunger is not a goal that a government can achieve; it is society that does this,” Mr. Graziano said. “It shows that if you have a basic society already organized, then you can organize it into communal goals.” 

    Zero Hunger lifted some 24 million people out of poverty since 2003.   Graziano actually launched Zero Hunger, but was removed from his post after the first year.  Brazil, however, under Lula persisted.  According to Fox News, “President Silva launched Zero Hunger in 2003 after saying at his inauguration that ending hunger was his administration’s main goal. The effort united several social programs and introduced new measures, such as Bolsa Familia. Dozens of other initiatives fall under the plan, including support for small farmers, running restaurants serving 50-cent meals and job training for women.   Brazil spends 0.4 percent of its gross domestic product on the Bolsa Familia program, yet it has a bigger impact shrinking inequality than far costlier programs, such as Brazil’s version of the U.S. Social Security effort.

 Brazil’s programs, which borrow partly from a Mexican initiative, have inspired other government initiatives around the globe, including 16 conditional cash transfer programs in Latin America and at least 14 outside the region.  “Brazil’s experience is hugely inspirational to a lot of developing countries that are themselves battling with a lot of issues around food security and hunger,” said Asma Lateef, director of the Washington-based anti-hunger Bread for the World Institute. “That it could be done and done so quickly is a wonderful success story and gives hope to a lot of people around the world.”

    ●   And  from  Celso Amorim (Foreign Minister of Brazil from 2003-2011, and current Minister of Defence), a man who has been described as having “…masterminded a transformation of Brazil’s role in the world that is almost unprecedented in modern history…”.

    Writing in the blog “thought economics”,,  Vikram Shah observes:   Brazil’s 191 million strong population have, within their lifetimes, seen their country exit the Great Depression of the 1930’s only to end up with seemingly never-ending cycles of economic and political crises which led to a coup (in 1964), a twenty year military dictatorship and then a process of re-democratization and rapid industrialization (from 1985 to present-day). During this period, Brazil’s GDP has grown from $15.1 billion in 1960 to almost $1.6 trillion today (making Brazil the world’s seventh largest economy by purchasing power parity).   “This rapid socioeconomic transformation…” says Werner Baer in his book ‘The Brazilian Economy: Growth and Development’ “…can be illustrated with a few numbers. In 1940 only 30 percent of the country’s population was urban; by 1970 this proportion had increased to 56 percent, and by 1999 to 78 percent. The contribution of agriculture to gross domestic product (GDP) declined from 28 percent in 1947 to about 10 percent in the late 1990’s (measured in current prices), whereas that of industry rose from not quite 20 percent in 1947 to about 36 percent in the late 1990s. After four decades of intense industrialization, Brazil was producing 2 million motor vehicles in 1997, 26 million tons of steel in 1997, 39 million tons of cement in 1998, about 7.8 million television sets, and 3.7 million refrigerators in 1997. It had over 58,000 megawatts of installed electric power capacity in 1998, and over 60 percent of its exports consisted of manufactured products. Its paved road network increased from 36,000 kms. in 196 to close to 150,000 kms. in 1999. ”  Recent history (since 2001) has seen more than ten percent of Brazil’s population rise out of poverty – and the nation adopt a driving posture in global economics and foreign policy (having led UN peacekeeping in Haiti since 2004, and being central to missions in Liberia, the Central African republic, Cote d’Ivoire and East Timor).

    Amorim says: “In the case of Brazil, one of the most important things is the huge ethnic and cultural mixture which makes us a country with dynamism, vibrancy, and the ability to understand the psychology of other nations. We have problems, of course, but this is one of our huge strengths, and a huge foreign policy asset. “

    At a time when many countries are blaming immigrants on job market problems, and doing their best to keep them out or evict them once they have arrived (America’s immigration officials now call themselves Border Protection – which says it all), Brazil understands that its cultural diversity is a source of strength. 

   I recently visited South Africa.  I learned first-hand how the incredible blend of African tribal cultural (Xhosa, Zulu, etc.), along with Afrikaans and British culture, plus Indian immigrants, has created an enormously interesting and dynamic society. 

    Leaders of the world:  Benchmark Brazil. You have a lot to learn.  Pay some homage to the country you loved to hate and criticize.   America, too, has deep poverty and hunger.  Perhaps it would do well to invest 0.4 per cent of its GDP, like Brazil,  in a Zero Hunger program.  The cost?  $56 b.  Not even the rounding error on the federal government budget. 

Innovation/Global Crisis Blog

Is Apple Worth More than Exxon? Is Luft Geshäft More Valuable Than Petroleum?

By Shlomo Maital

  Steve Jobs announcing the Mac in 1984

 Financial Times reports that last Tuesday, in intraday trading, the market value of Apple shares briefly exceeded that of Exxon.  At the close of trading, though, Apple again trailed, but not by much – its shares were worth $347 b., compared to $351 b. for Exxon.  Apple and Exxon now far exceed the market value of Wal-Mart, GE and other giants. 

   This leads us to ask:  Is Luft Geshäft (German for “air business”, i.e. gadgets that fetch very high prices and earn high margins) worth more than sticky black oil that powers our cars, cools and lights our homes and makes our plastic?   

   The answer is, yes.   Last quarter, Apple’s net profit doubled, reaching $ 7.31 billion, on revenue of $ 28.6 billion.   iPhone and iPad did not exist five years ago, but now  account for about two-thirds of revenue.  Apple’s cash reached $ 76.2 billion – again, at one point, more than the cash on-hand of the U.S. Treasury (before the debt ceiling was raised).  Apple’s growth was particularly driven by demand growth in China, and iPhone  shipments reached 20.3 million.  Moreover,  in the coming year, Apple computer sales are expected to double,  and iPhone sales are expected to triple.  If Apple’s new iCloud music and information storage services are successful, it will bring Apple millions of new users.

    So, for a brief but glorious moment in time, it was indeed possible to say that Luft Geshäft did exceed Big Oil in value, and more important,  consistent, persistent, blue-ocean innovative energy was more valuable than conventional energy.  Stuff that came out of the minds of creative people was more valuable than stuff that was pulled out of the ground.

    On the other hand, how many other such examples are there?  Very few.  It may indeed be tougher to extract ideas from deep in the minds of creative people, than it is to pull gas and oil from a sea bottom three miles deep and five miles under the seabed.    

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
August 2011
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