Building Vs. Investing

As the real economy goes into its worst nosedive since the 1970s, it's worth remembering two things:

• it's actually worse than it seems. If you count unwillingly part-time workers, the unemployment rates is 12.5%. Then throw in lost health care . . .
  
• the US gave away its intellectual and institutional capacity to create jobs 30 years ago.

I say this because economic thinking is still oriented towards investing, not building.

You say investors do build things. I say they don't.

Well sometimes they do, but only by accident.

Investors invest to make money. They look at current and expected prices, cash flow, and calculate returns on investment. This is entirely logical, from their point of view. If the entity they invest in makes next-generation tram equipment or plastic photovoltaic modules, great. If it makes money by buying hybrid cars and destroying them to raise the price, that's great too.

What about investing in the green economy, as president-elect Obama proposed yesterday?

It will work if it's not an investment in the technical sense of looking for calculable returns on investment in the short or even medium term. If the plan is to use government money the way a bank or individual would, then the money will go towards safer, less risky, and lower impact investments. Breakthrough research is incredibly risky, and markets, all macho propaganda aside, don't like risk.

The thinking around the infrastucture plan remains the same, if you take the NYT coverage I linked above as an example. The authors write,

Mr. Obama’s plan, if enacted, would be in part a government-directed industrial policy, with lawmakers and administration officials picking winners and losers among private projects and raining large amounts of taxpayer money on them.

This is supposed to be bad - the government "picking winners." As opposed to markets doing it, which have, for example, taken the area where the US supposedly leads the world - the Internet economy - and let it be 15th in broadband adoption, as Mr. Obama pointed out in his speech.

In Santa Barbara, I pay $45 a month for broadband that is about 1/3 as fast as my Lyon service, for which I pay 17 Euros a month - and that includes television and telephone with free long distance.

I would like the government rather than bankers to pick winners for a while. They might do better.

I would like local rather than national politicians to do it. The latter are out of touch. When Mr. Obama "met with the nation’s governors last week, they said the states had $136 billion worth of road, bridge, water and other projects ready to go as soon as money became available. They estimated that each billion dollars spent would create up to 40,000 jobs."

For the sound of the Investor Economy, on the other hand, read this intelligent piece about Warren Buffett from the Motley Fool. The Fools have been hard-core long-termers in the markets, meaning they have encouraged millions of middle-class people to see the markets as a kind of savings account. Their author here takes that Buffet op-ed that I was hatin' on in October and say that Buffett is right that stocks are cheap and that therefore it is time to buy. The piece has some interesting Buffett history, but it does get naked with the fantasy of middle-class investing:

buy cheap and sell high
replace earned with unearned income
by the way, building your wealth builds the country's wealth.

We should be clear here. This is not "buy-and-hold." This is not stocks as a saving account. This is market timing, which is what professional Buffetts do. You get in when the numbers are good. You dump when the numbers are bad. This has nothing to do with building a company or building a product. A good investor drops even a wonderful company the second the holding will cost him a dollar.

What we actually need now is three things:
a middle class that wants to build and not just invest
a carefully targeted stimulus
a huge tax on capital gains to punish speculative investing and raise the money the building will need.

As usual, the solution is simple . . .