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Innovation/Global Crisis Blog

Qatar is a Star!

By Shlomo Maital  

     Not many people track Qatar,   a peninsula in the Persian Gulf,   smaller than Connecticut, bordering Saudi Arabia, rich in oil and natural gas. Its population is only about 900,000,  living on 11,000 sq. kms., ruled as a monarchy by the al-Thani family, a majority of its residents are non-Arabs, non-citizens from India and Pakistan. Qatar is   home to the TV channel Al Jazeera. It will host soccer’s World Cup and it was an important player in Libya.  Qatar is not a democracy.  I have met Qataris; they are very well educated and very very pragmatic.

   Here is what tiny Qatar has accomplished in recent months:

● An expert at Brookings’ Doha Center, on National Public Radio:  “We had about five Qatari fighter jets in Libya… we helped train and arm Libyan rebels. And Qatar also played an important role in developing an Arab League support through the military intervention in Libya, which this Arab League support actually has provided the umbrella for the NATO intervention and for the military intervention and provided the legitimacy that, for example, was missing in Iraq.”  Qatar’s supplies of money and arms for the Libyan rebels was, according to many experts, crucial.

●  Qatar has invested heavily in Greek banks, through Paramount Services, controlled by a wealthy Qatari family. Yesterday, Qatar fostered a key merger between two troubled Greek banks, lubricating the deal with a 500 m. euro convertible bond.  Greek’s stock market rose by 14 percent, as a result.

● Qatar won the right to stage the World Cup (soccer) in 2022.

●  Qatar was successful in the mediating an agreement between the Yemeni government and the Houthi rebels.  Prevented a civil war almost in Lebanon, brokered peace agreements between the Palestinians, Fatah and Hamas, and also intervened successfully in Sudan.  

 ●  Qatar hosts the World Trade Organization negotiations in Doha, crucial for lowering trade barriers on agricultural products.   

  Qatar was a British protectorate until 1971, when it declared its independence. It has over 15 % of the world’s proven gas reserves, and has a futuristic plant to convert natural gas into gasoline.  Once a poor pearl-diving center, it is now exceptionally wealthy.  Qatar is, according to the IMD World Competitiveness Yearbook, the 8th most competitive economy in the world (!), has GDP per capita of $88,000 (!), highest in the world; GDP growth of  16% in 2010 (highest in the world), and has no unemployment at all.  It attracted inward direct foreign investment of 9 per cent of its GDP in 2009.

   If I were Libya, Syria, Israel, Egypt, America, China, EU and Iceland, I would benchmark this tiny speck on the map, to learn what they do, how they do it and why.  No country comes close to Qatar’s record of success.  Other countries have oil and gas wealth. Few if any leverage it as cleverly as Qatar does. 

     And as for democracy?  As with Singapore, the whole fragile system might come apart if, Qataris say, everyone had the right to protest, demonstrate and vote.  There are brutal murderous dictators like Qaddafi and Assad. And then, there are benevolent monarchs like al-Thani.  Why is al-Thani so unique?  Why is his model not widely copied? 

Innovation/Global Crisis Blog

Four Critical Ruling Bargains Come Unstuck: Can They Be Rebuilt?  

By Shlomo Maital



A Do-It-Yourself Tool for Forecasting Global Developments


Tom Friedman’s NYT column (Global edition, August 29) makes an insightful observation about global markets and economies, which again appear headed for crisis.

   Friedman notes that there are four ‘critical ruling bargains’ that held together the global system since the end of the Cold War in 1991.  They are:

 ● Mideast dictators supplying oil to the West in return for arms and tacit support

  ● Euro zone harmony

  ● American spending, deficits and borrowing

  ● China’s growth, based on an undervalued currency and high domestic saving.

All four of those ‘ruling bargains’, shown as circles above,  have come unstuck, Friedman notes.  The Euro bargain broke down because the PIIGS (Portugal Ireland Italy Greece and Spain) in the South strangely failed to behave like the diligent Germans in the North, and have crashed the system.  Mideast dictators are falling like flies and no-one knows what or who will replace them.  Americans, drowning in debt, have at last resumed saving, but only because recession has shaken their faith and confidence in holding their jobs. And China must shift from a factory-based to a knowledge-based economy with higher domestic spending – a shift easy to define, tough to do.  Underlying all this is the global revolt of lower and middle classes, seeking their democratic rights.

    The ‘zone of  success’ occurs where all of these four ‘ruling bargains’ are somehow restored.  China’s rapid growth returns and stabilizes. Mideast oil flows. American spending resumes.  And the euro is rescued by a grand compromise between the puritan North and irresponsible South. (This is the ‘lightning bolt’ in the Figure, a very tiny space indeed).

   Zones of failure are the 11 numbered areas, beginning with utter collapse (zone 1, none of the four bargains is rebuilt), ranging through, for instance, zone 10, where 3 of the 4  ‘bargains’ are rebuilt,  but China comes unglued. 

   Use this tool to build your own global scenario. Which of the four ‘grand bargains’ are likely to resume, and which are not? What is the timing?  Find your most likely ‘zone’.  Use it to build a future scenario. What does this mean for your career?  Your company? Your assets?   Faced with thick global fog, Tom Friedman may have helped give us a tool that disperses at least some of it. 

Innovation/Global Crisis Blog

What Would You Write to God?  Seven-to-nine-year-olds Know Best!

By Shlomo Maital

    While cleaning out some old books, I found an old paperback, first published 35 years ago, called “Children’s Letters to God”.  The authors, Eric Marshall and Stuart Hample, note in their Introduction that “grownups know for certain, that no matter how much postage they carry, [their letters] will not get there…”   but children believe, children imagine…and that is why the seven-to-nine-year-old’s are so much more creative and imaginative than we adults are.   Here is a sample:

● Dear God, I would like all the bad things to stop.    Debbie

● Dear God, My father is mean. Please get him not to be. But don’t hurt him. Martin.

● Dear God, Instead of letting people die and having to make new ones, why don’t you just keep the ones you got now?  Jane.

● Dear God, If you will make me invisible when I want to I will do all the things you want. Is it a deal?  Your friend, Gordon

● Dear God, The people in the next apartment fight loud all the time. You should only let very good friends get married.  Nan

● Dear God, How come you didn’t invent any new animals lately? We still have just all the old ones.  Johnny

● Dear God, Church is alright but you could sure use better music. I hope this does not hurt your feeling. Can you write some new songs?  Your friend, Barry

● Dear God, Why did you make so many people? Could you make another earth and put the extras there?  J.B.

● Dear God, I am doing the best I can, Frank.

● Dear God, I want to be an inventor but I don’t know what to invent. Carl

● Dear God, if you made the sun, the moon, and stars, you must have had lots of equipment. Paul.

● Dear God, I remember when you were a baby, you were born in a manger, Brenda

● Dear God, Mrs. Coe got a new refrigerator. We got the box it came in for a new clubhouse. So that’s where I will be if you are looking for me.  Marvin.

● Dear God, on Halloween I am going to wear a Devil’s costume. Is that all right with you? Marnie

● Dear God, can you marry food?  Martha

● Dear God, are boys better than girls? I know you are one, but try to be fair. Sylvia.  

● Dear God, how did you know you were God?  Charlene

● Dear God, are you rich, or just famous?  Steven

● Dear God, Do plastic flowers make you mad? I would be if I made the real ones, Lucy

● Dear God, Your book has a lot of zip to it. I like science fiction stories. You had very good ideas and I would like to know where you found them.  Your reader, Jimmy    

● Dear God, If we live after we die why do we have to die then? Ron

● Dear God, Why do I have to pray when you know anyway what I want? But I’ll do it if it makes you feel better. Sue

● Dear God, If I was God I wouldn’t be as good at it. Keep it up. Michelle     

Innovation/Global Crisis Blog

 How Long Does It Take Obama To Turn On a Light Switch?

By Shlomo Maital



I don’t know how many people it takes in the Obama Administration to change a light bulb.  My guess is, about several hundred.  Because in the revolving door of appointments, his experts and advisors leave before they even learn what a light bulb is.   When Obama took office in early 2009, he was counseled by an all-star economic team that included Great Depression scholar Christina D. Romer, former Federal Reserve Chairman Paul A. Volcker (center) and former Treasury Secretary Lawrence H. Summers. All have since resigned.  They were replaced by lightweights, precisely at a time when innovative thinking is desperately needed.  Treasury Secretary Timothy Geitner has stayed on;  his departure would have been very helpful.  The wrong people left; the wrong people stayed. 

    The question now is, how long does it take the Obama Administration to turn on a light switch?  The answer: Two and one-half years.  Here is why.

     The core problem of the U.S. economy is the construction and housing industries. The core problem of those industries is simple: 

 By the last quarter in 2010, about 11.1 million homeowners, or 23 percent of all owners of residential property, owed more on their mortgages than their home is worth, according to CoreLogic.  The backlog of unsold foreclosed homes remains one of the biggest challenges for the administration in trying to boost a housing market still struggling to recover from its 2007 collapse.  A total of 657,044 homeowners have won a permanent modified loan as of June — a fraction of the 3 million to 4 million the administration had initially forecast, according to the Treasury Department.  In other words, only 6 per cent of those whose homes are “under water” have had their problem solved. Some 94 per cent have not. Great work, Obama!  Great work, Tim Geitner.

   In other words:  Almost a quarter of all houses are ‘under water’ (worth less than what their owners owe).  Many of those houses are empty, because their owners have walked away from them.  The banks who foreclosed have dumped them on the market, depressing housing prices.  The houses are empty, and do nobody any good.  Some people have lost their homes and have nowhere to live.  Entire neighborhoods in California are empty.   Until this problem is solved, there will be no economic recovery in the U.S. and there will be no significant fall in the unemployment rate (construction is highly labor intensive). 

     The solution:  A fresh start.  Create a government corporation that buys all the empty houses, or ‘under water’ houses, at market prices.  The cost:  Say, 11.1 million homes times an average value of $300,000, or $3.3 trillion.  Pay for the houses in special U.S. Goverment  30-year bonds.  Gradually over time, as the housing market improves (as it will), sell the houses, and recoup the funds needed to redeem the maturing bonds.  (The Government will make a substantial profit on this deal over the coming decade).   Rent the homes to the people now living in them, for modest rents, and offer them the opportunity to buy back their own homes over time.   

    The housing market faces a “second shoe” problem (waiting for the upstairs neighbor to drop the second shoe),  in the form of 11 million homes dumped on the market. By supply and demand, as long as that ‘second shoe’ of 11 million houses remains on the market, housing prices will never recover.  Get them off the market. The government is the only one able to do so.  Break the doom loop:  No jobs, no way to pay the mortgage, foreclosure, slumping housing prices, bad economy, no jobs, no way to pay the mortgage, etc….

   Why is it so hard to take decisive action to solve the under-water problem?  Why does it take so very long for the Obama Administration to turn on a light bulb?  Why has America been doomed to live in darkness, by an Administration that has disappointed not only Americans but people everywhere?    Why are so many Americans living ‘under water’ for so long they are growing fins and gills?   And why have those 11 million ‘fish’ not organized effectively to protest? 

    A Reuters report yesterday stated:  “The Obama administration is looking at options for reviving the housing market, an Achilles heel for the struggling U.S. economic recovery.”   Two-and-a-half wasted years, and Obama is still “looking at options”.  He may still be “looking at options” on Tuesday November 6 2012, when angry voters send him into early retirement.                    

Innovation/Global Crisis Blog

 Gaddafi’s Real Crime Was Wasting Time

By Shlomo Maital

             There is a link between the events we are watching on TV, as Libyan ‘rebels’ pursue Muammar Gaddafi, and a complex article published in the leading journal Science (C. A. Hidalgo, et al., The Product Space Conditions the Development of Nations. Science 317, 482 (2007).   

      Gaddafi was a brutal murderous dictator. He hung his foes in public squares and broadcast the event on live TV.  He ruled for 42 years.  He claimed to liberate Libya from the yoke of imperialism. What he really did was enslave Libya in a one-product oil economy that potentially could have fueled enormous rapid development and progress.   Gaddafi wasted 42 years, or two generations.  None of those years can be regained.  Those two generations who lived under Gaddafi can rightly claim that his major crime was wasting their time.

      Hidalgo et al.’s article  produces a complex diagram that is actually beautifully simple. 

  Here is what this Figure means and what these scholars do to compute it.  The graph portrays world trade. There are 775 circles, large and small, with one circle for each ‘industry’ in the SIC (Standard Industrial Classification).  The circles’ size show the magnitude of trade, and the configuration of each circle (its position in x,y space) shows the extent to which the product is likely to be produced together with other related products.  Circles close together are related; circles far apart are not.   Circles on the periphery are more or less independent; circles in the core cluster are tightly interdependent.  

  What the figure shows is, of course, what we know already; countries that sell oil, and other raw materials,  or specialize in raw-material-based products, only do that.  Countries that produce sophisticated capital-intensive products (the inner dense core of circles) have complex ecosystems that combine a number of high-level industries, in complex trading networks with other nations. 

     Countries on the periphery of the global system are also on the periphery of the trade ecosystem.  Their products are not interconnected with other products.  Oil is a good example.  Libya, before the revolt, produced 1.6 m. barrels of petroleum daily.  That is 584 m. bbls. a year,  worth about $58 b. (at $100/bbl.).  Libyan oil is far lighter than Saudi oil, and hence was supplied to refineries in Europe best able to refine it.  Since Libya has only 4 million people,  if $58 b. were divided equally among all Libyans, they would each gain $15,000 a year.  But of course it was sequestered by Gaddafi and his family and supporters.   

      As Hidalgo et al. note,  “It is quite difficult for production to shift to products far away in the space, and therefore policies to promote large jumps are more challenging. Yet it is precisely these long jumps that generate subsequent structural transformation, convergence, and growth.” 

    Translation:  It is hard for nations like Libya to practice “the adjacent possible” (see my earlier blog on this subject) and shift away from oil to higher value added products and services (petrochemicals, plastic, aluminum based on cheap energy, etc.).  The oil wealth enables cruel dictators like Gaddafi and Iran’s Ahmedinajad  and others to survive (without it,  hungry people would have dumped them long ago), by giving the people just enough income to avoid deep penury.  Iran cannot even refine its own gasoline, and has to import it.   Yet this ‘adjacent possible’ (moving away from commodities to more and more sophisticated industries) is crucial.   Qatar has made huge efforts to do this, and is worth benchmarking.

    Gaddafi murdered, tortured and abused his people.  He also wasted 42 years of their time.  There is no international crime called “criminal incompetent waste of a country’s time”.  There should be.  It is not the colonial powers Libya should blame but the criminal incompetence of its long-time dictator.    

Innovation/Global Crisis Blog

Innovator: Get Real, Go Virtual!

By Shlomo Maital

 James Cameron’s “Avatar”

         Like educators everywhere, Israeli educators are grappling with a core paradox.  Children, aged 6 through 18, live in two worlds.  The morning world is real, based in school.  The evening world is virtual, based in Facebook, Twitter and other social networks. 

      But for our kids, believe me, the virtual world is far more real than the real world.  For them, the real world of brick-and-mortar schools is boring, unimaginative and for them increasingly irrelevant.  And herein lies the problem.  How can we make the real world more relevant, more meaningful, to them than their unreal (virtual) world?  Simply, by embracing the latter and blending it with the former.

     A new book by B. Joseph Pine II and Kim C. Korn, titled Infinite Possibility: Creating Customer Value on the Digital Frontier (BK Publishers: San Francisco, 2011), can help.    

   Pine takes a cue from Einstein, who redefined the relationship between time, space and matter.  The real world, Pine observes, in his Figure 1.2 and Figure 1.3, has matter, has time and has space.  The virtual world has none of those three.  Yet increasingly, we are living in a digital virtual world.  Digital technology makes possible vivid memorable experiences that the real world cannot truly rival. (Imagine sitting in a top tier seat, at Real Madrid’s Camp Neu stadium, and watching tiny figures miles away dance around the field, with binoculars; now add a hand-held HDTV and watch them up large, up-close, with only the ambience of crowd noise to distract you from the virtual soccer field).   Pine leads us systematically through several permutations and combinations of space/non space,  matter/non-matter, and time/non-time, to create vivid new offerings based on digital technology. 

    I have a strong example of an innovation that uses the virtual to make life much more real. Most videoconferencing technology requires extensive bandwidth, to stream live video.  Some Boston entrepreneurs have created venuegen, software that replaces real video figures with avatars, based on photographs.  ( .  The avatar ‘learns’ to mimic the motions of the real figures participating in the videoconference.  It gesticulates, moves, wriggles, and emphasizes.  Avatars need a tiny fraction of the bandwidth that video streaming demands.  The inventors got the idea from video games.  An avatar can be more real, for participants, than a real fuzzy blurred and jerky video image. 

     Read “Infinite Possibility”, then re-invent your offerings to explore and exploit the amazing new world of the virtual.  It’s time, innovator, to get real by getting far less real. 

Innovation/Global Crisis Blog

Business Leadership in Troubled Times: Oxymoron?

Why Restoring Jobs Requires First Restoring Trust

By Shlomo Maital

       Let us agree that the latest stage of the ongoing global crisis is the most worrisome.  Bank crisis became financial crisis, became economic crisis, and now – a crisis of suspicion. People everywhere have (rightly) lost faith and trust in their political leaders.  And leaders have lost trust in the people’s ability to hear the truth and accept bitter medicine.  Banks have lost trust in their lenders, people have lost trust in their banks.  Workers too have lost trust in senior management.  A study by Maritz shows that in the U.S. “… only seven percent of employees strongly agree they trust senior leaders to look out for their best interest, and only seven percent strongly agree they trust their co-workers to do so. Approximately one-fifth of respondents disagree that their company’s leader is completely honest and ethical, and one-quarter of respondents disagree that they trust management to make the right decisions in times of uncertainty.”

    We are learning that trust is the fundamental currency of global markets, not dollars.  Without trust, there is neither an economy nor a society.   

       Facing this vacuum of trust, business leaders have utterly failed to step forward.  In the U.S., facing a possible bond default, business organizations (like the Business Roundtable and U.S. Chamber of Commerce) screamed at Obama NOT to default – but offered nothing constructive on how to slash deficits and restore economic growth.  An editorial in today’s Global New York Times basically called ‘business leadership’ an oxymoron (internal contradiction). And I agree.

    A country is a business.  I address this question to business leaders everywhere.  If you were CEO of USA Inc., UK Inc.,   Germany Inc., Israel Inc., Greece Inc.:  What would be your competitive strategy, in the face of shrinking global markets, excess debt, over-leverage and political paralysis?  What would you do? And why?  And how would you communicate your plan to people, so they would understand and support you, and trust you?  Restoring jobs starts with restoring trust in our system.  Trust requires leadership.  We have neither. 

    Why is a nation’s turnaround plan any different from that of a business – except, it’s far more important and far more complex?  And where in the world are our highly-paid business leaders —  spending the vacation month of August on their yachts in the Mediterranean, replicating Obama’s ill-considered vacation, in the midst of turmoil, on Cape Cod.    

Innovation/Global Crisis Blog

You’ve Just Gotta Laugh!

By Shlomo Maital

  The latest issue of The Economist has three separate items that, unintentionally, bring a smile or even a belly laugh.

   Here they are.

   1.  China Eats America’s Lunch – Literally.    China has been eating America’s lunch for years.  By dominating manufacturing, China has taken away well-paying jobs from middle-class Americans, who now work at Wal-Mart for near-minimum wage.  Now, fittingly, China is LITERALLY eating America’s lunch.  A factory in rural Georgia, U.S., Georgia Chopsticks, is making 2 million chopsticks a day out of poplar and sweet-gum wood and exporting them to China.   (p. 53).  The company hopes to employ 150 people.   America is saying, eat our lunch China and…here, let us give you the tools with which to do it.

    2. Having achieved a Guinness Book of Records astronomical inflation rate, 230,000,000 per cent (that’s not a typo),  Zimbabwe ended it by abandoning its own worthless currency and adopting the dollar.  Now, Zimbabwe is worried, lest America’s irresponsible Fed print excessive amounts of money and destabilize Zimbabwe.  A Zimbabwean newspaper, Newsday, wondered on Aug. 10 whether “it was time for Zimbabwe to ditch the dollar, lest it import America’s macroeconomic recklessness.”  Pot calling the kettle black?  Well – who’s the pot anyway?  Can America learn fiscal and monetary responsibility from Zimbabwe?  Apparently, yes.  (p. 57).   

   3.  A special police unit in Stockholm Sweden handles protests in a unique way.  They have no weapons, no water cannons, no tear gas.  They are known as Dialogue Police.  They engage in philosophic dialogue with protesters, discussing the Manichean Ethic,  relativist morality, deontological intuitionism and utilitarianism.  My hunch is, they lull protesters to sleep.  (P. 45). This has huge possibilities. How about Lullaby Police, who sing protesters to sleep?  How about Economist Police, who teach segments of Econ 101, guaranteed to anesthetize an elephant?    

    Global crisis?  That’s a laugh.

Innovation/Global Crisis Blog

Patent Wars: Do Patents Strangle Innovation?  Or Foster It?

The Case of Android

By Shlomo Maital


What is “Android?” ?

  (based on wiki):  Android is a mobile operating system for mobile devices such as mobile telephones and tablet computers developed by Google and the Open Handset Alliance, a consortium of 80 hardware, software, and telecommunication companies devoted to advancing open standards for mobile devices.   Google released most of the Android code under the Apache License, a free software license.   Android consists of a mobile operating system based on the Linux kernel, with middleware, libraries and APIs written in C and application software running on an application framework which includes Java-compatible libraries based on Apache Harmony.    Android has a large community of developers writing applications (“apps”) that extend the functionality of the devices. Developers write primarily in Java.  There are currently more than 250,000 apps available for Android. Android Market is the online app store run by Google, though apps can also be downloaded from third-party sites. Android is now  the best-selling smartphone platform worldwide. 

   Who are Android’s competitors? 

   Apple, Microsoft and Blackberry.  Microsoft, as always, never missses an opportunity to miss an opportunity, but then uses its money and muscle to kill competitors.  Nokia’s Symbian is being euthanized.  (See diagram). 

Which is best?

The blog “Andgeeks” cites a Wall St. Journal report:  “Last week, the Wall Street Journal asked its readers which was the best mobile operating system. Grabbing 6,365 vote sample,  …Android came away not only with a lead, but with the majority of the votes. Apple, of course, finished second, while BlackBerry sat in third place.”

   And what are Android’s competitors doing to fight back?  Competing fairly? Or trying to squeeze Google through massive purchases of patents?

     From press reports:  “Google announced Monday that it will acquire Motorola Mobility for $12.5 billion in order to “supercharge” its Android mobile operating system and build up its patent portfolio.  “Android was born as an open platform,” Rubin continued. “It doesn’t make sense for it to be a single OEM. We want to go as wide as possible and all our partners make it what it is today.”

    Perhaps more important to Google’s bottom line will be the acquisition of Motorola Mobility’s patent portfolio. “Our acquisition of Motorola will increase competition by strengthening Google’s patent portfolio, which will enable us to better protect Android from anti-competitive threats from Microsoft, Apple and other companies,” Page wrote.   Sanjay Jha, CEO of Motorola Mobility, said the company has over 17,000 issued patents worldwide, in addition to 7,500 patent applications awaiting approval.

   Earlier this month, Google accused Apple, Microsoft, and other tech giants of trying to “strangle” Android with its coordinated patent purchases and pledged to “intensely” defend its mobile OS through patent purchases of its own and opposition to what it considers anti-competitive patent bids.

    Last month, a consortium of tech rivals purchased 6,000 wireless technology patents held by Nortel, which Google had said it wanted to buy. Apple, EMC, Ericsson, Microsoft, Research in Motion, and Sony joined forces to purchase the patents, which cover wireless, wireless  4G, data networking, optical, voice, Internet, service provider,  semiconductors, and other patent portfolios. Microsoft and Apple also teamed up to purchase patents from Novell, along with Oracle and EMC.”

    Comment:    Confused? So am I.  Google is pushing an “open system”.  Great.  It is defending its open Linux-based system by leveraging Motorola’s 17,000 patents (and 7,500 patents pending), i.e. using a monopoly right to foster ‘competition’.  Google’s rivals, in turn, are trying to marginalize Android by assembling their own patent monopoly, with Apple, EMC, Ericsson, Microsoft, RIM (Blackberry), and Sony joining forces. (Hello, America’s anti-trust regulators?  Is anyone home?  Is monopoly created by patents any different from monopoly created by predatory pricing or price collusion??).    

     It is time to rethink patents.  Patents grant a monopoly to the inventor.  When a million inventors come up with a million patented inventions, one can believe the system works. But when huge companies join together to buy thousands of patents, in order to block a rival, this is beyond doubt “restraint of trade”, and illegal.  

     Google may be slightly morally superior to Apple, Microsoft, Sony and RIM, but not by much.  

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. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital