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 April 5, 1989 Drexel Burnham Lambert 11th Annual Research Conference Beverly Hills, CA The Enduring Spirit of Enterprise
Carl Jung once said that physical ailments can be remedied, but diseases of the mind—psychic epidemics—are beyond all antidotes of doctors or statesmen. Our problem here is a psychic epidemic. The fact is, there is nothing wrong with the U.S. economy that couldn't be solved by turning a few thousand lawyers into engineers, or a few score Congressmen into potted plants. But U.S. economists seem to have contracted a dire mental illness—a psychic epidemic—that threatens the prosperity of the world. The kind of damage I have in mind is a 50% devaluation of the dollar, to a point far below any reasonable measure of purchasing power parity. It was achieved by a massive campaign by the U.S. government, supported by the entire establishment of what I call investment-grade Americans... Apparently they did not understand that a cheap dollar not only lowers the price of U.S. goods. It also raises the price of imported commodities and capital goods. It promotes inflation. And it lowers the price of U.S. assets and lowers the value of U.S. profits and weakens U.S. entrepreneurs competing in the world. The only firms that are helped are investment-grade firms with huge capacity already in place in the U.S. and around the world. Let's call these firms the Iggies, for investment-grade institutional establishment securities... Iggies are concentrated on Wall Street, in Fortune 500 firms, in leading universities, on congressional staffs, and in the Washington bureaucracy. Iggies get around and spread their diseases. The congressional staff infection, for example, is now rampant in both the U.S. Senate and the House... All these hypoconomists speak the same sickly tones. "Oh, my aching productivity, my atrophied manufacturing," they moan, after the six fastest years of manufacturing productivity growth since World War Two. "Oh, my swollen national debt," they caterwaul, though U.S. debt, as a share of GNP, is lower than the OECD average and is about to be swamped with revenues from a Social Security tax increases and a rising influx of young immigrants. "Oh, Lord, my crippled competitiveness, my rampant poverty, my wretched inequality, my slipping standard of living, my awful imbalanced trade." On and on the pundits prattle, like some runaway national nightmare of a garrulous and hypochondriacal in-law. But it is merely your friendly neighborhood economist at his usual podium on the networks, perhaps speaking ventriloquially thru your favorite politician or Chrysler executive. The disease has reached such a high profile that many of your best friends may have contracted it: Toughminded entrepreneurs in non-Iggy firms start talking like Martin Feldstein. Under such conditions, everyone should practice safe economics: Wear earplugs and smile. When you get home, assume the lotus position, and mumble quietly under your breath: Supply creates its own demand... There are problems among the Iggies. They no longer dominate the world economy. But they still dominate the economic statistics... The more creative the economy—the more new goods and services and the more new companies—the less GNP and productivity data will measure growth... The investment-grade firms are mostly investment grade because their products are familiar, and their value easily measurable, and the capital equipment they use has a demonstrable relationship to output. Iggy collateral is all comprehensible, even to Iggy bankers. New and creative smaller firms offer the unmeasurable collateral of new products, new ideas, new energies, new visions. In Iggy circles, these intangibles are known as junk. A further flaw of the statistics is that Iggy product lines are mostly mature enough so that prices do not drop. Largely because of quotas, U.S. automobile prices are still drifting upward. But fast growing companies, in general, are aggressive price-cutters. In GNP and productivity data, declining prices often signify declining output and productivity. Yet, in the most dynamic parts of the economy, prices drop precipitously, or else functionality rises, which is the same thing. All the fastest growing companies are radically improving functionality and lowering prices year after year. Very few of these quality improvements make it into GNP, inflation and productivity data. Until 1985, for example, the Bureau of Labor Analysis assumed no decline in the price of computing over the previous 20 years—a period when the cost of a computer function dropped more than 100,000-fold. Today, new forms of software are the most important and productive capital in the economy. Software is almost entirely a non-Iggy or junk product. It is also mostly absent from investment data... A dominant position on the frontiers of information technology might not make the U.S. an investment-grade credit. Iggies must offer a collateral in big machines and tangible and familiar products. But it gives the U.S. the lead in the most critical source of value in the new world economy, an economy of ideas and human capital. The main problem of the hypoconomists is that, deep down, they are mercantilists. They cannot imagine U.S. gains in competitiveness and market-share that are not accompanied by gains in trade. But a truly healthy and innovative economy, full of unpredictable junk like the U.S., attracts capital from around the world. As long as the rest of the world suffers capital flight and emigration to the U.S., the U.S. will necessarily run a trade deficit. That's just a necessary cost of running the most healthy and competitive economy in the world. The disease has reached such a high profile that many of your best friends may have contracted it: Toughminded entrepreneurs in non-Iggy firms start talking like Martin Feldstein. Under such conditions, everyone should practice safe economics: Wear earplugs and smile. When you get home, assume the lotus position, and mumble quietly under your breath: Supply creates its own demand... There are problems among the Iggies. They no longer dominate the world economy. But they still dominate the economic statistics... The more creative the economy—the more new goods and services and the more new companies— the less GNP and productivity data will measure growth... The investment-grade firms are mostly investment grade because their products are familiar, and their value easily measurable, and the capital equipment they use has a demonstrable relationship to output. Iggy collateral is all comprehensible, even to Iggy bankers. New and creative smaller firms offer the unmeasurable collateral of new products, new ideas, new energies, new visions. In Iggy circles, these intangibles are known as junk. A further flaw of the statistics is that Iggy product lines are mostly mature enough so that prices do not drop. Largely because of quotas, U.S. automobile prices are still drifting upward. But fast growing companies, in general, are aggressive price-cutters. In GNP and productivity data, declining prices often signify declining output and productivity. Yet, in the most dynamic parts of the economy, prices drop precipitously, or else functionality rises, which is the same thing. All the fastest growing companies are radically improving functionality and lowering prices year after year. Very few of these quality improvements make it into GNP, inflation and productivity data. Until 1985, for example, the Bureau of Labor Analysis assumed no decline in the price of computing over the previous 20 years—a period when the cost of a computer function dropped more than 100,000-fold. Today, new forms of software are the most important and productive capital in the economy. Software is almost entirely a non-Iggy or junk product. It is also mostly absent from investment data... A dominant position on the frontiers of information technology might not make the U.S. an investment-grade credit. Iggies must offer a collateral in big machines and tangible and familiar products. But it gives the U.S. the lead in the most critical source of value in the new world economy, an economy of ideas and human capital. The main problem of the hypoconomists is that, deep down, they are mercantilists. They cannot imagine U.S. gains in competitiveness and market-share that are not accompanied by gains in trade. But a truly healthy and innovative economy, full of unpredictable junk like the U.S., attracts capital from around the world. As long as the rest of the world suffers capital flight and emigration to the U.S., the U.S. will necessarily run a trade deficit. That's just a necessary cost of running the most healthy and competitive economy in the world.
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