Economist Writing Every Day

The Take Economy demands not just that you distinguish yourself with opinions that deviate from the median person, but that the manner in which your opinion deviates is immediately distinguishable from everyone else who is similarly deviating. This leaves us with a tendency to focus on what we don’t like – enjoying something is further evidence of the monoculture, while hate comes in a million shades of beige.

I bring this up because hating Thanksgiving foods, particularly turkey, oven-baked turkey, has been in vogue for years, and I’m sure stuffing is next. Everything is too dry, too bland, yada yada yada. It’s a boring take most often made by boring people. Not that such things usually matter to me, but in this case it does because Thanksgiving as a meal is not an epicurean holiday, it’s an attempt to solve a coordination game across families, friends, and geographies. When solving a coordination problem with so many players, with preferences and cost-constraints that make broadly amenable large-scale get-togethers increasingly difficult. Between navigating travel costs, sleeping arrangements, and the inevitable negative political externalities that some jackass in your family is going to pollute the familial air with, the last thing you have the resources to cope with is culinary coordination. So what do we do? We come up with a pseudo-national, heavily regional menu that we coordinate on, a$1.99 per pound Schelling point that’s a steal at thrice the price.

The turkey’s too dry? Drown it in gravy. The stuffing is too bland? Your aunt has hot sauce in her purse. Your cousin is explaining the vagaries of 18th century 2nd amendment judicial rulings? There’s a bottle of brown liquor quietly being shared on the porch this very minute that you can partake in for the price of nothing more than a pleading glance and keeping your politics to your self.

The food isn’t the point, but if you’re still feeling the pain of a sub-optimal meal, you can order Chinese with us later, and I’ll happily explain to you why you’re not just ordering the wrong dishes, you’re ordering off the wrong menu. Because I got food takes, just not when the meal isn’t about the food.

I had never spoken with someone so enthusiastic about what they could do with trash. A young, slender man from a city in India I was unfamiliar with explained to me how his machine transformed plastic refuse into an economically and environmentally superior substitute for concrete. This sort of techno-optimism fodder for “your daily reason to feel good” clickbait article provokes, but rarely maintains my optimism upon closer inspection. I listened, impressed by the person I was talking to, but unsure what to make of his elevator pitch.

Then he reached into his backpack and handed me a very real block of “Plascrete”. We’ve spent so much of the last 20 years inundated with ideas that were abstract software application propositions at best, and vaporware at worst, it was jarring to hold the physical manifestation of someone’s “big idea”. I spent the rest of the conversation, and a good chunk of my evening at the “unconference” being hosted by Emergent Ventures, thinking about the economic ramifications of Plascrete. What it could mean for developing countries to have a substitute for concrete that is 24 times stronger yet somehow 4 times cheaper – what it would mean for infrastructure and vertical housing construction. What the streets might look like picked clean of plastic bags and refuse. What happens to the lower tail of the wage distribution after the marginal product of trash-picking labor quintuples. How forecasted carbon emissions from developing countries might shift if the expected carbon footprint of construction were massively reduced.

But this post isn’t about Plascrete or the projected impact of any particular innovation. What I’m interested in this moment is the market for private venture capital.

The model of modern venture capital is built around the biggest of wins, those home run investments whose returns compensate for the more than 90% that largely fail. For the strategy to function, of course, means that every investment has to carry the possibility of prodigious returns, in the realm of 10 to 20-times investment, which limits the industries and technological categories under consideration. Tight profit margins are out. Factories, physical capital are out. Anything that might carry an inherent limitation to rapid scaling are out. What’s in are network consumer goods and zero marginal cost (e.g. software) products. So what does that leave out? Explicitly physical goods, such as inputs into shelter or food, things that require upfront investment in equipment where those costs increase with the scale of your output aspirations.

But that’s actually only the beginning of our problems. What about goods with enormous positive externalities, i.e. social benefits, that exist without the possibility of traditional property rights and monetization? Even if a private venture fund is culturally interested in such things, they are constrained by their model – any reduction in potential home run returns from their investment puts the short run solvency of their fund at risk, something unlikely to be tolerated by their investors. These problems are only compounded when considering positive externality generating technologies that are burdened with traditional physical capital needs and historically normal limits to scaling. Even if your product offers 100X social returns, that’s not going to keep the lights on for a series of high risk investments with private returns that top out at 5X.

Innovations whose adoption offers enormous positive externalities are, in theory, exactly why public support for general science exists (whether or not such things should fall within the domain of public funding agencies is a whole different question that I have no immediate interest in addressing). Let me simply say here that these hypothetical products require expertise in delivering a product to market and the capacity to appropriately take on risk. These are not the comparative advantages of large federal science funding agencies. Which leaves us with the dilemma motivating this entire rambling thought exercise. There seems to be an important gap in the market- and government-based institutions for funding innovation.

What I want to consider is the possibility of elevating the status and profile of private venture capital that goes towards profitable, self-sustaining technologies whose returns might only be considered prodigious if we include the broader positive externalities they have on human lives. The kinds of effects whose value may in fact scale exponentially as they diffuse through communities and networks, but will never be internalized into profits via property rights. I want to consider the reconstruction of the risk profile of an entire portfolio to optimize the ability of a fund to support these sorts of innovations in perpetuity. Earning returns sufficient to produce returns sufficient to self-sustain with a minimum of (if any) long run philanthropic subsidy.

Private capital with such a focus would find a niche that modern venture funds are unmotivated to serve and public scientific agencies are ill-equipped to support. Private funds focused on innovations with externally scaling returns would, in my half-baked hypothesis, would take on a two-tier model. The first tier would be composed of small investments scattered across a large number of very small grants (which is essentially the entire model of Emergent Ventures – I’m essentially plagiarizing the model I saw evidence of through two days of conversations with their grant recipients). These grants would predominantly be interested in people. These human lottery tickets would pursue their initial ideas through the proof-of-concept stages. Some would succeed, most will not, but all will benefit from their first connection to the broad international network of technology talent and talent-seekers. The small number who do succeed in producing compelling evidence of technological advancement would then enter the second tier, where large investments would be sought for a prototype and eventual distribution. What’s important to remember is that this remains a private good that must still enter and pass the market test. What distinguishes it is not an inability to economically self-sustain, but rather it’s inability to create profits so grandiose that it can subsidize a portfolio of failed moonshots. It’s prospective profitability need only justify it’s own independent risk of failure. This is not to say the bar is actually lower than traditional venture capital. While the profitability bar is lower, it must exceed a second, in many ways more difficult bar – it must produce a direct and attributable positive externality, be it through health, safety, or environmental channels. Its consumption must improve lives of not just its consumers, but those entirely uninvolved in its production or purchase.

I’m not an expert in venture capital or speculative philanthropy, but after the last week I can’t shake the idea that Michael Kremer was even more right than we realized: more people => more ideas => more economic growth. There are billions lottery tickets lying on the ground all over the developed world. We need to invent newer and better ways of picking more of them up.

Wranglings over spending plans, deficits and public debt increases have been quite intense of late. What is quite surprising, at least at first glance, is that there are so few individuals who are arguing for reducing public spending. Right now, the most “hawkish” policy stance is a slower rate of spending increases. Why the pro-spending tilt of debates?

One could argue that its the pandemic. A crisis is, after all, a natural moment to increase spending. However, that argument is a bit weak now. This position was easily defensible six to twelve months ago, but not today when the economy is starting its recovery. If anything, as recovery is underway, the case for slashing spending levels is stronger than the case for raising them.

So, once again, why the pro-spending tilt? Let me point to the work of James Buchanan and Richard Wagner in Democracy in Deficit. In this work, whose lessons are underappreciated today, Buchanan and Wagner argue that there is an asymmetry in the political returns to fiscal policy. This is known as fiscal illusion. When a deficit occurs, the costs are delayed and thus harder to observe. The benefits are immediate. When a surplus takes place, the benefits are delayed and the costs (i.e. less spending, higher taxes) are immediate.

Second, there’s the far more serious threat of fiscal illusion—that the public’s perception of the true costs and benefits of government expenditures is misconstrued. As long as the costs of taxation are underestimated and that the benefits of public expenditures are overestimated, there’s fiscal illusion. The nature of politics thus creates a strange incentive system where governments reap more electoral rewards from deficits than from surpluses. If you buy Buchanan and Wagner’s explanation, the pro-spending tilt is easy to explain.

However, the empirical evidence for this is somewhat limited. For example, Alberto Alesina in the 1990s, showed that he could not find empirical patterns that confirmed Buchanan and Wagner’s theorizing. But, I have recent work (co-authored with Marcus Shera of George Mason University — a good graduate student of mine) which proposes a simple mechanism by which to observe whether the first condition for a pro-deficit/pro-spending tilt is present.

American presidents are incredibly mindful of their historical reputation. As I argued elsewhere, presidents consider historians as a constituency they want to cater to so as to be remembered as great. If there is a reward from engaging in deficit spending given by historians, this would suggest that presidents have at least some incentives to be fiscally imprudent. Phrased differently, such returns by historians would suggest some divergence between what is fiscally prudent and what is politically beneficial.

Using the surveys of American presidents produced by C-Span and the American Political Science Association, Marcus and I found that there are strong rewards to engaging in deficit spending. Without any controls for the personal features (e.g. war hero, scandal, intellect) of a president and the features of a presidency (e.g. war, victory in war, economic growth), an extra percentage point of deficit to GDP is associated with a strong positive reward to a president (see table below). Once controls are introduced, the result remains: there are strong rewards from engaging in deficit spending.

Thus, at any time, a president who is mindful of his place in the history books would be tempted to engage in deficit spending. While Marcus and I are somewhat cautious in the paper, I do think that we are presenting a “lower-bound” case for a pro-deficit bias. Indeed, one could think that the hindsight of history would lead to greater punitions for fiscal recklessness. After all, historians are not like voters — their time-horizons for evaluating a presidency are clearly not as short. If that is the case, one should expect that historians should be less likely to reward deficits. And yet, they seem to do so — which is why I argue this is a lower-bound case.

In other words, Joe Biden might simply believe that the extra spending will secure him a place in history books. If other presidents are any indication, he is making a good bet.