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Investing in the long-term future

July 25th, 2008 · No Comments

One problem with markets, we just gave an example in the previous entry, is that they tend to rather heavily discount the not so near future. One investor argues for state remedies. However, this is not in the nature of the state beast either, although some states do better than others.

In the Financal Times, Financier Felix Rohatyn (senior advisor to Lehman Bothers) is calling for a broad, government-backed financing plan to stimulate the U.S. economy that focuses on “long-term investment,” rather than short-term stimulus.

Yes. Fantastic. A wise idea. But.. A couple of observations:

1) We’re in a rather urgent predicament. We need to ensure that the housing market doesn’t overshoot on the downside (although those who missed the bubble would like nothing more) and we also need to ensure that the financial system doesn’t melt down, and while we’re at it, keeping the economy from falling off a cliff.

These problems are most urgent, and these problems need to be addressed first.

The next question would be, how can we do that most effectively and efficiently, getting the most bang for the buck. As much as we’re in agreement with the need for long-term investment (our writings on solar energy reflect this, for instance) we’re really not sure this would be the best strategy in the present circumstances.

We think helping people who are on the receiving end in the housing crisis would be a good place to start as it helps stabilize the housing market and it keeps consumer spending up, getting a double bang for the same buck. But we agree, that’s not long-term investment for the future.

He does propose something smart though, letting the Treasury create bills that can be swapped temporarily (a couple of years) for those toxic mortgage backed securities whose markets have dried up. This would give banks a breathing space.

2) The state is not very well equipped for dealing with the long-term either. Politicians have a short-term outlook, a week is a long time in politics, as the saying goes. One of the reasons of the success of a number of Asian countries is that somehow (some by authoritarian means, others, like Japan, because they were basically ruled by powerful bureaucrats behind the scenes) they did manage to have a long-term perspective in many of their policies.

And what a difference that can make. Mind you, the state doesn’t always get it right. There are numerous examples of state policies backing the wrong industries, for instance. In Malysia, they’re trying to build a car (the Proton, we believe), but so far it’s more like a national prestige project. Toyota is not yet shaking in its boots.

This is not necessarily the case, because in China, they’re doing the same (although we belief that they’re using more foreign knowledge, and the project is a little bit more market based), and it looks like they could have considerably more success. The first Chinese cars are turning up in Europe.

What we’re saying is that (apart from the usually short-term horizon of politicians) there are no a-priori reasons for the state to have a better view of which sector to back, but that doesn’t exclude the possibility that sometimes, it is obvious.

But if we’re going to have long-term investment plans, we have a couple of ideas:

  • How about this: an energy policy worthy of the name, one that gets us off oil and puts us on a more sustainable future (both environmentally and geo-politically)
  • Or investing in education. That’s long-term but serves multiple purposes. Not only does it prepare future generations better for future job demands, but one could very well argue that it creates a better society (and it could even occasionally reduce the asymmetrical information problem we described in another post today). In the first half of the 20th century, the US was producing the best engineers, due to some simple government intervention
  • Fundamental research is a third one. This is so-called ‘pre-competitive’ research whose results are not owned by any company but can be shared by all of them (and because this property, companies do not have an incentive to do much ‘fundamental’ research themselves).

One thing to keep in mind. Markets are very good at creating multiple approaches and then competition sort out the best ones. So let most of the investment be done through markets, but help them by increasing the incentives.

The solar industry is a perfect example. Many different approaches (if you have doubts about that, consider the following fact: in Japan, in the last year, in what’s still a niche field namely organic thin film, there have been 1600 patents filed), let the market sort out the best ones, but incentivise them by levelling the playing field between traditional energy and solar.

By the way, that implies abolishing the myriad of subsidies that traditional energy production and use still enjoy,  and a nice side-effect, it would free up more than enough funds for quite an ambitious long-term investment plan.

There are a couple of reasons why solar energy should be backed by state policies:

  • Environmental and geo-political
  • Anticipation of scarcity of oil
  • The risk of failure is relatively low as economies of scale and learning will almost certainly be enough over time to ween the sector of subsidies and get a life on its own, being able to compete on price with other energy sources. So the risks of backing solar (or alternative energy) in general are low, but the state should refrain from backing a particular solar technology. The market is much better at that.

We think that countries that figure out what markets do best and how their phenomenal abilities can be harnassed to solve the most urgent problems will have a leg up. That doesn’t necessarily mean just setting them free, as the neo-liberals have it.

Sometimes they have to be nudged in the right direction, sometimes they have to be helped to function properly, and not suffer from problems like asymmetrical information.

Tags: Opinion