There Is A Shortage Of Ideas, Not Money

The strongest argument that the biggest current barrier to new capital investment is a shortage of good ideas, and not a shortage of investment capital, is the revealed preference of "technology" companies like Google, Microsoft and Apple that have huge stockpiles of cash, and effectively zero percent interest rates at a time of very low inflation, to horde that cash rather than investing it in new technology projects.

[Discussion moderator] ADAM LASHINSKY: You have $50 billion at Google, why don’t you spend it on doing more in tech, or are you out of ideas? . . .

ERIC SCHMIDT [of Google]: What you discover in running these companies is that there are limits that are not cash. There are limits of recruiting, limits of real estate, regulatory limits as Peter points out. There are many, many such limits. And anything that we can do to reduce those limits is a good idea.

[Discussion participant] PETER THIEL: But, then the intellectually honest thing to do would be to say that Google is no longer a technology company, that it’s basically ‑‑ it’s a search engine. The search technology was developed a decade ago. It’s a bet that there will be no one else who will come up with a better search technology. So, you invest in Google, because you’re betting against technological innovation in search. And it’s like a bank that generates enormous cash flows every year, but you can’t issue a dividend, because the day you take that $30 billion and send it back to people you’re admitting that you’re no longer a technology company. That’s why Microsoft can’t return its money. That’s why all these companies are building up hordes of cash, because they don’t know what to do with it, but they don’t want to admit they’re no longer tech companies. . . .

ERIC SCHMIDT: So, the brief rebuttal is, Chrome is now the number one browser in the world.

One exception to the rule of lack of innovation that was identified in the discussion was Amazon.com, which it was noted, is less profitable than the companies that are hording their cash.

Google has tens of thousands of the smartest people in the world working for it. Microsoft and Apple do too. If those companies don't have the collective brainpower to come up with capital investment that make economic sense in a time of zero percent interest rates, when they have large hordes of cash that they don't need any banker's permission to spend, how can we expect less well positioned economic players to be making new capital investments?

Notably, commercial banks also have far more of a capacity to lend money profitably at low interest rates than they are utilizing. There are far more ways to explain their activity than there are to explain tech companies that horde cash. But, the behavior of commercial banks is certainly consistent with the theory that banks are lending money to support capital investments because would be borrowers have failed to identify them. And, I've seen blog posts from the Federal Reserve Bank of Atlanta's economist's blog that likewise make the point that the banks it gathers data from in its Federal Reserve district aren't making as many business loans in substantial part because businesses aren't coming to the banks asking to borrow money for business investment.

While Schmidt reiterates a number of potential non-cash limits to business investment stated by another participant in the discussion, "limits of recruiting, limits of real estate, regulatory limits" suffice it to say that limits of real estate can almost always be solved with enough cash. Recruiting and regulatory limits are far more serious obstacles.

This is pretty depressing.

There are a number of quite well understood tax policy and fiscal policy options for improving the availability of money to firms that want to make capital investments in ways that are consistent with a belief by the firms using the money that the capital investments will be profitable, at least in the medium to long term. A shortage of money to invest is a problem that government can solve.

The problems associated with a shortage of ideas of ways to make profitable capital investments is muddier territory. There are policies that can address these problems as well. But, economic policy makers have become wedded to the notion that economic growth policy in the developed world begins and ends with the operation of the capital markets.  Other options have gotten dusty from sitting on the shelf and lack the kind of broad based political and academic support that they need to be implemented. For example, there are several measures one can take to address recruiting limitations, which either have a sound theoretical basis in economics and logic, or strong empirical support, or both. You can:

* Make it easier for highly skilled people to immigrate.  Free trade in labor markets is the last bastion of free market economics that economic policy makers in the United States have failed to adopt.

* You can weaken the legal effectiveness of non-competition contracts. This has been empirically identified as a key component of greater tech company competitiveness in California relative to Massachusetts.

* You can make a bigger and more effective public investment in education.

Similarly, while the universe of potential regulatory barriers to technological information are conceivably so many that they can't be numbered.  But, a company like Google isn't very concerned, for example, about the Clean Air Act regulations that regulation opponents have consistently identified as the most costly of recent new federal regulations.  From the perspective of an Internet technology company look Google, some of the principal regulatory barriers to innovation are:

* Excessively protective copyright, patent and trade secret laws that infer that can create "gridlock" in the process of trying to combine old ideas in new and profitable ways, or to better implement old ideas.  Many of Google's potentially most profitable concepts that it has developed to date are limited materially by the way that copyright laws and weak policing of new patents have shrunk the public domain and expanded the breadth of intellectual property protection via doctrines like the protection of "derivative works" under copyright law.

* Privacy protections and confidentiality rules that prohibit useful data from being shared at a low cost without considerable advanced planning by the sources that collect the data.  Securities laws also impair dissemination of "insider information" and create a risk that for the sharing of ideas for addressing corporate governance by a select subset of investors could be prohibited as a form of market manipulation of as some form of "civil conspiracy."

* Securities laws requiring costly disclosures before public offerings of investment opportunities can be advertised and offered to the general public that prevent companies like Google from getting into the investment brokering business for small capital firms where disclosure costs are material relative to the amount of funds that could be raised. 

Even more depressing, of course, is the possibility that a lack of ideas is due not to governmental barriers to innovation but due to "the end of science," i.e. to the fact that we are close to mastering the a whole host of scientific disciplines and hence have fewer innovations that can arise from new scientific discoveries.  To the extent that this is the case there are fundamental reasons, indifferent to government policies or business policies that we can expect greatly diminished long term economic growth, i.e. "the Great Stagnation."