One Pack of Losers Stimulating Another

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What makes investment, consumption, and charity different? Does it feel like these words get bent when applied by Congress rather than private citizens? How are we supposed to work our way out of the hole we've dug in our economy if we can't keep these basic concepts straight?

As a silly example, would you invest in a ham sandwich? Food energy certainly powers you through your workday and the protein you swallow ultimately builds muscle. Still, most of us would consider lunch an act of consumption.

Food stamps are sometimes characterized as a "social investment" helping the needy get through their troubles, perhaps allowing them to return to work. But if the same food is distributed to the same people by a church soup kitchen, wouldn’t you call it charity?

Congressmen and their court economists are in a lather worried that consumers will invest their savings during recessionary times instead of engaging in debt-besotted consumption. So they’re printing up a trillion dollars to "invest" in everything from shovel-ready infrastructure programs to politically favored science projects. The stated goal is “creating” jobs whose major benefit is turning investments directly into consumption. Never mind whether these jobs actually generate positive financial returns, the usual sign that more wealth is being created than destroyed.

Forget the scientific theories of long dead economists. Does Congress’s approach pass the sniff test?

I work in an industry, namely venture capital, charged with the task of making speculative investments. These investments never go to well-connected corporations that spend millions on lobbyists. They go to entrepreneurs and inventors seeking to upend the hegemony of these very corporations using the simple trick of doing a better job serving customers. We don't measure success by the number of jobs created, though create them we do. That’s because jobs are a cost not a benefit, a means to an end and never the end itself. In truth, we use our perch on the boards of the companies we invest in to hector CEOs to deliver as much progress as possible hiring as few people as they can. In our world, paying people to dig holes and fill them up again is not investment.

We persevere through good times and bad knowing that a significant number of our investments are going to fail. That's why we watch our companies like hawks, stepping in to make strategy and CEO changes designed to improve the odds of success while reluctantly shutting down companies that don't make the grade. We do this with keen attention largely because our own money is at risk alongside that of our investors. And contrary to the blather of pundits, it’s not venture capitalists that pick winners and losers. It’s Darwin.

Exactly how is Congress supposed to create economic growth “investing” someone else’s money in lobbyist-laden companies selected through political pull measuring success not by financial returns but by the number of jobs created? How are our sovereigns-of-subsidy likely to influence the behavior of CEOs who line up at their money trough? And what happens to such congressionally created jobs when Darwin renders an unfavorable judgment? This is bound to happen because, let’s face it; if getting this right were so easy venture capitalists wouldn’t be paid so much when it occasionally happens.

Some have suggested that public/private partnerships might inject enough discipline to resolve these conflicting goals. OK. Imagine sitting on the board of a company holding your CEO’s feet to the fire demanding that he hit his milestones using the smallest possible headcount while some government czar is insisting on just the opposite.

Another way of saying this is, how can we possibly succeed rebooting our economy if we conflate investment with consumption with charity?

Denigrate venture capitalists if you'd like but at least the losing investments we make are self correcting. Congress has a track record of investing in even more losers than we do, and on a scale unimaginable to those of us who actually pay attention to what happens to the money after it’s “invested.” When we make failed investments we take our lumps, learn from our mistakes, and move on. What does Congress usually do when failure becomes undeniable even to the most self-interested proponents?

It's been many years since I've worked in the engineering profession to which I was trained, but I do remember one thing. You can't solve a problem if you don't get the problem statement right. I have no magic plan to turn our slumping economy around. But investing someone else’s money in charitable consumption can't be a sustainable solution.

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