In a Wall Street Journal front page story from last week, it was reported that the boom in Austin, TX continues. Tall buildings and fancy clubs sit where auto repair garages, head shops, and barbecue joints used to be located. Austin is brimming with talented people, and the logical corollary to the latter is that it’s also brimming with investors eager to be match their capital with the talented.
Reading this happy story of growth, it was hard not to hope that Journal Fed-watcher Nick Timiraos gave the article more than a glance. Maybe it opened his eyes? For now Timiraos writes on the supposition that economic growth is engineered by central bankers. Slow growth? No problem to Timiraos and the PhDs he reports on. They can just stimulate “financial markets and the economy by holding down long-term interest rates” through size purchases of longer-dated U.S.Treasuries. Timiraos gets it backwards. So do central bankers.
Implicit in their central planning fantasies is that economic growth is as simple as creating abundant credit where it used to be scarce. Except that it doesn’t work that way. Had the Fed “gunned the money supply” through expansive purchases of interest-bearing debt held by Austin banks twenty or thirty years ago, its engineering would have been in vain. The dollars would have departed Austin almost as quickly as they arrived. Money goes where it can be productively put to work, and for the longest time Austin was a “college town” in a rather sleepy, capital rejecting sense.
So what changed? Timiraos might point to a Fed bond-buying program of the $120 billion per month kind, which is “larger than the $85 billion in monthly purchases during the Fed’s largest bond-buying program after the 2008 crisis.” Allegedly lower rates artificially created on the way to an Austin boom? No, not really.
What changed in Austin is people. Whereas University of Texas students used to depart the capital city upon graduation for Dallas, Houston and beyond, more and more stick around for the lifestyle that Austin affords, along with increasingly robust job opportunities. Indeed, it’s not just Elon Musk who is moving to Austin, nor is opportunity in Austin any longer solely defined by Dell Computer. Any technology company of note has a presence in central Texas.
It’s also worth pointing to the Stanford effect. Stanford dropout Joe Liemandt started business software company Trilogy in 1989, only to move it to Austin in 1992 since the cost of doing business there was lower. Liemandt has lured over 2,000 Stanford dropouts and grads to Austin since then.
Austin’s ascent from a crunchy college town memorialized in the 1991 indie film Slacker to swanky major city was logically driven by people. It’s a reminder that credit is a consequence of people, as opposed to fake rates faux engineered by central planners. It bears repeating that abundant credit would have been utterly meaningless in Austin in 1991, and would have exited within minutes. Thirty years later, savings from around the world are finding their way to the formerly hippie-vibed town. Capital follows people. Period.
To see why the above is true, imagine if Jeff Bezos announced his intention to move to Charleston, WV in 2021, with plans for the formation of a corporation upon arrival. If so, readers can rest assured that credit would follow Bezos in enormous fashion. That’s the case because Bezo’s relocation to Charleston would author the relocation from around the U.S. (and the world) of tens of thousands of wildly talented people. And while it’s not unreasonable to speculate that local businesses presently endure tight credit conditions when they enter a bank, it’s fair to say that the cost of borrowing for all manner of Charleston businesses would decline in concert with Bezos’s arrival.
Please keep Charleston and West Virginia in mind relative to decades worth of federal spending in the Mountain State. Despite billions and billions of federal outlays, West Virginia is still very poor. Well, or course it is. It’s been leaking its best and brightest while attracting very few for decades. When talent is exiting a city, state or country, so is credit. It’s kind of basic.
Which speaks to the naivete of the Fed’s machinations. They can’t possibly work. Congressional spending in West Virginia over the decades tells us why. All those billions spent by Congress didn’t keep around the people whom investment follows. This matters because the Fed’s existence is just a reminder that Congress outsources some of its functions. Rather than Congress vainly attempting to manipulate the cost of credit and the availability of same, the latter is outsourced to the Fed. Could Congress conduct open market operations? Of course it could. And they would be as effective of stimulus programs in West Virginia have been. Meaning not at all.
It’s a people thing, once again. Austin has them and as a result it doesn’t need the Fed. Sources of investment and credit will always find the brilliant. Just the same, no amount of governmental force can keep investment and credit where talent is limited. In short, the Fed is superfluous where growth is taking place, and it’s irrelevant where it’s not. Sorry East St. Louis. Sorry Cairo, IL. Sorry Charleston, WV.