Archive for setembro \29\+00:00 2009

The Geography of Venture Capital Expansion

setembro 29, 2009

Deu agora no National Bureau of Economic Research dos EUA (!


The Geography of Venture Capital Expansion

One of the most important determinants of the number of VC offices in a region is success rate for all previous VC investments in that region.

Relative to the amount of capital invested, venture capital backed companies have disproportionately contributed to the creation of jobs, market value, and revenue to their local economies. As a result, states and municipalities are competing for the establishment of venture capital investors’ offices in their communities.

In Buy Local? The Geography of Successful and Unsuccessful Venture Capital Expansion (NBER Working Paper No. 15102), authors Henry Chen, Paul Gompers, Anna Kovner, and Josh Lerner examine the location decisions of venture capital (VC) firms and the impact that venture capital firm geography has on investments and outcomes. They analyze data for 2,039 VC firms in the period 1975 to 2005, including their office locations and that of the businesses in their investment portfolios.

Currently, about half the VC firms and an equal percentage of the U.S.-based companies that they finance are concentrated in just three metropolitan areas – San Francisco/San Jose, Boston, and New York, which the authors refer to as “venture capital centers.” Those VC firms outperform VC firms based elsewhere, regardless of the stage of the investment. These superior returns may result in part from the most successful venture capital firms being located in these three cities, with their reputations allowing them to be among the first to see the most interesting investment opportunities, regardless of the geographic region of the company.

VC firms tend to open satellite offices in cities where other VC firms already operate, rather than in regions with few other VC firms. This is consistent with VC firms chasing the success of other VC firms. “In fact, one of the most important determinants of the number of VC offices in a region is success rate for all previous VC investments in that region,” the authors write.

However, “much of the VC outperformance in these venture capital centers arises from their non-local investments,” that is investments outside of the three VC centers. That may be because VC firms apply more rigorous standards when considering new investments further away from their office base, since they expect to incur a higher monitoring cost of that business.

The location decisions of VC-backed businesses are affected by a number of factors. Entrepreneurs seeking VC capital may choose to locate their businesses in areas that are close to potential VC funding sources, but they also may be attracted to regions with pools of talented employees and academic researchers, which have been shown to result in a higher success rate for new ventures.

This study finds that one VC-backed success in a new geographic area usually leads to additional VC investment in other businesses in the region. “We find evidence that a venture capital firm’s existing investments in a region affect expected success on other deals in that region, (so) bringing first-time venture capital investors to a region may be more effective than subsidizing existing investors.”

Another interesting finding is that ” some of the performance disparity between local and non-local investments disappears when the venture firm does more than one investment in a region, suggesting that (as) the marginal monitoring cost falls, venture capital firms may reduce their expected success rate for investment in a distant geography.”

Therefore, if local governments outside the nation’s three VC centers seek to attract VC branch offices, one strategy they might consider is providing support to VC-backed businesses in their communities. The study concludes that “� anything that policymakers do that contributes to an increase in the number of successful venture-backed investments in a region will also increase the probability of a venture branch office opening in that region.”

— Frank Byrt

The Problem with Mature ERP Systems

setembro 25, 2009

Post interessante do dia 16/09/2009 do blog!

The Problem with Mature ERP Systems

ERP systems tend to outlast the IT professionals who implement them, causing headaches for the CIOs who are subsequently brought it to integrate and upgrade them — and manage the business side’s changing expectations.

By Thomas Wailgum

Wed, September 16, 2009 — CIO

The word inheritance usually connotes something of value being passed down from one generation to the next. Money is always good, as is expensive art work and other antiquities.

 For IT leaders, an inheritance usually refers to enterprise software, which, while valuable from a corporate perspective, certainly comes with its own set of generational and technological baggage.

In fact, a new report from Forrester Research states that most CIOs today have inherited mature ERP systems implemented by predecessors, over which they have little to no control. Consequently, writes George Lawrie in the report (subscription required), enterprises and their ERP systems tend to drift apart.

Click here to find out more!

Read the Enterprise Software Unplugged Blog

“As the years pass, the original implementation team disbands, retires or dies, and the old use cases and best practices start to brown and curl at the edges like the sepia-tinted photos of yesteryear,” Lawrie writes. “Like tectonic plates adrift on a sea of magma, ERP instances and the businesses they serve are bound to drift apart over time or dramatically collide with earthquake-like consequences.”

CIOs are then left with clean-up duty. Manjit Singh, CIO of Chiquita Brands International, says that there are far too many instances inside companies of enterprise systems that were implemented by a CIO who is no longer there.

Further complicating matters is that while spending on ERP has grown at the rate of 6.9 percent each year, so too has dissatisfaction among end users with those enterprise applications, according to the Forrester report. In other words, ERP is a lose-lose scenario. (See Why ERP Is Still So Hard for more on this topic.)

Lawrie identified several challenges that cause end users, software vendors, consultants and systems integrators to struggle with ERP. Here are four sources of their problems:

Mismatched Rates of ERP Evolution. The chief problem, Lawrie writes, is that “business really does evolve faster than users can recast the ‘silicon cement’ of ERP using present technologies and practices.”

Multiple ERP Instances and Vendors. Professionals interviewed for the report describe a lack of standardization—SAP or Oracle in their headquarters or largest subsidiaries, and applications from vendors such as QAD and Infor in their smaller operations. “While this makes sense where operational needs vary widely, it places a huge burden on the IT support organization and provides scope for significant duplication.”

Poor Governance. Fewer than 5 percent of companies implementing ERP “create a thorough business case for their ERP implementation and then rigorously check that they are achieving their key performance indicators,” Lawrie writes. In particular, SMBs view ERP as an IT project, rather than a business project, Lawrie writes. Consequently, he adds, they end up needing more informal spreadsheets or manual procedures to enhance the ERP system’s functionality.

Accumulated Modifications Stymie Upgrades. At companies that have made significant changes to their core ERP systems, “there is a huge challenge to upgrading to the latest vendor release,” Lawrie writes. “The main problem is to find in one body of experts knowledge both of the business reasons for the modifications and of the true capabilities of the vendor’s new release.”

Chiquita Brands’ Singh is well aware of the lasting impact that ERP purchases can have not only on companies using them but on future IT generations.

“I do think about some of the decisions I make and the implications—whether it’s implications for me, because I’m going to be around and have to deal, or a decision that someone else is going to have to wrestle with,” Singh says. “I would hate for anybody to look back and say: ‘I don’t understand why he made that choice or what he thought was going to happen in X numbers of years.’ I would rather have people say: ‘I clearly understand the rationale for the choice that was made at the time.'”

How Will World Leaders Fix the Financial Mess?

setembro 24, 2009

Entrevista do com o Prof. Ken Rogoff!


How Will World Leaders Fix the Financial Mess?

Economist Ken Rogoff previews the agenda at this week’s G20 Summit.
Linda Y. Li | September 23, 2009

This week, the leaders of the world’s 20 largest economies will gather in Pittsburgh with an ambitious agenda: strengthening international financial regulation, coordinating economic recovery, and financing the most vulnerable developing countries. Given the history of ineffective economic coordination among world leaders, from the Basel II Accord in 2004 to the current trade negotiations of the Doha Development Round, it’s no wonder that expectations for this summit are low. The G-20, however, has already brought about unprecedented levels of cooperation among its members to fight the global recession through large-scale fiscal expansion and resources committed to the International Monetary Fund. The group is now poised to take center stage for guiding global financial reform.

Harvard professor Ken Rogoff, former chief economist of the IMF, talked to the Prospect about the underlying issues dividing the leading economies of the world. An edited transcript follows.

Economists and pundits alike seem very skeptical of the G-20 Summit. Will the world leaders be able to coordinate the international standards and regulations they aspire to?

Ken Rogoff: The short answer is no. It is hopelessly complicated and difficult, but perhaps over five to 10 years they will be able to figure something out. The trouble is that U.S. and European banks live in totally different accounting and regulatory worlds where “capital” has a different meaning. The United States has a very expansive interpretation of what a bank’s capital is, while in Europe, it’s just much stricter.

Also, the undercurrent is the United States makes a lot of money off of international finance. It’s a big profit center — we are the winners, and we want to keep the system. The rest of the world says, “But you’re generating risk.” We have a very different agenda from, say, Germany or France. They will have much less to lose by strengthening regulation because they have much stronger regulation to start with.

Despite the U.S. being a winner in the current system, stricter regulations are in our interest in the long term, right?

Yes, we should have stricter regulations. We should turn our financial-regulation system upside down. I’m very worried that we’re just going to see minor fixes and not serious reform. The fundamental issue is to force financial institutions, especially big banks, to hold much more capital against the debts that they’re taking, and especially when they’re borrowing short term. Financial innovation is very important to growth, but not at the scale that we’ve seen. [Treasury] Secretary [Timothy] Geithner’s proposal is to bring banks’ leveraging down to 15 to 20 times their net worth, down from 30 times. That’s not enough. We don’t need them to be rolling over five to 10 times their net worth every month.

One result of April’s G-20 meeting in London was an agreement to ensure that emerging market countries receive adequate support from developed nations to sustain their economies. What can we expect to see on this front after this week’s summit?

Casting this huge safety net over emerging markets was in many ways the biggest move they made in April. But we’re not going to see much change because they set out a very long-term timetable for awarding that support — as long as five years. This creates a real problem because the economies of Ukraine, Latvia, and other Eastern European countries will just fall off. Consequently, the IMF will be holding a lot of the debt, and it will just be a mess. But they prefer to have a bigger mess in emerging markets later than to have to deal with it while the rich countries are in crisis.

The main focus of this meeting regarding emerging markets is pressing Asia to expand its consumer demand. For the last 25 years, the U.S. consumer was the engine of the bubble, but nobody thinks the U.S. consumer is coming back the same way, even after the recovery. Somebody’s got to step in. The Chinese consumer has to be a piece of it.

How will the world leaders press Asia to increase consumer demand, and how quickly can it happen?

At this juncture, the Chinese authorities really have the same goals as us because they are not keen on doubling their U.S. dollars from $2 trillion to $4 trillion. The core problem is not easily solved overnight because most Chinese have to pay for their own education, retirement, and medical care; there’s very little social safety net. So they save. Meanwhile, they get very low interest rates on their savings because of the recession, and so they have to save even more. It won’t change overnight, but I think they are definitely going to press China to do it fast. And if China can solve the problem over five to 10 years, that would be enough.

Brazil, Russia, India and China [the BRIC countries], as well as South Africa, are expected to demand a rebalancing of distribution quotas and more voting power in the IMF. What will the response be from Western countries?

My sense is that they’ve cut a deal. I think Europe’s going to give as much as 5 percent to the BRIC countries. Europe is absurdly overrepresented at the IMF and is standing in the way of reform.

In truth, the BRIC countries should get a lot more than 5 percent, but this is a start. It’s not in anybody’s interest to have China, Brazil, India, and Russia so underrepresented at the IMF because the IMF is supposed to help deal with issues like global trade imbalances, and you can’t work with just half the equation. The current distribution of balance is absurd.

The EU will be coming to the G-20 Summit hoping to limit executive pay, an issue that’s expected to be contentious in Pittsburgh — will there be agreement?

Something will come out of it, but there’s no one-size-fits-all solution. It’s hard not to be sympathetic to that, and clearly we’ve shown that a lot of the financial firms are effectively public entities with trillions of dollars of cash at their disposal. On the other hand, it’s sobering to note that the European banks, by and large, did not have these huge, American-size payouts. Yet they managed to get themselves into just as much trouble. The short-term borrowing is the real problem.

Correction: The following line was missing “don’t” in the original version: “We don’t need them to be rolling over five to 10 times their net worth every month.”

Linda Y. Li is a Prospect intern.

A Vision for Innovation, Growth, and Quality Jobs

setembro 23, 2009

 Direto do blog da White House, nos EUA, uma visão sobre inovação!



A Vision for Innovation, Growth, and Quality Jobs

Posted by Lawrence H. Summers
President Obama laid out his vision for innovation, growth, and quality jobs earlier today at Hudson Valley Community College.  The President’s plan is grounded not only in the American tradition of entrepreneurship, but also in the traditions of robust economic thought.
During the past two years, the ideas propounded by John Maynard Keynes have assumed greater importance than most people would have thought in the previous generation.  As Keynes famously observed, during those rare times of deep financial and economic crisis, when the “invisible hand” Adam Smith talked about has temporarily ceased to function, there is a more urgent need for government to play an active role in restoring markets to their healthy function. 
The wisdom of Keynesian policies has been confirmed by the performance of the economy over the past year.  After the collapse of Lehman Brothers last September, government policy moved in a strongly activist direction. 
As a result of those policies, our outlook today has shifted from rescue to recovery, from worrying about the very real prospect of depression to thinking about what kind of an expansion we want to have. 
An important aspect of any economic expansion is the role innovation plays as an engine of economic growth.  In this regard, the most important economist of the twenty-first century might actually turn out to be not Smith or Keynes, but Joseph Schumpeter. 
One of Schumpeter’s most important contributions was the emphasis he placed on the tremendous power of innovation and entrepreneurial initiative to drive growth through a process he famously characterized as “creative destruction.”  His work captured not only an economic truth, but also the particular source of America’s strength and dynamism.
One of the ways to view the trajectory of economic history is through the key technologies that have reverberated across the economy.  In the nineteenth century, these included the transcontinental railroad, the telegraph, and the steam engine, among others.  In the twentieth, the most powerful innovations included the automobile, the jet plane, and, over the last generation, information technology.
While we can’t know exactly where the next great area of American innovation will be, we already see a number of prominent sectors where American entrepreneurs are unleashing explosive, innovative energy:
In information technology, where tremendous potential remains for a range of applications to increase for years to come;
In life-science technologies, where developments made at the National Institutes of Health and in research facilities around the country will have profound implications not just for human health, but also for the environment, agriculture, and a range of other areas that require technological creativity; and,
In energy, where the combination of environmental and geopolitical imperatives have created the context for an enormously productive period in developing energy technologies as well.
Looking across the breadth of the U.S. economy, the prospects for transformational innovation to occur are enormous.  But to ensure that the entrepreneurial spirit that Schumpeter recognized in the early twentieth century will continue to drive the American economy in the twenty-first century requires a role for government as well: to create an environment that is conducive to generating those developments.  
The President’s program is directed at strengthening our economic ecology—an educated workforce, a fluid environment that stimulates entrepreneurship, and building blocks in key areas of the economy—that has long been central to America’s prosperity.  These were core design considerations in putting together over $100 billion of Recovery Act funds that support innovation and they will continue to be core concerns going forward. With steps like these, the entrepreneurial spirit that Schumpeter recognized in the early twentieth century will continue to drive the American economy in the twenty-first century.
I hope you’ll take a few minutes to read the President remarks today or, to delve into more detail, into a new white paper prepared by the National Economic Council about the policies President Obama is implementing to create a broader, more inclusive, more prosperous America based on the ingenuity of our people.
Lawrence H. Summers is Director of the National Economic Council

Back In Demand

setembro 21, 2009

Eis aqui uma revisão de um livro que muito se aproxima do que eu penso!

Na atual crise econômica houve um retorno às idéias de John Maynard Keynes numa velocidade pouco vista no século 20.  De um lado os “adoradores” de Keynes, uns mais equilibrados e outros mais radicais, re-evocando a sabedoria do nobre economista morto há muitos anos.  De outro lado, seus “detratores”  re-pisando muita coisa do que já havia sido dita no século passado.

Mas a revisão abaixo, feita pelo Prof. Greg Mankiw ontem em The Wall Street Journal, dá uma boa medida dos fatos e coloca a atual “re-consideração” de Keynes no seu devido lugar.  Ou seja, nem 8 nem 80!

Back In Demand
A great thinker has his admirers and detractors. Do his ideas logically cohere?
John Maynard Keynes. The name, by itself, is something of a Rorschach test for economists. More than half a century after the death of this famed Cambridge University professor, he remains among the most controversial figures in the field. The recent economic crisis has raised Keynes’s profile yet again and further stoked the debate over his contributions.

Most macroeconomists—that is, those who study the ups and downs of the overall economy—fall into one of two broad camps: Keynes admirers or Keynes detractors. When these groups cross paths, the result is the ivory-tower equivalent of a spitball fight.

To admirers, Keynes was nothing short of the savior of the capitalist system. His “General Theory of Employment, Interest and Money” (1936) proposed a diagnosis and remedy for the calamity known as the Great Depression. According to Keynes, economic downturns are not a fundamental indictment of the market economy. Rather, recessions and depressions arise from insufficient aggregate demand. A smart government can remedy the problem with its monetary and fiscal policy—say, by printing up some money and spending it. Once the right policies are put in place, the thinking goes, the world is safe again for free markets.

To detractors, Keynes was an economist whose reach exceeded his grasp: He tried to replace classic economic principles with new ones of his own, but what he offered was vague and incomplete. Keynes’s many followers have tried to give his theory analytic rigor, but with only limited success. Despite these intellectual deficiencies, the detractors say, Keynesians recklessly push their ideas in the political arena, where they often lead to high inflation and excessive budget deficits. The fiscal policy of the Obama administration is a case in point. When the White House pushed for a massive increase in infrastructure spending to create jobs, it was taking a page from the Keynes playbook.

There is no doubt where Robert Skidelsky stands. A professor at the University of Warwick, he is the author of a magisterial three-volume biography of Keynes. After his years of research, he is a true believer. In “Keynes: The Return of the Master,” Mr. Skidelsky makes the case for Keynes—not only for his place in the history of economic thought but also for his relevance today. To understand the global economic crisis of the past year, he says, we need more unadulterated Keynes.

In the Keynesian view as channeled by Mr. Skidelsky, the credit crunch happened because policy makers “succumbed to something called the efficient financial market theory: the view that financial markets could not consistently misprice assets and therefore needed little regulation.” We must now aim at “treating symptoms.” Thus: “Global aggregate demand is collapsing; extra spending is needed to revive it.” In the long term, he says, we need “an expanded public sector, and a more modest role for economics as tutor of governments.”

In his preface, Mr. Skidelsky says that he is a historian, not an economist. The book bears out the claim, in both its strengths and weaknesses. Mr. Skidelsky is most engaging when he draws on his biographical work. Keynes, we are reminded, had a fascinating life. He was a widely read intellectual who wrote accessibly for the general public. He advised world leaders on the crucial issues of the day and socialized with the artists and writers of the Bloomsbury group. But most of “Keynes” is devoted to ideas, not history, and here Mr. Skidelsky is not playing his strong suit. To economists his discussion of macroeconomic theory will seem pedestrian and imprecise. To laymen it will seem abstract and hard to follow.


Keynes: The Return of the Master

By Robert Skidelsky
PublicAffairs, 221 pages, $25.95

As an ardent fan, Mr. Skidelsky fails to give Keynes’s intellectual opponents their due. In academic circles, the most influential macroeconomist of the last quarter of the 20th century was Robert Lucas, of the University of Chicago, who won the Nobel Prize in 1995. His great contribution to the discipline was to analyze how government policies influence the economy in part through their effect on people’s expectations—a lesson that Keynes would likely have appreciated but that early followers of Keynes often ignored.

Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. Mr. Lucas, we are told, is following in the tradition of the “French mathematician Leon Walras [who] pictured the economy as a system of simultaneous equations.” The very idea is made to sound slightly crazed.

This brings us to the biggest problem with “Keynes.” Mr. Skidelsky admits to being poorly trained in the tools that economists use: “I find mathematics and statistics ‘challenging,’ as they say, and it is too late to improve. This has, I believe, saved me from important errors of thinking.”

Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally, the language of logic. Modern research into Keynes’s theories—I have conducted such research myself—tries to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns out that the task is not easy.

Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment. But if recessions and depressions are as costly as they seem to be, why don’t firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium? This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.

Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

Mr. Mankiw, a professor of economics at Harvard University, is the author of the textbooks “Macroeconomics” and “Principles of Economics.”

The Talent Innovation Imperative

setembro 19, 2009

 Um excelente post do dia 27/08/2009 do blog!

The Talent Innovation Imperative
Any company that competes on the global stage must, in light of today’s changing workforce, rethink the way it manages people.


Illustration by Noma Bar

Too many companies are wasting their resources— their people and their financial leverage — by perpetuating outdated approaches to talent management. They structure jobs rigidly, forcing many people to work a 9 a.m. to 5 p.m., Monday through Friday, workweek. They focus their training on functional skills, not on aligning employees’ capabilities with the strategic objectives of the business. For leadership development and career advancement, they rely on long-standing training courses that don’t reflect the contributions that people can make in today’s flat, flexible, and entrepreneurial organizations. And their compensation systems do not adequately link to performance or hold managers accountable for developing the talent of their staff and their direct reports. In short, the talent management in these companies is not arming them with the decisive, experienced, globally minded visionaries that they need at every level.

It’s not that talent is unimportant to corporate leaders. Many of them see that people are the only asset that innovates, and that innovation is the only path to sustained breakthrough performance. As these leaders read about companies such as Google and Patagonia that are known for their creative and attractive work environments, they would like to provide the same. And they know, from these examples and others, that the investment needed to improve is relatively small, and the paybacks are relatively high.

But they are held back by an old model of talent management. This model, which is so pervasive it is almost unseen, is grounded in 20th-century assumptions about people and the workplace. It hasn’t adapted to demographic changes, to shifting attitudes among employees (knowledge workers in particular), or to the new priorities of global corporations. It needs to be changed, and the needed reform will come about only through deliberate changes in policies and practices.

To be sure, many executives are prone to postponing talent management innovation in the wake of the global economic crisis. Employees are so grateful to have their jobs, the thinking goes, that they can be relied on to deliver 100 percent. But the crisis has added urgency to the talent problem; the commitment of employees is most needed in a crunch, and that commitment is all too easy to lose. Surveys conducted by the Center for Work–Life Policy (CWLP) show that between June 2007 and December 2008, the number of employees expressing loyalty to employers plunged from 95 percent to 39 percent. The number trusting their employers fell just as dramatically, from 79 percent to 22 percent over the same time period. Surveys in mid-2009 continued to report similar disenchantment and mistrust. Another recent study, published in the Academy of Management Journal, found that after a round of layoffs, voluntary attrition spikes by as much as 31 percent, and precisely the wrong people — those who have the strongest track records and brightest employment prospects even in a recession — are most likely to leave. Companies that react to the crisis with across-the-board talent cuts are not just missing an opportunity to compete; they’re making themselves weaker.

By contrast, some companies have been steadily innovating their talent models, and the results are showing up in breakthrough performance, superior competitive advantage, and significantly enhanced global reach. No single company has all the answers, but it is possible to chart — using the experiences of many companies before and after the recession began, as well as research conducted by Booz & Company and the CWLP — the parameters of an effective approach to global talent innovation. As we’ll see, this approach has four main priorities: differentiated capabilities, performance acceleration, leadership development, and the fostering of a talent culture.

Toward a New Talent Model

The economic crisis has created a complex challenge for corporate leaders with respect to talent. They must stem the leakage of the highest-quality people even as they reduce overhead. They must reinspire employees and reinvigorate morale. Most urgently, they must realign the company’s talent practices with its strategic priorities — which, in many cases, the recession will have forced them to refocus. And they must revamp their talent model to reflect changing demographic trends; as companies begin to recruit and train people again, they will find a very different talent pool than they have had in the past.

Demographers have long foreseen dramatic shifts that would affect the makeup, location, preparedness, and expectations of every company’s workforce. Now those trends are here, and many companies are unprepared. Combined with the economic downturn, these shifts have created a perfect storm of workforce pressures on companies around the world.

One shift involves the growing numbers of Chinese and Indian people in the global talent marketplace; another is the expanding achievement gap between women and men. In many countries, more women than men graduate from colleges and universities, and women, barely present on corporate payrolls 30 years ago, now make up more than half of the global educated workforce. White men now make up less than 20 percent of the “tertiary” educated population (defined as those with a college or university degree), from which most corporate employees are drawn, and potential managers from North America and western Europe are outnumbered more than three-to-one by their counterparts from the rest of the world. (See Exhibit 1.) As a result, leading companies are already finding that they cannot simply passively bring women and people of color into the workplace; they must prepare them for greater positions of responsibility.


One company directly addressing this challenge is Johnson & Johnson (J&J), which has identified high-performing women of color as a pivotal group and successfully piloted an initiative aimed at accelerating their career development. Called Crossing the Finish Line, this program for director-level women of color and their direct supervisors consists of a four-day session: two and a half days for the high-potential women, and one and a half days for their (mostly male) supervisors. The two groups overlap for half a day in the middle, during which the women share what they have learned, their supervisors respond, and together they create action plans for career acceleration — which are rolled out upon completion of the program. Company data shows that women who participate in the program are more likely to get promoted than those who do not. It has since been expanded to include men of color.

“This program helps us capitalize on talent that is reflective of the global environment and different from the traditional mold,” says JoAnn Heffernan Heisen, chief diversity officer of J&J. Companies are similarly adapting to generational shifts, which vary by region. In the mature economies of Europe, Japan, and North America, the “demographic bulge” of the baby boom generation (born between 1946 and 1964, currently ages 45 to 63) is beginning to move out of the workforce. The swelling ranks of retirees, low birth rates (particularly among the college educated), and caps on immigration are all factors that will fuel a reduction of between 20 and 40 percent in the working-age population over the next few decades. Meanwhile, in transitional economies such as China, India, Brazil, and Russia, talent markets vary widely. India benefits from both high GDP growth and a young, highly skilled workforce, whereas China and Russia both confront a shrinking pipeline of young workers. All these countries need better-educated entry-level talent to sustain strong growth. (See Exhibit 2.).


Within global companies, three generations coexist in the workforce, each with a distinct demographic profile. Baby boomers expect to retire later than previous generations did (on average, four years later), because of increased life expectancies and decreased savings, especially after the global recession. The baby boomers are followed by a much smaller cohort: Generation X (born between 1965 and 1978, currently ages 31 to 44). Members of this group, who would ordinarily represent the corporate bench strength for leadership, are in short supply and, at the same time, are finished with “paying their dues” and ready to step into leadership positions. Finally, the millennial generation, also known as Generation Y (born between 1979 and 1994, currently ages 15 to 30) is entering the workforce. This generation outnumbers even the baby boomers; by 2025 it will make up 60 to 75 percent of the global workforce. Members of Generation Y are drawn to companies that demonstrate social responsibility and offer service-oriented sabbaticals and eco-friendly workplaces.

All three cohorts have made clear their desire for greater flexibility. They no longer want (or have given up hope of finding) the “organization man” model of lifetime employment and rigid hierarchies. They are interested in striking “talent deals” with their employers to balance their work obligations and private lives. They thus seek modularized work arrangements such as seasonal leave and flexible time. But they also expect to be part of high-impact teams that generate meaningful and valued results — within their companies and, if possible, in the world at large.

By contrast, the old prevailing talent model, still in place at many companies, assumes lockstep career progression for high-potential people (whose ranks are still quietly filled mostly by white men from North America or Europe). In these companies, it is assumed that people are motivated primarily by money and that the environment within the company should be stable and predictable. Employees are expected to move in linear fashion up the ladder of a vertical function or business line. They are mentored through, and learn through, face-to-face interaction, and get only one chance to enter a fast-track progression, generally in their 30s. From there, work obligations override all other personal interests and priorities, including family.

A more appropriate, 21st-century talent model assumes a workforce that is global, diverse, and gender-balanced, with discontinuous career progressions, in which high-potential employees may take time off or work for different types of organizations along the way. Under this model, companies value functional and leadership skills, embrace new employment structures (such as highly responsible part-time work), encourage virtual workplaces (in which people work together across long distances, communicating electronically), and offer nonmonetary rewards alongside financial rewards as a way to attract people. Family, community, and work are intertwined in a variety of ways, and the result is a more flexible, dynamic, and unpredictable workplace in which people feel they are continually building their skills and learning from the enterprise.

This new talent management model allows a much broader group of people to assume positions of responsibility. It promotes innovation, growth, and breakthrough performance by integrating the needs of the business with those of individuals. And when aligned with a clear and focused corporate strategy, it allows top management to optimize compensation, training, and other expenses; maximize the productivity and performance of the workforce; and gain competitive advantage.

But it takes a CEO to put such a model in place. The highest-performing organizations don’t leave talent performance acceleration to HR alone; they make leaders at all levels directly accountable for improving the capability and performance of their people. HR provides the necessary tools and program support; leaders oversee the process and determine the outcomes. Chief executives need to declare talent a priority, and to lead change in the four building blocks of global talent innovation: differentiated capabilities, performance acceleration, leadership development, and a talent culture. (See Exhibit 3.)


Differentiated Capabilities

Business success relies heavily on establishing the right capabilities — an interconnected set of systems, tools, processes, and knowledge that can be put in place to reach the most critical groups of customers. The differentiated capabilities that distinguish each company from its competitors vary widely among and within industries. The differentiated capabilities of a fashion retailer might include the ability to dramatically shorten time-to-market for cutting-edge designs, whereas those of a high-tech company might include best-in-class product customization. A capability is not the same as a functional capacity, such as forecasting, inventory planning, or R&D. It’s cross-functional, conceivably extending from manufacturing to marketing to finance, and across multiple regions and lines of business.

People are the key to differentiated capabilities. To create and sustain such capabilities at a world-class level, companies need to take the following steps:

• Understand and prioritize the critical capabilities required for competitive advantage. Companies should conduct an executive review of their business strategy and capability requirements. Then they should take inventory of their current skills, profiles, performance, and potential, identifying the high-priority gaps and developing talent strategies to close them.

Identify key talent segments. Most employees will fall into one of four general categories, based on their ability to provide the needed capabilities: (1) Pivotal employees, those with specialized skills, knowledge, and abilities that contribute directly to fulfilling a company’s strategic objectives, are the most crucial group. In a consumer products company, for example, this group might include product development managers and marketing directors. (2) Core employees are people critical to executing the strategy. (3) Support employees are people whose value is real but whose duties could be delivered through alternative means, including outsourcing. (4) Noncore segments are those with easy-to-duplicate skills that do not serve capability requirements. Companies that segment the workforce in this way can more easily see how to tailor talent strategies and allocate talent investments more effectively.

Develop tailored value propositions. To attract and hold the best people from all three of the most-desired cohorts — the pivotal, core, and support employees — companies need new and diverse attraction and retention drivers: competitive compensation and benefits packages, innovative job designs, flexible schedules, well-crafted career development opportunities, strong leadership and succession planning practices, a distinctive culture, and a welcoming work environment. Tailored value propositions might include socially oriented initiatives that deliberately engage the passion and potential of Gen Y, or “off-ramp and on-ramp” career paths that allow highly qualified women to take time off for family obligations without sidelining their opportunities for promotion and greater responsibility. These propositions will vary by company; the factors that motivate a pivotal employee in the pharmaceutical industry might be very different from those that are relevant to his or her counterpart in high tech.

Late in 2008, pharmaceutical giant Pfizer Inc. sought to engage employees by launching the Global Access initiative, partnering with Grameen Health (an affiliate of Grameen Bank) in Bangladesh to improve access to health care through rural clinics. As soon as the initiative was announced, project leader Ponni Subbiah was swamped with expressions of interest. “Employees wrote to me from all functional divisions within Pfizer — research, marketing, manufacturing, operations, auditing — telling me how happy they were to see Pfizer involved in this area and how it made them proud to be part of this company,” he says. Employees were so eager to contribute that many offered to volunteer after working hours or on weekends.

Performance Acceleration

Organizational success hinges on the collective daily decisions and actions of hundreds, perhaps thousands, of individual employees. The ability to engage and motivate them is the essence of performance acceleration. Accelerated performance is shaped by the company’s assessment and feedback processes, compensation and incentive structures, and development and advancement models. To rethink and redesign these elements, which have traditionally been in the domain of the human resources department, the following steps are needed.

Reinforce meritocratic pay and promotion decisions. Recognize and reward merit rather than mediocrity. Set up well-defined competencies and standards, so that individuals who excel when measured against them are consistently developed, promoted, and compensated accordingly. Align the performance acceleration process with career planning and learning and development, so that employee capabilities and outcomes are continuously improved.

The health-care products company Novartis AG tracks 14,000 high-potential individuals through its Organization and Talent Review (OTR) system, which rates each person’s potential, learning agility, people skills, and ability to drive results and change. The OTR system enables business leaders to assess individuals on a company-wide basis, illuminates gaps in skills and experience, and provides a list of qualified internal candidates for every critical position in the company. Where bench strength is lacking, the generalizability of OTR benchmarks makes it easier to identify individuals from the outside who might be recruited. (For some jobs, where specialized scientific expertise is required, only 20 people in the world may be qualified.) This rigorous and forward-looking system helps Novartis maintain a distinct competitive edge.

Measure outcomes. Companies can’t accelerate what they don’t measure. Capture performance through well-targeted metrics based on relevant results rather than activities (for example, tracking the percentage of people “ready now” to succeed their bosses, rather than the number of people trained). Other useful measures might be promotion rates, retention statistics for top performers versus average performers, and performance rating distributions by gender or ethnicity.

Leadership Development

The qualities and requirements that define a world-class senior executive have evolved significantly over the last 10 years. Some traditional leadership characteristics, such as a strong sense of vision and the ability to inspire others, are still important. But leaders today must first and foremost be able to master enormous complexity. They must appreciate and accommodate different perspectives and interpersonal dynamics, integrate multiple disciplines, work across cultures, and interpret diverse and multiple streams of information.

Too few leaders have the right combination of skills and experiences. Companies that want to improve their leadership development practices should take the following steps.

Evolve the executive leadership competencies model. Most organizations have established fairly narrow and nondifferentiated checklists of executive competence. A broader set of leadership competencies, taking into account the goals of the enterprise and the capabilities of the individuals, makes it easier to cultivate senior leaders who can both navigate fast-breaking crises and serve the longer-term best interests of shareholders, boards, and employees.

Promote and develop people who match those competencies. Even when they profess to support broad leadership, many companies continue to select leaders almost solely on the basis of technical and professional capability. Executives should stop moving people to the senior ranks of an organization simply because they hit revenue or other financial performance targets; they should instead take into account such factors as the performance of those candidates’ direct reports.

Build the leadership bench. Senior management, including the CEO, needs to help conceptualize, craft, and deliver leadership programs. These should be carefully integrated with the business strategy and grounded in a business case. High-potential leaders should receive a variety of developmental experiences: general management experience, cross-functional opportunities, global assignments, and opportunities to manage change and develop other talent themselves.

At the global bank HSBC Holdings, HSBC Chief Executive Michael Geoghegan holds his group management board accountable for leadership development; each member oversees the talent pools of a region, customer group, or product line. Business unit leaders collaborate with local human resources coordinators to identify and assess promising candidates from local talent pools. High performers are given new assignments in their region or line of business; they then cross boundaries to take on new positions in other functions or business areas. The local managers recommend individuals for the corporate talent pool, which is overseen centrally. These individuals are expected to work in at least two very different cultural environments before ascending to the highest levels of management, and this expectation is clearly communicated.

Talent Culture

A talent culture is made up of the values, beliefs, behaviors, and environment required to attract, engage, and retain committed and competent employees. Companies that develop this type of culture as a key element of their corporate brand consistently outperform companies that do not. Great cultures are not created by accident; they are the result of specific and deliberate practices and strategies, beginning with the following:

Build engagement. More than 100 studies have demonstrated the correlation between employee engagement and business performance. Engaged employees are far more productive and committed. They are more likely to make progress toward company goals, as well as the goals of their own group. But only one in four employees, on average, is “engaged.” Although the drivers of engagement vary from one organization to the next, four factors predominate: (1) whether employees feel respected, valued, and recognized; (2) whether they perceive their job to be important to the success of the enterprise; (3) how much pride they feel about the company and what it stands for; and (4) how much trust and confidence they have in company leadership. Improving these factors can represent a substantial and cost-effective opportunity for forward-looking companies.

A good place to start is with more direct communication from the top. In any turbulent period, when leaders don’t provide accurate and timely information, people start to assume the worst. Time Warner Inc. broke this pattern as part of its response to the economic crisis of 2008. The company organized a series of “skip-level” lunches where CEO Jeff Bewkes hosted groups of high-potential employees several layers down in the organization. The targeted employees were high performers, and although they did not have regular access to top leadership, they were network “connectors” (people who communicated directly with many others) and “influencers” (people whom others turned to for advice and clarity). Both the employees and the CEO stressed the value of the lunches.

Rethink organizational and career designs. Companies should develop talent models with 21st-century assumptions built in: tailored to their organization, with greater variation in roles, more efficient training, and more flexible career advancement opportunities.

Enhance the talent brand. Critical to attracting and retaining pivotal talent is a company’s ability to build (and protect) a differentiated employer brand to present to prospective employees, recruiters, customers, and others. If a company doesn’t do this well, it will be noted on Internet sites where employees and high-potential recruits share their impressions. The company’s culture should thus be visible to the outside; the brand should reflect and embrace the values of the company, emphasize its focus on talent, and differentiate it from its competitors.

Cisco Systems Inc. has deliberately built a talent brand based on innovation through collaboration. For example, it has set up a series of action learning forums. In each, a 10-person team, with members recruited across every conceivable line — rank, function, generation, geography, and gender — works together for three months with the assistance of a coach to further one of the company’s top strategic priorities. Venture capital prize money is awarded to winning teams, guaranteeing that the best business plans are funded and will get off the ground.

An immense amount of new value creation has been generated by these action learning forums. One idea, a set of network-based standards, protocols, and technologies for the nation’s emerging smart grid electric power generation infrastructure, is expected to deliver billions of dollars to Cisco over the next five years. Additionally, 20 percent of those who participated in these teams have been promoted, and only 2 percent of these high-potential employees have left the company. The forums are a powerful and defining element of Cisco’s talent culture.

The Road Ahead

Crafting an effective approach to talent management is as challenging and complex as any other C-suite mandate. The global talent innovation model described here can move companies beyond cookie-cutter best practices and standard tool kits. Each building block — differentiated capabilities, performance acceleration, leadership development, and talent culture — is essential. All four elements work in concert within the context of an organization’s business strategy. Following this systematic approach, companies can move beyond the best practices of their competitors to best-in-class innovation and performance. And that, in turn, will pay off in sustained talent advantage on a global scale.

The GLOW Network at Siemens
by Peter Löscher and Jill Lee

On March 19, 2009, Siemens AG launched the Global Leadership Organization of Women (GLOW), a network dedicated to enlarging the contribution of women to our business. The launch event, held in Munich, drew the 100 most senior women from across the company and from all parts of the world. It marked the first step in the rollout of an ambitious change agenda that encompasses mentoring, establishing flexible working conditions, on- and off-ramping for parental leave, and developing ways to expand the external visibility of women in the company.

We created GLOW because we want to proactively recruit and retain highly qualified women. We believe this will greatly enhance our talent pool. Throughout the world, women deliver outstanding academic and professional performance, and they represent an important resource for companies. Against the backdrop of demographic change and globalization, companies cannot afford to leave this resource untapped. 

GLOW is not an isolated initiative. It is part of the ongoing development of our corporate culture. In the future, we want our management to reflect the diversity of our customers. This is the only way we can satisfy the needs and requirements of more than 2 million customers, with whom we are in contact every day. We experience the benefits of diversity again and again. For example, Japanese, Chinese, or Arab customers prefer to talk to us in their own language. If decision makers in our company speak that language, it gives us a real competitive advantage.

Having a diverse group of senior leaders in place will help us all develop a better understanding of customer needs. The potential for networking is enormous: Innovative ideas can be channeled back to our R&D centers in Germany or used in different parts of the world. Take, for example, the entry-level CT scan device called the Somatom Spirit. It was originally designed, engineered, and manufactured in China exclusively for Chinese hospitals. But because our teams are increasingly global, we soon realized that this product has potential outside China, as well. It’s ideally suited for community hospitals in the United States that can’t afford more expensive high-end models. Today, 75 percent of the Somatom Spirits are sold outside China.

Approximately 80 percent of Siemens’s revenues are generated outside Germany; we operate in 190 countries. Yet the representation of women and many nationalities, ethnic groups, and cultures within our management ranks could be stronger. For example, currently only slightly more than one-third of our top management is non-German and only 7 percent are women.

Our diversity initiative reflects the commitments and beliefs of senior executives and the management board, and it has the highest priority within the company. However, we are not using diversity to “rainbow wash” the company, nor are we interested in establishing rigid quotas for gender, nationality, and ethnicity. Rather, we want to unleash the enormous potential of our employees — their cultural and personal backgrounds, their broad range of experience, their special skills — for their benefit and for the benefit of the company. We know that diverse teams are more creative and that creativity drives innovation. And innovation has been our lifeblood for 162 years. All of us at Siemens benefit if every employee can fully live up to her or his potential.

  • Peter Löscher is the president and chief executive officer of Siemens AG.
  • Jill Lee is the chief diversity officer at Siemens and the director of the GLOW network.

Author Profiles:

  • DeAnne Aguirre is a senior partner with Booz & Company based in San Francisco. She is an expert in organizational and talent effectiveness and change leadership, and has led transformations in both U.S. and global corporations.
  • Laird Post is a principal with Booz & Company based in San Francisco. He advises organizations in the U.S. and globally on people, leadership, and change effectiveness.
  • Sylvia Ann Hewlett is the CEO of Sylvia Ann Hewlett Associates and the founding president of the Center for Work–Life Policy, a think tank based in New York. She is the author of Top Talent: Keeping Performance Up When Business Is Down (Harvard Business Press, 2009) and eight other books.

This article draws on research and practice developed through Global Talent Innovation, a joint service offering from Booz & Company and the Center for Work–Life Policy (CWLP). Also contributing were, from Booz & Company, Principal Ilona Steffen and Associates Emily Kao and Claudia Onofrio; from CWLP, Vice President Ripa Rashid; and s+b contributing editor Sally Helgesen.


  1. Tony Avirgan, “Economies of Major Developed Countries Will Shrink in 2009,” Economic Policy Institute, February 18, 2009: Links demographic shifts to loss of economic potential.
  2. Shumeet Banerji, Paul Leinwand, and Cesare R. Mainardi, Cut Costs, Grow Stronger (Harvard Business School Press, 2009): Introduces a capability-based approach to shrinking expense while building a right to win in key markets. 
  3. Sylvia Ann Hewlett, Top Talent: Keeping Performance Up When Business Is Down (Harvard Business Press, 2009): Spells out critical changes needed in attracting, holding, and building new structures for high-performing and high-potential employees.
  4. Sylvia Ann Hewlett, Laura Sherbin, and Karen Sumberg, “How Gen Y and Boomers Will Reshape Your Agenda,” Harvard Business Review, July 2009: Guide to the “remarkably similar” intentions and demands of these two cohorts, and the implications for talent management.
  5. Per-Ola Karlsson and Gary L. Neilson, “CEO Succession 2008: Stability in the Storm,” s+b, Summer 2009: Booz & Company annual CEO succession study suggests that corporate leaders need to do much more to foster the next generation of highest-level executives.
  6. Edward E. Lawler III, “The Talent Lie,” s+b, Summer 2008; Talent: Making People Your Competitive Advantage (Jossey-Bass, 2008): Two resources describing how “few organizations seem to walk their executives’ talk when it comes to the management of talent.”
  7. Cesare Mainardi, Paul Leinwand, and Steffen Lauster, “How to Win by Changing the Game,” s+b, Winter 2008: How to invest in a capabilities-driven strategy, with some discussion of talent approaches.
  8. Richard Rawlinson, Walter McFarland, and Laird Post, “A Talent for Talent,” s+b, Autumn 2008; Theodore Kinni, Ilona Steffen, and Brenda Worthen, editors, Capturing the People Advantage: Thought Leaders on Human Capital (s+b Books, 2008): Interviews with leaders in the human resources function and others who have developed many aspects of talent innovation in their companies.

Some Thoughts on the State of Macro

setembro 18, 2009

 Um comentário do economista N. Kocherlakota sobre o estado da Macroeconomia.  Representa uma crítica ao artigo do Prof. Paul Krugman aqui reproduzido.  A dica veio hoje do blog do Prof. Greg Mankiw!


Some Thoughts on the State of Macro

N. Kocherlakota (Minnesota)

I’ve read many commentaries in 2008 and 2009 on the state of macroeconomics. For what it’s worth, I thought that I’d offer my own thoughts on the topic.

I begin with a table. It considers the top 17 economics departments, as ranked by US News and World Report in 2009. (I would have used 15, but there was a 4-way tie for 14

MIT: Acemoglu, Angeletos, Werning

Harvard: Laibson

Chicago: Alvarez, Mulligan, Shimer, Uhlig

Princeton: Rossi-Hansberg

Stanford: Bloom, Klenow, Piazzesi, Schneider

Berkeley: Gourinchas

Yale: Engel, Golosov, Moscarini, Smith, Tsyvinski

Northwestern: Doepke

Penn: Fernandez-Villaverde, Krueger, Schorfheide

Columbia: Ng, Reis, Sala-i-Martin, Schmitt-Grohe, Uribe

Minnesota: Perri, Phelan, Rios-Rull

NYU: Lagos, Leahy, Ludvigson, Violante

Michigan: House, Killian, Stolyarov, Tesar

UCLA: Burstein, Hellwig, Ohanian

Wisconsin: Seshadri, Williams

UCSD: None

CalTech: None

In terms of determining fields of specialization, I used self-classifications from c.v.’s, departmental classifications, and my own knowledge of teaching assignments.

These people are core researchers in our field. I do not believe that one can write knowledgeably or usefully about the state of macroeconomics without knowing their collective work well. In part because I’ve written tenure letters or prepared internal tenure cases for roughly half of them, I feel that I can rightly claim to be in this position.

Thinking about this group and their work, I’ve come to ten conclusions.

 For virtually all of these scholars (especially the younger ones), some form of heterogeneity has played a major role in most of their work. The heterogeneity comes in

different forms. It may be heterogeneity in terms of income or wage realizations. It may be heterogeneity in terms of job arrivals. It may be heterogeneity in terms of sex or age. It may be heterogeneity in terms of information about the macro-economy. It may be heterogeneity in firm productivity. And so on and so on …

2. Macroeconomists don’t ignore frictions.

Point 1 pretty much implies point 2, because heterogeneity is typically not all that interesting without frictions. So, again, for most of these scholars, frictions of some kind lie at the heart of most of their work. Of course, much of the work on monetary economics has some kind of price rigidity. Some papers have labor market frictions, so that workers take time to find jobs. Many papers have asset market frictions. In this work, agents or firms face borrowing constraints of some kind and cannot fully insure themselves against individual-specific shocks (so-called incomplete markets models). Many papers use overlapping generations models (with realistic multiperiod lifetimes) and assume that parents cannot borrow from their children.

Frictions are all over the place in modern macroeconomics.

3. Macroeconomic modeling doesn’t ignore bounded rationality.

A lot of macroeconomic modeling does treat all agents as fully rational. But a lot does not – see work by Angeletos, Laibson, Piazzesi, Reis, Schneider, Werning, and Williams (probably among others). These people work at some of the top departments in the country – they are hardly shunned as heterodox pariahs.

4. Macroeconomic models do incorporate a role for government interventions.

 Once you start using macroeconomic models with heterogeneous agents and frictions, government intervention is almost inevitable. The Minnesota and Chicago Ph. D.’s are probably best known for being anti-government. Yet, to pick three of the people on the list, Golosov (Minnesota), Tsyvinski (Minnesota), and Werning (Chicago) have been studying government insurance/taxation systems for most of their careers.

5. Macroeconomists use both calibration and econometrics.

Some macroeconomists use calibration, some use econometrics, and some use both. There’s no real methodological debate left in the field on this issue.

What is true is that most people outside of macro do not like calibration. I don’t know why. I spent seven years of my life thinking about whether econometrics was better than calibration … and pretty much decided that the answer is: “it depends”.

These scholars work on different questions and use different models. But it’s hard to see obvious ways to slice them into freshwater/saltwater camps.

Nonetheless, the list does reveal the imprint of an old freshwater/saltwater conflict, largely won by the freshwater school. First, compared to other fields in economics, there are surprisingly many Minnesota and Penn Ph. D.’s on this list, and surprisingly few Harvard Ph. D.’s. Second, some departments have shockingly few young tenured scholars in this important field (including large departments like Harvard and Princeton).

Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move.

The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables.

This particular group of younger scholars has worked more on the consequences of these disturbances and less on uncovering their true sources. I suspect that this ranking of priorities can be attributed in part to the Great Moderation of 1982-2007. Recent events may well lead to a shift in research priorities.

It is not true that all macroeconomic models assume complete financial markets – quite the contrary (see point 2 above). However, few macroeconomic models capture an intermediate messy reality in which markets are incomplete but there are nonetheless many assets and/or asset trade is conducted through intermediaries. As a consequence, we don’t understand the sources (or costs/benefits) of large-scale daily (or even quarterly) financial asset re-allocation.

In part, this omission reflects a belief among macroeconomists that this level of institutional detail was not essential for questions of interest. In part, it reflects the extreme difficulty in handling mathematical formalizations of these features of reality (see point 9 below). Again, recent events may well lead to a re-ordering of priorities.

The work of the people on this list is pretty technical. Most are very gifted intuitive economists. But intuition necessarily plays a limited role in macroeconomics. There are just too many things going on in a macroeconomic model of any interest to rely on intuition alone. Intuitive explanations invariably end up focusing on one or two of the many equations in a macro model (let alone the many more that operate in the world). The other equations might well end up undoing an effect that seems perfectly reasonable from just looking at one equation in isolation.

I believe that it is our need to formalize ideas and intuitions in mathematics that leads to a key misperception about macroeconomics, even among other economists. Macroeconomic models leave out many possibly important features of the real world. Sometimes, we choose to do so. Far more often, we leave out these aspects of reality because we

The good news is that, thanks in part to the people on this list, we’ve made enormous progress in the kind of realistic complications that we can usefully model. Of course, there is always more left to be done – and recent events have certainly pointed out useful directions for future work.

10. The macro-principles textbooks don’t represent our field well.

Little of the exciting work that’s been done by this group has made its way into undergrad textbooks. That’s probably inevitable. But it leads to a real misunderstanding about what macroeconomists do – both among lay-people and among economists in other fields. I hope that some of our gifted textbook writers rectify that situation soon!

The Promise (and Perils) of Open Collaboration

setembro 16, 2009

Um post interessante de 27/08/09 do blog!

The Promise (and Perils) of Open Collaboration

Two Movements in Time

Both quality management and open source were developed outside the corporate mainstream by pioneers who couched their missions in ethical and economic terms — as vehicles for simultaneous improvement of the integrity of the company and its bottom line. W. Edwards Deming, the leading exponent of the quality movement, was a self-employed statistician and a consultant. Deming inspired reverence among workers and engineers, but he often evoked impatience — even rage — among executives by publicly criticizing corporate practices. Nonetheless, his precepts were adopted by key members of the establishment, because they produced results. Deming’s followers included former Ford CEO Donald Petersen, who based the automaker’s turnaround during the early 1980s on Deming’s teachings.

Similarly, the earliest open source projects, such as Linux, were launched outside the corporate realm by thousands of self-organized engineers and computer science academics with a passion for collaboration and free software. Some of them, explicitly styling themselves as software iconoclasts and hackers, rebelled against the idea of proprietary intellectual property and the corporate profit motive. Then, in the mid-1990s, open source was embraced by such companies as IBM, which recognized it as a means of achieving unprecedented product quality and productivity increases. Thus began IBM’s transformation from a symbol of buttoned-up inwardness to champion of outward collaboration.

The open collaboration movement still draws directly on the open source values of knowledge sharing. Procter & Gamble, for example, relies on sophisticated social networking systems designed to make connections between in-house and outside sources of expertise. The collaborative model has enabled P&G to dramatically expand the number of its partnerships, licensing agreements, and technology purchases, which has in turn helped it unleash a steady stream of profitable innovations — with success rates up to three times as high as in the past.

Today, practitioners of open collaboration are picking up, in some ways, where the quality movement left off. They are working to tap the knowledge and creativity of a broad range of constituents, including employees and suppliers. In the process they are also rethinking their organizational structures and systems. Most important, at the core of both the quality and open collaboration movements (and sometimes it’s unclear where one leaves off and the other begins) are the values of trial-and-error learning, open communication, and systems thinking. Both movements recognized that employees — given the right tools, training, and management environment — are in the best position to do the analysis needed for meaningful improvement and innovation.

Open collaboration is already facing the same formidable barriers that held back the quality movement, especially in traditional companies. The persistence of hierarchical thinking, particularly a reliance on experts rather than the expertise of knowledgeable employees at all levels, can undermine any open collaboration effort. Also, although much of the publicity around the movement has focused on finding outside ideas through joint ventures and partnerships, it can be far more difficult, and more important, to cultivate and tap in-house creativity. Executives in many Western companies have never been comfortable soliciting the opinions of employees — especially rank-and-file workers — in any systematic way. And few companies have been willing to make the long-term commitment that quality management entails, including the training of both employees and suppliers in such areas as statistical methods and problem solving. The same is likely to be true for open collaboration.

Perhaps if we can learn from history, we won’t be condemned to repeat it. Here are seven key strategies that the pioneers of open collaboration have used to succeed in facing these obstacles, along with relevant perspectives from the quality movement.

1. Craft a leadership message. At a time when responsibility for quality improvement was ghettoized in manufacturing, W. Edwards Deming insisted that quality was the job of the CEO, and he typically refused to work for a company unless the CEO met with him regularly and developed a company-wide quality strategy. In addition to Ford’s Petersen (CEO from 1985 to 1990), Deming maintained a close relationship with Toyota senior management from the 1950s until his death in 1993.

The best CEOs articulate a leadership message that is both universal and of immediate relevance to a company’s strategic needs. In 2000, A.G. Lafley, CEO of P&G, established “Connect + Develop,” the company’s open collaboration strategy that deliberately fostered information sharing and joint project relationships with external innovators, even including some competitors. With the “50 percent rule,” P&G decreed that half of new product development should come from outside the company. Lafley has described P&G’s efforts in detail, both in The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation, coauthored with Ram Charan (Crown Business, 2008), and in interviews and articles. (See “P&G’s Innovation Culture,” s+b, Autumn 2008.) Every account of the project makes it clear that the senior executives at P&G are closely involved.

To Lafley, open collaboration is a social process that extends far beyond R&D and entails encouraging collaborative behavior and risk taking, spreading the message, and rewarding early adopters. Driving culture change, as Lafley writes in his book, also involves changing the “hard stuff”; thus, he has pushed open innovation via P&G’s organizational structures, work systems, and performance metrics.

2. Collaborate with your customers. The idea that quality is defined by the customer became a mantra of the quality movement. In response, companies beefed up consumer research, service options, and customer-service hotlines. Those strategies worked for a while. But keeping abreast of the changing needs of consumers in a global marketplace is a tall order, and too few companies kept continuously improving their approaches to gaining customer insights.

One of the hallmarks of open collaboration is that it provides new ways to incorporate customers’ ideas into new product development. MIT’s Eric von Hippel has observed that in specialized industries as varied as scientific and surgical instruments and sporting equipment, so-called lead users generate more than half of all innovations. Today companies like the Lego Group and Pitney Bowes Inc. are putting that lesson to work, using social networking and open collaboration models to redefine what it means to be close to their customers.

After Lego’s patents expired in 1988, the legendary Danish toymaker fought off copycat products, as well as the onslaught of electronic games, by allowing consumers to download software from Lego’s Web site in order to design their own toys. Lego stages competitions for the best designs. Today, Lego aficionados around the world use the Web site to custom design 3-D toys using virtual elements manufactured by the company, to purchase those toys online, and to chat with other Lego fans and share design ideas. (See “The Promise of Private-label Media,” by Matthew Egol, Leslie H. Moeller, and Christopher Vollmer, s+b, Summer 2009.)

3. Build a culture of trust and open communication. In the past, as now, one of the biggest challenges facing companies committed to quality improvement was restoring trust — among customers who were fed up with shoddy goods, suppliers who were being relentlessly squeezed, and employees who often were blamed for management’s mistakes. Trust is needed to win the participation of employees and suppliers in collaborative improvement efforts.

John O. Whitney, professor emeritus of management and former executive director of the W. Edwards Deming Center for Quality, Productivity, and Competitiveness at Columbia Business School, has estimated that more than half of a traditional organization’s activities, including use of the time clocks that monitor workers and marketing campaigns designed to win back disappointed customers, are needed  only because of mistrust.

Yet the success of open source software is predicated on an unprecedented degree of trust — or at least a widespread willingness to suspend mistrust. As IBM plunged into the open source world, for example, it had to redefine both its mind-set and its workflows. The traditional development process, which was costly and time-consuming, involved laboring in secret on a prototype before getting feedback from a customer and then returning to the lab to labor some more. “It used to be very rigid at the engineering level,” says Rod Smith, vice president of emerging technology at IBM Software Group. “You were allowed to talk only to engineers at [your] level. You had to earn the right to speak to engineers above you. Each product had its own little closet, and if you stepped out of the closet a ruler smacked your hand.”

Today, in contrast, IBM fosters forums, wikis, and other networks that give developers an early connection to a range of constituents. The company is involved with hundreds of open source projects that include customers, competitors, and other interested designers from outside the firm. Each project is aimed at bringing the brainpower of a huge open source community together to help vendors share the development expense for what is, in essence, commodity software. This more trusting environment has brought a remarkable degree of transparency to IBM.

4. Cultivate continuous improvement. As the quality movement waned, companies became impatient with the slow progress of some quality efforts. Fast-paced, fast-track executives began to regard continuous improvement with scorn as an incremental, bureaucratic, and process-driven function detached from the pressures of line management. In a major departure from the Deming approach, General Electric Company’s Six Sigma effort introduced the idea of cost-benefit analysis for improvement efforts. Over the years, however, companies that gave short shrift to continuous improvement fell behind competitors that made it an essential part of operations.    

Open collaboration has given the idea of continuous improvement a new respectability as a process that often leads to innovation, which P&G’s Lafley describes as “the conversion of a new idea into revenues and profits.”

Releases of beta versions of software represent a classic example of continuous improvement. In open source, it is fundamental to release software early and often, so that initial users can test it and suggest (or make) refinements. Many developers believe this process leads to products with higher quality and performance than those produced by “closed organizations.” And because complex software applications require technology that cuts across product lines, frequent release dates “facilitate the customization of each product line,” explains Doug Gaff, a senior engineering manager at Wind River Systems Inc. Wind River is an Alameda, Calif., company that develops software — much of it on open source platforms — for optimizing electronic devices as varied as mobile phones and the Mars exploration rovers.

This early-release-and-fix process also parallels advances in supply chain management, such as the just-in-time inventory methods that were key to the quality movement and that have become much more than a way to get inventory costs off a company’s balance sheet. Rather, for products with short life cycles, such as cell phones, just-in-time methods help ensure that parts inventories aren’t out of date by the time new product iterations occur.

At its best, continuous improvement leads to real innovation, as the experience of SSM St. Joseph Health Center, a hospital in St. Louis, demonstrates. About six years ago, St. Joseph began to experiment with a new approach to monitoring and treating the glucose levels of patients in intensive care as a way to reduce the number of costly — and potentially deadly — infections. The method, which required hourly glucose monitoring, cut the number of infections among postsurgical patients in the ICU to almost zero. It also led to substantial organizational change and increased the workload of nurses, but they embraced the new procedure because of the staff-wide commitment to continuous improvement. The process has since been adopted as a standard of care by many hospitals.

5. Build a flexible innovation infrastructure. At many companies, the responsibility for quality improvement became vested in a quality department run by staff experts in reengineering or Six Sigma, rather than being pushed throughout the organization by executive and line management. Although the functional experts understood quality techniques, they had little appreciation for the interpersonal connections that made such improvements work, and they often failed to align quality objectives with business goals.

Open collaboration relies on social networking systems and the rapid flow of intellectual property among the company’s people and its outside partners. These systems also have to enable quick decisions about which new ideas to embrace and which to discard. That mandates integrating the company’s open collaboration efforts into every aspect of the business.

At P&G, open collaboration is reflected in everything from the budget-setting process to quarterly management reviews to the way product development is done. The company’s best-known effort, of course, is Connect + Develop, which has dramatically expanded the number of innovations. As P&G’s Connect + Develop support organizations search for new ideas — some generated by a network of retired scientists, others by a team of 70 technology entrepreneurs who roam the globe looking for new ideas or pockets of excellence — they are driven by clearly identified consumer needs and operational goals. For example, multifunctional Connect + Develop teams are embedded with specific business franchise areas such as oral hygiene (Crest and Oral-B) to better understand the needs of the units and to tailor external search activities to those needs.

6. Prepare your organization for the new skill sets. One of the greatest challenges for the quality movement was the fact that it demanded a range of new technical and social skills — from statistical process control to collaborative problem solving — that employees at all levels had to learn.

Because effectiveness equals influence in open source, IBM says it has to pay closer attention to employee development and communication skills. Participation in virtual communities is a communications-intensive business, and the most successful participants are those who know how to navigate the unique culture of each community and articulate their views — usually in writing.

Engineers who want to become involved have to build their credibility gradually, by answering newsgroup questions or cleaning up software bugs. They also have to develop a thick skin to handle immediate feedback. Without layers of customer support and sales shielding developers, “the bugs and support questions come right into you,” says Ian Skerrett, director of marketing for the Eclipse Foundation, the governance organization for the eponymous open source community founded by IBM. “You have to have writing skills and the patience to collaborate.”

That is why IBM has established a set of best practices for new engineers joining an open source project. First, employees are required to “lurk” in a community for 30 or 60 days “to observe, to learn how it works” before they can participate, says Daniel Frye, vice president of open systems development. “Every open source community is different, and you have to adapt to the style and level of interaction.”

Procter & Gamble is also honing its employees’ communications skills. The company has developed more than 40 guides on a range of topics, including work processes, negotiating, and alliance management. Training also includes role-playing and videotaping different scenarios that might crop up with a partner, and then critiquing the participants.  

7. Align evaluations and rewards. The most controversial tenet of Deming’s philosophy was his belief in intrinsic motivation as a key driver of individual performance and his conviction that differentiated pay and bonuses can hurt companies because these shorter-term incentives undermine long-term goals and teamwork.

Open collaboration communities are meritocracies that offer feedback and rewards entirely outside the boundaries of the company, raising new questions about the effectiveness of pay incentives and traditional employee evaluations. Software engineers, for example, get many benefits from their open source contributions, but few are directly related to pay. “It’s an extremely wide aperture,” says IBM’s Smith. “People develop opinions about you based on your body of work. That’s very liberating in terms of [gaining] control over your own career.”

The tension between open source values and corporate pay incentives plays out every day at IBM, which remains committed to individualized incentives and evaluations by supervisors. Frye concedes that in open source, more than in the development of proprietary software, companies have to think about personnel management from a longer-term perspective. “A developer with three to five years of experience will carry more weight, more influence,” he notes. As a result, people have to stick with projects longer, and managers need to find ways to keep them interested and motivated. “The care and feeding of these individuals is very important,” Frye says.

Realizing the Potential

As these seven strategies suggest, open collaboration is a complex — indeed, all-embracing — process, requiring genuine commitment from corporate leaders, a willingness to abandon many venerable corporate customs, and an appetite for unleashing and managing disruptive change across the organization. Some companies, notably IBM and P&G, are likely to recognize this, to continue to develop their approach to open collaboration, and to reap the rewards.

But the widespread adoption of open collaboration is not at all a foregone conclusion. Not since the quality movement of the 1980s has a management trend had such potential for widespread transformation of the way companies do business. The biggest obstacle to both movements is that they require deep changes in the way knowledge is controlled and shared — changes that have the potential to alter relationships both within a company and with its outside constituents. With open collaboration, as with the quality movement, an incremental approach is likely to lead to short-lived improvements and eventual failure. But if the experience of the quality movement is any guide, the companies that successfully master open collaboration will command an enormous and lasting edge over rivals that do not.

 Reprint No. 09302

Author Profile:

  • Andrea Gabor is the author of several books, including The Capitalist Philosophers: The Geniuses of Modern Business — Their Lives, Times, and Ideas (Three Rivers Press, 2002). She is the Bloomberg Professor of Business Journalism at Baruch College at the City University of New York.

What’s Wrong with Macroeconomics?

setembro 16, 2009

Um muito bom apanhado do Prof. Mark Thoma, em seu blog de ontem (ver sobre o que está errado com a Macroeconomia!


What’s Wrong with Macroeconomics?

Some recent contributions to “what’s wrong with macroeconomics?”:

Added 9/15:


[This list is incomplete, so please add any I’ve missed in comments.]

How did Paul Krugman get it so Wrong?

setembro 12, 2009

Em resposta a um artigo do Prof. Paul Krugman, reproduzido neste blog no dia 07/09/2009, intitulado “Why Did Economists Get It So Wrong?“, o economista John H. Cochrane escreve sua opinião (abaixo) refutando o nobre Prêmio Nobel de 2008!  A indicação do artigo veio do blog do Prof. Greg Mankiw do dia 10/09/09!


How did Paul Krugman get it so Wrong?

John H. Cochrane[1]

Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?”

Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong.  Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses.  If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.

It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keyenesians” such as Olivier Blanchard and Greg Mankiw.  Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions.  Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations.  He accuses us of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid.

It’s annoying to the victims, but we’re big boys and girls. It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this attack instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.

That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and advice to spend like a drunken sailor are pretty superficial compared to all the fascinating things economists are writing about it these days.   

How sad.


That’s what I think, but I don’t expect you the reader to be convinced by my opinion or my reference to professional consensus.  Maybe he is right. Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas.  

Krugman’s attack has two goals. First, he thinks financial markets are “inefficient,” fundamentally due to “irrational” investors, and thus prey to excessive volatility which needs government control. Second, he likes the huge “fiscal stimulus” provided by multi-trillion dollar deficits.  



It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.

Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient. (I can overlook his mixing up the CAPM and Black-Scholes model, but not this.)  There is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency.  Efficient markets did not need to wait for “the memory of 1929 … gradually receding,” nor did we fail to read the newspapers in 1987.  Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on “fat tails” in stock returns.

 It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is lower in bad economic times.  As Gene Fama pointed out in 1970, these are observationally equivalent explanations. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.

But this difficulty is no surprise. It’s the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.

More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” ( “The risk premium must have increased” is just as empty.) Our ancestors could do that.  Really, is that an improvement on “Zeus had a fight with Apollo?” Good serious behavioral economists know this, and they are circumspect in their explanatory claims so far.  

But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse.

Krugman at bottom is arguing that the government should massively intervene in financial markets, and take charge of the allocation of capital.  He can’t quite come out and say this, but he does say “Keynes considered it a very bad idea to let such markets…dictate important business decisions,” and “finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a `casino.’” Well, if markets can’t be trusted to allocate capital, we don’t have to connect too many dots to imagine who Paul has in mind.

To reach this conclusion, you need evidence, experience, or any realistic hope that the alternative will be better. Remember, the SEC couldn’t even find Bernie Madoff when he was handed to them on a silver platter. Think of the great job Fannie, Freddie, and Congress did in the mortgage market.  Is this system going to regulate Citigroup, guide financial markets to the right price, replace the stock market, and tell our society which new products are worth investment?  As David Wessel’s excellent  In Fed We Trust makes perfectly clear, government regulators failed just as abysmally as private investors and economists to see the storm coming. And not from any lack of smarts.  

In fact, the behavioral view gives us a new and stronger argument against regulation and control. Regulators are just as human and irrational as market participants.  If bankers are, in Krugman’s words, “idiots,” then so must be the typical treasury secretary, fed chairman, and regulatory staff.  They act alone or in committees, where behavioral biases are much better documented than in market settings. They are still easily captured by industries, and face politically distorted incentives.

 Careful  behavioralists know this, and do not quickly run from “the market got it wrong” to “the government can put it all right.” Even my most behavioral colleagues Richard Thaler and Cass Sunstein in their book “Nudge” go only so far as a light libertarian paternalism, suggesting good default options on our 401(k) accounts. (And even here they’re not very clear on how the Federal Nudging Agency is going to steer clear of industry capture.) They don’t even think of jumping from irrational markets, which they believe in deeply, to Federal control of stock and house prices and allocation of capital.  



Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.” He’s not clear on what the “beauty” is that we all fell in love with, and why one should shun it, for good reason.  The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income. The second siren is plausible assumptions about how people behave. Keynesian economics requires that the government is able to systematically fool people again and again.  It presumes that people don’t think about the future in making decisions today. Logical consistency and plausible foundations are indeed “beautiful” but to me they are also basic preconditions for “truth.”

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.

Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true. For example, the theorem presumes lump-sum taxes, not proportional income taxes. Alas, when you take this into account we are all made poorer by deficit spending, so the multiplier is most likely negative. The theorem (like most Keynesian economics) ignores the composition of output; but surely spending money on roads rather than cars can affect the overall level.

Economists have spent a generation tossing and turning the Ricardian equivalence theorem, and assessing the likely effects of fiscal stimulus in its light, generalizing the “ifs” and figuring out the likely “therefores.”  This is exactly the right way to do things.  The impact of Ricardian equivalence is not that this simple abstract benchmark is literally true. The impact is that in its wake, if you want to understand the effects of government spending, you have to specify why it is false.  Doing so does not lead you anywhere near old-fashioned Keynesian economics. It leads you to consider distorting taxes, how much people care about their children, how many people would like to borrow more to finance today’s consumption and so on. And when you find “market failures” that might justify a multiplier, optimal-policy analysis suggests fixing the market failures, not their exploitation by fiscal  multiplier.  Most “New Keynesian” analyses that add frictions don’t produce big multipliers.

This is how real thinking about stimulus actually proceeds. Nobody ever “asserted that an increase in government spending cannot, under any circumstances, increase employment.” This is unsupportable by any serious review of professional writings, and Krugman knows it. (My own are perfectly clear on lots of possibilities for an answer that is not zero.) But thinking through this sort of thing and explaining it is much harder than just tarring your enemies with out-of-context quotes, ethical innuendo, or silly cartoons.

In fact, I propose that Krugman himself doesn’t really believe the Keynesian logic for that stimulus. I doubt he would follow that logic to its inevitable conclusions. Stimulus must have some other attraction to him.

If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it.  Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income.  The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.

If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up.  

If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.


The crash.

Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. He seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.

Here’s all he has to say: “Irrationality” caused markets to go up and then down. “Spending” then declined, for unclear reasons, possibly “irrational” as well. The sum total of his policy recommendations is for the Federal Government to spend like a drunken sailor after the fact.

Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on.  They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.

If we want to think about events and policies, this seems like more than a minor detail. The hard and central policy debate over the last year was how to manage this financial crisis. Now it is how to set up the incentives of banks and other financial institutions so this mess doesn’t happen again. There’s lots of good and subtle economics here that New York Times readers might like to know about. What does Krugman have to say? Zero.

Krugman doesn’t even have anything to say about the Fed.  Ben Bernanke did a lot more last year than set the funds rate to zero and then go off on vacation and wait for fiscal policy to do its magic. Leaving aside the string of bailouts, the Fed started term lending to securities dealers. Then, rather than buy treasuries in exchange for reserves, it essentially sold treasuries in exchange for private debt. Though the funds rate was near zero, the Fed noticed huge commercial paper and securitized debt spreads, and intervened in those markets. There is no “the” interest rate anymore, the Fed is attempting to manage them all. Recently the Fed has started buying massive quantities of mortgage-backed securities and long-term treasury debt.

Monetary policy now has little to do with “money” vs. “bonds” with all the latter lumped together. Monetary policy has become wide-ranging financial policy.  Does any of this work? What are the dangers? Can the Fed stay independent in this new role? These are the questions of our time. What does Krugman have to say? Nothing.

Krugman is trying to say that a cabal of obvious crackpots bedazzled all of macroeconomics with the beauty of their mathematics, to the point of inducing policy paralysis.  Alas, that won’t stick. The sad fact is that few in Washington pay the slightest attention to modern macroeconomic research, in particular anything with a serious intertemporal dimension.  Paul’s simple Keynesianism has dominated policy analysis for decades and continues to do so. From the CEA to the Fed to the OMB and CBO, everyone just adds up consumer, investment and government “demand” to forecast output and uses simple Phillips curves to think about inflation.  If a failure of ideas caused bad policy, it’s a simpleminded Keynesianism that failed.  


The future of economics.

How should economics change? Krugman argues for three incompatible changes.

First, he argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking.  To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk,  and comparing the resulting models, quantitatively, to data.  The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.  

Second, Krugman argues that “a more or less Keynesian view is the only plausible game in town,” and “Keynesian economics remains the best framework we have for making sense of recessions and depressions.” One thing is pretty clear by now, that when economics incorporates flaws and frictions, the result will not be to rehabilitate an 80-year-old book. As Paul bemoans, the “new Keynesians” who did just what he asks, putting Keynes inspired price-stickiness into logically coherent models, ended up with something that looked a lot more like monetarism. (Actually, though this is the consensus, my own work finds that new-Keynesian economics ended up with something much different and more radical than monetarism.) A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle.  At best you can play the fun game of hunting for inspirational quotes, but that doesn’t mean that you could have known the same thing by just reading Keynes once more.

Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.” I’m old enough to remember when Krugman was young, working out the interactions of game theory and increasing returns in international trade for which he won the Nobel Prize, and the old guard tut-tutted “nice recreational mathematics, but not real-world at all.”  How quickly time passes. 

Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research — understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?

No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.    


The insults.

The level of personal attack in this article, and fudging of the facts to achieve it, is simply amazing.

As one little example (ok, I’m a bit sensitive), take my quotation about carpenters in Nevada. I didn’t write this. It’s a quote, taken out of context, from a article written by a reporter who I spent about 10 hours with patiently trying to explain some basics.  (It’s the last time I’ll do that!)  I was trying to explain how sectoral shifts contribute to unemployment. Krugman follows it by a lie — I never asserted that “it take mass unemployment across the whole nation to get carpenters to move out of Nevada.” You can’t even dredge up a quote for that monstrosity.

What’s the point?  I don’t think Paul disagrees that sectoral shifts result in some unemployment, so the quote actually makes sense as economics. The only point is to make me, personally, seem heartless — a  pure, personal, calumnious attack, having nothing to do with economics.

Bob Lucas has written extensively on Keynesian and monetarist economics, sensibly and even-handedly.  Krugman chooses to quote a joke, made back in 1980 at a lunch talk to some business school alumni. Really, this is on the level of the picture of Barack Obama with Bill Ayres that Sean Hannity likes to show on Fox News.

It goes on. Krugman asserts that I and others “believe” “that an increase in government spending cannot, under any circumstances, increase employment,” or that we “argued that price fluctuations and shocks to demand actually had nothing to do with the business cycle.”  These are just gross distortions, unsupported by any documentation, let alone professional writing. And Krugman knows better. All economic models are simplified to exhibit one point; we all understand the real world is more complicated; and his job is supposed to be to explain that to lay readers. It would be no different than if someone were to look up Paul’s early work which assumed away transport costs and claim “Paul Krugman believes ocean shipping is free, how stupid” in the Wall Street Journal.   

The idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous. (If Krugman knew anything about hedge funds he’d know that believing in efficient markets disqualifies you for employment. Nobody wants a guy who thinks you can’t make any money trading!)  Given Krugman’s speaking fees, it’s a surprising first stone for him to cast.

Apparently, salacious prose, innuendo, calumny, and selective quotation from media aren’t enough: Krugman added cartoons to try to make opponents look silly. The Lucas-Blanchard-Bernanke conspiratorial cocktail party celebrating the end of recessions is a silly fiction. So is their despondent gloom on reading “recession” in the paper. Nobody at a conference looks like Dr. Pangloss with wild hair and a suit from the 1800s. (OK, Randy Wright has the hair, but not the suit.)  Keynes did not reappear at the NBER to be booed as an “outsider.”  Why are you allowed to make things up in pictures that wouldn’t pass even the Times’ weak fact-checking in words?

Well, perhaps we got off easy.  This all was mild compared to Krugman’s vicious obituary of Milton Friedman in the New York Review of Books.  But most of all, Paul isn’t doing his job.  He’s supposed to read, explain, and criticize things economists write, and preferably real professional writing, not interviews, opeds and blog posts. At a minimum, this leads to the unavoidable conclusion that Krugman isn’t reading real economics anymore.


How did Krugman get it so wrong?

So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah? Why publish an essentially personal attack on an ever-growing enemies list that now includes practically every professional economist? Why publish an incoherent vision for the future of economics?

The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer. This is not an insult. I read George Will, Charles Krauthnammer and Frank Rich with equal pleasure even when I disagree with them.  Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.

Alas, to Krugman, as to far too many ex-economists in partisan debates, economics is not a quest for understanding.  It is a set of debating points to argue for policies that one has adopted for partisan political purposes. “Stimulus” is just marketing to sell Congressmen and voters on a package of government spending priorities that you want for political reasons. It’s not a proposition to be explained, understood, taken seriously to its logical limits, or reflective of market failures that should be addressed directly.

Why argue for a nonsensical future for economics? Well, again, if you don’t regard economics as a science, a discipline that ought to result in quantitative matches to data, a discipline that requires crystal-clear logical connections between the “if” and the “then,” if the point of economics is merely to provide marketing and propaganda for politically-motivated policy, then his writing does make sense. It makes sense to appeal to some future economics – not yet worked out, even verbally – to disdain quantification and comparison to data, and to appeal to the authority of ancient books as interpreted you, their lone remaining apostle.

Most of all, this is the only reason I can come up with to understand why Krugman wants to write personal attacks on those who disagree with him. I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.

Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence.  Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.

[1] University of Chicago Booth School of Business. Many colleagues and friends helped, but I don’t want to name them for obvious reasons. Krugman fans: Please don’t bother emailing me to tell me what a jerk I am. I will update this occasionally, so please pass on the link not the document.

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