Yesterday I attended an event of the National Chamber Foundation and the American Enterprise Institute. The topic was “Challenges to Creating 20 Million New Jobs.” But, appropriately, and at the urging of one of the panelists, AEI president Arthur Brooks, we ended up talking about the importance of a “culture of entrepreneurship.” I mentioned I had just witnessed one of the great cultures of entrepreneurship at the three-day Gilder/Forbes Telecosm conference, this year focused on the technology companies of Israel, where a surge of venture capital and hyper-entrepreneurial activity has created a boom.

Today, David Brooks nicely captures this ethos of “futurity.” He worries that China has it, and we don’t.

It may seem like an ephemeral thing, but this eschatological faith in the future has motivated generations of Americans, just as religious faith motivates a missionary. Pioneers and immigrants endured hardship in the present because of their confidence in future plenty. Entrepreneurs start up companies with an exaggerated sense of their chances of success. The faith is the molten core of the country’s dynamism.

There are also periodic crises of faith. Today, the rise of China is producing such a crisis. It is not only China’s economic growth rate that produces this anxiety. The deeper issue is spiritual. The Chinese, though members of a famously old civilization, seem to possess some of the vigor that once defined the U.S. The Chinese are now an astonishingly optimistic people. Eighty-six percent of Chinese believe their country is headed in the right direction, compared with 37 percent of Americans.

What is the optimal economic arrangement to produce innovation and growth? And what is the optimal political arrangement needed to encourage and sustain such an economic order? I spend a lot of time thinking about these questions (as here in a paper on the rise of China). And so I’d recommend this thoughtful blog post by economist Scott Sumner. Sumner’s been blogging a lot on his recent trip to China and on the macroeconomics of the financial crisis/recession/rebound.

I disagree with a number of Sumner’s conclusions on the macro and political-economy fronts, but it’s insights like the one below that keep me reading Sumner.

Switzerland’s high level of democracy doesn’t just come from referenda, it also comes from its extreme decentralization.  This makes it a highly successful multiethnic society, and not just when compared to places like Yugoslavia and Iraq, but even in comparison to Belgium or Canada.  Another advantage of decentralization is that small places are less likely to be protectionist, as the gains from trade are much more obvious.  In addition, it is much easier to monitor and root out rent seekers in a community where most people know each other.

Stanford economist Paul Romer has had lots of good ideas over the years. Particularly his ideas about the importance of ideas in the economy. But his “Charter City” idea explored at the recent TED conference is one of the best yet.

Maybe I like it so much because it so closely tracks the concepts offered in my long paper of last August called “Entrepreneurship and Innovation in China - 1978-2008 - Thirty Years of Decentralized Economic Growth”, a follow-on article in The Wall Street Journal, and a previous essay “Breaking Metcalfe’s Law” on the economic importance of the exchange of ideas.

Romer uses China’s “free zones” envisioned by Deng Xiaoping and initially implemented by one Jiang Zemin as the chief example of how his charter cities would work in practice. He explains how they might cut the political-economic Gordian knot of societies too stuck in the past to make obviously needed rule changes that open the floodgates of ideas and entrepreneurship. These were the key themes of my paper.

Also check out this working paper by Romer that surveys the economic growth literature (hat tip: Growthology).

“In a few years we might actually find that we are hungry for more capitalism, not less. An economic crisis slows growth, and when countries need growth, they turn to markets. After the Mexican and East Asian currency crises — which were far more painful in those countries than the current downturn has been here — the pace of market-oriented reform speeded up. If, in the years ahead, the American consumer remains reluctant to spend, if federal and state governments groan under their debt loads, if government-owned companies remain expensive burdens, then private-sector activity will become the only path to creating jobs. With all its flaws, capitalism remains the most productive economic engine we have yet invented.”

– Fareed Zakaria, June 16, 2009

I have a photo of my father from around 1982, standing on the tarmac of South Bend airport with Jack Kemp. The economy was in the tank, and America’s world standing was uncertain. My Dad had gone to pick up Kemp, who was to speak at an event for his fellow Republican, Jack Hiler, who was our friend and congressman from northern Indiana. I was maybe eight years old at the time. We were Reagan-Kemp-Hiler conservatives, interested in entrepreneurship, economic growth, and a muscular but prudent international stance.

Some 15 years later I would go to work for Kemp as an economic analyst. It was not preordained, but neither was it a complete coincidence, I suppose, that I spent several years working for the man who, more than any other public official, had articulated and even helped shape my, and my family’s, worldview. Kemp and I even shared the same birthday, July 13.

It is difficult to overestimate Kemp’s impact on history. For those who don’t grasp the importance of economics in politics and geostrategy, that will seem a wild overstatement. But I do think Kemp changed the arc of human events by helping to launch the U.S. on a much higher growth trajectory. By freeing American workers and businesses and attracting the world’s human and financial capital, the Reagan-Kemp economic strategy of tax cuts, sound money, and deregulation unleashed two and a half decades of amazing feats in technology and entrepreneurship. Within just a few years, the American boom of the 1980s shook the Communist world and allowed Reagan to peacefully conclude the Cold War. These events not only bolstered the wealth and ideological foundations of the West but freed hundreds of millions of people in the East and set the stage for the next great wave: the low-tax-free-trade phenomenon we call globalization, which has brought at least a billion more people out of poverty.

Kemp was not immune to the ego-pumping of life on the Potomac. But football and his middle-class upbringing had given him a healthy concept of “the team.” More than almost any politician I have encountered he was deeply interested in ideas. (What other politician would spend so much time — or any time at all — on the intricacies of monetary policy?) And in getting at the truth. And in building a positive sum politics through energy and persuasion, not cleverness or negativity. He was a builder, not a destroyer.

Having been a central player in creating the long boom, Kemp was also a long-time critic of the wildly gyrating monetary and dollar policies that led to the crash and ended this particularly prosperous period in American history. Not coincidentally, it is Kemp’s enthusiastic, expansive, inclusive brand of politics that might help his party regain its footing so it can help launch the next great American wave. Kemp would have no doubt whatsoever America’s biggest, best, brightest days are ahead. 

I join many friends and former colleagues in offering Mrs. Kemp, Jeff, Jimmy, and the whole Kemp family my condolences, and deep gratitude for sharing Jack with the world.

Associated Press

MORE REMEMBRANCES:

“Capitalist for the Common Man” – The Wall Street Journal

“The Jack Kemp I Knew” - Richard Rahn

“Jack Kemp: The Happy Warrior” – Bruce Bartlett

“Jack Kemp, Our JFK” – Mona Charen

“Will the GOP Forget Reagan and Kemp?” – Dan Henninger

“He Had the Power of the Happy Man” – Peggy Noonan

“The Life of His Party” – David Broder

“Jack Kemp: Conservative Hero” - The Economist

“Quarterback of GOP Ideas” – Ed Rollins

Bloomberg columnist Caroline Baum exposes the crucial paradox between the title of Judge Richard Posner’s new book — A Failure of Capitalism — and the contents of the book, which mostly blames the Federal Reserve for the financial crash. 

I asked Posner why the Fed’s errors constitute a failure of capitalism. He said the central bank was part of the “capitalist structure,” along with property rights and a judicial system to enforce them. To the extent that the Fed mismanaged the money supply (or interest rates) and failed to assure “a reasonable degree of economic stability,” it has to be regarded as a failure of capitalism. . . .

“[Milton Friedman] wouldn’t agree” it was a failure of capitalism, said Anna Schwartz, a research associate at the National Bureau of Economic Research and Friedman’s co-author on “A Monetary History of the United States, 1867-1960.” “It was a failure of government.”

The Fed conducted “very easy monetary policy, which permitted the asset-price boom,” she said yesterday in a telephone interview. “It had nothing to do with capitalism failing. It had to do with the policies and institutions that conducted them.”

Charlie Rose: “Do we need to change capitalism?”

Bill Gates: “Not in some dramatic way. . . . There are some particular things that went on. But the fundamentals of, you create a company, you have a good idea, you get to hire people. . . . When you do that, the kind of thing that allowed Microsoft, or other great technology companies, to come along . . . I don’t think we’re going to do anything that would really blunt those kind of opportunities, and the huge societal benefits that it creates.”

– Bill Gates interviewed on Charlie Rose, April 28, 2009, at 49:20

It’s the only thing that can save us, write the always excellent Carl Schramm and Bob Litan.

we believe one of the major reasons for the resurgence in productivity growth in the 1990s and through much of this decade was the transformation of our economy from managerial capitalism dominated by large existing firms (think Big Autos, Big Steel, the old AT&T, and the old IBM) into a vibrant form of entrepreneurial capitalism powered by new high-growth firms (think the younger Microsoft, Intel, Cisco, and Google). If too many of our larger financial and nonfinancial firms become wards of the government for too long, we fear that could politicize credit decisions and tilt the economic playing field away from entrepreneurial endeavors. Large enterprises whose creditors know they will be protected if the firms run into trouble are more likely to take imprudent risks and put U.S. taxpayers in jeopardy—as we have learned too well with Fannie and Freddie.

David Malpass with a typically cogent column on the crisis of lost capital and plunging consumption, but also the more important factors that drive the future.

Losses in U.S. wealth and self-confidence have been massive, with job conditions still worsening. But a long downtrend into 2010 isn’t inevitable, even assuming a systematic lurch to bigger government. A starting point for optimism is to realize that the creation of new capital is more important than the loss of old capital. This is hard to absorb emotionally during a crisis. The world’s past wealth creation is outstripped every generation by innovation, human progress and the rapid growth of the above-subsistence population.

Consumption may also prove less important to the recovery than asserted in the warnings of another Great Depression. Consumption crashed after theLehman Brothers bankruptcy. With consumption equaling 70% of GDP, a downsizing there would decimate GDP if the economy were static. Yet GDP itself means production, not consumption. A lot of U.S. consumption has been idle or is sourced abroad and won’t be missed. The GDP issue is whether the Crash of ‘08 will cause people to work fewer years, less hard or less productively. That’s unlikely.

Even for those deeply worried about old capital and weak consumption there are grounds for optimism. So far most of the banking sector losses have been accounting writedowns, not cash losses. Layoffs would slow and consumption resume if the Fed sped its asset purchases and Washington stopped imposing arbitrarily low prices on equity holders and regulatory capital in the blind assumption that crisis markets are accurately priced.

See my latest on the nexus of China trade, monetary policy, and our current crisis in Monday’s Wall Street Journal. Contrary to the new conventional wisdom, which is gaining considerable steam, I argue that:

America did not underreact to the supposed Chinese threat. It overreacted. The problem wasn’t “global imbalances” but a purposeful dollar imbalance. Our weak-dollar policy, intended to pump up U.S. manufacturing and close the trade gap, backfired. Currency chaos led to a $30 trillion global crash, an energy shock, bank and auto failures, and possibly a new big government era. For globalization and American innovation to survive, we must first understand the Chinese story and our own monetary mistakes.

A “more competitive currency” and monetary “stimulus” cannot create new wealth. Only technology and entrepreneurship can do that. The “China currency” issue distracts America from all the important things that could actually make us more competitive –e.g., better K-12 education, much lower corporate tax rates, cutting-edge broadband networks, less (not more) centralization and power in Washington, and, of course, a stable dollar.

we may be approaching a tipping point for democratic capitalism.

– Peter Wehner and Paul Ryan, January 16, 2009

Steve Moore with a good retro-and-possibly-pro-spective on Atlas Shrugged.

Michael Malone says Washington is killing Silicon Valley. Among the depressing metrics:

in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Citing in particular an amazingly large array of new accounting rules, including but not limited to Sarbanes-Oxley, Malone gets the key problem:

From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness.

Three decades ago today, Deng Xiaoping shook the world.

We are in a new, if entirely predictable, danger zone. The State of Illinois and City of Chicago are now ceasing business with Bank of America because BofA declined to extend credit to Republic Windows and Doors, a plant where workers are now engaged in a sit-in. 

The take-over of much of the U.S. financial industry — with health care and maybe energy next — could lead to endless mischief of this sort and much worse.

A friend writes to say: “fascism has come to America.” Alarmist, or prophetic?