FINNOV

Austerity plans are based on the wrong diagnosis of the wrong problem -- and may plunge Europe into depression. Governments must be able to spend strategically to encourage growth, or the crisis will only get worse.

Contagion today is causing even the ‘core’ European countries to be affected by investors’ fear of the EuroZone (EZ) crisis, causing a mass selloff of EZ bonds which has caused the spread for French yields over German Bunds to hit a record high, and the Euro to fall. Even the stable Scandinavian countries, like Finland, are starting to get affected.

What is often referred to as the ‘financial crisis’ is in many ways a ‘real economy’ crisis. It is no coincidence that two of the biggest problems, Greece and Italy, have the lowest productivity figures in Europe, and little spending on key areas that cause growth like R&D.

Steve Jobs was an important entrepreneur. An inspirational one. But let's not forget how his success was built upon something that those who extol entrepreneurs often forget. The great fruits to be borne out of active State led industrial policy. Take Apple's iPhone. Every bit of it, except the ingenious way it all comes together (extremely important of course), owes its genius not to Jobs but to the… State.

Maximizing shareholder value through stock buybacks has become an economic religion in the U.S., and corporate executives and board members are its chief acolytes.

With the unemployment rate still at over 9 percent and the U.S. economy facing a possible double-dip recession, President Obama’s jobs plan can only help. If, however, the main point of the plan is to put the employment situation in decent shape by a year from now, I would not bet on its success. The U.S. jobs problem is deeply structural, and requires a transformative plan for a solution.

The U.S. does have an investment problem, but the blame lies with Big Business, not Big Government. Remember when the United States led the world in industrial technology? The peak of U.S. supremacy was back in the 1960s, when the “military-industrial complex” was in full force. Then in the mid-1970s the Japanese mounted a successful economic challenge to the United States in a range of industries, including steel, machine tools, memory chips, consumer electronics, and automobiles. Since then, among Asian nations, South Korea, Taiwan, China, and India have become major global competitors in industries that the United States used to dominate. In historical retrospect, U.S. industrial power has never been quite the same.

If you want to talk job creation, let’s talk China. While the United States suffers through a prolonged jobless recovery, with another recession on the horizon, the Chinese economy has continued to boom. In the second quarter of 2011 the China’s GDP growth rate slowed to 9.5% year-on-year, down from 9.7% in the previous quarter and 11.9% a year earlier.

During the 1980s and 1990s, Americans fell in love with the stock market. The “go-go years” of the 1960s had produced decent stock yields. But households still viewed investment in corporate stocks as a risky business, as would be confirmed by the negative performance of the stock market in the stagflation of the 1970s (see the table below).

The one innovation that I believe would most meet the world’s energy challenge is the development of NUCLEAR FUSION (hot not cold!). However, unfortunately this is still far off. Part of the reason is that in the last decade most of the very costly investments, required by the international collaboration in this area, have become concentrated into ONE single experiment: the ITER project (the International Thermonuclear Experimental Reactor). Besides recent revelations of the unrealistic costs of the project, which is estimated at 16 billion euros with many predicting it will increase significantly, a core problem of this unitary approach to the devlopment of a new technology is that the history of innovation teaches us that the exploration process that underpins innovation is most successful when distributed amongst a variety of different types of experiments, and settings, that allow the trial and error process of scientific discovery, and the serendipity which this embodies, to be let loose rather than restrained.

The UK government spends more on furniture than green technology. If the country is to grow, and if UK companies are to win future procurement bids for greener products, the UK economy must start to spend and send the right signals to business. Until then, the procurement issue is just an isolated drop in the ocean. And another reason for hypocritical requests for ‘protection’ by the state by the same companies that usually call for it to be withdrawn. It is the most innovative companies and nations that are growing, and not living in fear of EU procurement rules.

Focusing on shareholder return is a very bad way for companies to govern the allocation of their resources. Public shareholders simply trade outstanding stock, but taxpayers and workers make risky investments in the innovation process and should be able to lay claim to a fair share of the returns. Yet since the 1980s, top executives of major US business corporations have invoked the flawed obsession with maximizing shareholder value to justify the exclusion of taxpayers and workers from sharing profits. Instead, they have been intent on increasing not only cash dividends — the traditional way of distributing value to shareholders — but also stock buybacks, which are used to manipulate their company’s stock price. So shareholder return has become the measure of success of the publicly traded corporation.

The IMF report was not good news. It reduced its expected growth in the UK from 2.5 in April 2010 to 1.5 in May 2011. This after a period of 0 growth (-.5 in the last quarter of 2010 and .5 in 2011 1st quarter). It also said that the course being pursued for deficit reduction (mainly cuts) should not change UNLESS there is a prolonged period of weak growth, unemployment and inflation. There are many signs that we are headed for exactly that: a prolonged period of slow growth.