Jason Calacanis Made Me Do It

I'm a big fan of Jason Calacanis, he's one of the most compelling writers out there, smart as hell and never afraid to speak his mind, defend it, and damm the consequences.

He has an email. It says you're not supposed to reprint it, it's just for email. Or maybe not, as the case may be.

The latest one is called "The 120% Solution." It proposes some, shall we say, innovative, ideas for facing our current economic crisis. I'll skip over a bunch to keep it from being too tedious, but let's start at least at the beginning:

Many intelligent people I've been speaking with believe that the economic crisis facing our country today is our biggest challenge since America's inception.

This is an oxymoron. Let's compare the civil war, 1950-60's threat of nuclear annihilation, the direct attack on our soil by Axis powers. Or, um... a recession consisting so far of a couple consecutive quarters of negative GDP growth.

Let's pick two random examples:

• Example A: Civil War - 2% of the entire U.S. population is killed in battle.    

• Example B: 2008 - GDP is found to be declining at half a percent annualized. Investment banks fail. 

Apparently, my definition of "intelligent people" differs from Jason's. But moving on...

I'm suggesting that, until America takes care of its debt, untangles the housing mess and gets unemployment under control, we all commit to working six days a week. Yep, move the standard 35-40 hour work week right up to 48 hours.

This is actually one of those very interestingly counter-intuitive situations you come across sometimes in economics. Having everyone work additional hours will actually be disastrous to the economy.

This seems impossible and like I said, counter-intuitive. But it's true. Think about the most basic economics, supply and demand.

(visual aid here)

You're moving the supply curve to the right by doing this. In other words, because people are getting paid the same wage but produce more goods, at the same price point there is an additional supply of goods. (We have to assume he's made that assumption rather than talking about hourly workers here getting paid overtime for this extra work, right?)

But the problem in the economy right now is facing drastically falling demand. Or the demand curve is moving to the left. If you think about supply and demand curves you can get a sense of what happens next. A massive deflationary spiral. Google: "Japan's lost decade"

Or to be more colloquial, there's no such thing as a free lunch. Right now we're facing a demand side recession. People are buying less, they are borrowing less, spending less, and reducing the demand for goods. This problem cannot be solved by suddenly and drastically increasing the amount of goods available. The solution presented here is entirely supply-side based. Let's try it and see what happens, we won't like it.

There are many examples of things which are prudent for a single economic actor to do, but are disastrous to the economy in the aggregate. And lo and behold, reading further we come across a couple of the most classic examples:

If you've got credit card debt, pay it down if you can.

If you've got a mortgage, pay it off if you can.

This is part of the problem. So everyone goes to work longer and works harder and makes more stuff. Let's call them widgets, economics types love to call imaginary products and services widgets.

OK, so your team is all in there on Saturday cranking out an additional 20% more widgets. Mind you, they're not getting paid 20% more, just spitting out 20% more goods and services.

Simultaneously, the savings rate is skyrocketing. That's what paying off debt means of course, paid off debt is savings. Since incomes/wages haven't increased, and that money going to pay down debt is no longer being used to buy products and services (or shall we call them widgets?) then people don't need as many widgets and when they go to the store they buy fewer of them.

Meanwhile, thanks to Jason's advice the factory is cranking them out now with far more efficiency like there's no tomorrow. Widgets, stacked to the rafters. 

Are we starting to see what's wrong with this picture yet?

I'll save a pedantic part right here and assume the seven people reading this far down can figure out where this is going. It's called turning a moderate recession into a full-fledged economic collapse.

Interesting advice, but, sadly, severely misguided.

OK, let's skip over some other stuff, and on to the summary:

In summary

What made America great was our ability to innovate and create world-class products, ideas and services that people around the globe fell in love with and wanted for themselves.

Can't disagree completely. It's hard to ignore things like extracting resources from nearly every region of the world at the barrel of a gun for 200 years, or the massive economic benefits that accrue from becoming the world's default reserve currency. But innovation's no small part of it either, undoubtedly.

From health care to human rights, from democracy to dishwashers, from windshield wipers to the World Wide Web, from search engines to soda pop, we've accomplished so much by dreaming and rolling up our sleeves.

Heh. We've invented many things. But what I'm most amused by as an American myself is our ability to be so self-centered that we do things like claim credit for most of the world's civilization. Or creating the World Wide Web, say.

Fun facts sidenote, check this out.  (Hint: The "E" in "CERN" stands for European, as in Switzerland, where Tim Berners-Lee, an Englishman, was working at the time. But regardless. We, um, made it great too. Without any help or anything, or something.)

Oh, PS: fun fact number two is that Americans didn't invent soda pop either.

But whatever. Go America!™

We need to put down the remote, cut our credit cards in half and start new companies with new ideas. Our entrepreneurial spirit and hard work will get us out of this mess.  All we need to do is release them.

OK, we're at the end here, so let me see if I've got this. Step one: put down the remote and see if you can annihilate the media industry. Got it. Step two: slice up them credit cards and wipe out the retail sector.

Then start a business and sell things to people! Don't start an online business though, as everyone just cut up their credit cards in step two and will need to pay by cash or barter. But work hard.

Because hard work and persistence trumps having a f-cking clue about macroeconomics.

Or so it seems.

UPDATE: Looks like I have some visitors, thanks to Owen. Interesting. I've updated and expanded on a few of the arguments, and counter arguments here.

Comments

[Roger Ehrenberg]

Nick, this is a terrific post. Accurate. Funny. Scathing and critical. Love it. Keep up the good work! Your friend Jeff Stewart sent me. I'm glad he did.

Roger

[Chris]

This is great - I'm glad someone called him out on the total misread of the issue. I swear, simple econ needs to be taught more in schools or something...

[Paul]

I think he has a very specific idea of what we should be toiling for: not producing more factory goods, but innovating services and improving the tech infrastructure.

For example [and this is a really inadequate example], if every engineer and programmer in Silicon Valley devoted a weekend a month to reworking some government database/website/archive, a different one each month, one at a time, forever, there would be undoubted gains without any loss, except the legitimate loss of free time the volunteers would endure.

Just a simple effort like this would have a completely non-economic-but-great-for-the-nation ripple effect from students to artists, to innovators, to nostalgiacs.

My imagination is wholly impoverished at the moment and I cannot think of any more realizable and realistic endeavors to excite and inspire IT's brightest minds to give above and beyond what can be reasonably expected, but I think Mr. Calacanis wants to harness the intellectual and creative power that he is likely constantly immersed in and surrounded by.

Many have been so similarly inspired. Many high IQ societies have totally ineffective think tanks. The whole wiki resonation aggregates knowledge by harnessing the social network.

It is a dogged belief in the eventual realization of user generated content's world saving powers morphed into a more entrepreneurial and economically stimulating ever-work, like the task is your life, like the person who loves his job, like the beauty and power of Tron...forever!

[abhi]

it just shows how sold on the consumerist mindset you are, that you think if everyone starts working hard it'll result in failure because no one will be buying.

your arguments are based on what you think economics are - and that's the same type of economics that have caused the current crash.

it's a pretty good soltuion.
cutting up credit cards is essential because being in debt encourages 'limited, money restrained' thinking and work.

you don't truly innovate because you're only thinking about money and paying the bills.

[Wilson McDonald]

Interesting post. The economic concepts Baily is discussing are pretty basic, it's not reallu groundbreaking stuff. There's a recent economist article that makes the same basic point.

"This cash squeeze is a huge problem for the world economy, because as firms cut discretionary spending wherever they can, the result is likely to be a corporate version of what John Maynard Keynes called the “paradox of thrift”. Every firm does what is prudent for itself, but by cutting its spending it slows down the economy still further and thus hurts everybody, including itself."

http://www.economist.com/opinion/displaystory.cfm?story_id=12637043

Though that does illustrate how clueless of basic concepts Calacanis was, to be fair.

[Dan]

Great post, really.

I think you're going to have to live with failing to convince people that you are correct. "Working harder" and "saving more" are, as you note here and in the subsequent post, good ideas -- for individuals, but not for a macroeconomic plan. But let me offer an example, in hopes of convincing another.

A garage has six mechanics. Each mechanic is fixing five cars per week, for a total of 30 cars fixed each week. It's good, because the garage gets about 30 customers a week.

One mechanic, fearing the economic Apocalypse, decides to take Mr. Calacanis' advice and work harder (20% harder). He is now fixing six cars/week. The other five guys take notice and similarly increase their output -- six fixed cars per worker. But there's a problem. Their collective output is now 36 fixed cars, with only 30 to fix. The simple math suggests to fire a worker, which is fine but sad (and the owner wins, paying less for the same output).

But wait! It gets worse -- because the mechanic doesn't get fired, per Mr. Calacanis' second suggestion: save more.

And that is exactly what the town which the garage services does. People stop buying cars and instead have their older vehicles fixed, saving $100 here and $500 there. Within days, the garage is servicing 36 cars a week. Everyone saves their job.

Except the people who work for Big Three auto manufacturers, as people stop buying their cars. Which is pretty much where we're at right now. Oops.