• WisBusiness

Monday, January 31, 2011

Is there a ‘right’ to broadband? Public Service Commission case could help decide

By Tom Still
We live in a society that values its historic constitutional rights and which sometimes aspires to create new rights, justified or otherwise. Witness the federal debate over health care reform, which basically comes down to whether Americans accept the existence of a “right,” or entitlement, to health care.

The next public policy debate in Wisconsin will explore another potential “right” – the right to broadband coverage.

Responding to a petition made last summer, the state Public Service Commission has agreed to look into a request by residents of the Dane County town of Berry to compel a private carrier to offer high-speed Internet coverage. It is a case that could have statewide implications for people living in rural areas, telecommunications providers and state government itself.

The town of Berry is a rural community of about 1,125 people northwest of Madison, which is one of the most intensely “wired” cities in Wisconsin, if not the nation. Many residents in Berry have coveted high-speed Internet service for years, but a combination of the town’s rolling topography and the costs of installing the cable needed to bring broadband to a thinly populated area have led the town’s local carrier, TDS Telecom, to say no.

The company has offered dial-up internet access, but that’s much slower than broadband and it can’t handle transmission of digital photos and other graphics. The only other options for Berry residents are satellite service or a cell-phone connection.

In a complaint filed in June 2010, residents of Berry claimed state regulations obligate TDS to provide “reasonably adequate service and facilities,” which in their view includes broadband coverage. They want the PSC to order TDS Telecom to provide the service, for which the residents would pay once it’s available. The complaint says the lack of high-speed Internet affects virtually every aspect of daily life in Berry, from the ability of people to work from home to their children’s education to property values to access to emergency services.

Not providing the service “has a profound adverse impact on the quality of life, economic development and individual efficiency and productivity in the town of Berry,” the 50-page complaint noted.

Executives at TDS Telecom say they’re sympathetic – they understand the power and value of high-speed Internet connections in today’s world – but add there are some places too costly to serve. The company offers broadband coverage to 94 percent of its customers nationwide, including places as remote as the floor of the Grand Canyon and an island off the western coast of Michigan. In Wisconsin, by way of comparison, about 80 percent of the population has access to some sort of broadband coverage through cable television or telephone providers.

Broadband is fast becoming an essential communications tool for families, businesses, schools, hospitals and virtually any other institution in America. In fact, during his State of the Union speech, President Obama called for connecting 90 percent of all Americans to the Internet within a decade.

But is broadband a “right” that deserves government sanction? That’s the question the three-member PSC may ultimately need to resolve.

The town of Berry is rural but also somewhat exurban, a home to farmers as well as professionals who are likely to work in nearby Madison. Some moved to Berry in recent years because they liked its rural character – a choice that presumably came with the knowledge there would be tradeoffs between lifestyle and convenience.

The flip side of the argument is that the definition of “reasonably adequate” service appears to have changed, seemingly overnight, with the Internet. But state rules governing telecom companies have yet to keep pace with the digital revolution and don’t reflect that change. By and large, Wisconsin telephone companies are still regulated by costly rules that apply primarily to land lines, which are rapidly disappearing from use.

Proposals to modernize Wisconsin’s telecom laws would help relieve carriers of those burdens – and clear the way for more investment in broadband, wireless and other technologies. As the PSC reviews the town of Berry case, it should consider the very real possibility that updating state law could transform a debate over “rights” to a discussion about greater digital opportunity for all.

-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.


Wednesday, January 26, 2011

Health law repeal: Does the Senate have what it takes?

By Dan Danner
On Jan. 19th, courage overcame politics as the U.S. House of Representatives voted to repeal President Obama’s new healthcare law. Now it’s senators’ turn to show the American people they care more about the nation’s economic future than scoring partisan points.

It might help senators to pause at the Senate Chamber’s western entrance and draw inspiration from “Courage,” a sculpture above the door of a warrior battling a deadly serpent. That’s an accurate image of the struggle facing small-business owners if the misnamed Patient Protection and Affordable Care Act slithers free of Congress’ grasp.

For a quarter-century, even during periods of prosperity, the cost of health insurance has been small-business owners’ greatest problem. On their behalf, the National Federation of Independent Business constantly suggested meaningful reform suggestions. We offered ideas, policy changes and sound solutions.

Instead, and despite an economy now fighting for its life, Congress and the president ignored small business’ concerns, handing down an edict that not only fails to improve their healthcare dilemma, but punishes recession-weary small firms with new taxes, fees, paperwork, penalties and mandates that will drive costs even higher.

Senators should also be aware that tax compliance costs small businesses two-thirds more than their larger counterparts. That might help them muster the courage to recall this unwise plan that adds new financial burdens, including a never-expiring tax camouflaged as an annual fee on the plans small businesses buy, bleeding them collectively of $14.3 billion. As a result, early estimates show family premiums could hike by at least $500 a year.

Small-business owners also fear other lurking items such as the “Tanning Tax,” a 10-percent services levy that could bite 18,000 businesses, and the “Cadillac Tax,” a whopping 40-percent duty on health coverage that exceeds the government’s idea of “appropriate.” And, Medicare payroll taxes will jump to 2.35 percent.

Among the reasons more than 90 percent of small-business owners oppose President Obama’s job-killing health law is yet another tax--this one on their time--that forces them to file an IRS Form 1099 for business-to-business transactions adding up to $600 or more--a devastating paperwork burden.

This law is not reform. While NFIB is determined to push for its repeal, we remain committed to helping Congress discover practical, affordable solutions to the healthcare cost crisis.

It will require courage to repeal this law before it inflicts greater damage on the nation’s small businesses and the economy, courage like that displayed by NFIB months ago when it stepped forth as the only business organization to challenge the law’s constitutionality in federal court.

But doing the right thing always demands courage. Small-business owners are hopeful the Senate has what it takes.

-- Danner is president and CEO of the National Federation of Independent Business in Washington, D.C.


Tuesday, January 25, 2011

Tapping into Wisconsin’s energy potential should be bipartisan goal

By Tom Still
Unless someone strikes oil in Oshkosh, discovers natural gas in Necedah or mines coal in Colfax, the state of Wisconsin is destined to remain largely dependent – perhaps for decades – on outside sources of energy that power its homes, businesses and vehicles.

That economic dependency can be slowly but steadily reduced, however, if Wisconsin builds on its emerging expertise around development of new sources of energy.

Two recent news events sounded alarm bells for those who believe Wisconsin has the right combination of natural resources, research capacity and private sector know-how to begin charting a new energy future. In rapid order, Gov. Scott Walker introduced regulations that would make it harder to build wind-power projects in some parts of Wisconsin and he cancelled plans to convert a UW-Madison power plant from coal to biomass.

There may be logical reasons for the new administration’s specific actions. Some people have complained that current state rules allow wind generators to be built too close to private property, and the conversion of the UW-Madison’s Charter Street plant to burn switchgrass pellets was estimated to be $75 million more expensive than burning natural gas.

The larger danger is that Wisconsin could lose momentum around the development of much-needed energy technologies – advanced wind, next-generation biofuels, energy storage systems and much more – if the message is sent that energy and conservation innovation isn’t welcome or valued.

But that’s not what Walker is trying to say. Still, his position could be politicized in rapid order unless opponents stick to the high ground of explaining what’s at stake for Wisconsin over time and how its private and public sectors are poised to help.

Take wind energy, which has always attracted its share of “not-in-my-backyard complaints” despite a wealth of studies that dispute major health and safety concerns. While not all of Wisconsin is ideal for wind farms, the economics of wind power have improved steadily – to the point Wisconsin utilities are laying plans to import more wind power from Minnesota and the Dakotas.

Wisconsin’s manufacturing foundation has given rise to companies that build parts for wind turbines, and its historic strengths in batteries and electrical controls might someday yield storage systems that hold wind-generated electricity. That could transform wind from an intermittent power source to electrical power that more closely matches peak demands.

Conversely, the potential for biomass as a source of electric generation is still emerging. While current federal and state goals compel greater use of biomass (tree trimmings, wood and plants such as switchgrass), the economics are sketchy when compared to wind. It’s not just Walker who has questioned the cost of biomass projects – but watchdog groups such as the Citizens’ Utility Board. A proposed biomass plant in the Ashland area was sidelined by Xcel Energy in November because the utility company was worried about costs, even with ready sources of biomass within a short drive in the forests of northern Wisconsin. Another proposed project in central Wisconsin, proposed by We Energies, is under review by the state Public Service Commission.

Again, none of this diminishes the long- and even mid-term potential for biomass. Switchgrass, for example, is highly efficient in terms of net energy produced, can be grown on marginal lands and could become an important cash crop for Wisconsin farmers. With power plants, however, the trick is getting enough raw material transported at the right cost.

In addition to wind and biomass, Wisconsin’s emerging energy technologies include next-generation biofuels (such as cellulosic ethanol and “green” gasoline), new engine technologies, advancements in nuclear fission and fusion research, energy storage and solar power. Through the state’s engineering colleges and other centers such as the U.S. Forest Products Laboratory and the Great Lakes Bioenergy Research Center, work continues on a mix of technologies that will position Wisconsin for the years and decades ahead.

Wisconsin has a huge economic stake in building a more diverse, cost-effective energy base. It also has the research base, natural resources and industry mix to do so. That won’t happen overnight, but a Wisconsin that is “open for business” today should also keep it eyes on energy options for tomorrow.

-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.


Monday, January 24, 2011

Book review - "GenBuY: How tweens, teens, and twenty-somethings are revolutionizing retail"

By Terri Schlichenmeyer
by Kit Yarrow, PhD and Jayne O’Donnell
c. 2009, Jossey-Bass $24.95 / $29.95 Canada 250 pages, includes index

You’re not an old fogey.

Far from it, but the young man walking in front of you at the mall the other day personified the words “generation gap”: specifically, a gap of five inches of fabric between the top of his jeans and the waistband of his drawers and there are two things you don’t understand.

First, why can’t he pull up his pants? Secondly, why didn’t he buy those pants from you?

You try to market to teens and twenty-somethings, but they walk in packs past your door without a glance and it doesn’t make sense. But when you read “GenBuY” by Kit Yarrow, PhD and Jayne O’Donnell, it will.

No doubt, you’ve already noticed a dearth of youth in the aisles of your store, and that’s a problem. According to Yarrow and O’Donnell, your “problem” is deeper than you think: Generation Y (everyone born between 1978 and 2000) is positioned to revolutionize the way shopping is done.

And, in a way, Baby Boomers gave them a push to do it.

Unlike their parents and grandparents, Gen Yers are confident, the authors say, perhaps because they’ve been doted on by those same elders. They’ve never known a world without computers, so they’re incredibly “connected” and global. And because they’ve rarely had to wait for anything, they’re easily bored. “New” isn’t new enough.

These factors mean that Gen Yers don’t shop like anyone else in history. Shopping, for a tween, teen, or twenty-something is a way of relaxation, a “vacation of the mind”. Gen Yers rarely shop alone. And because they’ve grown up with brands, they’re fiercely loyal to their favorite ones.

But that doesn’t mean Gen Y won’t value individual style, and it doesn’t mean they won’t shop with budget in mind. Gen Yers love sales - and, by the way, if your store champions a social cause, they’ll love that, too.

So what can you do to attract Generation Buy? First, fully embrace technology; Gen Yers can’t live without it. Recruit a peer champion; it’s better than advertising directly to Gen Y. Understand that what you did at that age is not even remotely like what Gen Y is experiencing. Keep things new. Get “real” and don’t force yourself on them. Suspend judgment. Engage and inspire.

Remember when we were told to “never trust anyone over thirty”? Well, guess what ...

Using one-on-one interviews, mall visits, surveys, personal observations and expert opinions, authors Kit Yarrow and Jayne O’Donnell pulled together an eye-opening, light but informative marketing atlas for retailers wanting to tap into this emerging dynamic of shoppers.

I was fascinated by what the authors had to say, and very surprised. This tribe of consumers has already unobtrusively (yet, not-so-quietly) changed shopping, almost without the realization of the average Boomer or Gen Xer.

And there’s more to come.

This book is a shout to retailers wanting to stay in business and if that means you, then you need a copy of it. “GenBuY” will make you want to pull up your sleeves and make change.

-- Schlichenmeyer has been reading since she was three years old and she never goes anywhere without a book. She lives on a hill in Wisconsin with two dogs and 11,000 books.


Thursday, January 20, 2011

Trash talk is fun, but state needs to focus internally too

By John Torinus
A little pre-game trash talk can liven up the scene – the 12-5 Chicago Bears still suck -- but let’s face it, to win, you still have to play the game.

As it plays out in sports, so it goes in politics. Last week’s flurry of jibes at our neighboring state of Illinois, which is dramatically raising personal and corporate income taxes, provided a lot of good fun. New Gov. Scott Walker became a media darling, because the media loves nothing better than a good fight, the more superficial the better. He made the Wall Street Journal, which follows Wisconsin issues because its editorial page editor Paul Gigot grew up in Green Bay.

The Wisconsin heckling was pay-back for the signs on the Illinois border in the 1980s when their governor jeered: “Would the last business to leave Wisconsin please turn off the lights?”

So, now we’re going to do the billboard thing to them? Let us count the ways that doesn’t make much sense:

* Recruiting seldom works for Wisconsin. With the exception of some shifts over the borders from Illinois to Kenosha and from the Twin Cities to Hudson, recruiting has generally been a non-starter for this state for 40 years. Some maintain we haven’t done it right or spend enough on attraction. I say to them: Go for it; knock yourselves out. But let’s do some real work, too.

* Recruiting from other states is a costly zero sum game for the nation. One state wins; the other state loses. The price tag for the subsidies, sometimes to job reducing corporations, is high.

* The Wisconsin economy is inextricably linked to those of our neighbors, especially to Chicago. A good number of strategists in Wisconsin and the Midwest are trying to figure out how to make those connections work better. For instance, a Midwest coalition in Congress could do a lot more to pull in federal dollars than our small delegation can pull off on its own.

* Illinois is not the enemy. The real competition for the Wisconsin economy is coming from overseas, particularly China and the rest of Asia.

* Wisconsin’s fiscal position may not be as bad as Illinois’, but it’s still a mess. Our deficit and debt per capita are among the worst in the land.

* Our tax rates are still higher than theirs. Their top personal income tax rate is now 5%; ours is 7.75%. Their corporate rate is 7%; ours is 7.9%. We have some work to do on our tax structure before we start strutting.

That said, the Walker team has created a new atmosphere for business, and a positive advertising campaign to proclaim our many virtues makes sense.

As anyone in the PR or advertising game knows, though, the message has to built on substance, or it rings hollow.

Wisconsin has an economic strategy for the first time in its history, called the Wisconsin Prosperity Strategy. It was supported by most of the major stakeholders in the state. It is a strategy based on the enormous reservoir of innovation resources in our very smart state.

It calls for technology advancement, more capital and support for startup ventures, a more effective linkage between the academic R&D at our universities and the commercial world, fiscal sanity in Madison, a lean commission to streamline government, innovative approaches for broad access to health care at an affordable price and the attraction of our fair share of federal dollars.

All of the above will take some hard, serious work. It doesn’t need buckets of state spending to accomplish. But will take a willingness to reshape our institutions to fit the global, innovation economy.

It is not a slogan; it is a game plan that can work.

I have a tentative bet with a friend. It’s $5 that Wisconsin won’t pull in three significant Illinois companies in the next three years. He’s a smart guy, so he hasn’t accepted the bet. Anyone else up for that bet?

Meanwhile, let’s start a fleet of new companies – the creators of jobs for the future – and let’s hug our market leading companies – the job deciders who create wealth and maintain our current job base all along the supply chain.

And, one more thing: did I say that the Bears will always suck?

-- Torinus is the chairman of Serigraph, Inc. and author of the book "The Company That Solved Healthcare." Learn more about the book: http://www.thecompanythatsolvedhealthcare.com.


Wednesday, January 19, 2011

Striking a balance: Economic development is mostly a 'grow your own' game

By Tom Still
Coming during a historic Packers-Bears showdown week, Gov. Scott Walker’s declaration of an economic “border war” against Illinois is more theater than threat. Unless his advisers are recalling a bygone era, Wisconsin’s chief executive is well aware of the following:

1. The Chicago economy is the Wisconsin economy, at least for those counties closest to the line. If you live or work in Kenosha, Walworth or Rock, what’s good for Illinois is usually good for southern Wisconsin – and vice versa.
2. Even if deficit-ridden Illinois shot itself in the foot this month by raising its income taxes, they’re still lower than similar taxes in Wisconsin.
3. Taxes are only one reason why some Illinois companies would consider a move. Labor, real estate and energy costs; access to markets; ease of transportation and regulatory climate matter at least as much.

All that economic reality aside, it’s still pretty good PR for a new governor to throw up some interstate billboards, take an aggressive stance and reassure the home folks that you’re serious about economic growth. If you’re truly “open for business,” you might as well shout it from a few rooftops.

If Wisconsin really wants to nettle its rivals, however, it should strike far beyond the horizon of Illinois to other states that lure away our best and brightest minds, our retirement-age adults and our venture capital. It should also plant more Badger state flags in the ascendant trade nations of Asia, Europe and Latin America – places that will buy our high-quality products. Finally, Wisconsin should also look within its own borders for innovators and entrepreneurs who will contribute far more over time than a handful of pirated companies.

The truth about 21st century economic development is that states matter far less than metropolitan economies and regional economies, such as the Upper Midwest, and that innovation matters most of all in a rapidly changing world.

The recently released report by the Wisconsin Economic Summit, titled “Be Bold: The Wisconsin Prosperity Strategy,” suggests a few core approaches. First, keep investment capital close to home and attract more from elsewhere. Second, encourage well-educated young adults to stay home by offering them more attractive opportunities to do so. Third, focus on the state’s core industries and their supply chains – often called “clusters” – because they bring a competitive edge. Fourth, encourage entrepreneurs to build new companies in Wisconsin.

Entrepreneurism and company creation is vital. A study by John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the U.S. Census Bureau concluded that all net job increases came from start-ups during the period between 1999 and 2005.

Wisconsin already has a head start on many states, Illinois included, when it comes to encouraging start-ups. Its investor tax credits were so envied that Minnesota and Illinois essentially copied them last year. Wisconsin also offers ways for entrepreneurs to connect with others like themselves, to write business plans, to get hands-on advice and to locate in technology parks or incubators that help their companies grow.

By the way, Wisconsin is also home to some of the nation’s leading idea factories – its major research universities and colleges.

Firing a few shots across the bow of Illinois can’t hurt, but no one should be misled into thinking that’s a comprehensive economic strategy. For Wisconsin to prosper, it must continue to generate world-class ideas, educate competitive workers, build new companies in emerging sectors and nourish its historic industry clusters.

If all that happens, Wisconsin won’t need signs at the Illinois border. It will need “greeters” to welcome all the capital, talent and companies in search of opportunities.

-- Still is president of the Wisconsin Technology Council. He is a co-author of “Be Bold: The Wisconsin Prosperity Strategy,” which can be read at http://www.wisconsintechnologycouncil.com


Wednesday, January 12, 2011

It's a Wonderful Fed

By Narayana Kocherlakota
The following is an excerpt from the prepared text of remarks to the annual Wisconsin Economic Forecast Luncheon by Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis. Read his complete prepared text.

The National Bureau of Economic Research’s business dating committee serves as the official arbiter of recessions. The committee has determined that the Great Recession began in December 2007 and ended in June 2009. During that time period, real GDP fell by 4 percent and unemployment nearly doubled.

The Federal Reserve responded to the Great Recession and the associated financial crisis in a number of ways. These responses fall roughly into two classes. First, the Fed engaged in a vast amount of lending to firms believed to be in sound condition. It lent through conventional vehicles like the discount window and swaps with foreign central banks. But it also lent through relatively unconventional vehicles like the Term Asset-Backed Securities Loan Facility. I’ll briefly discuss how this lending is distinct from the Fed’s injection of funds into obviously nonsolvent institutions like AIG.

Second, the Fed lowered the real interest rate facing borrowers and lenders.

Here, I should clarify some terminology. By the term “real interest rate,” I’m referring to the interest rate received by lenders net of inflation. Thus, if the interest rate on the loan is 5 percent and lenders expect inflation to be around 2 percent, the real interest rate is roughly 3 percent. Economists generally think that the real interest rate, not the nominal interest rate, matters for economic decision-making.

Early in the recession, the Fed lowered its target for the fed funds rate. Given that inflation expectations remained stable, this action served to lower the real interest rate. By early 2009, when the fed funds target essentially reached its lower bound, the Fed used large-scale asset purchases to achieve further reductions in the real interest rate.

I’ll first discuss the lending responses and then talk about the interest rate cuts. I’ll then discuss how I believe economic events would have unfolded had there been no Fed.


To understand the Fed’s responses to the events of 2007-09, we need to step back to the second half of 2006. At that point in time, firms and people around the world held a wide array of financial assets that were ultimately backed by U.S. residential land. (Think, for example, of mortgage-backed securities or any asset backed by mortgage-backed securities.) They viewed those assets as being largely free of risk. Investors may have understood that a fall in the value of U.S. land would impose large losses on them. However, they put low odds on such a decline taking place. Rather, they seemed to believe that U.S. land prices would continue to rise at a steady clip.

By the second half of 2007, that belief began to unravel in the face of incoming data. People were beginning to learn the hard way that U.S. land was a risky investment. Now the only question was how risky. The uncertainty about the answer to this question planted the seeds for a global financial panic.

What do I mean by the term “financial panic”? Financial panics are events that blur the line between liquidity and solvency. A firm is solvent if its revenues (in a discounted present value sense) exceed its expenditures. A firm is liquid if it is able to raise enough funds—either by borrowing or by selling assets—to pay its current costs. In a well-functioning financial market, solvent firms are typically liquid, because they are able to borrow against their future profits. In contrast, in a financial panic, lenders feel unable to assess the future profits and/or collateral of borrowers. Borrowing becomes highly constrained, and even highly solvent firms may become illiquid.

During the mid-2000s, many forms of collateral around the world were either implicitly or explicitly backed by U.S. residential land. As I’ve described, beginning in mid-2007, it became clear that this asset had more risk than financial markets had originally appreciated. It was not clear, though, how much more risk was involved. As a result, financial markets became increasingly uncertain about how to evaluate assets backed by U.S. land. That uncertainty translated into uncertainty about the ultimate solvency of institutions holding those assets—and the ultimate solvency of any of those institutions’ creditors. Spreads in credit markets between Treasury returns and other bond returns began to widen—at first slightly and then alarmingly.

I would say that most economists agree about how central banks should respond to financial panics. The crux of that agreed-upon response is that central banks have to be willing to lend freely to solvent firms, against a wide range of good collateral, at some kind of penalty rate. This policy is useful for two reasons. First, it provides a source of funds to potential borrowers who are illiquid but nonetheless solvent. Second, it provides a floor to collateral valuation. Private lenders know that they can always use collateral seized from a defaulting borrower as a vehicle to borrow money from the central bank. That baseline use serves to spur private lending.

Beginning in mid-2007, the Fed took a number of actions consistent with this operating principle. It lent money to financial institutions through the discount window and its close cousin, the Term Auction Facility. It injected liquidity into a broad range of essential credit markets through a veritable alphabet soup of special lending vehicles. In some sense, these interventions were typical for a central bank operating in the context of a financial panic. But the size of the problem meant that the operations were—to an extent—unprecedented in their scale. At their peak, the interventions made up more than a trillion dollars of Federal Reserve assets.

There is no doubt that these interventions saved many solvent firms from collapse during the financial crisis. Over time, panic eased and spreads in financial markets normalized. Once that happened, the private sector stopped borrowing from the Fed because it found the Fed’s penalty rates too onerous. As a result, the Fed was able to shut down its special lending facilities in 2010.

It is plausible that the Fed’s loans through the various special facilities exposed it—and by extension, the American public—to some risk of loss. However, it is difficult to know how much risk was involved. We generally try to measure a financial asset’s risk by the spread between its yield and that of a safe benchmark like U.S. Treasuries. But in a financial panic, a relatively large fraction of such a spread is attributable to illiquidity as opposed to intrinsic risk. The goal of the central bank’s intervention is exactly to eliminate this panic-driven illiquidity. Accordingly, we cannot gauge the Fed’s risk exposures without somehow correcting spreads for this illiquidity factor. This calculation strikes me as a nontrivial one. What we can say is that the Fed has not lost a penny on any of these transactions.

The lending that I’ve described differs greatly from the institution-specific assistance the Federal Reserve provided to firms like AIG. These institution-specific interventions were deemed necessary by the Fed and the Bush administration because of deficiencies in the existing resolution regime for systemically important financial institutions. The Dodd-Frank Act addresses these deficiencies. Simultaneously—and correctly—the Dodd-Frank Act removes the Fed’s ability to engage in institution-specific assistance. The act does leave in place the Fed’s ability to engage in broad-based market interventions of the kind that I’ve described, albeit with more congressional and White House oversight.

Cutting Interest Rates

I’ve talked about how the fall in land prices generated a sharp increase in risk perceptions in financial markets, and how that in turn led to a financial crisis. I now want to turn to what I see as the second key effect of the fall in land prices. This fall reduced the net worth of many households and firms. They responded by forgoing consumption and investment projects. The fall in household demand for consumption and firm demand for investment led in turn to a fall in output and employment, and put downward pressure on the price level.

The FOMC reacted by lowering its target interest rate from 5.25 percent in August 2007 to a range of 0-25 basis points in December 2008. Since inflation expectations remained stable, the FOMC’s action has the effect of lowering the real interest rate facing households. Households respond by saving less and demanding more consumption. Similarly, firms undertake more investment projects. In this way, the FOMC can partially offset the impact on the economy of the loss of net worth.

Lowering rates, of course, may lead to undesirable inflationary pressures within the economy. However, the recent path of inflation shows little evidence of such pressures. On a year-over-year basis, core PCE inflation was running about 2.5 percent in the fourth quarter of 2007. It is now down to about 1 percent.

Indeed, given the ongoing deceleration in inflation and the high rate of unemployment, the FOMC would probably have liked to respond by cutting its target interest rate still further. The problem is that the target interest rate is essentially at zero and cannot go negative. Instead, from December 2008 through March 2010, and again beginning in November 2010, the FOMC engaged in large-scale purchases of long-term Treasuries. The goal of these transactions is to lower long-term real interest rates and again offset the impact on the economy of the net worth shock.

Thus, the fall in land prices triggered an increase in risk perceptions and a decrease in household net worth. The increase in risk led to a major financial crisis that has been cured, thanks in no little part to actions by the Federal Reserve. The decrease in net worth led to a major recession and ongoing slow recovery. The Federal Reserve’s reduction in interest rates has lessened the impact of the net worth shock.

George—Meet Clarence

But now I turn to the hypothetical posed in the last third of “It’s a Wonderful Life.” Suppose that there were no Fed. What would have happened to the U.S. economy in the past three years?

The Federal Reserve’s key power is that it has the ability to adjust the size of what’s called the monetary base. The monetary base has two components. The first component is currency—the bills and coins that we use for transactions. The second component consists of what’s called “bank reserves.” These are essentially the deposits that various banks hold with the Fed. The Fed has expanded the monetary base by more than 100 percent from September 2008 through the end of 2010. To me, an America without a Fed means an America in which the monetary base is fixed in size.

So, suppose the monetary base had been fixed in the past three years at its December 2007 level. What would have happened? One consequence is immediate. The Federal Reserve funded its various lending programs by creating large amounts of bank reserves. If the monetary base were fixed in size, the Fed could not have created those lending initiatives. As a result, many more solvent financial institutions would have failed during the financial panic.

More subtly, the limitation on the size of the monetary base would have made currency and bank reserves scarcer after 2007. Their scarcity would make these monetary assets more valuable in a couple of senses. First, they would have been more valuable relative to other financial assets. That means bond prices would have been lower and so bond yields higher. Second, currency and bank reserves would have been more valuable relative to consumer goods. Hence, expected inflation and realized inflation would have been lower over the past three years.

Higher bond yields and lower expected inflation work together to imply that households and firms would have faced higher real interest rates. Their demand for consumption and investment would have been lower. Thus, if the Federal Reserve could not have adjusted the monetary base upward, real GDP would have fallen by even more than 4 percent and unemployment would have been well above 10 percent.

As with any counterfactual, these ruminations are necessarily conjectural. But there are data to support them. In the early years of the Great Depression, the United States was on the gold standard and the Fed could not easily adjust the quantity of bank reserves. As a result, the Fed did not engage in broad-based lending during the 1929-33 period. Nor did it cut interest rates aggressively. By 1933, hosts of financial institutions had failed, real GDP had fallen by over 25 percent, unemployment was 25 percent, and the nation had experienced annual double-digit rates of deflation. The Fed’s passiveness in 1929-33 was associated with an economic catastrophe. Many scholars—including Milton Friedman and Chairman Ben Bernanke—have argued that much of this association should in fact be viewed as causal.

Did the Fed Cause the Bubble?

My version of “It’s a Wonderful Life” may strike some as incomplete because it starts in 2007. Those listeners might ask: Was the land price appreciation in the United States in the early 2000s due to the Fed’s low interest rate policy? If so, we might have to recast the Fed as being more akin to the unfortunate Uncle Billy than to George.

But my answer to this query would be no. The problem for this story is that land prices actually started to grow at a surprisingly fast rate when the Fed was following a relatively tight policy. To be concrete, from 1975 to 1996, land prices grew in real terms at less than 2 percent per year. In contrast, from 1996 to 2001, land prices grew by 11 percent per year in real terms, while the Fed maintained its target interest rate between 4.75 percent and 6.5 percent. This is hardly considered to be loose monetary policy, especially given that the economy was entering recession toward the end of this period. It is true that the rate of growth of land prices did accelerate still further—to 17 percent per year—in the next five years. But I think that the data clearly say that the fast rate of growth in U.S. land prices—what’s sometimes called a “bubble” in land prices—originally started in 1996, without any obvious change in Fed policy.

I have to say that this lack of an empirical connection is not surprising to me. At least at present, there is little or no economic theory to support a connection between monetary policy, as typically conducted in the United States, and bubble formation.

But, if not the Fed, what or who was responsible for the high price of U.S. residential land? My views are more agnostic on this point. I have heard several plausible stories. In general, though, I think that the stories tend to be overly focused on the United States in the 2000s. We saw large run-ups in land prices, followed by large falls in land prices, in many other parts of the world in the 2000s. And these episodes have recurred repeatedly throughout history. We need to develop macroeconomic models and modes of thought that can successfully confront this broader scope of economic data.


Let me wrap up. We have come through a very difficult recession, caused in no little part by the large fall in land prices that took place after 2006. I believe that the size of this shock meant that this recession was going to be a painful and challenging one, regardless of the policy response. Nonetheless, it is clear to me that the recession and its subsequent recovery would have been significantly worse in the absence of the actions of the Federal Reserve.


Kocherlakota, Narayana R. 2010. “Two Models of Land Overvaluation and Their Implications.” Presented at “A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve,” Jekyll Island, Ga. Online at http://www.minneapolisfed.org/news_events/pres/papers/kocherlakota_landovervaluation_110610.pdf.

Willardson, Niel. 2008. “Actions to Restore Financial Stability.” The Region (December), Federal Reserve Bank of Minneapolis. Online at http://www.minneapolisfed.org/pubs/region/08-12/willardson.pdf.

Willardson, Niel, and LuAnne Pederson. 2010. “Federal Reserve Liquidity Programs: An Update.” The Region (June), Federal Reserve Bank of Minneapolis. Online at http://www.minneapolisfed.org/pubs/region/10-06/liquidity.pdf.


Monday, January 10, 2011

State pension fund's creation of venture 'portfolio' could help Wisconsin economy

By Tom Still
If you want to understand the value of venture capital to the nation’s economy – and the challenges facing Upper Midwest states such as Wisconsin – look no further than findings issued a year ago by the Brookings Institution, a leading independent policy research group.

In a report that urged creation of a $1 billion investment fund focused on the Great Lakes, Brookings researcher Frank Samuel noted:

* In 2008, venture-backed companies were responsible for 11 percent of the nation’s private sector employment and 21 percent of the gross national product. That’s so even though venture capital, as a percentage of all business capital, is a fraction of the total.

* Compound employment growth rates for venture-backed companies grew by 1.6 percent during a three-year period, compared to 0.2 percent for the U.S. private sector as a whole.

* Thirty-three percent of all U.S. research and development dollars and 35 percent of National Institutes of Health research grants are spent in Great Lakes states, but less than 14 percent of all venture capital is invested in the region.

* “Even more discomfiting,” the report noted, large public pension funds in the Great Lakes region contribute 40 percent of all venture capital investments by large U.S. public pension funds – but most of it winds up in investment deals on the East and West coasts.

The Brookings report, “Turning up the heat: How venture capital can help fuel the transformation of the Great Lakes region,” was an outside analysis of what many insiders already knew – that the Upper Midwest is a “donor” region when it comes to attracting and retaining start-up capital.

A recent action by the State of Wisconsin Investment Board, one of the nation’s largest public pension funds, may help change that trend.

Spurred by its own 2010 analysis of potential deals in Wisconsin and the Midwest, as well as changing fund-raising patterns among some of the nation’s top-performing venture capital firms, SWIB will commit $80 million to an investment portfolio designed to engage some of those “top 30” funds.

The pension fund board is putting the $80 million in its new “Catalyst Portfolio,” which will invest in one or more blue-chip venture funds. That would give SWIB an opportunity to play matchmaker between the coastal VCs, emerging companies and Wisconsin-based investors, who are usually well-positioned to spot deals that could become profitable while creating jobs.

While there’s no guarantee the desired investor-to-company matches will happen, the odds of pulling more venture dollars into Wisconsin should rise as top coastal investors see the quality of state and regional start-up companies.

Wisconsin’s pension fund has invested in venture capital for years, but not always in amounts that satisfied critics. Because SWIB has built expertise and performance in venture capital over the past decade, its managers concluded the time is right to reach out to coastal VCs – especially when so many of those funds had trouble raising private money during the recession.

With $81.9 billion in all of its funds, SWIB’s $80 million “Catalyst Portfolio” is a sliver of its total assets under management. But it may be enough to persuade other large institutional investors in Wisconsin to get more involved in venture capital, as well.

That would represent a second victory for Wisconsin’s entrepreneurial economy. There are a surprising number of large institutional investors, private and public, managing funds in Wisconsin. Even if a fraction of that money could be invested in emerging companies, Wisconsin could create more jobs.

“Venture-backed economic development is vital to the ability of the Great Lakes region to tell a new, future-oriented story about the region and its communities, rebranding them as innovative and creative talent centers, rather than industrial backwaters,” Samuel wrote in the Brookings report.

The rest of the ingredients are here: World-class research, talent and a creative atmosphere. All that’s needed is for more homegrown money to be put to work at home.

-- Still is president of the Wisconsin Technology Council. To read the Brookings report or SWIB’s 2010 report, visit the newsroom at http://www.wisconsintechnologycouncil.com


Thursday, January 6, 2011

In a 'jobless recovery,' create your own company by writing a business plan

By Tom Still
Economists agree the recovery from the Great Recession is under way, but the unemployment rate in Wisconsin and most other states remains stubbornly high. You can wait for the phone to ring with a job offer – or you can take matters into your own hands by starting a business and hiring yourself.

It’s called entrepreneurism, which is a fancy word for the process of launching a small business that may someday grow into a much larger one. The 2011 Wisconsin Governor’s Business Plan Contest offers a proven pathway for entrepreneurs to get started.

The deadline for entering the eighth annual BPC is 5 p.m. Monday, Jan. 31, through http://www.govsbizplancontest.com – the official website. The contest’s grand prize is worth $50,000 in cash and services, but many past contestants say the real “prize” was the plan-writing process itself. Here are some reasons to enter:

* You don’t have to be Tolstoy. The first phase entry is no more than 250 words, so there are no stresses about writing “War and Peace.” At least, not right away.

* It’s free. There is no cost to enter, other than your time.

* No stamps? No worries. All entries are accepted through http://www.govsbizplancontest.com. The second and third stages of the contest also take place through that Internet portal, culminating in a 20-page plan. Up to 12 finalists will present live at the Wisconsin Entrepreneurs’ Conference in Milwaukee in June.

* Entries are made in one of four categories: Advanced Manufacturing, Business Services, Information Technology or Life Sciences. Entrepreneurs may enter multiple ideas, so long as each idea is separate and distinct.

* Your chances of winning something are pretty good. If past contests are any indicator, roughly one in 14 entrants will reach the finalist round. That’s better odds than a Super Bowl bet.

* Contestants meet some interesting people. The 50 semi-finalists may attend a half-day “boot camp,” where they’ll meet potential investors, successful entrepreneurs and others with start-up experience.

* Your idea will get some valuable exposure. Semi-finalists may post their executive summaries on the Wisconsin Angel Network web site for secured review by accredited investors. Also, leaders in Wisconsin’s business press may see news value in your story.

* Finally, and most important, many past winners have been successful. Most finalists from 2004 through 2010 report they’re still in business and attracting investors, partners and clients to their ideas.

Some recent success stories include Xolve, a nanotechnology company in Platteville that raised $2 million from investors in Wisconsin and well beyond. Xolve won the 2008 BPC and was among the finalists in this year’s National Cleantech Open. Eso-Technologies, a medical device company that won the 2009 contest, raised $1 million from investors in short order and has since moved its product toward clinical trials. Vector Surgical, an Oconomowoc medical products company that won the 2007 contest, is selling its operating room tools globally to hospitals and surgeons.

According to a fall 2009 survey of past finalists, more than half of those who responded have received financing for their plan through a variety of sources – including angel and venture capital. About three-quarters of those who responded reported the contest led to an increase in public exposure for the company.

Since its inception in 2004, more than 1,800 entries have been received and more than $1 million in cash and in-kind prizes has been awarded.

Starting a company during a recession can be like vacationing during off season. You’re competing with a smaller crowd and the prices can be better. Then again, starting a company is never a day at the beach: It is hard work that begins with a great idea and a business scheme to match. And if you start a company, your next boss will be the toughest you’ve ever known. That’s because you will be investing your own money and, with luck, support from friends, families and other founders.

If you have a start-up idea, give the Wisconsin Governor’s Business Plan Contest a try. Who knows? The next job you have might be one you create yourself.

-- Still is president of the Wisconsin Technology Council, which produces the Wisconsin Governor’s Business Plan Contest. He is the former associate editor of the Wisconsin State Journal.


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