Fiscal Madness And Entrepreneurship

By Simon Johnson. 

This post draws on points discussed in class #7 of Entrepreneurship without Borders, a course at MIT Sloan.  More details on the course are here.

With the US government in partial shutdown (including suspending a significant amount of research and development activity) and the very real threat of a default on US government debt looming, now is a good time to ask – can the US maintain its edge in technology-based entrepreneurship?  What would it take to squander the advantages we currently have?  Can other countries catch up or surpass us on this important dimension that matters a great deal for technological innovation, productivity improvement, and job growth?

Consider, for example, Germany, which has a strong small and medium-scale business sector, but traditionally not the kind of “home run” entrepreneurs seen in Silicon Valley.

In part this may be due to culture.  In particular, Silicon Valley and perhaps the US in general are relatively tolerant of failure – failing with a start-up is often regarded as valuable experience.  In contrast, in Germany there is stigma attached to business failure.  In comparing across countries, ask questions about where top engineering talent wants to go to work – in Germany the preference seems to be large companies.

But there is also an important difference in capital markets – it is much easier to go public with a relatively young company in the US compared with Germany.  The lack of an initial public offering (IPO) exit may limit the appeal to venture capitalists.  The Neuer Markt, introduced for tech startups in the 1990s, was not a success – damaged by the Internet bubble bursting and some fraud.  The recent US JOBS Act lowers disclosure requirements for some companies and makes it easier to engage in “crowd sourcing” of capital.  Does this help or hurt entrepreneurial start-ups?  The answer presumably depends on whether investors get treated well or badly by companies and by the investment banks that represent them.

German venture capital (VC) funds are more dependent on wealthy families; pension funds and endowments in have been prominent limited partners (LPs) in the United States.  German funds tend to be smaller – investing less and willing to exit for lower amounts.  As a result, there is less inclination to look for and bet on potential “home runs”.  Some US venture capital funds derive most of their returns from the small number of investments that return 10 times the original outside investment (or more).

This is really helpful if you want to attract the best and the brightest potential entrepreneurs from around the world.  People who want to hit business home runs would like to be funded by VC funds that are willing to place big bets.  In this case, it makes sense not to see failure as a negative – perhaps actually making it easier to get backing for the next venture; in part, culture can be an outcome of economic incentives.  (This point is made clearly and with math by Ramana Nanda and Matthew Rhodes-Kropf in their paper, “Innovation and the Financial Guillotine“.)

All of these long-standing advantages would be wiped out if the US defaults on its federal government debt.  That would be the end of the world’s safest asset.  Our value as a safe haven would disappear. And forget about taking your company public any time soon.

Most likely venture capital and most other sources of funding for business would dry up completely.

Playing games with the debt ceiling is a very bad idea – threatening to blow up innovation along with the rest of the US economy.

32 thoughts on “Fiscal Madness And Entrepreneurship

  1. Could you elaborate on the jump from entrepreneurs need risky capitalists to US default is bad? Maybe there is a simply link that I am not seeing.

    How does the removal of a safe asset hurt VCs who were not investing in that safe asset? My first thought would be the opposite. It removes the safe asset and encourages this risk taking. But this does not seem good either.

  2. The logic is that default adds risk to investments in the US, as it is no longer considered a safe haven for foreign vc. Tinkering with default lowers our attractiveness across the board, making other markets relatively more stable in the process.

  3. There would be zero, zip, nada effect on venture capital if the US govt. ‘defaulted’ on outstanding bonds. The two things are completely unrelated.

    That Simon claims there would be linked, is pure ‘throw in the kitchen sink economics’. It’s the kind of thing you say when you have no real arguments. Note that today, even after the preposterous speech Barack Obama gave today, in which he tried mightily to frighten financial markets, the DOW dropped only about 1%.

  4. Wait…how do you get from the supposition that U.S. VC “big bet” culture is good to the idea that the debt ceiling fight will destroy the US as a place where entrepreneurs and tech swingers want to play?

    First off, how is the US culture “better” than the German one which seems to create a lot more smaller firms? You imply that the Facebook or Google is better but offer no evidence.

    Second, last I checked, US-based VC firms have, in aggregate, sucked ass since the mid 1990s–and that is from the investors’ point of view. So where is the supposed “superiority” of that “home-run” betting culture?

    Third, the fraud in US markets has been out of hand for a decade or more. I think it was you taught me that.

    Fourth, and again, even if your foundational assumptions are true, you have not connected them to this debt ceiling, Republicans-are-bonkers thing with any logical tentacles.

    What are you trying to prove, Dr. Johnson?

  5. Perhaps the doc got the title wrong, maybe he meant Fiscal Madness And Entropiaship of The 17 Trillion dollar public debt.

    Which could then go to $25 Trillion in a hurry should a small rise in interest rates occur. Is belief in the economy still going to pull us out of that fiscal madness in a couple years, or do we confront our troubles in the here and now at the $17 Trillion level? The idea of simply raising the debt level to keep our crony corrupt promises every year, with no compromise, is about to raise the prospects that this president, needs to be impeached if he doesn’t do a 180 in very short order.

  6. I am lost as to the connection between US Government debt default and venture capital investment. While the term structure of US Treasury debt serves as a useful tool for extrapolating risk free investing, why would that really matter if an alternative is found? Here’s my question for you, Simon. What if Euro debt became the standard (note: the fact that I’m using this as a substitute shows the lack of attractive alternatives). If Euro debt term structure was priced more dear than Treasury debt, VCs could simply add a forward rate premium plus an additional premium to represent the investment risk of the startup. In other words, even if Treasury debt lost perceptual AAA+ premium, there are alternatives.

    The bigger risk is for the US government to continue to ignore its structural problems, particularly the health care and public pension needs of its aging populace which will escalate debt further. That might have a far greater corrosive impact on the dollar denominated debt in the future, and yet we are still witnessing relatively a relatively low US Treasury debt term structure. Why? The same reason why Euro debt isn’t a threat. There aren’t really “safe” viable alternatives.

    In my limited perspective I do not see how the shameful government shutdown and looming default cripple domestic VC investment. In addition Simon, if you see how VC investment is used elsewhere in the world it isn’t always used for “bleeding edge” investment as we see in the USA. China VC money (for example) is plowed into relatively safe bets like building out cellphone infrastructure. Though such investment is classified as “technology” it certainly isn’t anything bleeding edge. That isn’t their culture and it isn’t their need (in other words, why invest in bleeding edge when a safe bet pays off in proverbial spades?). I don’t know about German VC, but VC investment in many countries does not resemble the animal we have in the USA.

  7. The great Breakthrough in your life comes when you realize it that you can learn anything you need to learn to accomplish any goal that you set for yourself.This means there are no limits on what you can be, have or do.

  8. Infrastructure investments that are in the works can lead the economy from the threats that finance and its fiscal madness:
    CNSE’s Albany NanoTech Complex is a $17 billion, 1,300,000-square-foot (120,000 m2) complex
    College of Nanoscale Science and Engineering
    CNSE YouTube Channel
    Graphene will be the material foundation for 3D Prinnting and the so-called NIR innovations for entrepreneurs
    Innovations that may also solve the problems forSolar Energy Production, transport and storage:
    3D Printing Leads the ‘New Industrial Revolution’
    Graphene, An Advanced Strategic High Tech Material
    By Global Research News
    Global Research, July 06, 2013
    Theme: Global Economy

  9. America is a rotting corpse. A sinking ship. Politicians, pundits, and parrots in the socalled MSM pimp a relentless litany of patent lies proclaiming “exceptionalism” and brute old quaint notions of freedom, and rights, and justice, and all the principles that formally defined America. But those days are dead and gone. Our society is dim and ill. We may issue degree’s at exhorbidant costs, but most of our graduates are poorly educated and non-competitive globally. The wildly expanding divide between thehaves and thehavenots (unprecedented in our history) ensures that a privileged class of sliverspoonfed sociopaths are hoisted to positions of loftiness, who do not know what the Emancipation Proclamation is, or anything about the War in Viet Nam, – and the rest of society – the 99%, is denied access to higher education because of the exhorbidant costs. Teaparty freaks in our socalled Congress extort the the socalled government to circumvent the Constitution, and extract their racist fascist ends. Duck Dynasty is the most watched show on Amerikan TV. Wanton systemic crimes are committed by our finance oligarchs and there is no recompense. We incarnate more of our citizens than any other country on earth. Amerikan healthcare is magnitudes more expensive than any other country and yet – we are 34th in the world in actual healthcare. Our gun laws are a joke to the rest of the world. We spend more money on defense (warmaking) then the next ten nations combined, yet 10 years in the wayward misadventure in Iraq, and Iran is victor. Twelve years in Afghanistan, and the Taliban controls 90% of the country. Our government spy’s on everyone and shreds the Constitution pursuing nebulous evildoers! Our manufacturing base is a decrepit shadow of its former self. Our GDP is based on and supported by Ponzi schemes concocted by the den of vipers and thieves in our finance oligarchs. Our police are militarized and abuse and kill civilians with little restraint and no repercussions. We inhabit a dying rotten Amerika. The rest of the world is keen to this truth and working in myriad ways to dislodge the rotting caucus of what’s left of Amerika from out once lofty perch, – and it’s only a matter of time until the systemic crimes and abuses Amerika is responsible for, are called to question, and answered. I could go on for pages, – but the point is we are dead empire and a dying society. But – there’s Honey Boo Boo to entertain us in the last days!

    Burn it all down. Reset! It’s the only hope for the 99%!

  10. Advance the video to about 1:38:50 for summary: Narrator and speaker Bill Still offers his solutions (1:48:55), besides the recycled rantings we often read about due to the ease of “cut and paste”:

    Consumers inadvertently contribute to the corruption, decay, rotting, and loss of U.S. sovereignty: Apple CEO Tim Cook was questioned in a Congressional Hearing about his company’s complex scheme to avoid paying taxes. According to Mr. Cook, the company’s stash of billions of dollars in overseas shell corporations was not tax dodging – it was ingenuity……In 1950, corporations contributed over 30 percent to our nation’s revenue, and individual income and payroll taxes made up about 45 percent. But today, corporations only contribute 17 percent, and individuals are paying for over 60 percent of federal revenue.

    So, despite all the Republican claims about the U.S. having the world’s highest tax rate – corporations are contributing less to our nation than ever before. Yet, corporate executives like Tim Cook have the audacity to say we should be celebrating their “ingenuity.” These companies make the huge profits they have been raking in by using the commons that our tax dollars develop and maintain.

    Without roads and bridges, communications systems and utilities, corporations couldn’t get their products into the hands of hard-working Americans. They should be paying for the privilege to do business here. American tax payers should not be picking up a larger share of the tab, while corporate executives hold on to an ever-increasing share of the profits. Let’s tell companies like Apple that we’ll celebrate their ingenuity just as soon as they start paying their fair share. -Thom Hartmann

  11. I know this is off topic (like that has ever stopped me), but has anyone told the pompous windbag named Jonah Goldberg that other methods of consuming water exist than just buying bottled water??? (not to mention plastic bottles can be refilled/reused multiple times, and plastic/metal thermos bottles can be refilled/reused THOUSANDS of times.

    Hey Jonah, can you please tell us where it was that Michelle Obama ever insisted (or even stated) that the water be “bottled” water, ‘cuz I missed that part. REUSABLE thermos bottles look like This Jonah, I know a snobbish sack of Sh*t like you just tosses stuff Jonah, but real people use these Jonah. Some of them are [double gasp!!!!] TEACHERS!!!! Oh God, Jonah!! Oh God the horror Jonah!!!!!

    Jonah Goldberg is a sad sack of S H I T who’s made his entire living for years throwing wads of partisan C R A P up against the wall to see what clings. If on a weekend column (when a vast number of Americans “catch up” on political news) the best criticism Jonah can come up with is “Oh how horrid!!! Michelle Obama is telling America to drink an extra glass of water per day!!! Oh, the Horror!!!”, the First Lady must be thinking she’s doing pretty good.

    Jonah go back to your sink hole and whine about some Palestinian throwing a small pebble at the IDF after they shot white phosphorous into a Gaza hospital, because I think you might (even with your 4th grade whiny tone) get more “traction” on that, than a First lady telling people to drink a little more water.

  12. Tonyforesta miscalculated ” ill. We may issue degree’s at exhorbidant costs, but most of our graduates are poorly educated and non-competitive globally. ”
    This statement would have more impact if this problem was confined to America or most 1st world countries. I believe that you think that it is, but it really isn’t. China and India both have tried to mimic America by expanding access to education by encouraging the growth of multiple institutions of higher education where the quality of instruction and students is not as high as it is at the more selective schools and they are facing problems employing most of their graduates as well–and most of their graduates have useful degrees.
    The problem is not exhorbiant costs, the problem is that we think education, by itself, is the solution to all economic problems, when the reality is that the we are sending too many people to college. The only group of people benefiting from the situation are employers who can ask employees to accept lower wages due to the growing pool of eager/desperate workers who would kill for a job, lenders who offer student loans, and educational administrators. We are substituting college enrollment for real economic activity and that is is what is contributing to higher costs and the disparity in the quality of graduates.

    Germany, for example, doesn’t have this problem because its colleges only accept students who have demonstrated a clear aptitude for learning useful skills. Costs for services, such as education, are contained when a service is rationed and quality/effectiveness is valued over superficial/misleading quantity.

    The same applies to healthcare, I think

  13. Interesting points Mike Gee. Any nation that fails to educate its youth is doomed to fail. Part of the problem with education in Amerika is that the exhorbidant costs far outweigh the benefits for the 99%. There are very few meaningful jobs out there and competition for any job is Darwinian in its intensity. Germany and other European nations have institutionalized apprentice programs training artisans and craftsmen for more pedestrian employment in essential industries like carpentry, masonry, mechanics, machining, welding, the arts etc. These programs produce well trained workers who earn a decent living and are valued and respected by their communities. The Amerikan penchent for pursuing the ridiculous pipedream imponderable wealth that the fictional promise of a college education provides is a dead issue. Amerika is owned and controlled by the predatorclass and only the sliverspoonfed sociopaths in the predatorclass have access to high paying jobs. The hope for upward mobility no longer exists! Whatever social contract oldAmerica once honored has been long ago shredded and discarded. There is no social contract in Amerika today. America has shapeshifted over the last few decades into a nation of, by, and for the predatorclass exclusively. The people have no voice or representation in the conduct socalled government. The insidious dumb downing of Amerika and gutting education at all levels are purposeful machinations, intent on creating an ignorant, pliant, easily manipulated and controlled society, too stupid to recognize or remedy wanton abuse. But – as long as Duck Dynasty and Honey Boo Boo are on TV – who cares???

    Burn it all down! Reset! It couldn’t be worse for the 99%.

  14. For once Tony has a point, Amerika, the Clam Chowder Nazi;

    ‘In an unexpected turn of events, the famous San Francisco Cliff House restaurant was ordered to close after dinner service ended around midnight on Tuesday.

    ‘The restaurant and bar, a popular destination for tourists and locals alike with its fine cuisine and stunning views of the ocean, are concessionaires of the federal Golden Gate National Recreation Area. And like so many businesses on park land across the country, they are required to close during the partial federal shutdown.

    ‘The 150-year-old San Francisco icon was closed for a bit last week, but stubbornly reopened on Monday and Tuesday. Then the National Park Service caught wind of the defiance and ordered it closed again.’

    Good thing we have essential government workers on the job.

  15. Simon & James,

    I realize you’re both quite busy, but you’ve both been curiously quiet of late. Could either of you opine on the Treasury default scenarios, and in the dire case of an impasse? I am curious as to both US Treasury operations and options, as well as what you anticipate in the short, intermediate and long term for the US and global economies.

  16. I hate agreeing with the Tea Partiers, given how they seem to be as manufactured as the Swift Boat Veterans for Truth at times, but if if we are reaching limits to economic growth, globally, wouldn’t it make sense for the U.S. to cease deficit spending? I mean, sooner or later, we are going to have to give up the 1st world counsumerist lifestyle that we’ve all come to expect a birthright–why not now instead of later?

    Why keep perpetuating the myth that’s Everything is Okay, just Stay in School, and Get a Good Job because opportunities for upward mobility and further consumption are constantly increasing?

  17. I must say I don’t see the connection between debt default and venture capital either. Couldn’t you argue, that the Chinese for example, rather than investing their dollars in US-backed securities, would perhaps invest those dollars in start-up companies in the United States, companies that they would own a share of, and derive the benefit from any technological advances those companies make. Of course. I guess it is not a benefit if you hold the anti-Chinese bias that seems to infect so much of American political dialog. It is a bias I find very tedious and small-minded.

  18. There is no ‘lesson’ to be learned from the debt ceiling “crisis” since pols and their overlords would not agree with the premise of ‘lessons to be learned.’ It may have to come down to a fiscal tragedy, effecting a broad swath of the American citizenry. Christian version ( )

  19. “BASEL III. Not content with two massive regulatory failures, the same bankers have now produced Basel III (“The Revenge of Basel I & II”). Like Basel I & II, Basel III increases capital requirements yet again, in a series of steps beginning in 2013 with the start of the gradual phasing-in of the higher minimum capital requirements not completed until 2018. The BIS bankers have imposed this and are forcing their home governments to get in line, as has the UK, the US and most other developed nations. It is truly a global rule by central bankers acting in concert/cabal.

    An OECD study estimates that the medium-term harmful impact of Basel III implementation on GDP growth is in the range of −0.05% to −0.15% per year – just what’s needed in a worldwide recession! To meet the capital requirements effective in 2015 banks are estimated to need to increase their lending spreads on average by about .15%. The capital requirements effective as of 2019 could increase bank lending spreads by about .5%. Rising interest rates could significantly hurt small bank capital positions because a 3% upward swing in interest rates could drop a bank’s capital by 30%, placing the bank in an undercapitalized position, forcing it dramatically to reduce loans. Again, the downhill snowball effect.”

    New World Order: (

  20. A bit off topic but timely none the less.

    I want to believe that most everything can be reasonably defined, given enough time. As for the politician, the best

    definition given is that he or she is a person who is a negotiator. But we must go beyond that and also say that these political negotiators can next be classified as either a manipulator(s), or manipulate(s), the former few being able to control the massive latter. This is then back with that thing called trust, the politicians trust the people, and a few of the people trust the politicians. Once their job of negotiator becomes moot, and the separation of the manipulators-vs-the manipulates becomes great enough, the trust breaks down until the gears of true justice grind to a halt, only to be cemented in over time. That is where American democracy finds its self today, a nation that should have taken the lead to develop other continents in a humane way, has instead needed to take advantage of these same lands in order further it’s unholy goals. They are indeed repeat offenders, but there is an end to every means. The wealthy will not see their demise coming, or care to see it arrive, it would require that they relearn, all over again, and this is in its self too much to bear, so they ignore it all which they must do, but time is not on their side. For you can run from time, but you can not hide from it, especially if you never saw it coming in the first place. Live the wild life, vote for a politician knowing time is not on their side.


    See ya there! :-))

    Every HUMAN BEING has the right to make their lives less miserable through honest labor.

    Not bending my knee to the GLOBAL War, Drug and Slave Lords who exploit the stupidity of the countries and cultures that never got a SCIENTIFIC handle on the man to land ratio and over-bred themselves.

    Can’t blame USA for the over-breeding other people did…you can blame misogyny and “religion” for the stupidity and selfishness that the billion+ masses teeming in misery brought upon themselves! How is that MY PROBLEM?

    Banksters CAN NOT swoop in and take everything away that honest labor built (USA moon-walking MIDDLE CLASS) without a blood bath of a JUST WAR.

    Once you start swapping out USA generations-old citizens for SOMALI refugees to increase your profit margins on stupid cosmetic products manufactured in places like Vermont, there is no “ism” to explain that kind of hatred towards the USA citizen…

    Yea, it IS the end of The Protocols of the Learned Elders of Zion…that was way too much hatred of the stupid toward the “normals”….zionists hung on their own petard….

  22. The usual suspects here should hate the Nobel awarded to Robert Shiller, because of much of what he says here;

    Especially the bit at around 13 minutes when he talks about ‘shorting the Great Leap Forward’.

  23. I must say I don’t see the connection between debt default and venture capital either. Couldn’t you argue, that the Chinese for example, rather than investing their dollars in US-backed securities, would perhaps invest those dollars in start-up companies in the United States, companies that they would own a share of, and derive the benefit from any technological advances those companies make. Of course. I guess it is not a benefit if you hold the anti-Chinese bias that seems to infect so much of American political dialog. It is a bias I find very tedious and small-minded.

  24. “China’s official news agency has called for the creation of a “de-Americanised world”, saying the destinies of people should not be left in the hands of a hypocritical nation with a dysfunctional government.”

    I couldn’t agree more. And the numbers of those aligning with this belief and determination are rapidly expanding abroad and here in the land of Oz. Amerika today is a fascist state, owned, controlled, advancing, and shielding the predatorclass and predatorclass oligarchs alone. The socalled government does not work in the peoples best interests. The socalled government is a dysfunctional freakshow circus peopled with grotesque carnival characters, bowing to and owned and controlled by predatorclass fiends and oligarchs! The sooner the unholy, corrupt, dysfunctional, and retarded dirigiste charade for a government is burnt to the ground and every spaniel in the panjandrum removed or worse from any position of authority – the better and more hopeful will be the future of all humanity. Whatever good may have been born from the America of the past, is dead and rotting. Amerika has insidiously shapeshifted into a malignant toxic nefarious threat to its own population and the world.

    Burn it all down! Reset! It’s only option for a better future for mankind!!


    What are the chances that China or Israel will give intimate details about their people over to the NSA so that Annie can paw through it and hurl psychobabble at their populations and rob them blind?

    If China was “all that”, then they would have been the world’s leaders back when they had 330 million, no?

    As for Israel – *DELUSIONAL* best explains that whole idea about “chosen ones”….

    Amerika became a crap country when the GOVERNMENT was over taken by the sycophants of the GLOBAL War, Drug and Slave Lords.

    But you are right, peeps. it IS up for grabs right now.

    I ask what’s the ultimate freedom REAL USA moon-walking Middle Class will pick up arms to get back…?

    Freedom from EVIL.

    And that means *you* all…

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