It seems like a tall order, solving the world economic problems, and, given that so many have tried unsuccessfully, I thought that it wouldn’t hurt for me to take a crack at it. I’ve actually gotten a few phone calls from people who asked me: “Bob, you work at Babson, a business school, right? How do you think we should solve this problem?” First, my degree is in engineering and most of what I’ve learned through starting and running several businesses has been in the field of psychology, not business. But, maybe they’re the same.

My first observation is that the stock market and the economy both have the deceiving attribute that they are described with numbers which would lead one to believe erroneously that they have something to do with mathematics, statistics, and formulas. My own impression is that nothing could be further from the truth. Both are really driven by mass psychology much more than by number theory. So the roots to the solutions may lie not in interest rates but rather in the hearts and minds of people.

It seems fairly obvious that if more of the population was employed, then productivity would be higher, and with more productivity, each additional dollar earned would cycle through the economy several times (I believe that I read that each dollar cycles an average seven times) and the GDP, and tax revenues would also climb wiping out the national debt and making everybody happy. It all starts with jobs.

An increase in jobs and productivity would also drive the real estate market as people looked to improve their living conditions with their new found salaries.

But the problem is that employers are reluctant to speculate on growth and add resources without clear evidence that their customers are ready to buy and so goes the vicious cycle. If “you” don’t invest, then I’m not going to either. And if neither of us invest in hiring, and building, the jobs and the spending associated with those newly employed people just doesn’t materialize.

So what happens is that downturns in the economy can be precipitous as many shed jobs quickly in response to fear, but the growth back occurs gradually as confidence builds in their ability to sell what they’re going to make.

I see this in very much the same way traffic at a stop light works. All of the cars come to a full stop and there are two ways that they can move as a group when the light turns green. In the first way, the common way, the first car moves, then second sees the first move, and begins to move. The third sees the second, and so on. The cars propagate through the light, but slowly, and some, at the end of the line don’t make it.

It would be much more efficient, and many more would go through, if everyone applied gas to their car simultaneously, upon seeing the light turn green, with confidence that the car in front of them was also accelerating at the same pace.

So, we’re stuck at the light waiting for the consumer or business before us, our customer, to flinch first.

There are four approaches to solving this problem.

First, do nothing and eventually, maybe in 10 or 20 years, the economy will slowly grow back. Each year, the consumers buy a bit more, the manufacturers build a bit more and we all get moving. Keep in mind that 60 to 70 percent of our economy is driven by consumer spending.

Second, stimulate the economy by having the government buy a whole bunch of stuff, like roads, airports, and infrastructure. After all, we need that stuff, the stuff we have is getting old, and we’ll all enjoy the better roads, schools, trains and airports, so why not. Remember that every dollar that the government spends is a tax dollar, but it does cycle through the economy and generates more tax revenues through the growth of employment.

The TARP funds were an attempt at this and it would appear in comparison to the UK, where last I looked there were riots, the concept was successfully responsible for growth. But, the problem lies not with the concept, but rather in the fact that we are a bitterly divided country on political grounds and if one side says blue, then the other side feels compelled to say red. And with our government divided, it leaves us at a standstill. One would have hoped that there was a possibility that our elected leaders could form rational decisions, but having met a few of them, the concept of rational and elected official seems somewhat oxymoronic.

Third, we could start, or participate in, a war. That would give us all something to focus on that we could unite in, namely the mobilization of our resources for the protection of our country. Everybody gets to work, the government borrows the money from the citizens (through bonds) to pay for the labor and tax revenues go up, and productivity is maximized. Note that this isn’t all that different from the second choice only that the elected officials agree to borrow the money to boost productivity in this case because they’re doing something good overall for the country.

There are only two problems with this. First, you have to kill a whole bunch of people in a war, and that’s fairly unpleasant. And second, the productivity is directed at the creation of assets that are of no real use to the society. Unlike the second case, you don’t have a new airport, you just have more bombs.

In both the second and third cases, there is another problem, the accumulation of additional debt by the government. I’d like to discuss this in two ways.

First, governments, unlike businesses don’t seem to publish their complete balance sheet. They do disclose their current and long term debt but they don’t seem to disclose their assets in the same way. As in the case of Greece and other struggling companies, the sale of assets can be used to pay off debts. The US has enormous assets including the Post Office, roads, bridges, parks, mineral rights, waterways, as well as several operating “businesses.” Back during the Vietnam War Lyndon Johnson sold off Fannie Mae and Freddie Mac to private investors as a way to finance the war. It was a good idea to reduce the debt, a bad use of the money.

Not carrying a record of the assets on our national books leads us to misunderstand our debt. If, for example, we assumed 10 trillion dollars of additional debt for the purpose of building a national solar energy generation facility and distribution system that completely eliminated our need for imported energy, that investment would be paid for in 10 years. But, getting our government to make those long term investments is virtually impossible if we don’t actually understand or record the asset and the impact that it has on our collective spending. Keep in mind that our government could sell us the electricity and the income would retire the debt. We do leave this to business in the US, which isn’t a bad idea, but in some cases, it’s just too large a problem.

So, one way to deal with all this debt is to sell off some of our collective assets. When selling assets, one typically considers whether the interest that you’re paying on the debt is greater or less than the income that the asset would otherwise provide. Or, as an example, one could either sell mineral rights to a tract of land, or choose to lease or license the mineral rights for an annual fee. While interest rates are low, it’s likely that the fees that can be generated from these assets is actually the better deal. This implies that the entire concept of getting energized about the national debt is silly since at any time we want, we could sell assets to cover the debt, but with the interest rates so low, it makes more sense to hold on to the asset and collect the revenue that they offer. If interest rates climb, then the sale of assets becomes more compelling.

Finally, here’s the fourth method for raising productivity. To use the car analogy, we all need to step on the accelerator simultaneously. But, nobody wants to take the risk. This is exactly where the collective force and wisdom of government can help. If the government would effectively “guarantee” the investment in increased productivity, then it would all just likely work out OK. This means that the government, instead of paying unemployment insurance and letting someone sit and watch Jeopardy should guarantee the wages of new hires if, and only if, revenue and profits don’t grow in accordance with the additional investment.

Companies are shielded from the additional risk, unemployment goes down, productivity goes up and the tax base along with it. The risk to this plan is that positions are created in companies that have no impact on their actual productivity. For example, the CEO gets two additional “assistants” to shine his shoes and bring coffee as opposed to adding two more workers on the assembly line. Thus, companies need to be able to demonstrate the growth of their productivity, which is measured through revenue or an increase in their assets through the additional hiring. Of course, there are ways to cook the books and defeat the intent of the program, but that goes without saying with any government program and the critical question is whether the end justifies the means.