Secret, Pixar, Schumpeter, and Louis CK: The world’s shortest economics lesson

Flash-in-the-pan smartphone app Secret, has announced it’s shutting down after just 16 months and after raising $35 million from investors.

Secret allows users to post anonymous comments and read anonymous comments by others. Add in location services, and users can post and read comments to other people near them. Yes, it’s a bit creepy, but Secret is not alone in the creepy secret business.

Co-founder, David Byttow, made the announcement in a blog post:

Secret, Inc. still has a significant amount of invested capital, but our investors funded the team and the product, and I believe the right thing to do is to return the money rather than attempt to pivot. Innovation requires failure, and I believe in failing fast in order to go on and make only new and different mistakes.

In a world where hi-tech investors are treated as easy marks for fast-talking Millennials, Byttow shows a bit of class with his promise to return the money (although, one wonders if he’ll keep his Ferrari).

More important is Byttow’s acknowledgement that innovation requires failure. Pixar’s John Lasseter puts it best:

Be wrong as fast as you can. Mistakes are an inevitable part of the creative process, so get right down to it and start making them. Even great ideas are wrecked on the road to fruition and then have to be painstakingly reconstructed.

Lasseter’s wisdom is a version of economist Joseph Schumpeter’s concept of creative destruction in which the creation of new technologies destroys older technologies. While some may regret the loss of older technologies, the creation of new technologies pulls the economy forward in ever increasing prosperity.

And, if you don’t want to believe an economist, you can trust a comedian.

Single party rule and state spending: Discipline through disagreement

Ask a politician what the goal of their party is and they will tell you: To dominate the government.

Democrats and Republicans alike would like nothing more that to totally eliminate the other party from the legislature.

That may be good for the party, but new research says its bad for the budget.

A paper published in the Quarterly Journal of Economics finds that political competition reduces overspending by state legislatures (paywall version; free working paper).

The authors develop a model of legislators, some whom have a bias for overspending. In other words, these legislators want to boost current spending and put off any spending cuts.

Their model predicts that when unanimity is anticipated—for example, under one-party rule—legislators give in to the temptation to overspend.

  • On the one hand, if unanimous support for high spending is expected in future legislatures, legislators know that low spending today cannot stop policymakers from raising spending in the future.
  • On the other hand, if unanimous support for low spending in the future legislatures is expected, legislators can spend today and knowing that future legislatures will clean up the mess.

This seems to cross party lines. It was the Republican-dominated Congress that pushed the infamous Bridge to Nowhere.

But, the researchers argue, as legislature gets closer to a 50/50 split of those that are fiscally responsible and those that are spendthrifts, the possibility of gridlock increases. With gridlock, the status quo prevails and spending will not increase as much as the high spenders would like. In that way, political competition leads to fiscal responsibility.

Neat idea, but can you prove it?

The authors do not provide any statistical evidence supporting their model, but past research seems to be consistent with their model.

For example, statistical analysis published in the Review of Economic Studies finds that increases in political competition are associated with:

  • Lower tax revenue as a share of state personal income, meaning residents have greater disposable income;
  • A higher level of infrastructure spending by state governments; and
  • A higher probability that a state uses a right-to-work law, which makes it easier for employers to hire workers and easier for job-seekers to get work.

Thus, there is some evidence that greater political competition is associated with higher growth rates of state personal income per person.

Competition: It’s good for business and good for government.