Economy and Innovation

| May 04, 2020

As a teenager, I had the wonderful opportunity to attend the New Tamiami Air Race, which took place here in Florida. My luck came about because, during high school, I hung around a local airfield owned by the renowned polar explorer, naval officer, and aviation pioneer Isaac “Ike” Schlossbach. Ike’s airport consisted of a 3,000-foot runway next to a duck pond. One had to be careful of the ducks when taking off and landing, and sometimes a horse might wander onto the runway. A chicken coop served as the office and air-traffic control center for Ike’s airport. It took an amazing person to create this unique place. Ike became the first Jewish midshipman at the US Naval Academy in Annapolis in 1911. He later became a submariner and war hero, ultimately serving at Guadalcanal. As if that isn’t enough for one man, Ike also went on to lead twelve polar expeditions, and one of the planes he flew on these adventures remained on the airfield. So too did many of the most famous of America’s warplanes, including a Ryan PT-22, a Curtis P-40 Warhawk, and most importantly for me, an orange P-51 Mustang. It is the P-51 that provided the opportunity for me to come to Florida in a quasi-official capacity.

The guys from the airfield generously invited me to join them at the air race, where the famous World-War II pilot and war hero, Bob Hoover, would use “our” plane as the pace plane for the race. My experience is why, for me, the P-51 will always be the definition of a fighter aircraft. More than that, the plane, with its magnificent flying characteristics and beautiful lines, continues to embody the American spirit.  To quote from Larry Dwyer’s The Aviation History Online Museum, the British agreed to the development of what became the P-51 “only on the stipulation that a prototype be on hand within 120 days.” Designers Raymond Rice and Edgar Schmued beat the deadline by three days.1  I confess to constructing many model aircraft as a boy, but the P-51 will always be my favorite.

For years I have lamented America’s apparent inability to innovate with the speed of Rice and Schmued, or to show the indomitable spirit of an Ike Schlossbach. Yet, today I am hopeful. Those who read our newsletter or attend our presentations know that we have cautioned people against conflating the stock market with the “real economy.” By real economy we mean the world outside of publicly-listed corporations. The government shutdowns of the real economy bring the importance of that distinction into focus. Those hardest hit by the closures are the owners of small businesses and their employees. For many, the rise in the value of public markets in the midst of mass layoffs is incomprehensible.

Many factors contribute to this divergence, but none is more important than the actions of the Federal Reserve Bank (FED). Obviously, prices can be driven higher by the Fed’s nearly limitless buying. Sometimes, the Fed doesn’t even need to buy, since just the announcement of their intentions supports prices. By driving rates lower and prices higher, the Fed herds investors into risk assets. Hopefully, this will spill over into the real economy, creating jobs and broadening general prosperity. Less certain is the ability of businesses to pay their liabilities when the economy is shut down. Congress has taken unprecedented actions to bridge the gap created by the shutdowns. Nevertheless, the problems created by the demand collapse in energy threaten large segments of the bond market. Problems for domestic energy producers also menace ancillary workers and businesses in the real economy. Ultimately, we expect many small energy producers to be absorbed into the larger integrated oil companies, either through asset sales by banks that have foreclosed, or through mergers of desperation.

Either way, the ultimate solution is not monetary policy, but a return to business activity and a resurrection of demand. For that we need the daring and innovation embodied by Rice, Schmued, and Schlossbach. Many times, I thought about these innovators as it took longer for me to acquire a landscaping permit to renovate our building than it did for the prototype P-51 to go from impossible dream to immortal reality. Everywhere today we are seeing the unleashing of the creative spirit, but no place more than here in America. We continue to be leaders in science and technology, and I believe that America unleashed will prove up to the challenges of today. It took many years for me to realize the extent of my own good fortune in knowing Ike Schlossbach, and what it really means to be great. Today, I see it all around me.