The Chief Kochonomist Is All Wet

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The still shaky U.S. recovery has the economic commentariat searching for answers. Given a rebound that is far more subdued than previous snapbacks from recession, there exists a belief – albeit controversial – that the economy has reached its limits, or a "new normal" of subpar economic growth.

The above argument has gained greater currency more recently with the release of George Mason University economist Tyler Cowen’s e-book, The Great Stagnation. Cowen is well known as a credible free market economist, so for someone of his ilk to suggest that we’ve arrived at a "technological plateau" that signals reduced growth going forward, there’s arguably cause for worry.

Happily for the worriers among us, we can fairly say that we’ve heard Cowen’s arguments before. In the 1970s a great deal of gloomy commentary made it into the national discussion, and much the same occurred in the early 1990s after the economic boom of the 1980s.

The arguments weren’t credible then nor are they now because they fail to recognize that an economy is not some living, breathing entity, rather it is a collection of individuals acting in their own self-interest. Ideas and energy matched with capital are what drive economic advancement, and while the present may seem bleak, to suggest we’ve hit a plateau is to presume that individuals in the U.S. have run out of ideas. That notion is hard to countenance.

We’ve heard this all before. Much as every period of economic prosperity is thought by many to have no endpoint, that "this time is different," so do times of hardship give rise to naysayers who believe that things will only get worse. The late Robert Bartley noted in his classic 1992 book, The Seven Fat Years, that a popular book in economic circles in the early 1970s was titled The Limits to Growth. Supposedly we were running out of everything, and worse, had no idea how to emerge from our difficulties.

Moving to 1979, then President Jimmy Carter told a group of visitors to Camp David "I think it’s inevitable that there will be a lower standard of living than what everybody had always anticipated, constant growth…I think there’s going to have to be a reorientation of what people value in their own lives. I believe that there has to be a more equitable sharing of what we have…The only trend is downward."

Seeking to provide readers with a sense of how the U.S. economy would perform in the 1990s, Princeton economist Paul Krugman published The Age of Diminished Expectations in 1990, and in it he predicted a fall in productivity, a decline in GDP, and reduced living standards for the average American. It’s notable that at the time of publication the economy was entering a recession, just as economic optimism was similarly down during the generally weak 1970s. But as history reveals in living color, the 1970s economic malaise soon turned to 1980s exuberance. As for the 1990s, while the decade began somewhat subdued economically, by the end of the millennium the economy and stock market were roaring.

What this tells us is that the depressed outlook among certain economists today is hardly new, and even better, that predictions of diminished growth as far as the eye can see have been incorrectly floated before. Be they recessions or merely periods of light economic growth, there’s a tendency toward long-term gloom during times of economic uncertainty. Just the same, many economists tend toward irrational exuberance during periods of plenty.

In the above sense, the negativity expressed by Cowen and others is in no way surprising given the difficult times we’re experiencing. Far from an economy set up for a "new normal" of subpar economic growth for the foreseeable future, Cowen’s pessimism is what’s normal; economic growth at present is what’s abnormal.

Why is Cowen incorrect? Cowen’s thinking is that for hundreds of years the U.S. economy has benefitted from "low-hanging fruit," or easily realized opportunities for powerful economic growth. As he sees it the easy innovations have "started disappearing" and "the trees are more bare than we would like to think."

Of course what Cowen misses is that what he deems "low hanging fruit" only appears that way after the fact, which explains why innovators grow so wealthy for innovating. If grand wealth creating ideas were obvious to everyone, including economists such as Cowen, there would be no profit to be had from bringing them to the market. To presume that opportunities for advancement are limited is to suggest that Americans, along with consumption-driven individuals around the world, are fully satisfied in terms of what they have such that there are no other life-enhancing innovations for enterprising entrepreneurs to create.

The very idea is fanciful because as evidenced by how much of the world remains malnourished, impoverished and generally unsatisfied, entrepreneurs irrespective of country haven’t scratched the surface when it comes to fulfilling our myriad wants. With all due respect to Cowen, that there appears to be very little in the way of low-hanging fruit is for the professor to state the obvious. Indeed, if he were aware of where the opportunities for wealth creation existed, he would raise capital to pursue them rather than teach economics.

What history tells us is that precisely because they’re innovations, the amazing, wealth-enhancing advancements created by the entrepreneurially minded hit us somewhat unexpectedly, and fulfill needs we perhaps didn’t know we had. An easy example here would be Facebook. Started to connect students at elite college campuses, Facebook’s global footprint has grown astronomically all the way to private valuations of the innovator that have reached $50 billion.

When we consider that Facebook began its march upward with a $500,000 investment by venture capitalist Peter Thiel in 2004, we see with great clarity how very unknown are the future generators of wealth. Thiel’s investment is now worth billions, but no one, least of all Cowen, could have predicted Thiel’s windfall when the latter made what was then a courageous decision to commit capital to a nascent start-up.

Cowen’s perhaps more controversial point is that we’ve reached a "technological plateau," whereby Americans have run out of ideas necessary to generate substantial commercial revenue.

A scary thought for sure, but certainly not a compelling one. Cowen’s argument seems to be that Americans have ceased to imagine, a notion that is hard to take seriously. To believe Cowen, is to believe as he implicitly does that there’s a saving’s glut, or too much capital chasing too few ideas.

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