Thursday, October 31, 2013

Those Nattering Nabobs of Negativism

I am an optimist. 

My secretary once nicknamed me "Pollyanna," and not entirely as a compliment. It's a personality disorder I share with people like Matt Ridley.

My optimism was dented a few years back when my career took a tumble. Then I fell in with the ZeroHedge (ZH) crowd and folks like Marc Faber. In response I bought a few hundred shares of GLD, managing to time the very top of the market. That's what pessimism will get you. I've since recovered and am back to my old self--see here, for example.

It is possible to be pessimistic in the short term while being a long-term optimist. Trotskyists are like that, though for them the short term extends indefinitely into the future. They believe that capitalism will eventually self-destruct, and until then will be a time of wars, crises, and poverty. But long term (assuming there is a revolutionary Party with the precisely correct political perspective) future generations will live happily ever after. Idealistic young people (i.e., 18-year-olds who think they will live forever) became Trotskyists precisely because of this naive optimism. 

For true pessimism you need to turn to Mark Steyn. He forecasts the demographic and intellectual decline of civilization as we know it, assuming a) that civilized people will never have enough babies, and b) that people who have lots of babies will never be civilized. I think he's probably wrong on both counts, but there is no denying that demographic decline will have a major effect on the economy. That, along with persistent deflation, are probably the signal trends of our age.

A more insidious pessimism--because it is more reasonable--is propounded by Tyler Cowen in his books The Great Stagnation and Average is Over. I've commented extensively on his opinions here and here.

So that brings us to a recent paper by Brink Lindsey entitled Why Growth Is Getting Harder (pdf). He is almost apologetic about his pessimism, practically inviting readers to respond tell me it ain't so. I'll oblige: Mr. Lindsey is too pessimistic by half (but only by half).

His argument is that the four major drivers of GDP growth are all showing signs of long-term, secular decline. Each of them has declined in the past, but this is the first time in the last century that all four have gone down simultaneously. The four components are labor force participation, labor force skill level, capital appreciation, and "total factor productivity," otherwise sort of known as innovation.

The first item largely echoes Mr. Steyn's arguments--we baby boomers didn't have enough babies, and as we retire the labor force is going to shrink. This is happening full force in places like Japan and Italy, and is gathering pace in the US as well. Put more colloquially, the Millennial generation is getting screwed. Unfortunately, I can't argue with this prognosis.

His second point is that we've extended education to point of diminishing returns. In the 20th Century there were huge productivity gains achieved by dramatically increasing the number of people who went to college. There will be no similar gains in the future. Beyond that, I argue that we've passed the point of diminishing returns, and instead today's marginal investment in education is a dead weight loss.

So there is hope on the horizon. Our current college system is hopelessly inefficient and ripe for change. It will become much cheaper in the future--indeed, even trending toward free. One of the ways it gets cheaper is by becoming shorter--there is now a growing trend toward three-year bachelors degrees. Many students can productively use the senior year of high school taking on-line college classes, possibly shortening the time to degree even more. Yes, kids will still want to live on campus in dorms, but for a shorter time than they do today. Beyond this, graduate programs are a complete and total waste of time & money for almost everybody. In particular, the PhD is a recipe for a lifetime of underemployment.

Mr. Lindsey's third point is that less capital is being accumulated and invested. His modest claim is that at very least it does not auger for strong economic growth. And true enough, but I will argue that the point is largely irrelevant. Stuff is just cheaper these days. It requires little up-front investment to launch an international ad campaign on Google. A desktop, 3D printer can be had for a few thousand dollars. Arts & crafts people can set up shop on eBay in a jiffy. Frankly, it just doesn't take a lot of capital to start a business. The days of huge automobile factories is coming to a close. Therefore I suggest there isn't a strong correlation between capital investment and economic growth.

The last factor on Mr. Lindsey's list is innovation. There are reasons to think that the rate of innovation is increasing. Not only are capital and labor both cheaper than they ever have been, less labor and capital are needed to bring an idea to market. More people can start more companies with less money--the cost of innovation has declined dramatically. Individuals can start colleges. People can publish their own books on Kindle for free. 3D printing will allow all sorts of small time entrepreneurs to get into business making stuff. And so on. Of course most of these efforts will fail, but throw the dice enough and you'll get lucky. Resources are so cheap that we'll be throwing the dice a lot more often than we used to.

So I'm not as pessimistic as Mr. Lindsey. I admit his point about the declining labor force, but I don't see any commensurate increase in salaries. So this can't be harming the economy. I acknowledge that our education system is dysfunctional, but that presents an opportunity for growth. Lack of capital investment may be a problem, but with interest rates so low it's hard to see how it makes much difference. And finally, the cost of innovation is dramatically cheaper than it ever has been. We should be getting more of it.

So Mr. Lindsey is wrong. The glass is half full!

Note: The title is borrowed from a speech written by William Safire for Spiro Agnew. Does anybody remember Spiro Agnew?

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