Has the American economy run out of ideas?
In last weekend’s edition of the New York Times, David Leonhardt makes a startling claim. Not only are we experiencing a downturn similar to the 1929 depression, he claims, but we are possibly going through something even more severe. His main argument is that while the Great Depression saw the U.S. undergo a severe cyclical downturn, it marked a period of quiet secular growth. While people were waiting in bread lines, a technological revolution took place behind the scenes, as the “emergence of new technologies” allowed the U.S. to “vastly increase its productive capacity.” He contrasts this with the economic misery of today: we’re stricken both with secular and cyclical decline at the same time.
Not the most heartwarming read, I might say, on my Columbus Day weekend, but Leonhardt’s claim is worth considering. Are we really living in times worse than the 1929 Depression, where Tom Joad took his Hudson truck across America in search of a livelihood? Are we really an economy that has reached its limits? I’m inclined to disagree, and here’s why.
Firstly, Leonhardt’s rendition of economic history seems to be based on technological innovations, even though economic growth is often contingent on many other factors. He writes:
There is no contemporary version of the 1870s railroads, the 1920s auto industry or even the 1990s Internet sector. Total economic output over the last decade, as measured by the gross domestic product, has grown more slowly than in any 10-year period during the 1950s, ’60s, ’70s, ’80s or ’90s.
Note the discrepancy between his first and second sentences: even though the auto industry took off in the 1920’s, gross domestic product only took off from the 50’s onwards. The reason for this is simple. The postwar boom didn’t spring from some groundbreaking invention, but from the favorable political and economic climate at the time. Postwar Japan and Europe presented opportunities for investment, while the Bretton Woods institutions like the World Trade Organization ensured smooth flows of goods and services between markets. Risk appetite is a function of healthy economic and political institutions – not the other way round – so we should worry less about who’s going to invent the next game-changer, and ensure our institutions are functioning properly.
One thing to avoid entirely – which, ironically, the Senate seems to be doing now – is the temptation towards protectionism and angry rhetoric, since that will limit the United States’ ability to tap into emerging markets. If U.S. consumer spending has dried up, there are still 6.5 billion other consumers on the planet. Nothing illustrates this more vividly than the recently-opened Apple store in Shanghai, which drew 100,000 customers over the course of its opening weekend. Assuming our leaders don’t resurrect Smoot-Hawley and give in to the insular instincts of the interwar years, I’m confident that markets will find a way out of this mess.
A second reason why I think Leonhardt’s pessimism is misplaced is demographics, a factor that tends to be overlooked. While Leonhardt is spot on in pointing out the structural flaws of our economy, one reason why the U.S. will survive is simply because the population is growing at a healthy rate. Robert Solow, the Nobel Prize winning economist, predicted that as an economy approaches a certain level of capital accumulation, the only thing left that’s important is the arrival of new workers in the economy, namely, population growth. While other advanced economies like Japan and Germany will struggle to replenish their workers as their population ages, the U.S. is demographically primed for secular growth.
In the end, Leonhardt’s pessimism isn’t groundless, but I fear his portrayal of the 1930’s as some kind of quiet golden age is misleading. That somehow we’ve exhausted our productive capacities and are headed towards a dead zone is an argument I don’t quite buy.
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