March 22, 2011

Tyler Cowen vs. Steve Forbes

I've been a big fan of George Mason Economist Tyler Cowen (what do they put in the water at GMU?) so I took a flyer and ponied up $3.99 for a Kindle version of his essay "How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better"

That's an uneconomical title, but an interesting essay, and an interesting sales model: publishing directly to econ fanboys like me. The problem with the model is that I have to summarize the piece to discuss it. Thankfully, the extended title helps. According to Cowen, we have achieved astounding growth and productivity gains because we have taken advantage of "low hanging fruit." And, according to Cowen, much of the current malaise is the absence of easy gains.

This runs counter to everything I believe. I confess that if I did not respect the author I would have discarded it halfway in. I'm one of the right wing zealots Cowen dismisses who thinks we can just lower taxes and return to historical growth. Not really, he is dismissive of those who feel the Laffer Curve will provide for huge spending increases. I ain't one of those.

Yet Steve Forbes (and I) think some better policies in Washington would unleash a little animal spirits, and that animal spirits will climb the tree if they need to find fruit (pardon the metaphor mash).

Reagan came into the White House facing an economy as troubled as ours--one that had even higher unemployment, catastrophic interest rates (18% for mortgages) and a stock market that in real terms had fallen 60% from its mid-1960s levels. When he left office eight years later, the U.S. had become an economic miracle: 18 million new jobs had been created; Silicon Valley had blossomed, becoming a global symbol for innovation; and the stock market was experiencing a bull run that, despite dramatic ups and downs, didn't end until the turn of the 21st century, after the Dow had expanded 15-fold. The expansion of the U.S. economy exceeded the entire size of West Germany's economy, then the world's third-largest.

I do not discard Cowen's theory. We need to recognize the headwinds we had. Free land, smart uneducated kids, game changing innovation in communication and transportation set up some easy growth scenarios. But if we could get Washington "the hell out of the way," a little Postrelian Dynamism would put us back on track.

Economics and Markets Posted by John Kranz at March 22, 2011 10:58 AM

If I'm understanding Cowan's hypothesis correctly, it sounds like the famous misquote that "everything that could be invented already had been." Or, that all the oil in the world has already been discovered.

There are still huge gains to be made in transportation, technology and science. Someday, the car will look like the horse and buggy - hopefully in my lifetime. The biggest obstacle remains misallocation of capital due to government interference and crony capitalism plus crushing regulations that halt start-ups before they can start up.

Posted by: Boulder Refugee at March 22, 2011 1:13 PM

Down the (Wall) street from Forbes's article is an Ed Page piece, Whatever Happened to IPOs? that reminds:

New companies are the lifeblood of a capitalist economy. Every venture-backed start-up that grows into a public company could be the next Google, Intel, Starbucks or Amgen. Venture investment adds up to 0.2% of U.S. GDP, but the revenue of companies created with such investment amounted to 21% of the economy in 2008. The diminished ability of start-ups to hit the long ball with an IPO discourages investments at all the earlier stages. Venture capitalists know they need some equity home runs to offset losses in the thousands of firms that never find a market.

But, post SarbOx, annual IPOs have fallen to an average of only about 50. Doctor Cowen! Call your office!

At the same time, I have to say Cowen is not a run-of-the-mill pessimist. He takes many of the arguments you or I would make head on. If I can play GMU professor for a minute, he might say that transportation is likely to see incremental improvements. The economic benefit of anything short of teleportation, however, will not likely match the broad-based economic growth afforded by the trans-continental railroad.

Posted by: jk at March 22, 2011 1:32 PM | What do you think? [2]