Best Business Books 2016: Economy [Archive.org URL]

It’s unappreciated that for much of history, growth in economic frontiers — what we would call development markets — was actually quite low. The era of modern economic growth got started only in 1870, with the simultaneous advent of the iron-hulled screw-propelled oceangoing steamship, the submarine telegraph cable, and the industrial research lab. It was then that the pace of growth kicked up a notch to a steady, long-term per capita economic growth rate of 2 percent per year. That may not sound like much. But it meant that in an average year, the share of the average household’s resources that was needed to acquire what that household had acquired the previous year shrank by one-fiftieth. With a 2 percent growth rate, well-being rises faster, because the resources released by that growth for other purposes can be spent acquiring not just more of the same but all of the new goods and services that are the fruits of ongoing invention and innovation. Over time, as this growth compounds, it leads to enormous increases in economic output and standard of living.

But Gordon, whose pessimism is driven by data, believes this era of growth has come to an end: In the coming decades, frontier economies will see a measured pace of growth of only 1 percent per year. Why? Between 1850 and 1950, we saw the invention of life-changing technologies such as jet aircraft, telephones, indoor plumbing, gas cooking and heating, electric refrigerators, streetcars, automobiles, radio and television, antibiotics, and steel-and-concrete construction. Between 1950 and 2015, we saw the widespread diffusion of those technologies — and the coming of computers, mobile phones, and the Internet. But what comes next? Gordon says: less. You can only industrialize your society once, after all. And that slows down the pace of innovation. In addition, economies today face significant headwinds that they didn’t face in the past: an aging population, an average education level that has hit a ceiling, rising income inequality and wealth inequality, and struggles to continue to run pay-as-you-go social insurance. Add it up, Gordon says, and for the first time, an American generation faces the possibility of not living better than its parents did.

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In the past, the world was poor enough, economic growth was fast enough, and the capital requirements of enterprise were high enough that the world was genuinely short of savings. As a result, society found that the promotion of enterprise required more than those who brought to the table labor, skills, knowledge, drive, technology, and a willingness to experiment and bear risk. But to get the capital that would turn these ingredients into growth, society also needed to induce those who would otherwise consume resources to delay consumption and deploy their capital. Thus the simple commitment of one’s current purchasing power to an enterprise could command a healthy return, and one could live well as a rentier off the coupons from bonds and debt that were safe stores of value. On the plus side, this form of economic organization did induce people to mobilize savings and resources for the enormous capital investments needed for economic growth. On the minus side, this form of economic organization would inevitably lead to episodes in which debt securities that had been widely believed to be safe turned out not to be so — and there would then follow one hell of a mess.

Now, however, we are in an age of what Larry Summers, the former Treasury secretary and Harvard University president, calls secular stagnation, in which low growth, low interest rates, and low prospects for innovation make it unattractive for people to deploy capital. Because too much cash is chasing too few opportunities, the mere willingness to postpone consumption no longer commands a real return, as anyone who has tried to augment wealth without taking on risk since 2008 knows very well. Indeed, there appears little prospect that the mere willingness to postpone consumption will command a real return as far out into the future as financial markets forecast.

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Turner’s insight is that in such an environment, debt no longer has a productive role to play. And yet it still carries its dangers. And so it’s time, Turner argues, to treat debt as a form of economic pollution and tax it. Labor and skills and knowledge should be recompensed with wages and salaries. Technology should be recompensed with royalties and licensing fees. Drive and willingness to experiment should be recompensed with profits and options. And a willingness to bear risk should be recompensed with equity returns. But, in Turner’s view, the era in which debt is good and we can look benignly on high or increasing leverage is over — if it ever truly existed.

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…up until 1980 it was taken for granted in the United States that the public and private sectors were partners in a project of equitable growth. It was never the case that the government needed to take control. And it was never the case that what the U.S. needed was to drown government in the bathtub and let laissez-faire rip. Rather, the government needed to do its proper job of clearing the ground, opening up the space, setting up the playing field and keeping it level, building the institutions, and providing whatever support it could that would greatly add value to private enterprise. While government does the blocking, private enterprise takes the ball and carries it forward at great speed. This is how the U.S. developed from a group of poor, disconnected, agrarian colonies into a powerful, industrialized, integrated nation.

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Sometime around 1980, American conservatism stopped seeing government as primarily a partner to private enterprise and began seeing it exclusively as an enemy. The conventional wisdom came to hold that the smaller the government, featuring low taxes and fewer regulations, the faster the economic growth. This was, moreover, not a practical judgment but an ideological imperative. The deregulated low-tax laissez-faire market could not fail: It could only be failed. Policies that failed to deliver results could do so only because the policies were not extreme enough.

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I do, however, think that Hacker and Pierson miss an important sociological cause and concomitant of the shift. They miss the Republican Party’s transformation from a group of forward-looking enterprisers who think they can take advantage of the creative destruction that change and economic growth will bring to a group of backward-looking owners who believe that they are as rich as they will ever be, and who are under threat from the creative destruction that change and economic growth will bring.