Why Tyler Cowen, 'America's Hottest Economist', Is Wrong
by John Tamny
by John Tamny: 2012:
The Media Canít Save Barack From the Obama Economy
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.
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.
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.
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."
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
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.
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.
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
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