Austrian Ruminations

Dr. Kapital posts this from The Infinity Suite at The Langham:

"All of Europe is abuzz with the question: what is wrong with America? Leaving aside that they should probably be worried about something else, it certainly is a question Americans should be asking themselves.

"In Dr. Kapital's view, the problem is not so much what is wrong with America. Rather, it is what has been going wrong for a long time.

"Well, where does economic growth come from? A good central banker will conservatively estimate future population growth and productivity per worker, and add the two to arrive at an estimate of his nation's long-term growth potential. For the U.S., the population growth trend is about 1%, and productivity has been about 2% in recent years. You could have expected 3% GDP growth, and that is about what you got.

"Is that the best you can do? The estimable Alice Rivlin once explained: 'How fast the economy can grow is determined by how rapidly the employed labor force is increasing and how fast the productivity of that workforce is growing. There are only two ways to get more output: either more people work or working people produce more (or both).'

"Unless you are planning a merger with China (an intriguing notion), your population growth is probably not going to move the needle. So, you should be focusing on Plan B, increasing productivity. There are three strategies for accomplishing this. You can invest money in productive things (e.g., automated factories), you can improve the skills of your labor force, or you can invent things that make people more productive.

"Let's take those in turn:

"Investing: If you wish to invest money you must get it first, either by saving or borrowing. Until recently Americans hardly saved at all, foreclosing that source of funds. Americans have discovered, however, that global capital markets are remarkably indulgent, allowing unprecedented levels of national borrowing. Alas, rather than investing this money, you used most of it for consumption of various kinds. The current Krugmanite excuse is that one must borrow to stimulate cyclical demand. It pains me to say he is right, for another quarter or three, but it also reminds one of St. Augustine's prayer: 'grant me chastity and continence, only not yet.'

"Educating: American higher education is very good, and you have a big population. So you should have enough geniuses. But the next levels down do not look good. Today, about 25% of Americans have a four-year degree - barely more than in 1978. If you are not careful you will find your good technology jobs taken by industrious Chinese, Russians, and Poles.

"Invention: It has saved you. That little strip of land, from San Francisco to San Jose, has created more innovation than most of the rest of the world over the past thirty years. But what will become of it? Can you count on a repeat of that little miracle?

"Dr. Kapital's policy prescription:

• Save more, spend less. America may borrow like a drunken sailor, but you need not. Individuals should diversify their savings very widely.
  
• Put education at the top of every list. Although Dr. Kapital prefers private education, the rest of you might look into the Finnish model. (And what, exactly, is vibrant testing, Ms. Whitman?)
  
• Keep Silicon Valley alive, no matter what it takes. Provide Federal stimulus money for Failcon, if need be.

"Dr. Kapital suspects the short term will be better than you believe. But, over the longer term, America is acting like a championship athlete that is losing his focus. It might turn out all right, but it usually doesn't."