Arnold Kling  

The Future

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Jeff Cornwall summarizes the panel on the outlook for the economy and entrepreneurs at the Kauffman Foundation forum this past weekend in Kansas City. In a later post, I will discuss the interesting ideas that were brought up at that discussion. For now, though, I will summarize the thinking behind my own five-minute remarks.

Once again, I am doing scenario analysis, with two drivers: quick recovery or deep recession; and capitalist trend vs. statist trend.

Recovery PathKeep CapitalismAdopt Statism
Quick RecoveryElection Shocker
p=0
European Welfare State
p=0.3
Long Deep SlumpBig Comeback
p=0.3
Strangled by the State
p=0.4

The Obama Administration forecast is for a quick recovery. Most of the people at the Kauffman forum disagreed. Instead, when our session chairman Robert Litan polled the audience, almost everyone raised their hand to say that they expect a long, deep slump.

If there is a quick recovery, then it seems to me unlikely that the Democrats will be thrown for an electoral loss, and thus it seems unlikely that we will see a shift away from statism. Thus, I put the probability of that scenario ("Electoral shocker") at essentially zero. Instead, I think that a quick recovery will end with the U.S. looking like a European welfare state, with much higher government spending as a proportion of GDP.

With a long deep slump, I think the most likely outcome is that we will be "strangled by the state." All of the ambition and "animal spirits" will be channeled into opportunities created by government appropriations and subsidies. In spite of a weak economy, statist policies will remain in place, because those who are receiving a share of the pie from the government will be a more potent political force than those who are upset that the pie is stagnant or shrinking.

However, the scenario that I focused on in my five minutes was the "big comeback," in which after a long slump we decide to give capitalism another try. I pointed out that the post-Depression economy that we saw in the 1950's was very different from the one in 1929. A lot of farmland went out of production, as better transportation reduced the value of marginal farmland near cities. Some of that farmland became suburbia and some of it reverted back to wilderness. Also, a lot of sweat went out of work. The proportion of jobs in factories and farms fell, and labor in those settings became less physically demanding.

I expect to see an equally radical reconfiguration of the economy under the "big comeback" scenario. What will it look like? I suggested reading David Halberstam's The Fifties to get an idea of how the new suburban-based business ecosystem developed in that decade. I suggested watching the podcast I mentioned recently featuring Marc Andreessen interviewd by Charlie Rose. I suggested looking into Clay Shirky's thoughts on "cognitive surplus," which I linked to here. I suggested reading Nobel laureate Robert Fogel's book on the decline of hunger and premature death. Fogel sees future growth in health care, education and leisure. Nick Schulz and I have taken to calling these sectors the "new commanding heights."



COMMENTS (5 to date)
Greg Ransom writes:

Different parts of the country may play out a bit differently.

Here in California, we are already in the "Strangled by the State" quadrant -- tax consumers and low wage earners continue to pour into the state, tax payers and job creators continue to flee out of it.

Many government workers retire at age 50 at 100% pay.

Government workers are making 20-30% more -- not including benefits -- than their private sector counterparts.

And there is no end in site.

The folks who would vote against this are leaving. The folks who would vote for it continue to pour in.

Franck Boizard writes:

Hello,

Didn't you make a mistake in the Ā«keep capitalismĀ» column, inverting the lines ?

Franck Boizard writes:

Don't mind my previous comment: I misread your explanations. Sorry for that.

George writes:

Arnold,

You wrote:
A lot of farmland went out of production, as better transportation reduced the value of marginal farmland near cities.

You mean it reduced its value as farmland, right? If I'm not mistaken, its value when put to its "highest, best purpose" tended to go up (again, because of better transportation).

(Hey, when are you going to hold another lunch?)

Brad Hutchings writes:

What Greg said about California. You can't beat SoCal weather though, unless you go south. "Strangling" is borderline at this point, but a real threat. I don't see the Republican Party doing anything here. Schwarzenegger has been a complete disaster. The rest of the party is focussed on social conservatives. A fiscally conservative party would never have caved on the budget. Period.

In the spirit of Marc Andreessen's out of the box thinking on banking, find some Democrats who could be just a little better on taxes and spending than a vintage 2009 Republican while remaining socially moderate. That shouldn't be difficult. There is tremendous political opportunity in that niche.

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