A guest post by Joseph Friedlander
An awful lot of people have weighed in on Tyler Cowen’s ‘Great Stagnation’ ebook,
including Brian Wang http://nextbigfuture.com/2011/12/planning-to-breakthrough-great.html
Tyler Cowen’s ‘Great Stagnation’ (explaining the rather disappointing future we live in compared to projections of where we would be by now) makes (most famously) the ‘we ate the low-hanging fruit’ argument that the easy things have been invented and the high yield moves made, and thus the economy faces the point of diminishing returns–
It makes many other points as well, as Chuck Crane’s excellent review (summarized in Brian’s link above) outlines.
I am going to investigate in this article what it is that in the modern world has made rapid advances in new tech difficult, what it is that systematically eats up capital that could have financed the development and deployment of new technologies.
My own understanding is that a number of things are necessary for economic growth and prosperity:
1. Freedom of endeavor (which I define more completely below, but basically an environment in which your every move is not checked in advance by powerful connected parties in government, professional associations, cartel-like groups in the economy, and in which your surplus is not siphoned away by the same parties) An environment in which endless permits are not required to start a business, nor endless bribes or legal maneuvering to keep it open, and in which you are free to make your decisions chiefly with reference to your customers’ needs with an eye to future business. The right of freedom of transaction, association and the right to decline unfavorable relationships and transactions.
2. Cheap energy and transport that is reliably available upon demand without political interference. (In some countries in the vicinity of Europe, for example, car prices are double USA prices (taxes and customs) and gas is $10 a gallon. In the USA many poor people get started salvaging junk with an old truck and driving it to a place they can get money for it. That would not really be possible with the $10 a gallon gas (and restricting the supply of new cars drives the cost of used cars sky high as well)
3. A tolerable administration of justice, taxation (and what ever governmental functions exist) in the area where economic operations are being undertaken
4. A rule of truth and true (rather than politically-dictated) equality of transaction and information, with no game playing. This means no rigged markets, that no actor is above the law, and that no unquestionable ‘high priesthood’ of favored people get to create lying statistics, (ask yourself why the site Shadowstats exists–)) dictate accounting rules that destroy the ability to discover truth by a simple examination of accounts, http://blog.jim.com/economics/economic-decline.html and it means that ONLY those who lose bets pay them, not the general public getting to bail them out.
5. Reasonable land prices. High land prices are not a sign of national wealth, but rather of real capital fleeing productive uses.
6. Capital that pools for easy investment in new ventures, and is not drained by deliberate inflation or games played by government or the favored connected players’ “patronage economy” or sapped by excess circulation. Capital is like blood or sap—produced at a certain rate, and easily drained out by vampire like parties with not as much interest in sustainability as the producing party. Note that restricting access to capital by elaborate SEC type rules makes it much harder to start businesses while apparently not doing much to stop fraud (Enron existed after SEC, Sarbanes Oxley basically stopped new startup and small IPO formation, http://blog.jim.com/economics/sarbanes-oxley.html
7. On a related point local savers and local startups aren’t free to find each other; they must go through Wall Street turnstiles to be fleeced and the scale of things (less than a few million does not pay) is such that many local businesses just don’t get funded because its’ not worth it to Wall Street.
(There is also the major problem that when a local transaction MUST go through Wall Street, it loses locality. So for example, a hundred years ago, when the Federal Reserve was getting started, they located 12 member banks in major business centers. Today the only one that counts is New York. So in effect small businesses now need the finances—BEFORE they get financing– to go to New York and jump the hoops. All this before they can even hope to expand in a major way—and it also kills the local ecosystem of support businesses that a rising business will use and expand) Killing regional and local and consolidating in large centralized national industries also helps kill innovation because it reduces the supply of innovators in touch with unique local assets and capabilities.
So effectively we have made many startups illegal and then we complain about unemployment. The common objection to this, of course, is that people “could be ripped off” by con men. The answer to that objection which I have come to believe in is, the system as it is already has exceeded the depredations of nearly any conceivable storm of conmen. Most con men cannot buy political protection, or rewrites of laws. Wall Street can and has.
8. Capital formation by accumulating savings (see point 8—a stable currency is needed in which to store value–) not by leverage games, off-balance sheet entities, “instruments” to which ordinary expectations don’t apply, Ponzi scams or false asset valuations. The flip side of this “not playing games” attitude is living within your means—and avoiding personal and societal extravagances. Note that unfunded mandates of any sort by governments to private actors drain savings at least as much as (and probably more) than private waste (because a simple decision to stop wasting cannot be made when it is a legal mandate locked into law.) And on the governmental level no government can (sustainably) spend more than it taxes in current tax receipts.
9. A currency that is a reliable store of value (no deliberate inflation) a reliable means of exchange (no huge swings vs. other currencies) and is not too scarce (Think Gresham’s Law, but there are other meanings of that phrase)
That completes the list. Now we go through it in random order to see that it is no shock that I believe the ‘Great Stagnation’ is simply a result of systematic knocking down of the pillars of the economy, one by one. The list of things necessary for economic growth and prosperity have been taken away to drain the pool of money available for new tech, and a maze of life and soul sucking rules have been put in place to make jumping through all the hoops with correct timing ever harder. It has literally become nearly impossible to be certain that you are not in violation of some law or other if you have any kind of active tech entrepreneurial life.
(Concerning the very definition of currency, Adam Smith said-
All money is a matter of belief. Adam Smith
Which is to say, money in times of crisis goes down Exter’s Pyramid –picture here
to the drainage sump, the upside-down point of the pyramid, which is flowing towards gold, Gold is a blast shelter for wealth. But like all blast shelters it is expensive to maintain (the present value of the money you must hold in gold ), difficult to live entirely within, and confining. During normal times other forms of spendable wealth are more productive to transact with—not least of which (in Adam Smith’s day) were ‘real bills’ which were 90 day gold backed instruments of transaction that guaranteed payment and were retired upon maturity (in effect, a ‘force multiplier’ for the limited stock of circulating gold)
It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. Adam Smith
Of course real bills have been illegal since FDR in the United States (ban on gold clauses in contracts)
In addition, governments have through central banks been keeping interest rates low to reduce their payments on the national debts.
Professor Antal E. Fekete, has, in his writings, commented on the destruction of industry caused by falling interest rates.
“A falling interest-rate structure is lethal. It is an insidious destroyer of capital. It means that wealth is stealthily siphoned away from the capital accounts of the producers, … falling interest rates and rising bond values march in lock-step, albeit in opposite directions. We are all familiar with the fate of TV manufacturers and steel-makers in America… their capital was destroyed by the relentless fall of interest rates. (He then predicted, sapiently at that point in October 2008, that GM would soon join the ranks of the destroyed http://www.drschoon.com/articles%5CAEFCMRE.pdf)
Capital investment obviously falls when the return to capital (interest rate) does too. High taxes can have the same effect separately, let alone together. With near zero interest rates managers waste little capital in improving tools or business methods, when bond values can yield better returns than almost any honest (ie wealth creating) business. There is also little penalty for unnecessary debt and polluting balance sheets by looting capital (think using homes as ATMS between 2000 and 2007) yet governments have enormous incentive to keep interest rates below 1% by any means necessary (because some of them literally could not make payments on their debts at say a 4% interest rate) This superlow interest rate environment enables near risk free speculation (often, in the case of banks with ruined balance sheets, literally as a gift from the Fed)
More evidence on the systemic drainage of capital from the economy—
Easy Money and the Decapitalization of America
Kevin Dowd and Martin Hutchinson
( quick takeaway: the Fed saves Treasury interest by keeping rates low—this however killing return on capital—more confirmation of Fekete’s claims above)
There is also a video of Kevin Dowd’s talk—
The Decapitalization of the West | Kevin Dowd – YouTube
This is serious business because being well-capitalized (until recently) was America’s primary competitive advantage in the world—in old movies you can see dinky European equipment and cars versus fantastic lush and powerful American equipment and cars (The very highest end European products were superior, but we made it up with very competent products in floods a level or two down from that). This is because Americans had cheaper prices enabled by capital rich mass production, lower taxes, and more money to save (and high savings rates) All of these advantages have been shriveled by systematic draining of capital from the USA, by accounting and management games. (From both private and public connected players)
These games essentially constitute hidden taxes on capital accumulation, and thus future jobs, industrial research and nearly everything productive in the economy, to raise money for the government, which as Tyler Cowen in The Great Stagnation points out, then basically wastes it on dysfunctional money-sucking sectors like the education, medical, prison/legal structures, and the vast complex of indirect federal employees—(the ‘official count’ of a few million people is wildly wrong—the real test is how many paychecks would stop flowing if the government at all levels, including quasi-governmental entities did not pay its’ subcontractors and vendors. Those people are (for financial purposes) government employees just as much as the official ones. And they number in the tens of millions.
Some observers documenting this “whole economy vampirism” (my term phenomenon in the real world—
Neil Craig on government parasitism (defined operationally here as the fact that taxes and regulations and unfunded mandates together literally take such a huge chunk of national income that people barely make it in good times and experience a collapse of their living standards in bad times. http://a-place-to-stand.blogspot.com/2009/03/costs-of-government-regulation_22.html
Craig estimates (Scottish) government consumption at between half and three quarters of the real economy. He has stated: (in a comment here http://nextbigfuture.com/2010/12/summary-of-dr-bruce-cordells.html) May I suggest that the cause of such cycles ending cannot be an inherent loss of investment resources since by definition the overall economy has grown in the growth phase. What could happen is that the parasites grow faster than the wealth creators. Historically that could be anything from ne4ighboiring tribes looting the cities of ancient Mesopotamia; the growth of an ever more useless and parasitic aristocracy under Louis XIV the Sun King; to the current state parasitism where tax takes about 50% of the economy and regulatory controls (nuclear regulations, housing restrictions, environmentalism etc) destroy at least 50% of the possible economy reducing what people really get to 25% of the optimum. Modern governments can afford to extract more than barbarian hordes and absolute monarchs because there is so much more existing now but this in turn means that the potential for growth without the parasitism is very much greater than ever before. This growth in state parasitism may also explain what economists call the “productivity paradox” – that the doubling of computer capacity every 18 months has not improved growth rates (at least not in the “developed” countries though the number of countries achieving 10% annual growth is unprecedented elsewhere.
I have read an astonishing post at Mike Darwin’s blog http://chronopause.com/index.php/2011/02/08/london-at-apogee-a-reflection-on-the-criticality-of-life-affiriming-values-to-economic-viability-and-personal-survival/
He reckons that 60-70% of productivity is effectively taxed with hidden taxes fees and mandates, that no civilization in history has long term endured more than 30% and only our astonishing technical productivity has shielded us until now… this is evidence from L Neil Smith (patched together from several places)
…government takes seven eighths of it away, mostly to use against us…
I said seven eighths. Taxes consume half of what we earn. Taxes double the price of everything we buy. And regulations double the price all over again. We all live on on eighth of what we earn. A once-free people have been reduced to the status of medieval serfs. Tax slaves.
Karl Denninger has ingeniously come up with this chart
and an explanation of one mechanism of wealth theft from the populace at large:
How The Banks, President And Congress Steal From You
Your cost of living has gone up by 78% in notional dollar terms but it should have gone down by 44%!
The spread between those two lines was literally stolen by the banks and government acting intentionally as a group. They defrauded you, stealing your economic output and improvement in productivity, using it to hide the impossibility of continual deficit spending. Summed, the line is flat — but it should not be; that improvement in standard of living belongs to you, not them.
If I am reading Denninger correctly the (unspoken) mechanism by which this is done is credit issuance unbacked by the “One Dollar of Capital” (for each covered bet) standard.
Risky credit issuance constitute essentially a naked short on the currency value—which goes down, so prices go up. The Fed similarly increases the amount of currency—to take up the slack by rising productivity—giving ‘free’ purchasing power to the government—instead of leaving it with the private sector in the form of falling prices.
One more vampire tap of capital in an economy shriveling from inadequate savings and capital accumulation.
Adam Smith had his own take on this:
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: All the rest being brought about by the natural course of things. Adam Smith
May we infer the reverse? Detroit 1960 vs Detroit 2020: A thought experiment 5/6 completed now and not looking too good…
That “natural course of things”, of course, includes hard work and self-denial, (capitalism depends upon retained capital, and if you are convinced the returns of your efforts will be retained by you and not a tax collector, a protection racketeer, etc, etc then you will voluntarily inflict denial upon yourself that you would never dare to inflict upon the lowest employee—sometimes 20 hour days, sleeping with a beeper, skimping even on necessary purchases, etc. On the other hand, if your capital is subject to arbitrary seizure why not spend it or give it away now before someone else does?
An old peasant proverb serves well here: “What I spent I had, what I saved I lost” (another version, “What I spent I had, what I saved I lost, what I gave I have.”—in the sense that private parties such as relatives will remember your generosity and reciprocate more than a distant king will)
Too many regulations, as we have seen, however defensible each individual one may be, will eat up capital just as surely as luxurious self indulgence.
… some estimate that there are in excess of fifteen million regulations at just the federal level. http://down-with-power.com/theplan.html by L. Neil Smith
and the problem with taxes is that they roll downhill, inevitably once again depleting capital accumulation—
No corporation pays taxes, they pass them on to their customers, doubling the price of goods and services. by L. Neil Smith
Although I personally favor low taxes, it is perfectly possible to prosper in a higher tax country as long as you get value for your money–
There is a work on the habits of highly successful countries done by South African economist distilling lessons from around the world http://brianmicklethwait.signal100.com/podcast/HabitsofHighlyEffectiveCountries.pdf
Neil Craig of Scotland has a review here:
Neil Craig’s takeout: (why government spending isn’t always bad as long as it is efficient)
if government spends the money as wisely as the free market it will achieve at least as good results. To spend effectively government should (!) build infrastructure especially transport, (2) provide services rather than regulate (ie the NHS rather than smoking police) (3) do things that don’t merely duplicate what the market does (don’t run the railways) (4) increase efficiency by outsourcing & privatisation. To extend my point about the early USSR I believe that where government is bad is in the long term – because it doesn’t have the spur of bankruptcy an efficient government enterprise will, over time, increase inefficiencies. I believe that is what happened to NASA & the USSR, both government organisations which once performed spectacularly & over time became mired in bureaucracies.
And here is another article by Neil Craig about the “Habits of Highly Effective Countries” paper. The motivation for discussing it here is to probe why the Great Stagnation, if real, is not universal–
Key excerpts from the document itself:
regulations usually cost a country twenty times more than they cost the government” p58
11 SHORT LIST OF WINNERS’ POLICIES p65 ”The proverbial “bottom line” is that the world’s experience suggests that …….. is likely to prosper if, and only if, it: 1. reduces crime; 2. relaxes and preferably scraps exchange control; 3. reduces time people have to spend with bureaucracy; 4. relaxes or scraps insistence on centralised bargaining 5. shifts from spending on economic regulation and parastatals to spending on transfers and subsidies… 6. the rule of law; 7. foreign trade liberalisation; 8. business liberalisation; 9. banking and financial market liberalisation.
What this implies of course is that people have freedom of association and transaction, not having to worry about import duties much higher than say about 10 percent (above this figure people start gaming the system to avoid paying it) and presumably equally low taxes. Freedom to import the best tools and materials and to export and to transact without worrying about complex webs of regulation. In other words worrying about the quality of your product or service rather than how to legally make it.
Think a Japanese luxury auto brand vs. GM.
Note that low taxes are not an absolute necessity but getting value for your money whether spent in the private or public sector is. Thus, a dysfunctional public sector in (say) Detroit and Michigan forces those competing with the Japanese auto industries to spend more for the goods they allegedly are already paying for once—good roads (toll), good schools (private) good you name it. Lack of received value compels extra expense and that drains capital.
As Mike Darwin pointed out above
My rough guess is that conservatively,
60 to 70% (more now) of each individual’s productivity is taken from
him before he ever gets his paycheck. The decaying, and now failing
infrastructure in the US is proof positive that this wealth isn’t
going to fund basic and ‘good’ things government can do – such build
and maintain roads, dams, utilities, land reserves – and maintain
basic public health. INSTEAD, IT IS BEING STOLEN AND
Google Chronopause.com London At Apogee
By “STOLEN AND WASTED” we not infer crime but merely misallocation—making sure road projects are in compliance with thousands of legal mandates is literally more important than building a good road.
Indeed Neil Craig has, in Scotland documented many cases where civil works projects that over 5, even over 10 times the inflation adjusted equivalent of just a few years ago.
“In FoIs (Freedom of Information Act queries—JF) I have been told that government projects have an inflation rate consistently 4% above everybody else’s and that this has been the case for over 50 years. This explains why British public projects cost around 8 times their engineering cost….Clearly the real reason is some mixture of bureaucratic parasitism (like the £200 million mentioned without a spade being turned) and “preferred bidders” getting to charge whatever they want.”… Perhaps a Parliamentary question or committee enquiry into why our public projects cost so many mutliples of their actual cost might be worthwhile.
http://johnredwoodsdiary.com/2012/01/11/a-new-railway-for-2032/#comments (search for Neil Craig)
Kevin Dowd and Martin Hutchins on this similar decline in societal competence (the ability to engineer on time and on cost in this spiderweb of directives, laws and mandates–
“THE FEDERAL GOVERNMENT DESTROYS CAPITAL
We should also see these problems in the context of a vast number of other government policies that are decapitalizing the U.S. economy. The wastefulness of government infrastructure projects is an obvious case in point. One instance is the Amtrak proposal for a Boston-Washington highspeed railroad, costed at $118 billion, compared to $20 billion equivalent for similar lines in France and under $10 billion for a line recently opened in China. Even more striking is the ARC tunnel project between Manhattan and New Jersey, recently killed by Gov. Chris Christie because of its excessive cost of $8.7 billion plus likely overruns.
Yet the Holland Tunnel, performing an identical function and opened in 1927, came in at $48 million, equivalent to $606 million in 2010 dollars. Even allowing for the higher real wages of today’s construction labor, and a certain amount of fiddling of the consumer price statistics by the Bureau of Labor Statistics, it should have been possible to bring the ARC project in at under $2 billion, less than a quarter of the actual projected cost. The high costs of infrastructure problems boil down to the onerous regulations under which such projects are carried out, such as the Davis-Bacon mandate to use union labor on federally funded projects and a whole welter of health, safety, and environmental regulations.”
Clearly this tendency is widespread in the Western World—and it systematically eats up capital that could have financed the development and deployment of new technologies.
–one more reason for the “Great Stagnation” is just plain the fact
that the patent lawyer nowadays ALWAYS gets paid, the small inventor
hardly EVER gets paid. and people are tired of being ripped off.
I am coming to believe that the IP structure we have is so
manipulated by statist/rentseeking cartel actors that it is making
it nearly impossible to invent or create as a free man…
see what I wrote—on the patent system:
Don’t believe me? See what Robert Zubrin
wrote—on the patent system:
And one more reason for declining innovation is mounting barriers to entry for new entrants to the marketplace (people who could make a saleable product but cannot figure out or afford to navigate the legal maze to be allowed to do so)
One huge thing about this is the desire for
• Professional Associations with the power (granted through lobbying the state) to sic the police on unlicensed competitors.
And many other cartel-like forms that basically restrict freedom of association both economic and non-economic, and force people to do business in an environment where they must choose from a (governmentally favored) subset of actors to do business with.
This is the origin of cartel capitalism (as opposed to entrepreneurial capitalism: one seeks to limit competition, the other produces competitive products at prices people willingly will pay in a market that all are free to enter)
As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. Adam Smith
In a one line summary of this article, I would say that the Great Stagnation (where it is occurring) is happening not because there are no more low hanging fruit but because someone the government and their favored private actors have locked the gate to the orchard!
• Because people have reached the point of diminishing returns in dealing with the superstructure of cartel-like organizations, associations and favored groups—
• Because the capital to fund startups (and the legal environment in which it is legally possible and even easy) has been drained away.
• Because none of the following conditions are true any more as they were during the peak era of new technology–
1. The law has to be understandable.
2. The law has to be predictable. (Year end stories in newspapers about hundreds of new local regulations you need to know to avoiding running afoul of are invariably a bad sign)
3. The law has to be merciful in cases of no ill intent (IF you get nailed when you find you are in technical violation of some regulation—when making an honest attempt to comply)—if they come down on you like a hammer, it kills the desire to take risks that is the essence of entrepreneurship—playing it safe is the opposite of innovation.
4. The law has to be limited to the local region or state you are in so you have freedom to move in case things get bad.
5. Affordable capital formation.
6. Affordable family formation.
7. Affordable idea critical mass formation (Patented business methods or a massive patent pool are the opposite of this—some businesses have such high entry hurdles that fresh startups are impossible, and it is usually for legal, not engineering reasons)
But the encouraging thing is this means there will be a massive tech boom if these totally synthetic barriers are stripped away and the freedom to create and deploy is restored. When it pays to take risks, people will take them, and amazing new technologies will begin appearing once the tech incubation pipeline has filled up and begins overflowing. In a few years after that, the debate over the Great Stagnation will be only a historical footnote.
It is worthwhile to recall Robert A. Heinlein’s famous chart showing an exponential projection of the future from 1950 through 2000, (in the book Expanded Universe, around 1980) where he predicted 8 times the change between 1950 through 2000 as occurred between 1900 and 1950. Nothing exponential goes on without end in nature, yet we can say that amazing things are in our future, if we will only open the locked doors to the tech orchard and start picking those low-hanging fruit once more.