Last Wednesday's Wall Street Journal featured an editorial by one of my favorite economists, Brian Wesbury, entitled "Change We Can Believe In Is All Around Us."
Wesbury's piece was nearly a full half-page in the Journal, so I won't go into excruciating detail. The headline themes will suffice for my purposes.
Partway through his piece, Wesbury wrote,
"Look at the chart nearby. America's manufacturing output, as measured by the Federal Reserve, is up seven-fold since 1950, but manufacturing jobs as a share of all jobs have fallen to 10% from 30%. Your grandfather and father may have worked for General Motors (and joined the UAW), but it's likely that you don't and won't. The problem, if it really is one, is not foreign competition or evil financiers. It is technology and productivity. In the 10 years ending in 2007, durable goods manufacturing productivity averaged an annual growth rate of 4.8%. In other words, if real growth is less than 4.8%, the sector needs fewer workers year after year.
For the economy as a whole, overall U.S. business productivity rose 2.7% at an average annual rate during the decade ending in 2007, 1.7% in the decade ending in 1997 and 1.4% in the 10 years through 1987. Change is everywhere, and it's accelerating."
Wesbury thus notes that if you want change, baby, you're already getting it- in spades! As with rapid economic and social change throughout the centuries, this sort of change can actually make politicians fearful of blood running in the streets.
Back in the 1920s and '30s, when Schumpeter was writing about creative destruction, the hot economic topic of the day was whether unbridled American capitalism would destroy itself by depressing wages so low as to create social unrest and overthrow of our economic and governmental systems. Socialism was perceived as the greatest threat, and it actually came in the person of FDR and his many ill-considered New Deal programs- NRA, court packing, etc.
In a manner similar to Milton Friedman's and Anna Schwartz' "A Monetary History of the United States," Wesbury goes on to view American history as a collision of productivity and innovation with populism which has tried- and still tries- to control that economic vitality,
"This has happened before – in the Industrial Revolution – where the political environment bred America's first real populists, people like William Jennings Bryan and Theodore Roosevelt. Bryan was perhaps the best orator of American political history, and like Mr. Obama, he could affect people emotionally. Roosevelt, like Mr. McCain today, was a true American hero and one tough guy. History may not be exactly repetitive, but it sure seems to move to similar rhythms.
Unfortunately for the American economy, the populist movement of the late 19th and early 20th centuries led to a rapid growth in government intrusion into business activity. The populists didn't like the gold standard and demanded more government regulation.
In 1913, the Federal Reserve System was created and the income tax was introduced to pay for a growing government. And then, during the Great Depression – which was caused by the new Fed, trade protectionism and tax rate increases – a massive expansion in government took place.
Forty years later, in the malaise of the late 1970s and early 1980s, the U.S. finally figured out what it was doing wrong. By returning to hard money under Paul Volcker, and lower taxes and less regulation under Ronald Reagan, the high-tech leg of the Industrial Revolution began.
The fruits of this are plain to see. Rather than watching the sun set on the U.S., as many believed would happen in the early 1980s, the U.S. has experienced one of the greatest booms in wealth creation in world history. And the impact of our technological innovation has helped lift untold numbers out of poverty."
So to Wesbury, the American experiment has been a revolving door between economic wealth creation and lifting of all incomes by resulting economic expansion, and governmental attempts to restrain this vitality, tax it and use the proceeds to misallocate resources to 'the poor.'
Wesbury continues in that vein, noting,
"This technology has created massive amounts of change. Like the Industrial Revolution before it, the current transformation is anything but pain-free. It's what Joseph Schumpeter called creative destruction. Google, Craigslist and Microsoft have been prospering. General Motors, United Airlines and the New York Times have not. In the midst of layoffs in the newsroom, it's hard to see anything good happening in the rest of the economy.
Americans have had it so good, for so long, that they seem to have forgotten what government's heavy hand does to living standards and economic growth. But the same technological innovation that is causing all this dislocation and anxiety has also created an information network that is as near to real-time as the world has ever experienced.
Decades ago the feedback mechanism was slow. The unintended consequences of the New Deal took too long to show up in the economy. As a result, by the time the pain was publicized, the connection to misguided government policy could not be made. Today, in the midst of Internet Time, this is no longer a problem. So, despite protestations from staff at the White House, most people understand that food riots in foreign lands and higher prices at U.S. grocery stores are linked to ethanol subsidies in the U.S., which have sent shock waves through the global system.
This is the good news. Policy mistakes will be ferreted out very quickly. As a result, any politician who attempts to change things will be blamed for the unintended consequences right away."
Thus, Wesbury notes that because of recent rapid change, originally economic-based, in information technology, boneheaded governmental changes will be quickly penalized in the next election cycle, rather than, as in the last century, 30-40 years later.
This is important as both Presidential candidates and Congress have turned increasingly protectionist, focused on meddling in American business, and provincial with respect to US energy policy and the global energy situation.
Thus, Wesbury concludes,
"Both Mr. McCain and Mr. Obama view the world from a legislative perspective. Like the populists before them, they seem to believe that government can fix problems in the economy. They seem to believe that what the world needs is a change in the way government attacks problems and fixes the anxiety of voters. This command-and-control approach, however, forces a misallocation of resources. And in Internet Time this will become visible in almost real-time, creating real political pain for the new president.
In contrast to what some people seem to believe, having the government take over the health-care system is not change. It's just a culmination of previous moves by government. And the areas with the worst problems today are areas that have the most government interference – education, health care and energy.
The best course of action is to allow a free-market economy to reallocate resources to the place of highest returns. In the midst of all the natural change, the last thing the U.S. economy needs is more government involvement, whether it's called change or not."
Consider Mr. Wesbury's points when you read about Obama's desire to tax and spend millions on government-directed technology. Or McCain's neo-environmentalistic refusal to let private enterprise drill for oil within sensible parameters for protecting said environment.
We've had great, productive change in America since the reversal of the economic malaise that ended with the Carter era. If we want it to continue, creating wealth and jobs for Americans who want to work and accept the American proposition of positive change, we had better listen to Brian Wesbury.
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