Growing Pains

From Barrons:

Goosing growth is the only way out of this mess.

HOW ARE WE GOING TO GET OUT OF THIS MESS? We face recession, a banking crisis and mammoth government debts. We face either deflation or inflation, if not both, one after the other. We practice protectionism and internationalism at the same time. Our politics can no longer be called a system -- just a cat fight.

Solutions are not in short supply, of course: Stimulus spending, financial regulation and austerity are popular forms of change. So are business bailouts, authoritarian environmentalism and generalized activism. On the fringes we find such nostrums as soaking the rich with taxes, a return to the gold standard and radical redistribution of wealth.

We can't count on any of them.

They have a common flaw. It's the belief that there's one misdeed at the root of our mess, so that repenting of our economic sin will restore the prosperity we enjoyed so much so recently.

Let's face the fact that much of our recent prosperity was borrowed from the future. It must be paid back with economic growth.

Losing Ground

A society that grows at an average 1.8% a year (as the U.S. economy did from 1973 to 2001) will double its income in 39 years. We certainly can't grow our way out of our debts to the next generation that way.

At recent Chinese rates of growth -- let's say 10% per year -- income doubles every seven years. The Chinese are growing their way out of the economic malaise imposed by their former political system. Note well, as the Chinese do, that doubled income means people can spend on things and services that also double in number and quality, also every nine years.

China's adoption of capitalist methods has lifted more people out of poverty than all the world's foreign aid since World War II. Imagine if the U.S. were growing like that. We might be able to pay off our debts to our elder generation and our foreign creditors.

In some circles, however, growth like this is considered a gigantic problem. "China cannot continue along its current path because the planet can't handle the strain," declared Paul Krugman, a Nobel-prize-winning economist and New York Times columnist. He called recently for tariffs on Chinese exports to force the Chinese to stop using so much coal. "Letting China match the West's past profligacy would doom the Earth as we know it," he said. Is that protectionism? "So what?"

Lester Brown, founder and chief visionary of the Earth Policy Institute, goes Krugman one better. In an article in Scientific American, Brown raised the specter of food shortages that destroy civilization. Rising populations and rising incomes, he warned, mean rising food prices, falling water tables, and eroding soils. Rising temperatures compound the problem, he added.

"The world is in a race between political tipping points and natural ones," Brown announced. "Can we close coal-fired power plants fast enough to prevent the Greenland ice sheet from slipping into the sea and inundating our coastlines?"

Beyond the apocalyptic rhetoric, there is an economic truth: China's use of coal, particularly to generate electricity, is very inefficient. The country produces half as much as the U.S. and generates more carbon dioxide in the process. But this is also an opportunity: Chinese prospects for sustainable economic growth include more efficient use of energy and labor. India, Vietnam, Indonesia and other developing countries also can meet the challenge of energy efficiency as well as or better than the U.S. (which itself is 50% behind the world's leader in energy efficiency, Japan).

Growing Up Faster

The idea that America can grow at 8% a year is not usually open for discussion. The U.S. is already the world's richest nation. It has an economy twice as big as China's, and its per-capita GDP is 10 times greater than China's. The U.S. is criticized around the world for sucking up resources, not praised for creating them.

Imagine what Krugman and Brown and their ilk would think of a restarted American economic engine, growing at 8% a year by the application of some unexpected technological advance, such as fusion energy, highly efficient batteries, or widespread biotechnology. They would see it as disaster.

In the current economic mess, it's easy to believe that the U.S. has reached a point where there are diminishing returns to the usual forms of investment. Putting more people to work at the same tasks doesn't do as much as it used to. Putting more capital equipment to work at the same tasks doesn't do as much as it used to. We have even found that higher leverage -- borrowing more to get more work out of every dollar of capital -- has its drawbacks. Should we rest content with what we have, even if recession and debt payments force us to have a little less?

Quite the contrary: We should press forward with investments that offer chances to improve the efficient use of key economic inputs. Just as the computer revolution that started in the 1960s has improved the quantity and quality of some kinds of labor, the biotech revolution that started in the 1980s may improve the productivity of agriculture.

Clairvoyance

The future is not clear. Those searching for a vision will select a vision they want. Krugman and Brown are among those who envision a future of greater government control for the greater good. Naturally, they have their fans. We prefer visionaries along the lines of Freeman Dyson, who expects technological solutions to the same problems.

If the question is carbon dioxide emissions, the answer could be bioengineered plants that make more efficient use of carbon dioxide. Shortage of water? New desalinization technology. Living space? Maybe hollowed-out asteroids accessible with cheap space travel. "Infinite in all directions," as Dyson put it in a book title.

The American economic policy should be to wait and see. Not injecting false stimulation to fool consumers into unwarranted confidence; encouraging genuine investment with prospects for big profits in the long run. Not soaking the rich; letting producers keep more of their earnings. Not "cap and trade"; nuclear power. Not corn-ethanol mandates; free-market fuel at free-market prices.

Not stagnation; growth for the world.