Monday, December 27, 2010

Where are we going?

So where are we going?

The better question may be: are we going up or are we going down? It is in our human nature to see the sky falling, believing the world is going to hell in a hand basket. Can we even see the sky when our gaze is on each tedious step we take through the muck and mire of daily life? I'll be first to admit it's hard to be an optimist even if all the evidence that has come before predicts a better future than the past.

When the Soviet Union collapsed twenty years ago I saw a spectacular future for the world. To me the Cold War represented shackles on all of humanity. I was convinced that much of humanity's potential and Earth's treasure was wasted on waging the MADness of the U.S./Soviet conflict. Well, as it turns out there were shackles holding us back. The Cold War wasn't holding back astounding human potential, it was holding back pent up conflict in every little corner of the world. Face it, the twenty years that have passed since the end of the Cold War have been a major disappointment. How could I have been so wrong?

I am ready to admit my naivete. Yet, according to people like Matt Ridley, Thomas Sowell and Peter Dupont there is still reason to be optimistic. The good old days weren't all that good.

Still, considering the state of affairs the world finds itself in am I really the one being naive?

One of the problems with my perception is that I live in times when changes in the human condition are readily apparent. Up until about two hundred years ago the pace of change in daily life was glacial. Since then the transportation of people and goods (ideas and trade) has set the world on a breakneck pace. According to Matt Ridley's book "The Rational Optimist" (hat tip to Al Fin) trade and specialization has been responsible for the blessings of prosperity we have enjoyed since the 19th century. The way the average Westerner lives today is radically different than the way our ancestors lived in the 1770's. Our colonial fore-bearers had more in common with the humans who battled the mammoths ten thousand years ago than with us.

We tend to see everything in the here and now, failing to consider there were dark times and dire predictions many times before and yet mankind forged ahead. Things were pretty bleak in the American heartland in the 1930's. What must Europeans have thought about their future as the smoke cleared in 1945?

Looking at the state of affairs here in the United States one can easily conclude we are heading downhill and fast. Ridley acknowledges in his book that the U.S. and his homeland of Britain may be in for a rough couple of decades, but progress, innovation and specialization continues. Trade with China and India has moved capital and jobs where it is more efficient for the time being. History shows that when one power contracts financially another expands. It took significant political an economic changes in these emerging economies to ensure that progress and prosperity continue unabated. Refreshingly Ridley reinforces what most people know instinctively (whether they will admit it or not) that prosperity is a positive benefit to all of humanity and not some planet-destroying consumerist nightmare. Additionally, it is individual freedom that results in millions of transactions of personal choice and not government planning or humanitarian drivel that is the primary engine of prosperity.

To that point Thomas Sowell shows us in his book "Economic Facts and Fallacies," how the use of undefined terms and non-evidenced based assumptions are used to manipulate an uninformed public. Much of the financial, political, and psychological basis for left-wing policies are shibboleths and canards. When everything is structured in the language of social justice, racism, sexism, fairness and inequality it weakens the pillars of a prosperous society. This is what has happened to the American psyche over the past 40 years. We have talked ourselves out of our place as the economic leader of the world even while we still are. While there is always an element of truth in the doomsayers proclamations their heavy handed prescriptions applied with a brute force of the courts almost always burdens society with terrible, debilitating and unintended consequences.

And yet humanity overcomes to create even more with less.

We have seen this with our own eyes, more than once. Doomsayers predicting the collapse of economic and environmental systems are as old as the written word. Today's global warming or climate change if you will, is only the latest sky is falling narrative. The real danger here is that coordinated efforts by governments and NGO's can enact policies that will shackle rich, energy consuming societies in favor of poorer nations, when in the end the charlatans themselves will be the only real beneficiaries.

The same is true for the financial manipulators. There is a fine line between debt and disaster. A monetary and fiscal system reliant on debt can't make debt the enemy and the savior through manipulation and continue to create prosperity. It takes debt to inject new money into the system, providing the fuel for wealth creation. However, the use of massive amounts of government debt as we are seeing today can't succeed due to the inefficiencies of forced redistribution. Such government spending drains private capital through higher taxes, increased debt burden or inflation. Right now with taxes and hyper-inflation held in check the looming debt burden actually leads to deflation fears. Nothing is more dangerous to prosperity than deflation.

On one side you have the debt scare mongers and on the other the government panacea. Neither side has exclusivity on truth, but this statistic is telling: since the end of World War II, average annual Federal government spending was a relatively consistent 19% of gross domestic product, but in the last few years it has spiked up to around 24% or 25%. If you were to include state and local spending, total government spending is now probably about 50% of GDP. We have seen a proportional dip in our economic prospects as a result. With much of the government spending going toward transfer payments via social programs overall prosperity suffers the inefficiencies of government ineptness.

Is there new hope that the government beast will be tamed? I'm skeptical. The Republican track record during the Bush era was hardly different than the Democrats. It is hopeful thinking on The Wall Street Journal's Peter DuPont's part to believe that "when the Republican House comes into session there will be new rules, new procedures, and very new thinking about what the government should be doing."

DuPont does offer this The Wall Street Journal sentiment that I wholeheartedly agree with... "The single most important result of the November 2 election is the marginalization of the House Democratic left... Paul Ryan has replaced Barney Frank as the most prominent House spokesman on economics."

Amen to that!