There was an excellent column in the July 23-30 NEWSWEEK by Niall Ferguson. He reviewed Adam Smith who coined the term "Stationary State". In Smith's time, the prime example was China. A once prosperous and innovative nation that simply ceased to grow. Smith blamed Chinese culture and institutions, particularly its bureaucracy. He noticed that the bureaucracy favored the rich and civil servants at the expense of labor who slid toward subsistence.
Today, the stationary states are in the West while China has the fastest growing economy in the world. Europe's economy is expected to contract this year according to the World Bank. The U.S. growth rate is 1.5%. China is growing four times as fast. This is terrible for investors. Only 7 out of 47 major national stock markets around the world have posted gains in the last 12 months.
Most people blame our current state ( and Europe's ) on deleveraging. Households and banks are trying to reduce their debts having foolishly bet on ever increasing property values. To prevent a lethal debt deflation, governments and central banks have stepped in with fiscal and monetary stimulus. It might work short term but we are seeing the replacement of excess private debt by an excess of public debt.
But Ferguson points out that a lot more than deleveraging is going on. Since June 2009 the U.S. has created 2.6 million net new jobs. It has also added 3.1 million people to the Disability rolls. In 1992 for every person on Disability there were 36 people working. Now it is 16 workers for every "disabled" person. Ferguson calls this "concealed unemployment" and of course it is becoming permanent. Just like " the dole" in Europe.
China became more and more stationary in the 18th and 19th centuries. So are we. Literally The rate of people moving from one state to another has gone from 3% before the Financial Crisis to less than half that now. A prime cause of poverty in China and in post-Colonial India ( and dozens of other 3rd World Countries) was bureaucratic red tape. China made it impossible to start new businesses. So did India. Ferguson charts how long it takes to open a lemonade stand in NYC - 65 days.
Adam Smith had a prescription for China that they are finally following after centuries of poverty and stagnation : more free trade, more small businesses, less bureaucracy and less crony capitalism. Another way to escape stagnation that China stifled is technological innovation. For centuries innovation was discouraged leaving China militarily and economically weak. Contrast China with Japan under the Emperor Meiji. In 30 years Japan went from a medieval feudal state to a regional power. 20 years later it was a World Power while China was being carved up into "spheres of influence". For decades India tried to preserve its "culture" , traditions and jobs for unskilled labor by erecting barriers to automation, among other things. That reminds me of the famous story of when Milton Friedman was touring India. ( It took them DECADES to start listening to "Uncle Miltie" btw.) He saw an irrigation project with hundreds of guys using picks and shovels. He asked why modern earth moving equipment was not being used and was told that it would displace the workers he was watching. Friedman said : "Why not take away the picks and shovels and replace them with spoons ? " It ought to be remembered that India's recent boom took place in spite of and sometimes in direct defiance of India's government. It was a totally private sector driven embrace of technology and innovation. While he was primarily responsible for India's independence , nothing retarded Indian development more than Gandhi's socialist and traditionalist prescriptions.
Why do we enjoy the wealth that we do today ? We can tip our hats to capitalism , to government assistance to industry but the primary reason is technological innovation. What results in more wealth creation than anything else ? Technological innovation. Unless and until we make it easier to innovate we risk falling in with pre-Revolutionary China, the post-colonial 3rd World and of course, Europe and Japan.
Germany's median age is 45.3. So is Japan's. it is 43.8 in Italy and 42.8 in Greece. See a pattern ? In the U.S. it is 37. One of the biggest problems with "Old Europe" is that it is literally old and getting older. In Greece and Spain, 50 % of those under 25 are unemployed. In the U.S. the good news is that the average person is 28 years away from eligibility for Social Secuirty and Medicare. The bad news is that most members of Generation X and Y do not own any assets of their own. And with reverse mortgages becoming so popular, even fewer will inherit the family home.
I'll give you my suggestion for the most timely and essential innovation that is not only needed now but long , long overdue : A massive research project to figure out what works in medicine and what does not. Huh ? WHAT ? Yeah, that's right. 20 years ago doctors were prescribing PSA tests for men and hormone replacement therapy for women. Now we know the former is not necessary and the latter does more harm than good. We know now that occult blood testing is just as effective as a colonoscopy and is a LOT cheaper. We don't know if tiny ductal carcinomas in women's breasts are worth worrying about. So I say to lock Microsoft , MIT , The Mayo Clinic and The Dept. Of Health and Human Services in a room and let them come up with a program of statistical analysis to figure out what works and what doesn't in medicine. That way Medicaid and Medicare can limit payment to effective treatments and stop paying for what doesn't.



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