New Possiblities for Our Grandchildren; M. Skousen

Economics on Trial THE ~~!M~~ JUNE 1999 New Possibilities for Our Grandchildren by Mark Skousen "It would not be foolish to contemplate the possibility of a far greater progress still." -JOHN MAYNARD KEYNES l I n 1930, after the Roaring Twenties, John Maynard Keynes wrote an optimistic essay titled "Economic Possibilities for our Grand children." After lambasting his disciples who predicted never-ending depression and per manent stagnation, Keynes foresaw a bright future. Through technological improvements and capital accumulation, mankind could vir tually solve its economic problem within the next hundred years, he said. Goods and ser vices would become so abundant and cheap that leisure would be the biggest challenge. According to Keynes, capital could become so inexpensive that interest rates might fall to zero. Interest rates have not fallen to zero, but our standard of living has advanced remark ably since the Great Depression. In fact, we have probably already fulfilled Keynes's pre diction that "the standard of living in progres sive countries one hundred years hence will be between four and eight times as high as to-day."2 Mark Skousen (http://www.mskousen.com;mskousen @aol.com) is an economist at Rollins College, Department of Economics, Winter Park, FL 32789, a Forbes columnist, and editor of Forecasts & Strategies.See the next page for details on his newly published textbook, Economic Logic.

Can We Grow Faster? Today's economists don't appear to be as optimistic as Keynes, even as we enter anoth er year of a dynamic, full-employment econo my. I asked several well-known economists for recommendations that would give us sus tained (long-term, not short-term) economic growth rates of 6, 7, or maybe even 10 percent a year, eventually fulfilling Keynes's econom ic nirvana. "Not possible!" most of them exclaimed. "I think it's impossible to double the long-term growth rate in the U.S.," answered Harvard economist Robert Barro. David Colander of Middlebury College agreed. "The idea of dou bling economic growth in ten years sounds very much like a central planning goal of the former Soviet system." He quoted Herbert Stein: "Economic policy is random with respect to the performance of the American economy,but thank God there isn't much of it." Recently a whole book of essays was devot ed to charting a course toward higher growth rates. In the foreword to The Rising Tide, Dana Mead, CEO of Tenneco and former chairman of the National Association of Man ufacturers, rejects the notion that the U.S.

economy can't exceed its secular long-term growth pattern of around 3 percent a year. He 52 argues that faster economic growth is achiev able without creating shortages, rising labor costs, and higher interest rates. As Jack Kemp states, "We can raise the ceiling on growth by judicious changes in policy."3 Of course, not all the economists in the book agree with Mead and Kemp. James Tobin, Yale professor and Nobel laureate, declares, "Although politicians freely promise faster growth, governments have no handy set of tools for effecting it."4 Apparently he hasn't found the formula to fulfill his mentor Keynes's dream of universal opulence. Despite their skepticism of substantially higher growth rates, major economists do offer several ways to improve long-term prospects. Rudi Dornbusch of MIT recom mends privatizing Social Security and educa tion. Robert Barro urges a flat-rate consump tion tax, exemption of savings from taxation, deregulation of labor and business, and a 10 percent cut in the size of government. Robert Mundell warns against inflating the money supply as a growth tool and instead favors slashing capital gains and income tax rates to encourage entrepreneurship and investing. "A lower level of government spending would make more of the surplus of society available for capital formation and growth. A shift in government priorities from consumption and redistribution to social overhead capital, improved education, and investment in scien tific and medical research would go far in raising the productivity of capital with a per manent effect on growth."5 The Future Is Boundless My own view is that we are selling our country short by thinking that super-growth cannot be sustained over the long run. Imag53 ine how much advanced·our standards of liv ing could become if we • slashed government spending to its legit imate functions, which undoubtedly means less than 10 percent of GDP; • replaced the current tax code with a sim plified 10 percent flat tax; • privatized Social Security, or better yet, let Americans make their own plans for retirement; • established a sound money standard that discouraged malinvestment and the boom-bust business cycle; • established a fair system of justice that freed 90 percent of the lawyers in this country to become productive citizens; and • stopped interfering in foreign military affairs.

Imagine the breakthroughs in medicine, transportation, housing, telecommunications, and science that could take place by adopting this laissez-faire program. It boggles the mind to think that we could double or triple our liv ing standards in a short time. To quote Keynes: "Thus for the first time since his cre ation man will be faced with ... how to use his freedom from pressing economic cares, how to occupy his leisure, which science and compound interest will have won for him, to live wisely and agreeably and we11."6 D 1. John Maynard Keynes, "Economic Possibilities for Our Grandchildren," Essays in Persuasion (New York: Norton, 1963), p.365. 2. Ibid. 3. Quoted in Jerry 1. Jasinowski, ed., The Rising Tide (New York: John Wiley & Sons, 1998), p. xxi. 4. James Tobin, "Can We Grow Faster?," in ibid., p. 44. 5. Robert A. Mundell, "A Progrowth Fiscal System," in ibid., pp.203-04. 6. Essays in Persuasion, p. 367.

Professor Skousen's Economic Logic Now Available "EconomicLogic is a first-rate and exciting introduction to economics. It's clear and accessible, uncommon among today's textbooks." -DON BOUDREAUX The first volume of Mark Skousen's breakthrough college textbook, Economic Logic, has just been published. This "micro" text ?overs s.upplyand deman~, m~nopoly vs. competition, entrepreneurship, wages, capItal and Interest, and the fl~anclal markets. Economic Logic is a no-compromise freemarket college textbo?k, ~Ith a hands-on approach (it begins with a profit-and-Ioss income stateme~t). Pnce IS $29.95 each. Sen~ your order to: Skousen Publishing Co., P. O. Box 2488, Winter Park, FL 32790, or e-mail Mskousen@aol.com.Instructors should e-mail requests for a review copy.