The Cure for Our Economy’s Stationary State

 Adam Smith knew what ails us—and he prescribed the cure.

Jesse L. Jackson Jr. has been suffering from “a mood disorder.”

He is not alone. The world economy may not be in a depression as bad as that of the early 1930s. But it’s certainly got emotional problems.

A year ago, according to Gallup, economic confidence in the United States plunged, touching bottom in late August. It then rallied, only to start sliding again with the arrival of summer. Sunshine doesn’t seem to work like it used to.

What is going on?

The answer is that much of the developed world, including the United States, is stagnating. The founder of economics, Adam Smith, had a term for this. He called it “the stationary state.” In his day it was China that looked stationary: a once “opulent” country that had simply ceased to grow. Smith blamed China’s unfavorable institutions—including its bureaucracy—for the stasis. He also noticed how the stationary state favored the super-rich and civil servants, leaving poor laborers to slide toward subsistence wages.

Now the boot is on the other foot. It is Westerners who are in the stationary state, while China is growing faster than any other major economy in the world. The World Bank expects the European economy to contract this year and the U.S. to grow by just 2 percent. China will grow as much as four times faster than that.

The mood disorder is especially bad for investors. Only seven out of 47 national stock markets around the world have posted gains in the last 12 months.

The currently voguish explanation for the slowdown is “deleveraging.” The argument is that the excessive debts the West ran up in the past 10 or 20 years are now acting as a drag on growth. Households and banks are desperately trying to reduce their debts, having gambled foolishly on ever-rising property prices. To prevent this process from generating a lethal debt deflation, governments and central banks have stepped in with fiscal and monetary stimulus. That helps for a time, but it ultimately transforms a crisis of excess private debt into a crisis of excess public debt.

Yet more is going on here than deleveraging. Consider this: the U.S. economy has created 2.6 million jobs since June 2009. In the same period, 3.1 million workers have signed up for disability benefits. Back in 1992 there was one person on disability benefits for every 36 people in employment. Now the ratio is 1 to 16. Unemployment is being concealed—and rendered permanent—in ways all too familiar to Europeans.

The stationary state is literally stationary. People claim to be disabled. And they also stay put. Traditionally around 3 percent of the U.S. population moves to a new state each year. That rate has halved since the crisis began. You can’t blame all this on deleveraging.

Question: if you want to open a lemonade stand in New York City, how long does it take to jump through the necessary bureaucratic hoops?

The answer is 65 days (including a wait of up to five weeks for your Food Protection Certificate). That’s the kind of crazy red tape that development economists like Hernando de Soto used to blame for Third World poverty.

So is there any way out of the stationary state? Smith made it clear that he thought imperial China’s sclerotic “laws and institutions” were the root of the problem. More free trade, more encouragement for small business, less bureaucracy, and less crony capitalism: these were his prescriptions. Well, we can live in hope that such policies get adopted by the next occupant of the White House.

The alternative is to escape stagnation through technological innovation. One man who seems to have declared war on stasis is Elon Musk, the South African–born engineer-entrepreneur who, in the space of just a few weeks, has celebrated both the docking of his spaceship Dragon at the International Space Station and the launch of his electric car, the Tesla Model S.

I met Musk for the first time earlier this summer and was captivated by his energy and vision. Whenever the prevailing mood of economic gloom gets me down, I remind myself that it was men like Musk who—for fully two centuries after Adam Smith published The Wealth of Nations—propelled the West onward and upward simply by doing things that their contemporaries considered impossible.

It is time to shake off the “mood disorder” caused not just by excessive debt but also by excessive bureaucracy. Only entrepreneurial optimism can get us out of the stationary state—and moving again.

Newsweek/Daily Beast
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