Are We Entering The Great Stagnation?

Includes: AAPL, LNKD, QQQ
by: Investment U

By Dr. Mark Skousen

Has the Great Recession turned into the Great Stagnation?

One of the most popular debates at this year’s FreedomFest in Las Vegas, was between high-tech experts Peter Thiel and George Gilder. It was entitled “Future Shock: Has Technology Stalled in America?” Peter Thiel is the co-founder of PayPal and an early investor in Facebook and LinkedIn (NYSE:LNKD). He’s also a member of the Forbes 400 Richest People in America.

Thiel’s views are similar to those of GMU economist Tyler Cowen, who wrote a controversial book this year titled "The Great Stagnation." In the book, he argues that technology has reached a long-term plateau and that median wages have stagnated or grown slowly since the 1970s. All this, despite the introduction of the Internet, cellphones and personal computers.

Peter Thiel endorsed Cowen’s book, which is surprising given Thiel’s success in new technology. Cowen’s title reminds me of the infamous “stagnation thesis” proposed in the late 1930s by Keynesian economist Alvin Hansen. Under the influence of the Great Depression, Hansen argued that the frontiers of technology were over. He proved to be utterly wrong. It almost ruined his career.

Four Examples of Slowing Technology

In his talk, Thiel pointed to four examples of slowing or negative technology:

  • Transportation has slowed down (it now takes longer to fly coast to coast;
  • Energy prices are rising, including alternatives such as nuclear, solar, battery, etc.;
  • The FDA has made it too expensive to develop new medical breakthroughs and drugs;
  • Education has become too expensive.

Of course, Thiel and Cowen blame the slowdown in technology largely on government interventionism.

George Gilder took the opposing view. He is a supply-side economist and the Editor of the Gilder Technology Report. He is the author of some of the most influential books, including "Wealth and Poverty," "Microcosm and Telecosm," and was the one who popularized Moore’s law. Moore’s law states that computer power doubles about every 18 months and costs fall by half.

Gilder is more optimistic about the ability of venture capitalists and the tech entrepreneurs to overcome the heavy drag of government. He notes that Moore’s law continues to hold decades after Gordon Moore first described the process. In every decade, we have seen a 100-fold increase in computer power and a 524-fold increase in bandwidth, which is why you can now see movies on your cellphone.

Online education is a point ignored by Thiel and Cowen. It’s a classic example of democratic capitalism, of turning luxuries into necessities (to quote Andrew Carnegie). With eTextbooks being all the rage on campuses, textbook prices are falling sharply for the first time due to this technology. I just wrote an entire course on personal finance called “Dollars and Sense” for Grantham University without charging students anything for supplementary reading.

I tend to side with Gilder. So does Steve Forbes, who had to cancel at the last minute due to emergency surgery for prostate cancer. In a recorded video I had with Mr. Forbes right before the conference, he said that the U.S. economy will always produce inventors and technological breakthroughs.

“Entrepreneurship is alive and well in the United States,” he said.

Benefiting From Dynamic Capitalist Advances

Many pundits, like Tyler Cowen, argued that real wages and our standard of living declined in the past 40 years. They derive their pessimistic views from “median real per capita income” released by the U.S. Labor Department.

But this aggregate measure is quite misleading. It’s simply wrong to say that real wages/standard of living peaked in 1971. In their book, Myths of Rich and Poor (2000), economists Michael Cox and Richard Alm demonstrate that real wages aren’t the right tool to measure living standards.

Rather they rely on the buying power of a “typical manufacturing worker” and the typical consumer. They show that the average worker and consumer live in a bigger house, have more useful products (such as microwave ovens, cellphones and personal computers), and have better goods and services (such as their automobiles).

The fact is that the quantity, quality and variety of goods and services have increased dramatically since 1971. And the rich aren’t the only ones to benefit. All income classes have benefited from these dynamic capitalist advances. Even women and minorities share in rising living standards. Moreover, there’s plenty of evidence that the poor and middle class don’t stay that way, but move up the ladder.

Here’s a way to test the stagnationists’ hypothesis: Check the Nasdaq 100 Index (NASDAQ:QQQ). The Nasdaq 100 has stagnated since early 2000, when it hit 4500. Today, it’s at just north of 2100, less than half its all-time high.

Advantage, stagnationists.

However, if we take a longer view, the advantage goes to the technology bulls. Since its inception in 1985, the Nasdaq 100 is up over 20-fold (from 100 to 2400)!

I suspect we’re due for another run-up in technology. Apple (Nasdaq: AAPL) may be leading the way. It doubled in the past year.