Warren Buffett Is Half Right
The American economy today faces many threats, but perhaps the biggest is a sense of diminishing expectations.
Expectations play an important role in economic growth. Central banks engage in inflation targeting because they hope it will help establish consumer and investor expectations about future price movements. Likewise, the outlook for future economic growth can help stimulate or suppress consumer and investor behavior. And, right now, economic fear and pessimism are being compounded by diminished growth expectations.
In the current issue of Foreign Affairs, for example, several essays are dedicated to the proposition of "surviving slow growth." In his latest newsletter, Bill Gross of Janus Capital says our entire economic system is "running out of fuel."
Warren Buffett, in his annual letter to Berkshire Hathaway shareholders, is slightly more optimistic than this, saying, "now is no time to start" betting against the American economy. Yet at the same time, Buffett seems resigned to slow growth. Historically, the United States has enjoyed roughly 3 percent annual economic growth. Today, we're only just above 2 percent, and forecasts don't go much higher than that.
Don't "bemoan" 2 percent growth, Buffett says. It is, after all, better than 1 percent! This is mathematically true, but Buffett is only half-right. He is correct that giving up on America is a bad idea.
We should not be satisfied with 2 percent, however, and Americans should demand higher expectations from our commentators and leaders. Economic pessimism begets economic populism, creating a self-fulfilling prophecy of low growth and stagnation.
Happily, there are many reasons to be optimistic about the future of the American economy. In our recent book, The Good Economy, we address the case for pessimism and make the argument that the United States is actually on the cusp of a period of rapid growth and broad prosperity. Why?
The principal reason is technology. From cloud computing and smartphones to 3D printing and artificial intelligence, the United States is currently enjoying a period of technological change nearly unmatched in its history. What is important here is that millions of individuals and businesses are now in the process of applying these technologies in different sectors of the economy. That diffusion process is what will help drive renewed growth.
A second reason is entrepreneurship. It's well known by now that, today, business creation in the United States is below the rates of the 1980s and 1990s. But, for a variety of reasons-including the technological changes mentioned above, demographics, and geography-we believe the country is about to enter a period of stronger entrepreneurial activity.
The oldest members of the Millennial generation will turn 34 this year; the youngest will turn 14. Over the next several years, we will experience mass entry into the workforce of this generation. Importantly, Millennials have yet to reach the "peak age" for entrepreneurship, which is around age 40. As millions of young people enter their 30s, the number of American entrepreneurs should therefore rise as well.
Much of this entrepreneurial activity, moreover, will be spread across the country. As detailed by James Fallows in a recent Atlantic essay, and as explored by Steve Case in his forthcoming book, The Third Wave, entrepreneurial renewal can be found in nearly every corner of America. Entrepreneurship and growth in America will be stronger over the next ten years precisely because they will not be confined to usual hotspots like Silicon Valley.
The seeds of higher growth are thus being planted right now in places like Buffalo and Cedar Rapids and Fargo. Entrepreneurs and innovators and civic leaders in those cities and elsewhere will not be content with 2 percent growth.
It is possible to be optimistic without being Pollyanna, and our economic optimism is tempered by realism. The United States faces undoubted challenges to its prosperity and growth. Millions of Americans need help in adjusting to technological change. We need greater public investment in certain areas, but that is hampered by political dysfunction. And in some sectors, it really does appear as if innovation has slowed.
The place to start is with our own expectations. Americans have never settled for economic resignation, even in the face of steep challenges. There are ample reasons for optimism today, and millions of Americans have already taken it upon themselves to renew entrepreneurship and growth. Our leaders should recognize this. Expectations can be self-fulfilling, and people will respond to the expectations they face.
Why don't we help Americans out by setting our sights higher?
