Nowadays, it seems pessimism is the only rational attitude. But if you take the long view, it's more rational to be optimistic. Hence the title of a fabulous new book, "The Rational Optimist," by Matt Ridley. I was so delighted, amused and uplifted by it that I bought a couple hundred copies and sent one to all my clients.
The key concept in the book is that ideas can have sex, just like people. They can meet, date, marry and start families. Through sexual reproduction, ideas spread. The child ideas live lives independent of the parent ideas, and they in turn have sex and have their own children. And over generations, they evolve, and maybe even improve.
Ridley, an accomplished science writer, traces the entire history of the human race in terms of the increasing power of ideas to have sex and reproduce -- and thus to improve the human condition.
Now how is this relevant to the economy or the markets?
For one thing, it means that as long as ideas can continue to evolve, then the world will never run out of opportunities to grow. As long as there can be growth, there can be investment opportunities -- no matter how bad things seem at some of the darker moments, such as right now.
A corollary is that growth opportunities are most plentiful when ideas are given free range to evolve and that they are scarce when ideas are suppressed.
Based on that, we live in the best possible time for growth opportunities. With the Internet connecting all ideas in the world and across time at the speed of light and at virtually no cost, ideas can be more promiscuous than ever before. That means more new ideas, more evolution of ideas, and therefore more growth.
But there's a darker corollary, too. We can't treat it as a given that ideas will remain as global and as free as they are right now. There have been times in history when the free flow of ideas across borders has been blocked. Those have been times not of growth, but of depression.
The best example is the Great Depression of the 1930s. There are many theories about what caused it, but one proximate factor has to be the 1930 passage of the Smoot-Hawley Tariff Act. It raised taxes on imports coming into this country, and our global trading partners retaliated by raising their own taxes on U.S. exports.
The first result was a collapse of global trade. But perhaps the most important result was the collapse of global ideas. Trade embodies ideas because the goods and services that are traded are all based on ideas. Stop trade, and you stop ideas.
Suddenly, after Smoot-Hawley, ideas in the United States could have sex only with other ideas in the United States. Ideas in England could have sex only with ideas in England. And so on. So ideas quit giving birth to new ideas, and the ones that were born were the product of inbreeding.
Franklin Delano Roosevelt campaigned for the presidency against Herbert Hoover in 1932 by promising to dismantle Smoot-Hawley. It took him most of the next decade, but he did it. Of all FDR's efforts to fight the Great Depression, I believe that was the most significant, and the least appreciated by students of economic history.
Which brings us to the present. This week, the House of Representatives will vote on a new trade bill that could be Smoot-Hawley all over again. In fact, it's actually an amendment to Smoot-Hawley which, believe it or not, is still on the books after all these years.
The bill is aimed straight at China. It's designed to make Chinese goods imported to the United States more expensive so that hopefully we'll buy fewer of them. Supposedly, that will help American jobs -- but it's a mystery to me how any jobs would be created by raising prices on imported goods for every American who shops at Wal-Mart (WMT), which is to say nearly every American.
Here's how it works. The bill gives the Commerce Department the power to declare that China is manipulating its currency, the yuan -- keeping it deliberately undervalued, so that Chinese goods seem artificially cheap when priced in dollars. Commerce can then adjust the price of Chinese goods sold here by whatever degree they think the currency is being manipulated -- the number 40% gets thrown around a lot, as an estimate. With that adjustment, Commerce could calculate that Chinese goods are being sold in the U.S. at prices lower than their cost of production -- a tactic known as "dumping," which allows the United States to set up countervailing tariffs as punishment.
If the U.S. were to inflict such punishment, China would retaliate. That's what happened in the 1930s. It's called a trade war.
We are China's largest export market. China is one of America's top export markets, and it is the biggest for many important U.S. products such as soybeans. So if this new bill becomes law, it wouldnâ??t just be a trade war, it would be a nuclear trade war.
But in terms of Ridley's paradigm, the secondary damage of such a war could be worse than the immediate catastrophic loss of trade. It would be the loss of the power of U.S. ideas to meet, interact with, have sex with and have children with Chinese ideas, and vice versa.
Long term, I'm a rational optimist like Ridley. But short term, I'm a little worried. Something that Ridley doesn't mention is that bad ideas can have sex, too, and their children can be nasty little creatures. There's no nastier an idea than protectionism. And the House of Representatives is about to give birth to it.
If and when it does, and if it looks like the Senate might go along when it reconvenes after the election, that would be a signal to get out of stocks for a while because it would be a real threat to growth. I'm betting that it won't come to that.
But it's a real risk that we rational optimists have to keep our eyes on.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.
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