IS THE GOLDEN GOOSE COOKED?

Is economic growth over? 

For the last 100 years, the U.S. gross domestic product has grown 3 percent per year, on average.  But tax hikes and spending cuts scheduled to go into effect next year will send the economy back into recession, the Congressional Budget Office estimates. 

The CBO forecast doesn’t assess the effects of new federal regulations, the deteriorating situation in Europe, or the rising prospect of war in the Middle East.  So investment guru Peter Schiff — one of the few who predicted it — thinks the recession triggered by the subprime mortgage crisis was just the "overture."

 "The opera is coming," next year, or in 2014, he said.  There’s a 90 percent chance of collapse by April, predicts Max Keiser, who hosts a business and investment program on the BBC.

So batten the hatches. A big storm’s coming. But if misguided policies are reversed, will we return to "normal" growth, as most conservatives think?

Probably not, say economist Robert Gordon and investment adviser Jeremy Grantham.

The economy will grow in the future at less than half the rate of the past, Mr. Gordon predicted in a paper for the National Bureau of Economic Research.

Our old GDP growth rate is "gone forever," said Mr. Grantham, chief investment strategist for a Boston-based asset management firm.  He predicts future GDP growth will average less than 1 percent a year.

Economic growth is rare and recent in historical terms, and may have run its course, Mr. Gordon said.  "The rapid progress made over the past 250 years could well turn out to be a unique episode in human history."

From ancient times until near the end of the 18th Century, wealth grew barely when it grew at all.  Worldwide, the annual rate of economic growth worldwide in the 18th Century was just one third of one percent, according to economist Robert Solow in his seminal 1956 paper. 

Growth was even slower in most earlier periods.  "It is fairly clear that up to 1800 or maybe 1750, no society had experienced sustained growth in per capita income," wrote Robert Lucas, a Nobel laureate in economics, in a 2003 essay for the Minneapolis Fed.

Then, suddenly, growth spurted.  World economies grew three times as fast in the 19th Century as they had in 100 years before. World production grew at an average annual rate of 2.4 percent in the first half of the 20th Century, 4 percent in the second half.

Wealth exploded worldwide because of the vast increase in productivity generated by the inventions of the Industrial Revolution, from James Watt’s steam engine (1763), to cell phones.

But productivity gains from many Industrial Revolution innovations could happen only once, Mr. Gordon said, and they’re petering out.  Growth rates will plunge chiefly because population is growing more slowly, and resources — particularly energy — are getting more expensive, Mr. Gordon and Mr. Grantham said.

If they’re right, things will get ugly.  Before the Industrial Revolution, people thought the only way to get more wealth was to take it from someone else.  This sparked class conflict and wars of conquest.

I don’t think they are.  Mr. Gordon and Mr. Grantham are right that slower population growth — which means fewer workers and fewer customers — is bad news for the economy.  But they confuse cause and effect.  The Industrial Revolution triggered a population explosion, not the other way  ‘round.

They’re wrong about energy.  The fracking revolution indicates that all that stands in the way of lower prices and less pollution is government policy.

Why — after thousands of years of stagnation — did the Industrial Revolution break out where and when it did?  That’s the key question, but Mr. Gordon and Mr. Grantham didn’t ask it.

The answer is found in the ideas of two men.

People have God-given rights no king or parliament has a right to take away, John Locke said in his "Second Treatise on Civil Government" (1690).  Chief among them are liberty, and the right of a man to the fruits of his own labor.

When people are free to pursue their self interest, nations prosper, because people make mutually beneficial arrangements, Adam Smith said in "The Wealth of Nations" (1776).  The concept of win-win was born.  Another term for win-win is Laissez Faire Capitalism.

It’s no coincidence the Industrial Revolution broke out first and foremost in Britain and the United States, where the ideas of Locke and Smith took hold.

The root cause of economic growth is freedom.  Political freedom and economic liberty.  Growth-spurring innovation has declined in the United States because of government policy, not resource limits.  If Americans become as free again as once they were to pursue their dreams, and to reap the rewards from their hard work, economic growth will resume, probably at a higher level than ever before.

Resource limits often have been predicted, but rarely have come true, as the famous bet between ecologist Paul Ehrlich (The Population Bomb) and economist Julian Simon illustrates.  (Simon challenged Ehrlich to name any five metals he thought would become more  scarce.  After 10 years, the prices of all would go down, Simon said.  Ehrlich chose chrome, copper, nickel, tin and tungsten. They bet $1,000 on each.  Simon won on all five.)

Resource limits rarely appear because imaginative people create resources out of materials not previously regarded as valuable.  Petroleum was considered a pollutant until Canadian geologist Abraham Gesner in 1849 found that kerosene was an excellent substitute for whale oil (a declining resource at the time) in oil lamps.    The chief material ingredient in the computer chip is silicon.  We’re not likely to run out of sand anytime soon.

Most of us have difficulty seeing beyond the here and now.  Only a few have the imagination and the persistence of a Thomas Edison, who saw the electric light, the phonograph and the motion picture camera when no one else did.   When I was the age my daughter is now, I couldn’t have imagined the Internet, or cell phones.  Fortunately, others could. 

People like Edison, Eli Whitney (the cotton gin and interchangeable parts, the key to modern manufacturing), Cyrus McCormick (the mechanical reaper) , Clarence Birdseye (frozen food),  Henry Ford and the Wright Brothers are very rare . But I doubt such genius was restricted to 19^th Century America.

Thomas Edison was born in 1847.  The population of the U.S. was then about 23 million.  The population of the U.S. in 2010 was about 308 million – 13 times as great as in Edison’s day.  How many potential Edisons might there be among us, whose creativity is being stifled by overbearing government? 

When people are free to follow their dreams, prosperity follows.  Only free societies enjoy wide-spread prosperity.  Freedom – both political and economic – is the key to economic growth, to social and international peace, to human happiness. 

Freedom is the Golden Goose.  It’s unfathomable that the people who have enjoyed more freedom than any other in history would choose to reelect a man determined to cook it to death.

Jack Kelly is a former Marine and Green Beret and a former deputy assistant secretary of the Air Force in the Reagan administration. He is national security writer for the Pittsburgh Post-Gazette.