A conversation with macroeconomic strategist and author David Smick.
When Nantucket summer resident David Smick released his first book The World Is Curved nearly a decade ago, the world indeed took notice. Smick’s bestseller was lauded by the likes of New York Times columnist David Brooks as an “astonishingly prescient” look on international business and globalization. The World Is Curved was translated into dozens of languages, won awards, and sold every copy in China within two and half weeks. Most recently, Smick released The Great Equalizer, and N Magazine spoke with the author to find out what he sees in the country’s economic future.
N MAGAZINE: What’s striking about your new book is that it is endorsed by both Republican House Speaker Paul Ryan and Obama’s economic advisor Larry Summers. What’s the message?
SMICK: Under both George W. Bush and Barack Obama, the U.S. economy began losing its dynamism. The economy grew at subpar rates. Main Street economic risk-takers began holding back. Productivity growth (that is, doing more with less) is essential to a robust economy. Yet the rate of productivity expansion declined dramatically. That’s in part because innovators were starting firms at half the rate they did fifteen years before. Newer firms found it difficult to survive and invest in new expansion. Folks in the lower middle class suddenly found it a lot tougher to move up the ladder of opportunity and success. The rise of Bernie Sanders and Donald Trump, I predicted, was inevitable.
N MAGAZINE: You say “growth is everything.” Explain.
SMICK: Almost everything. The long-term implications of subpar growth are stunning. From 1789 until 2000, for example, the U.S. economy grew at an average annual rate of more than 3.5 percent. Today? Less than half that rate. Here’s the thing: Had our economy since its founding grown at today’s mediocre growth rate, America today would have the per capita income of Papua New Guinea. Whether you’re a liberal or conservative, here’s the troubling fact: Almost half of American families can’t afford a $400 bill for an unexpected medical emergency or car repair. A message for Nantucket.
N MAGAZINE: So how do we raise the growth rate?
SMICK: Washington policymakers continue to peddle top-down, centrally engineered schemes. Yet the world, from Facebook to ISIS, is in the midst of a bottom-up revolution. The process of innovation-driven growth is an evolutionary one. It is difficult to control and predict. But we can nurture the process, first by establishing a level playing field. We need a series of reforms relating to anti-trust, patents, and banking that reverse the current bias in favor of the established corporate sector at the expense of the small business/innovative startup sector. Washington should also provide government support in a lot more communities for a more effective ecosystem that improves the connection between entrepreneurs and the academic and funding communities. Vouchers should be available to lower income families to help them move from sections of the country with low job growth to more vibrant areas where businesses and jobs are being created.
N MAGAZINE: What’s your game plan?
SMICK: There is a theory called Secular Stagnation that argues that the economy faces intractable demographic and technological headwinds. Economic mediocrity is baked in the cake. But the problem may be less secular stagnation and more policy stagnation. My book lays out fourteen bipartisan policy changes that need to happen quickly. We need a series of paradigm shifts that change the nation’s expectations toward the future. Average folk need to be encouraged to dream big and dare big. But this requires a system in which Goliath doesn’t always win.
N MAGAZINE: Are you optimistic toward the future?
SMICK: I’m cautiously optimistic because I believe the American people are not going to give up on the American Dream without a fight. On the economy, the economist John Maynard Keynes was right when he referred to the essential role of the economy’s “animal spirits.” Attitude is everything. Public attitudes became more optimistic in the 1980s and again in the 1990s. In both cases, a kind of paradigm shift occurred. Americans began to believe in their destiny. The economic turnaround came quickly. It could happen again. The stock market is telling us the economy has a lot of pent-up energy. It is ready to soar.
Another reason for optimism: The world is awash in capital. In the near decade since the financial crisis, capital has poured into the U.S. economic and financial system at twice the rate as during the decade before the crisis. America has been a global investment magnet, and it’s not just rich Chinese and Russian families investing. German investors have been buying mid-size U.S. companies at aggressive rates. This situation is not likely to change anytime soon no matter how reckless President Trump’s tweets become. It is as if America, despite its flaws, keeps winning the global ugly person beauty pageant.
There’s no question our problems are serious. With the rise of Artificial Intelligence (AI), for example, at least half of American jobs could someday be done by a machine. Yet America still has the building blocks for higher growth. Compared to the rest of the world, we have advantages, including in technology and energy. And we enjoy a culture that still tolerates innovative risk-taking and failure — and respects the rule law. The American Dream is still alive. Women in America, after all, are starting new businesses at twice the rate of men.
N MAGAZINE: At today’s valuations could you see a major stock market reversal or even a crash?
SMICK: Certainly the global financial system is safer today than it was in 2007 just before the Great Financial Crisis. It is unlikely that a systemic crisis will stem again from the banking system. But it is still far too early to declare complete victory. The financial system has yet to feel the full effect of technological disruptions. I agree with the market analyst Mohamed El-Erian who argues that certain segments of the non-bank system are in the grips of a “liquidity delusion.” In other words, some products risk overpromising the liquidity they can provide for transactions in high yield and emerging-market corporate bonds that are particularly vulnerable to market volatility. Like most analysts, I’m also worried about a so-called “Black Swan” event — some completely unanticipated geopolitical, governmental or market-related crisis. But we’ve survived them before, and will so again.
I’m not as worried about the Federal Reserve returning short-term interest rates to their historic levels. When the Fed several years ago ended its quantitative easing (bond buying to keep interest rates low), the financial response was surprisingly minimal. Stock prices kept rising. For the Fed, the wild card is the potential for global capital seeking a safe haven to rush into long-term U.S. government bonds. Long-term rates drop even as the Fed is raising short-term rates -– a tricky situation that has historically been destabilizing to the financial system.
N MAGAZINE: What do you mean when you say “we desperately need to rewrite a new narrative and that the clock is ticking”?
SMICK: I buy the argument offered by Robert Shiller of Yale that at the center of a healthy economy is a compelling narrative. The more that consumers, investors and the entrepreneurial sector believe in the narrative, the more confidence they have as economic actors, and the better the economy performs. Of course, the narrative has to be fact-driven. In the 1980s, for example, the narrative of optimism was that the stagnation dragon was in the process of being slain. Stock prices soared. In the 1990s, with the fall of the Berlin Wall, the new narrative was that the U.S. economy was about to receive a powerful peace dividend. Again, the market soared.
Why do we need a new narrative? Because the current one tells the story of a dysfunctional Washington in which both parties are out to kill each other. Compromise is a dirty word so nothing ever gets done. The White House is dysfunctional. Plus, a corporate capitalism of inside deal making is determined to maintain the economic status quo, squashing upstart competitors.
We need a new, bipartisan narrative for growth based on an explosion in innovative risk-taking. In the history of the West, the great increases in per capita income came during periods when average folk, not just the elites, were engaged in commercializing both existing and new technologies through enterprise startups. Nobel Prize-winner Edmund Phelps argues that during these periods, average folk became everyman “idea machines.” It’s kind of like the movie Joy. The female protagonist invented the “Miracle Mop” as a means of escaping a dire personal economic situation. Throughout history, the big jumps in per capita income came when a kind of Main Street Capitalism came into vogue. The economy benefitted from a bottom-up dynamism.
The clock is ticking because the longer people believe effective change is either an illusion or an impossibility, the greater the chance pessimistic attitudes harden.