Our New Economic Era

By Kevin D. Williamson

Tuesday, June 07, 2022

Silicon Valley isn’t just rich — it feels rich, too: Central San Francisco may have a late-capitalist fin de siècle pre–Walking Dead feel to it, but the genteel precincts of West Atherton and Menlo Park feel like a different, happy, refined little world. Because Silicon Valley has a kind of self-enforced sumptuary law, only certain kinds of conspicuous consumption are socially acceptable — you’ll see more Lamborghinis parked outside an Eddie V’s in Houston than you’ll see ferrying the suburban aristocracy of Very High Tech America to and from wherever it is they go. As the Guardian reported in 2019, Silicon Valley is on a GDP per capita basis wealthier than such global enclaves of the serious money as Luxembourg, Macau, and Qatar, at least as the World Bank ran the numbers in the pre-Covid economy.

With $128,647 in economic output per person in 2017, Silicon Valley represented the crème de la crème of big money, almost within economic spitting distance of . . . Midland, Texas, which reported a GDP/capita that was substantially higher at $174,749.

Midland doesn’t feel rich. A lot of it feels temporary — and weird, and brutal, and Blade Runner–ish where it is not positively Martian in its barrenness and austerity.

But the road from Midland to Menlo Park isn’t as long as you might think.

Things are a little weird in the economy right now. The U.S. economy is currently suffering from a combination of weak (and, recently, negative) economic growth at the same time it is dealing with high inflation — a “stagflation” Americans have not endured since the 1970s. (You know, the 1970s: the age of disco and butterfly collars and such that coincided with the first time Joe Biden got elected to federal office.) Real wages — meaning inflation-adjusted wages — have been in decline. Fuel prices have been skyrocketing, but many of the oil and gas producers in West Texas are sitting on the sidelines. Between January and May, the so-called FAANG stocks — the formerly bulletproof shares of Facebook, Apple, Amazon, Netflix, and Google — lost more than a third of their value. Because these shares are so widely owned, their performance over the years has made a big positive contribution to the net worth of a whole lot of U.S. households — in 2015, for example, the NASDAQ as a whole would have lost money if not for the performance of five or six blockbuster companies. When they falter, there is a lot of hurt to go around.

With tech shares in free fall, a fair number of venture capitalists (many of whom made their fortunes in tech and still have a lot of exposure to the industry) are dialing back their operations, restricting the flow of capital to start-ups that have been important drivers of U.S. economic growth and innovation. That has important long-term implications: VC-backed companies account for almost two-thirds of U.S. research-and-development spending.

A not-great sign: Business investment remains substantially off its 2019 peak. Even those West Texas drillers are hesitant to invest much in the current economic climate, in spite of high oil prices. From Bloomberg:

After Russia invaded Ukraine in late February, crude prices surged to a 13-year high. Gasoline is above $4 a gallon in every US state for the first time. Jet fuel in New York spiked to a record last month. Yet shale explorers show no sign of riding to the rescue. Their business model has fundamentally changed, reshaped by pressure to curb growth and divert cash to investors with dividends and buybacks. Inflation is also taking a toll. US oil output this year is expected to expand by less than half the amount it did in 2018, when crude traded around $65. That means more pain for consumers, with JPMorgan Chase & Co. predicting US gasoline at $6.20 a gallon by August.

Americans are really good at a lot of things — a surprising number of things, in fact. But we have an absolutely enormous footprint in four key areas: agriculture, energy, technology, and culture. Americans are awesomely productive farmers, and the United States is the world’s largest exporter of agricultural products, a fact that is going to matter a great deal as Vladimir Putin’s brutal assault on Ukraine disrupts global grain markets. The United States is the world’s leading producer of oil and gas. Most of the world’s most important technology companies are U.S.-based. (Can you think of an important Internet company from the European Union or Japan? Other than Spotify in Sweden, it’s hard to think of any big ones.) Eight of the world’s ten largest media companies are U.S.-based. Practically all of the world’s mobile phones run on Android or iOS. The United States, with its sophisticated capital markets and highly productive work force, is a center of global innovation and productivity.

Any country in the world would be glad to have one of those four gems in its economy. China is the world’s largest food producer, but it is also the world’s largest food importer and the world’s largest oil importer, something that must disturb the sleep on the autarky-minded gerontocrats in Beijing. The Germans are justly proud of their automotive industry, but the regulators in Berlin and Brussels are frustrated by the fact that practically all the Internet firms they wish to exercise control over are U.S.-based. And American culture — and cultural products — are simply everywhere: As Americans traveling abroad will notice, you couldn’t escape American popular culture even if you wanted to. There is no yurt far enough away.

It would be a great understatement to observe that the fundamentals of the U.S. economy — the real, long-term fundamentals — are strong. Arguably, they are stronger in the United States than they are in any other country anywhere in the world.

So, why is our economy so unsatisfactory at the moment?

Go ahead and make your ritual denunciations of Joe Biden. Get it out of your system. All right, then.

President Biden is not great on the economy — in fact, he is pretty bad. But I would like you to try to take a slightly larger view, one that is not simplified to meet your ideological and political needs.

There is some good reason to believe that a big part of what ails the U.S. economy right now is best understood through a Hayekian or “Austrian” lens, an analysis that emphasizes the problem of uncertainty. We have organic uncertainty in the economy, much of it having to do with worries about the persistent supply-chain hangover from Covid-19 and lack of clarity about how and when that will be resolved, and about what a post-resolution world really looks like. Covid also accelerated some organic changes in the economies of the developed world, hastening labor-market changes related to demographics and turbocharging the move to remote work that probably would have happened to some extent on its own but perhaps would not have gone as far or as fast as it has. How that is going to shake out remains unclear.

We also have industry-specific uncertainty caused by politics and policy. The folks in Midland and the nice people in Silicon Valley may not have much in common culturally, but they share some uncertainties when it comes to business. Put in the most stark and extreme way, they are worried that they may be effectively regulated out of business. The fossil-fuel industry has no friends in the Democratic Party and relatively few friends in Europe, and it faces a world in which Wall Street greenwashing threatens their access to capital and financial services; on top of that, many of that industry’s business partners around the world are, because of the nature of the petroleum business, authoritarian states and state-run firms linked to authoritarian governments. The American Left intends to put fossil-fuel companies out of business, and putting them out of business is, in effect, the long-term consensus position in the European Union. How many millions of dollars of your own money would you invest in long-term energy projects, given that uncertainty and hostility?

Technology companies are worried about punitive populist tax measures and aggressive regulation, especially of social-media platforms. Social-media firms such as Facebook and their high-tech cousins such as Google and Amazon have few friends on either side of the aisle in the United States — Republicans see them as West Coast progressive cultural enemies, and Democrats see them as plutocrats in need of plundering for the sake of the common good. The urgent political voice of the moment is something like that of J. D. Vance, purveyor of the most authentic anti-capitalist populism Peter Thiel’s money can buy. (I like you guys, I really do — call me when you sober up.) And, if anything, the bureaucrats in Brussels are at least as much of a danger to U.S. social-media companies as the culture warriors in Washington are.

Democrats are the greater economic offenders at the moment, kicking around very significant changes not only to business taxes but also (probably more significant) to laws and regulations affecting corporate governance. But Republicans are no longer reliable allies when it comes to trade, regulation, corporate governance, and much more. And, in many ways, an uncertain friend is a bigger problem than a certain enemy. Reliable hostility you can plan for — you can put it in your budget. Uncertainty is a heavy tax.

We don’t need to reinvent the American economy — if we were building it from scratch, what we built almost certainly would not be as good as what we have. We have the sort of organic prosperity and capacity that you can’t buy, legislate into existence, or cook up in a committee planning session. But prosperity is not self-sustaining or self-executing. It requires constant investment, innovation, and cultivation. We have remarkable areas of excellence and economic strength, but we also have a political consensus that at times seems hell-bent on killing that magical goose in the false belief that we can get all the golden eggs at once if we do so.

Of course, there is more to the U.S. economy than farming, energy, technology, and culture. But these provide a real foundation for the real-world realization of that “broadly shared prosperity” that the politicians are always talking about — something for everyone. But we need a stable, predictable policy environment — especially after the radical disruptions associated with the Covid epidemic.

We are in a new era. Unfortunately, it is an era in which our economic needs are radically at odds with political incentives. We need consensus, cooperation, stability, modesty, moderation, and prudence, but our politics rewards confrontation, extremism, narrow-minded partisanship, and short-term maximalism. But there is so much in America that works — and works well — that it is difficult for me to believe that it is impossible to build a successful political agenda around our genuine national strengths rather than one that is based on parochial grievances.

I only wonder how much trouble and misery we are going to inflict on ourselves before we figure that out.