Jeff Cornwall summarizes the panel on the outlook for the economy and entrepreneurs at the Kauffman Foundation forum this past weekend in Kansas City. In a later post, I will discuss the interesting ideas that were brought up at that discussion. For now, though, I will summarize the thinking behind my own five-minute remarks.

Once again, I am doing scenario analysis, with two drivers: quick recovery or deep recession; and capitalist trend vs. statist trend.

Recovery Path Keep Capitalism Adopt Statism
Quick Recovery Election Shocker
p=0		 European Welfare State
p=0.3
Long Deep Slump Big Comeback
p=0.3		 Strangled by the State
p=0.4

The Obama Administration forecast is for a quick recovery. Most of the people at the Kauffman forum disagreed. Instead, when our session chairman Robert Litan polled the audience, almost everyone raised their hand to say that they expect a long, deep slump.

If there is a quick recovery, then it seems to me unlikely that the Democrats will be thrown for an electoral loss, and thus it seems unlikely that we will see a shift away from statism. Thus, I put the probability of that scenario (“Electoral shocker”) at essentially zero. Instead, I think that a quick recovery will end with the U.S. looking like a European welfare state, with much higher government spending as a proportion of GDP.

With a long deep slump, I think the most likely outcome is that we will be “strangled by the state.” All of the ambition and “animal spirits” will be channeled into opportunities created by government appropriations and subsidies. In spite of a weak economy, statist policies will remain in place, because those who are receiving a share of the pie from the government will be a more potent political force than those who are upset that the pie is stagnant or shrinking.

However, the scenario that I focused on in my five minutes was the “big comeback,” in which after a long slump we decide to give capitalism another try. I pointed out that the post-Depression economy that we saw in the 1950’s was very different from the one in 1929. A lot of farmland went out of production, as better transportation reduced the value of marginal farmland near cities. Some of that farmland became suburbia and some of it reverted back to wilderness. Also, a lot of sweat went out of work. The proportion of jobs in factories and farms fell, and labor in those settings became less physically demanding.

I expect to see an equally radical reconfiguration of the economy under the “big comeback” scenario. What will it look like? I suggested reading David Halberstam’s The Fifties to get an idea of how the new suburban-based business ecosystem developed in that decade. I suggested watching the podcast I mentioned recently featuring Marc Andreessen interviewd by Charlie Rose. I suggested looking into Clay Shirky’s thoughts on “cognitive surplus,” which I linked to here. I suggested reading Nobel laureate Robert Fogel’s book on the decline of hunger and premature death. Fogel sees future growth in health care, education and leisure. Nick Schulz and I have taken to calling these sectors the “new commanding heights.”