June 19, 2018

The three most influential economists were born in the late spring. All wrote their works in Great Britain, but their ideas spread sequentially around the world. Adam Smith was born 295 years ago last weekend, June 16, 1723 in Scotland. Karl Marx was born 200 years ago (May 5, 1818) in Trier, Germany, but he wrote his most influential works in London; and John Maynard Keynes was born 135 years ago (June 5, 1883) in Cambridge, England. They are considered the godfathers of the right (Smith), left (Marx), and the “mixed up middle” of a democratically elected government and centrally controlled economy (Keynes).

At this year’s Freedom Fest (July 11-14 in Las Vegas), I will be moderating a panel which includes economist Deirdre McCloskey, who has a lot to say about all three; so I have been reading her masterful trilogy on “Bourgeois” Economics, with a special emphasis on the latest tome, “Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World” (2016). In particular, I’m curious as to how Adam Smith’s economic ideas suddenly conquered Asia after 1960, beginning with Four Tigers – Hong Kong, Singapore, South Korea, and Taiwan – four small nations with few natural resources which became super-rich simply by trading. Then two giants turned from no-growth communism (China in 1978) and slow-growth socialism (India in 1991) to become high-growth global leaders in exporting goods and services.

In “Bourgeois Dignity: Why Economics Can’t Explain the Modern World” (2010), McCloskey opens the book by saying, “The Big Economic Story of our times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy and came to attribute a dignity and liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth.” (By bourgeoisie, she means “the hiring or owning or professional or educated class,” the entrepreneur, or the middle class in general.)

India and China certainly had no help from the British, who ruled India from 1858 to 1947 and hooked China on opium. Instead of exporting the ideas of Adam Smith, Britain inculcated Fabian socialism into the future leaders of India. Jawaharlal Nehru, the first leader of independent India, learned socialism in England. He told his country’s businessmen, “Don’t talk to me about profit. Profit is a dirty word.” India’s spiritual leader, Mahatma Gandhi, agreed, declaring that “there is nothing more disgraceful to man than the principle ‘buy in the cheapest market and sell in the dearest.’” As a result, Indians referred to a 1% rate of growth in the first 40 years of Indian independence as the “Hindu rate of growth.” Since 1991, however, after economic liberalization took root there, India has been growing at about 7% per year.

These changes are also reflected in India’s culture. Economist Nimish Adhia has shown that India’s leading “Bollywood” films have changed their heroes from government bureaucrats to business people and changed their villains from factory owners to corrupt policemen. The same shift is evident in the editorial pages of the Times of India in how they cover businesses more fairly now than in the past.

U.S. GDP Growth Now Threatens to Double Europe’s Growth Rate

While Asian growth keeps eclipsing the rest of the world, the U.S. is now pulling away from Europe as the second-fastest-growing region. The Atlanta Fed’s GDPNow model’s estimate for real GDP growth in the second quarter of 2018 has stayed above 4.5% during the first half of June. At last count (on Friday, June 15), it stands at 4.8%, boosted by Thursday’s bullish retail sales report from the U.S. Census Bureau.

The GDP Now model is created from 13 subcomponents of the GDP. As each key piece of the GDP puzzle is released each month, the economists at the Atlanta Fed update their GDP forecast. They do not pretend that this is an accurate forecast but that it is a “nowcast” of where growth stands at the moment.

The U.S. economy is doing well, which is bullish for growth stocks. As a result, the S&P 500 Growth Index has been outperforming the Value Index for the last decade – and that gap has widened lately:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Meanwhile, the Eurozone economy is losing steam. Last Thursday, the euro lost 1.88% to the dollar, reflecting the new turmoil in Europe, including labor strikes in France, political turmoil in Italy and Spain, and a sudden slowdown in the mighty German economy. Last week, Germany reported that factory orders fell 2.5% in April. Eurozone growth was only 0.4% in the first quarter and the IMF thinks that growth in the euro region will slow to a 1.4% annual rate this year, about one-half to one-third the U.S. growth rate.

The problem in Europe is that they have high wages, strong unions, long vacations, early retirement, and a costlier social safety net than the U.S. Therefore, they have slapped on high tariffs to protect their workers. If a trade war with the U.S. escalated, the U.S. would survive but the euro region could easily fall back into recession. That’s why the politicians in Europe may huff and puff but they don’t want to let their visceral distaste for President Trump’s lack of diplomatic finesse push them into a third recession within a decade.

The businessman author of “The Art of the Deal” realizes that he is dealing from a strong hand right now. This may be the perfect time to get tough and get rid of some of the more onerous foreign trade barriers.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*


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