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Economics professor, prolific author and blogger Tyler Cowen anticipates short-term volatility but adds: ‘I do not think we are headed for doom.’

Stephen Gosling

He's not as famous as Nouriel Roubini and has far fewer Twitter followers (roughly 23,000 versus 194,000 for Dr. Doom). And he hasn't, like New York Times columnist Paul Krugman, won a Nobel prize. Yet 50-year-old Tyler Cowen is a formidable presence on the American economic landscape. Chairman of Economics at George Mason University in Virginia, he is a prolific writer and editor and blogger; his Marginal Revolution – co-written with his Canadian colleague Alex Tabarrok – is among the best read blogs in the field. His last book,The Great Stagnation, was a bestseller. His next, he told Globe and Mail reporter Michael Posner in an interview, will explore what the path out of the great stagnation will look like. Mr. Cowen will deliver a lecture Tuesday evening at Toronto's Isabel Bader Theatre.

COWEN:When I wrote The Great Stagnation, I thought it would take 20 years for us to get out of it. Now, I think it will be 10 years. I don't think the great run of innovation is over. I just think it's on pause. The Western world has excellent institutions. Science is still vital. But part of our problem is behavioural – getting people to be motivated. Throwing more science at things isn't always the answer. Insofar as I'm pessimistic, it's behavioural issues, especially in education and health care.

How volatile will markets be?

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We'll see levels of market volatility and stock price collapses that will be, to many people, horrifying. So the headlines a year from now – I'm very pessimistic. But if you're asking about the real economy several years down the road, I do not think we are headed for doom.

What sectors will lead the next great boom?

Artificial intelligence [AI] will be a significant breakthrough. There are new developments almost every day. Cheaper fossil fuels, particularly natural gas, will spur short-run growth. And an increasing share of national income will go to capital and high productivity. It may not feel like an end to stagnation for many workers, but in terms of aggregate output, the U.S., Canada and Mexico are poised to do extremely well. Mexico will find its way around the drug problems and become more integrated into the U.S. economy. It's the great underrated nation in the world right now.

Can advances in AI create great numbers of jobs?

No. A lot of people will be hurt by it. Owners of intellectual property, and capital and manufacturing plants will do very well. Output will go up a lot. But in many areas, wages will fall and jobs will disappear. So the U.S. trend – falling labour force participating rates – will continue. But people who get quality education will be better off.

Many economists see China as the great growth saviour. You don't.

You can't grow at 10 per cent per year forever. It's already been 30 years – the greatest growth streak in history. But China is slowing down very rapidly. It's been investing about 50 per cent of GDP [gross domestic product] for a long time. It's very hard to do that well. And they are massively corrupt. I tend to think they will never be as wealthy per capita as Mexico. I would call that a medium-hard landing. It's here now. The slowdown will be very bad for parts of Africa and it will hurt Canada. But Canada has other strengths and will be fine. It will hurt Brazil and other resource-rich economies. I don't think it will hurt the U.S. I don't adhere to apocalyptic scenarios – no riots or rebellion. I just think they will grow much more slowly. The same thing is happening in India.

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What's your call on the future of the euro zone?

I think multiple countries will leave, but I'm not sure that's the pessimistic forecast. The pessimistic forecast might be they stay in forever and all get dragged down by deflation. I'm a pessimist about the euro, but not about Europe. So the southern periphery, Spain, Italy, Greece, leave – Italy might be the first to go – and the rest stay. That will work just fine. But unless they want to give up democracy, I don't see greater fiscal union as the answer. The economies will eventually recover. There is great human capital, a lot of strengths, and mostly good institutions. Austerity is not the main problem – it's that their banking systems are coming apart at the seams.

Do you play the stock market?

I've been heavily in cash for some time, and paying down debt. I thought stocks were overvalued in the early part of the last decade. I was right too early, but I did not suffer in the financial crisis.

What's the likelihood of a major war?

I'm worried about it, especially in the Middle East. I don't think it would be good for the U.S. economy. Energy prices would go up. There'd be a lot of uncertainty, which the world does not need more of. And the issue of nuclear weapons is not trivial. It's hard to get a good understanding vis-à-vis Iran. There's a lot of misinformation. But we seem to be on a collision course.

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Does it matter who wins the U.S. presidency?

It's hard to tell. As people, [Republican leader Mitt] Romney and [U.S. President Barack] Obama are not that different. Both are in bad situations, for reasons not of their own making. If Obama wins, which seems more likely, we probably get more of the same – gridlock, nastiness. If Romney wins, we have to ask, 'Do Republicans really mean what they've been saying?' I think they don't. It'll be like the Bush years – right-wing versions of left-wing ideas.

Does Obama get enough credit for saving the global economy from collapse?

George Bush doesn't get enough credit. He basically said, 'This is over my head, but I'm going to back [then-U.S. Treasury Secretary Henry] Paulson and [U.S. Federal Reserve Board chairman Ben] Bernanke to the hilt,' and he did. I give most of the credit to Bernanke. He was an absolute genius.

What about Russia?

I see a big brain drain, too heavy a reliance on resource prices and their politics is far from settled. And they are not reinvesting in education. So I'd say I'm a pessimist.

What credence do you attach to the Black Swan scenario – the possibility of a completely unanticipated event having a major impact?

It's an interesting theory, but it's miscategorized. These so-called unpredictable events are actually the classic events of history – war, financial panic, maybe pandemic in the future. They're unpredictable because we make mistakes. The problem is us. They're not actually black swans – not bolts out of the blue.

To what extent was America's sense of exceptionalism damaged by 9/11, the Iraq war, and the 2008 financial debacle?

We have a much stupider version of exceptionalism now. It's less fact-based. The better version has to do with our ability to reinvent ourselves, be self-critical and, if we screw up, come back to better ways of doing things. The stupider version is jingoistic and patriotic, and gets you into mistaken wars. So our exceptionalism has been traded in for a weaker version and it's distressing.

Canadian exceptionalism often focuses on the virtues of our health-care and banking systems. Justified?

Canada has done extremely well in controlling health care costs. The question is how much is that because the system is better, and how much because health care doesn't matter – Canadians are just healthier behaviourally. As for the banks, I'd say that when you have two countries next to each other, you're best off if they're run on different principles, say with respect to of risk aversion, as Canada and the U.S are. The banking systems are thus complementary. On our side, it's not clear we've done anything to corral the banks. It's not clear we will. I think we're in denial. This is very worrying. As in the auto industry, where there is still excess capacity, the underlying problems have not gone away.

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About the Author

Based in Toronto, Michael Posner has been with the Globe and Mail since 1997, writing for arts, news and features.Before that, he worked for Maclean's Magazine and the Financial Times of Canada, and has freelanced for Toronto Llfe, Chatelaine, Walrus, and Queen's Quarterly magazines. More


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