David Henderson’s synopsis of Tyler Cowen’s speech brings up two key factors in the long-term outlook. I want to resurrect a table from one of my classic essays, called The Great Race.

Four Scenarios Moore’s Law Fails Moore’s Law Succeeds
Medicare is Reformed Low Gear Capitalist Utopia
Medicare is Not Reformed Economic Implosion Affordable Welfare State

From Henderson’s account (see points 9 and 10), it seems that Tyler described the scenarios on the far right, which assume that technological progress is rapid. One scenario is that nearly all of the gains from this progress are channeled into transfer payments to the elderly, primarily to pay health costs–Affordable Welfare State. The other scenario is that there is actually enough wealth created to increase other forms of consumption–what I call Capitalist Utopia.

I developed that table almost seven years ago. Since then, computers have continued to get smaller and cheaper. However, in general, technological progress has been disappointing. If you look at the predictions that Ray Kurzweil made in The Age of Spiritual Machines for what we would have achieved by 2009, many of them have not materialized. In biotech, my sense is that the more we learn about the human genome, the more we find that we do not know, so progress there also seems slower than people might have hoped for ten years ago. The Singularity may still be near, but I think it is definitely behind schedule.

The other change to my outlook concerns the ruling class. In the back of my mind, I always assumed that the ruling class knew what it was doing. That is, I thought that government would be less libertarian than I would like, but our leaders were good enough to muddle through. Today, I no longer have that underlying assumption, and that has moved me from a relatively optimistic and centrist position several years ago to one of rather extreme pessimism.

My big concern these days is that we could get what I then called “economic implosion” and what I now would call the Looting Scenario. The financial crisis and the political follow-on both have drawn my attention to looting.

One way to describe the financial crisis is as a massive exercise in looting by financial firms. See James Kwak on the Magnetar story. (Kwak is willing to put the blame on deregulation, even while he would have to admit that regulatory arbitrage actually played a big role in the Magnetar scam and the rest of the financial frenzy. Relative to Kwak, I have less confidence in regulation as the solution.)

Douglass North famously said that when the institutions of a society reward piracy, ambitious people become pirates. When the institutions reward wealth creation, people create wealth. In finance, our institutions did much to reward piracy in the past decade.

In the Looting Scenario, what is going to be rewarded is what we call rent-seeking. Basically, over the next twenty years, wealth transfer by government will be much more important than wealth creation–and the amount available for transfer could actually decline. For example, I expect that benefits for the elderly will become increasingly means-tested and savings will be increasingly taxed, to the point where the marginal return to saving will approach zero. If the marginal return to saving is low, and government deficits are high, then capital formation is going to be low. It’s hard to see how you get rapid innovation in that kind of world.

The Looting Scenario is one in which public employees and pensioners have the incentive to just take as much as they can while they can get it. It is a scenario in which people talk about the deficit, and wise heads say we must do something about it, but the only politically feasible approach is to raise taxes. Even so, it turns out that higher tax rates bring in less revenue than projected, because of the incentives to consume leisure and engage in black-market activity.

Seven years ago, it would not have occurred to me that our ruling class would be so bad that the Looting Scenario would be likely. My guess is that, even among libertarians, just about everyone else still has faith that our ruling class will not let the Looting Scenario take place. However, I think it is one of the higher-probability scenarios out there. Where others think of the upper bound of incompetence as, say, Jimmy Carter or George Bush, I think about truly historic blunders that make Carter and Bush seem brilliant. I see our current economic strategy as comparable in folly to the “search and destroy” strategy in Vietnam or the mass offensives of World War I. So, if I sound crazy on this blog, that is where I am coming from.