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Warren Buffett Just Attacked the Most Popular Idea in Economics

• Myles Udland / Business Insider 

In his letter to shareholders

The economics world is obsessed with “secular stagnation” right now.

In short, this idea — which was re-surfaced by Larry Summers in 2013 — says that there isn’t enough demand in the US and world economies to create economic growth above 2%.

Over the last 40 or so years, the US often enjoyed growth rates far in excess of that number.

But Warren Buffett thinks concerns about what this 2% growth path means for the future of the US economy are far overplayed. In fact, he thinks the idea that this is bad news at all is just wrong.

In his 2015 letter to shareholders, Buffett writes, “Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers astounding gains.”

Here’s Buffett working out the whole problem (TL;DR, it’s gonna be great either way. Also, all emphasis ours):

America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration).Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children.

Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.

Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons.Lobbying will remain a growth industry.

The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, “search” is invaluable to me. (I’m not ready for Tinder, however.)

For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.

Of course, if you look at Buffett’s portfolio of holdings, he is levered very, very long to the US economy. Said another way: he himself is betting heavily that things will continue to get better in the US.

But when thinking about how “bad” things are for an economy that is growing around 2% per year — as the US economy is right now — Buffett’s argument is that, well, it’s not bad at all.

Read the whole letter here »

This article originally appeared on BusinessInsider.com