The Big Picture: The Case for Rational Optimism
by Alexander Green, Investment U Chief Investment Strategist
Monday, April 9, 2012: Issue #1747

“People who live in a Golden Age usually go around complaining how yellow everything looks.” –Randall Jarrell

A few weeks ago at our 14th Annual Investment U Conference in San Diego, I discussed and recommended a number of investment opportunities in the U.S.

Afterwards, an attendee pulled me aside and privately declared that my optimistic outlook was not just wrong but naïve.

He then recited the litany of woes broadcast daily and recycled hourly by the national media: the weak economy, high unemployment, rising energy prices, the continuing housing slump, troubles in the Eurozone, tensions in the Middle East, political gridlock in Washington, the growing national deficit and so on.

(By the time he was done, I could have sworn he said the sun was too bright and the birds were singing too loud.)

“You really need to look at The Big Picture,” he said. Indeed, let’s do that…

We all know the recent downturn was severe and the recovery has been long and slow. But the United States still has the most dynamic economy in the developed world. The best research centers, universities and companies are here. Our country still attracts more immigrants and investment capital than any other. And the industries of the future, from biotechnology to nanotechnology, are centered here.

Many people are still hurting. Yet, despite the gloomy headlines, the majority of us have it pretty darn good.

Consider that in the first half of the twentieth century, most people earned a subsistence living through long hours of backbreaking work on farms or in factories. In 1850, the average workweek was 64 hours. In 1900, it was 53. Today it is 42 hours. On the whole, Americans work less, have more purchasing power, enjoy goods and services in almost unlimited supply, and have much more leisure.

Formal discrimination against women and minorities has ended. There is mass home ownership, with central heat and air-conditioning – and endless labor saving devices: stoves, ovens, refrigerators, dishwashers, microwaves and computers. Senior citizens are cared for financially and medically, ending the fear of impoverished old age.

Quality healthcare was almost non-existent 85 years ago. In 1927, President Calvin Coolidge’s sixteen-year-old son Calvin Jr. developed a blister playing tennis without socks at the White House. It became infected. Five days later, he died. Before the advent of antibiotics, tragedies like these were routine.

Advances in medicine and technology have eliminated most of history’s plagues, including polio, smallpox, measles and rickets. There has been a stunning reduction in infectious diseases. Heart disease and stroke incidence are in decline. A new study from the Centers for Disease Control reports that overall rates of new cancer diagnosis have dropped steadily since the mid-1990s.

We complain about the rising cost of healthcare. But that’s only because we routinely live long enough to depend on it. The average American lifespan has almost doubled over the past century.

We take a lot for granted today. Light is a good example. To get an hour of artificial light from a sesame-oil lamp in Babylon in 1750 B.C. would have cost you more than fifty hours of work. The same amount of illumination from a tallow candle in the 1800s required six hours’ labor. Fifteen minutes of work was the trade off for an hour from a kerosene lamp in the 1880s. Yet for an hour of electric light today, the average American labors half a second.

Or take transportation. For millions of years, we only got somewhere by putting one foot in front of the other. Six thousand years ago, we domesticated the horse. In the 1800s, going from New York to Chicago on a stagecoach took two weeks’ time and a month’s wages. Today you can fly to virtually any major city in the world in under 24 hours and – even with oil near recent highs – for less than a thousand dollars.

And speaking of oil… How many reports have you heard about gas surging to more than $4 a gallon recently? Contrast that with how little you’ve probably heard about the price of natural gas. Four years ago, it was $13. Today it sells for $2. The average American who heats with natural gas saved about $1,000 last year.

Or take computing. In 1987, a megabyte of memory cost $5,000. The Mac II sitting on my desk – with one megabyte of memory and a running speed of 16 megahertz (which Apple described as “blindingly fast”) – cost $5,500. Today an exponentially smaller, faster and better machine costs less than a tenth as much. As for memory, you can buy a terabyte drive today for less than 60 bucks.

Scientists say human beings evolved to have a heightened sense of fear and suspicion. (Those who lived on the plains of Africa without this quality didn’t leave many descendants.) Yet by seizing on the negatives, we often miss the good things happening around us.

In their new book Abundance, technology gurus Peter Diamandis and Steven Kotler offer an alternative view:

“What does the world really look like? Turns out it’s not the nightmare most suspect. Violence is at an all-time low, personal freedom at a historic high. During the past century child mortality decreased by 90% while the average human life span increased by 100%. Food is cheaper and more plentiful than ever (groceries cost 13 times less today than in 1870). Poverty has declined more in the past 50 years than the previous 500. In fact, adjusted for inflation, incomes have tripled in the past 50 years. Even Americans living under the poverty line today have access to a telephone, toilet, television, running water, air-conditioning, and a car. Go back 150 years and the richest robber barons could have never dreamed of such wealth.

“Nor are these changes restricted to the developed world. In Africa today a Masai warrior on a cellphone has better mobile communications than the President of the United States did 25 years ago; if he’s on a smartphone with Google, he has access to more information than the President did just 15 years ago, with a feast of standard features: watch, stereo, camera, video camera, voice recorder, GPS tracker, video teleconferencing equipment, a vast library of books, films, games, music. Just 20 years ago these same goods and services would have cost over $1 million…

“Right now all information-based technologies are on exponential growth curves: They’re doubling in power for the same price every 12 to 24 months. This is why an $8 million supercomputer from two decades ago now sits in your pocket and costs less than $200. This same rate of change is also showing up in networks, sensors, cloud computing, 3-D printing, genetics, artificial intelligence, robotics and dozens more industries.”

Despite relentless media negativity – designed to attract viewers and thus advertisers – most of society’s trend lines are overwhelmingly positive.

We enjoy economic, political and religious freedoms denied to billions throughout history. All forms of pollution – with the exception of greenhouse gases – are in decline. Our culture gives us an unprecedented ability to store, exchange and improve ideas. And we benefit enormously from the ultimate renewable resource: human imagination and creativity.

Free markets deliver an enormous bounty based on specialization and exchange. Just a small example: Our forebears couldn’t conceive our typical salad bar today because they couldn’t imagine a global transportation network capable of providing green beans from Mexico, apples from Poland and cashews from Vietnam together in the same meal.

Even the world’s poorest are being pulled upward. According to the World Bank, the number of people living on less than $1 a day has more than halved since the 1950s. That still leaves billions in destitution, but according to scientist Matt Ridley, author of The Rational Optimist, at the current rate of decline the number of people in the world living in “absolute poverty” will be statistically insignificant by 2035. The spread of microfinance and cellphone technology in many developing countries, for example, are creating countless opportunities and greater prosperity.

To know how much better off you are than your distant ancestors, you have to recognize how they lived. In his essay A History of Violence, Harvard psychologist Steven Pinker writes:

“Cruelty as entertainment, human sacrifice to indulge superstition, slavery as a labor-saving device, conquest as the mission statement of government, genocide as a means of acquiring real estate, torture and mutilation as routine punishment, the death penalty for misdemeanors and differences of opinion, assassination as the mechanism of political succession, rape as the spoils of war, pogroms as outlets for frustration, homicide as the major form of conflict resolution – all were unexceptionable features of life for most of human history. But, today, they are rare to nonexistent in the West, far less common elsewhere than they used to be, and widely condemned when they are brought to light.”

Thank your lucky stars that you won the lottery simply by being born in the modern era. This is not to downplay our current challenges, including the most predictable crisis in the nation’s history: huge and growing state and federal deficits.

Yet you’ll notice that the extreme forecasts always begin with the words, “If nothing is done…”

Something will be done. Only the most hardened cynics believe that politics will ultimately trump the national interest. The solutions are not politically easy, but they exist. Simpson-Bowles and other bi-partisan commissions have already set the stage for fiscal sanity. State governors like Chris Christie and Andrew Cuomo are now tackling deeply entrenched problems, such as pension shortfalls, that threaten to destroy state budgets. It won’t happen in this election year of political polarization and heated rhetoric, but reform at the national level is coming.

I know some, like the gentlemen in San Diego, will disagree. And it’s true that we all have gaps in our knowledge, biases and blind spots. However, it would be nice if the prophets of doom conceded that as well.

The truth is most of us have it better than we could have imagined a few decades ago. Most of us live long lives, in good health and in comfortable circumstances. By almost any measure, we are living better than 99.9% of those who came before us. Yet we routinely tell pollsters that life is hard and things are getting steadily worse.

As the essayist Randall Jarrell observed:

“People who live in a Golden Age usually go around complaining how yellow everything looks.”

Carpe Diem,

Alexander Green