Innovation, innovation, innovation

Here's a terrific new video from economist Brian Wesbury entitled "Good Thursday, Good Friday," explaining that the economic recovery is now building on itself in a virtuous cycle.

Mr. Wesbury points to three reasons for the fact that some important economic measures are better right now than they have been since 1999, and the first (and, in our view, most important of these) of these involves innovation.

He called this first reason "technology," but he doesn't simply mean companies that Wall Street thinks of as the "technology sector," because he then gave examples which include hydraulic fracturing (aka "fracking"), which certainly involves technology but not "Silicon Valley-style" technology, so we think a better word for what he is talking about would be "innovation."

The United States of America has traditionally been a world leader in innovation, often combining existing things in new and unexpected ways -- think of the skateboard for example (originally a combination of the concept of the surfboard and roller skates), or the more recent snowboard (an application of the concept of the surfboard to snow skiing, to create an entirely different approach to downhill skiing). Hydraulic fracturing, which we have discussed in previous posts such as this one, is yet another example of this type of innovative combination, and one that is changing the world as much as skateboarding and snowboarding did in their own ways.

The reason innovation is so important is that it is the only thing that really grows the economy. The other two reasons Mr. Wesbury lists -- an accommodative Federal Reserve and a government and regulatory environment that appears to be slowly getting out of the way, relatively speaking -- cannot grow the economy. They either obstruct innovation, or (in a perfect world) they don't, but they do not innovate and therefore they do not create growth.

As Mr. Wesbury points out, the current state of Fed policy and regulatory policy are not entirely "good," but he sees signs that they are obstructing growth less than they perhaps could be.

The important lesson is that innovation is what drives the economy, and what we need to focus on as investors. Monetary policy from the Fed or stimulus bills from the Congress do not really grow the economy.

However, as we have pointed out in previous posts and as Mr. Wesbury points out in the video today, innovation remains alive and well in the US (and in other economies as well, sometimes to a greater or lesser degree depending on their own situation with the other two factors).

Thus, we would argue that there are really only three things matter the most for an economy and for future growth: innovation, innovation, and innovation.