some thoughts on the stagnant economy

Any honest economics professor or instructor will admit that economics is not an exact science, like say chemistry is.  Nonetheless, we can use economics here in our analysis of the present state of the economy in the US and in Europe (which practices similar policies).

 

a container lift

 

As the economic suffering and misery continues for millions of persons, we are revisiting this issue.

Much of Europe and the US are stuck in economic recession.  Do not believe the news media reports or the words of the politicians.  The US has not recovered from the recession that began late in 2007, and became much worse in late 2008.  Unemployment in Spain is running at about 25 per cent or higher.  High unemployment rates have become the norm in other European countries.  The true US unemployment rate is much higher than the currently cited (latest) figure of 7.3 percent.  Millions of discouraged job seekers have given up looking for work over time, and these people would work if they could find jobs. They are no longer counted in the official statistics.  Job creation in the US in 2013 has been anemic.  In a normal “recovery”, 90 percent of the new jobs created are full-time. Thus far in 2013 in the US, about 90 percent of the net jobs created have been part-time positions (thanks to the expensive and burdensome requirements of Obama Care).  Many full-time positions are being cut by businesses.

The shame of all this unemployment and under-employment is that the productivity of all these affected workers, the potential added value to the economy, is lost forever.  A waste of human capital is what we are seeing.

Why is this so?  Why the continuing economic woes in the US and in Europe?

Before we attempt to answer these questions, let us say that these years of misery, unemployment, economic dislocation, and declining asset values were not necessary and could have been avoided.  Yes, there are business cycles and there are periodic economic slowdowns in a market economy.  But, where you see very large amplification to the “booms” and then the “busts” (downturns) of economic cycles it is due to government actions and central bank actions that distort the normal functioning of free markets.

(In one of our earliest essays, we indicted Alan Greenspan, former chairman of the Federal Reserve for his central role in causing the housing market bubble and subsequent collapse in the US.  We believe his reckless (and criminal in effect) actions ought to have placed him in a federal prison for the remaining years of his miserable life.  Recall, the severe global economic contraction of late 2008 and early 2009 was caused (started) by the financial panic in the US.  Remember the failure of Lehman Brothers, and the problems with so-called mortgage-backed securities that had been sold to banks in Europe?  Much suffering worldwide ensued.)

To briefly answer the above questions:  Europe and the US are stuck at low or zero economic growth largely because of excessive, at times redundant, and largely needless government regulation of private businesses (regulation overkill), reckless fiscal policies (never ending deficit spending), loose monetary policies (artificially low interest rates, and money creation), and high income tax rates on businesses and individuals.  3 of these four causes are government actions and policies.  The remaining cause is on the part of central banks; that work with corrupt politicians to hide the damage their reckless and profligate spending is doing to the economy.

Let’s expand on these causes to drive our point home that governments around the world need to get out of the way!  (Voters and concerned citizens need to demand this.)

Business men and women will not invest in expanding their businesses in a hostile environment of high taxes, excessive regulations, and with the expectation of more of the same in the future from an over reaching government.  Doubt this?  Study the 1930s in the US under the administration of President Franklin Roosevelt!  This has happened before. The US still had mass unemployment in December, 1941, nearly 9 years after FDR took office.  So, obviously his New Deal was a failure!  He did not “get us through the Depression”.  FDR’s policies and actions prolonged the Depression.  (One might also venture to say that prolonged economic misery is not good for world peace.)

There are hundreds of billions of dollars sitting on the sidelines (much of this with banks that are not making loans) that could quickly enter the economy and spur growth if the policies from Washington were not so anti-growth and so burdensome.

Simply put, government does not create prosperity.  The private sector in a free market economy will do that if government will allow it to by interfering as little as possible.

Excessive regulations.  These kill jobs by raising the cost of doing business.  Managers can always eliminate jobs as a means of saving money and cutting costs.  (Salaries are cash expenses that cannot be deferred or easily financed, but must be paid regularly.)  The onerous and very expensive requirements of Obama Care are forcing many business people to eliminate jobs and/or reduce existing employees’ hours to part-time. Environmental regulations in Europe, and through Obama’s EPA in the US, to reduce so-called “green house gas” emissions are killing jobs in many industries.  (Needless, we say, as man-made global warming has been debunked.)  So-called “green jobs” have not materialized in the US to any significant degree.  Without ongoing government subsidies, many green industries are not economically viable.

Reckless fiscal policies.  Such policies are largely due to very costly and thus unsustainable social welfare schemes and programs (pensions, health coverage, financial aid/benefits for those who do not work, etc.).  These programs are referred to in economics as transfer payments.  As well, the government in the US panders to special interests and distributes much “pork” to them each fiscal year.  This pork, or political paybacks, costs tax payers many billions of dollars each year.  Of course, you have to tax current income earners for all this government “generosity” or largesse.  But, what do you do when taxes are already too high or cannot easily be raised?  You tax the future income earners, even those yet unborn, by running up the sovereign debt of your nation (which future tax payers are obliged to pay off).  Such government borrowing normally tends to raise interest rates for all borrowers.  As well, government borrowing reduces the available pool of funds for business investment.  Large annual budget deficits are thus not good for the economy long-term.

It is amazing to me that the other large credit ratings company, Moody’s, has not yet downgraded the credit rating of US government debt.  S&P did so in 2011.

Loose monetary policies. Central banks (the Federal Reserve in the US, the ECB in Europe) now routinely print money to enable the politicians to engage in their irresponsible deficit spending, and to bail out those countries that have run up truly outrageous debts that can never be repaid.  Needed reforms are often put off or not seriously attempted. (Just this week, the US Federal Reserve announced that it will continue to buy US government debt in large amounts for months to come (known as quantitative easing). Where does the Fed’s money come from to do this?!)  As well, the central banks distort the capital markets by setting very low interest rates that serve to hide the true cost of excessive government debt.  Higher interest rates on the debt would increase the deficits.  Thus the central bankers are enablers of the corrupt politicians.

We believe that you cannot make good the bad fiscal policies of these corrupt, bloated, and inept governments with such loose monetary policies.  You may kick the can down the road, but at some point this house of cards will collapse.  One way it may collapse is with the return of high (price) inflation rates for many years.  As they say in economic circles, “there is no such thing as a free lunch”.  The costs of government largesse and waste have to be paid at some point.  The only real question is how these will be paid.

High taxes.  There are 2 things to consider here.  The more that businesses pay in taxes each year, the less capital (from operations) they have available to invest in research and development, and/or to invest in expansion (capital spending) of their companies.  This means fewer jobs created in the economy.  Similarly, higher taxes on individuals and families reduce consumer spending and that reduces economic growth.  The second thing to be aware of is that these politicians in office will always spend more than is collected in taxes.  They have done so year after year in Europe and in the US.  Thus, raising tax rates does not help to reduce the cumulative national debts.  (Ironically, in the US it has been the case that raising tax rates usually results in lower total tax revenues.)

why this matters

The economic reality is that no country or economic bloc (the EU) can afford large, expensive central governments that lack fiscal discipline.  The logical, if not palatable, solution is to shrink the size, the role, and the reach of government.  If we do not do this, we will all be accepting a lower standard of living and less freedom in our lives.

When the big government Left gets its way, we all lose, we all are poorer, and are less free, and have a dimmer future.

what can be done

What would help the economy to grow, and grow strongly?

1. Reduce government spending by significant amounts.  Do this now.  We cannot wait years to cut spending.  This includes reforming bloated and unsustainable entitlement programs.  Politically unpopular but necessary.  In the US, stop the implementation of Obama Care, a major job killer that the majority of Americans do not want implemented.

2. Reduce the unnecessary and burdensome regulations on businesses, especially on small businesses.

3. Reduce tax rates for businesses and for individuals. Why?  Because the private sector is much better at allocating financial resources in to productive endeavors.

4.  Get back to a sane monetary policy.  Central banks must stop the routine money creation that enables deficit government spending.  Such money creation over time destroys the value of the currency and that creates its own problems.