Why We're Down on the Economy

Derek Thompson touts these as "the 4 scariest economic graphs I've seen this year." Basically, they chart every recession of the last fifty years in terms of a percentage of the previous peak.

As a rule of thumb, I'm always skeptical about metrics that are multiple steps away from raw numbers, in this way. A peak is a single data point and can therefore skew a decade's worth of numbers because it was unnaturally high or low. If, for example, a housing boom predicated on loans from the the future causes a particularly large spike, then the following trough — when people realize the delusion under which they've been operating — will be particularly low.

That said, the first and last charts seem to me to suggest that eyes have been opened to more than just the insecurity of mortgage-backed securities. The first shows "Real Gross Domestic Product: Percent of Previous Peak," and after a five percent dip, by mid-2009, we're currently back to 99.5% of the prior high point. The last shows "Employment: Percent of Previous Peak," which bottomed out with a 6.5% drop by 2010 and has only recovered about 1.5% of its comparative strength.

It looks like investors and producers have discovered that they can turn a profit without employing Americans. And they won't fill their payrolls again unless some change in the market gives them reason to do so.

Alternately, competitors could duplicate the jobs available in a particular industry in order to build their own organizations, but that brings us to another thing that I think people are realizing: The United States is no longer as good a place to be an upstart company looking to squeeze out efficiencies in existing industries or fill niches that the big companies haven't noticed.

I'm not, here, talking about the lottery-ticket possibilities exemplified by Google and Facebook. Neither do I mean the investment-driven bids to attract large buyouts from behemoths wishing to pad portfolios of potential next-big-things. If existing companies are finding that they can maintain their bottom lines without the large expense of labor costs, then smaller companies ought to be able to leverage that capability to compete, therefore making it crucial that incumbents put their profits and reserves to the most efficient use possible, whether that means opening new branches or lowering prices.

If, for example, the large contractor across town finds that relatively inexpensive equipment and tools allow him to cut his crews in half and take the savings for himself, there's no reason his employees can't break off and use the same techniques to compete. They'll edge out the contractor's excess profits, but they'll be doing better, themselves.

Of course, my use of the phrase "no reason" is rhetorical, not accurate. Public policy creates all sorts of reasons that carpenters might not want to try their hand at contracting. There are layers of insurance that a business requires. Regulations that they must follow. Minute codes with which they must be familiar. Fees that they have to pay to gain this license or that registration. In Rhode Island, they have a $500 minimum tax if they organize as anything other than a sole proprietorship. If they hire other people, there are piles of paperwork to manage.

I'm using the construction industry emblematically, here, but Iain Murray notes that "the costs of regulation today amount to $10,000 per employee per year for small businesses in the U.S."

That's why the advert where a little girl borrows her father's phone to help run her lemonade stand and ends up running a multinational just can't happen. The bureaucrats just wouldn't let her do it without jumping through the costly bureaucratic hoops first.

He even links to a map set up to track towns that shut down kids' lemonade stands.

Sure, there are arguments to be made for each and every regulation on the books, but in favoring the impulses to regulate and tax and to protect consumers from their own unfortunate decisions, we've set up a system that protects organizations once they reach a certain level of establishment. This applies to the downtown barber who has the means to secure a license, pay minimum taxes, and make his shop fully compliant with regulations and building codes, and it applies to the bailouts of banks and automobile manufacturers that have established themselves as "too big to fail."

Charles Krauthammer is right, as a lot of us have said all along, that President Obama (and President Bush, before him) "did a huge Keynesian gamble, and it failed." That's because borrowing money from the future to inject into the current economy can only jump-start real growth if the specific economic downturn of the time results from a lack of funds and if those funds can flow to the segments of the market best situated to transform raw materials and human productivity into new dollars.

If the downtown barber and corner lemonade stand are all set to go but just need the union masons working on government road projects to stop in on their way home from work, then Keynesian stimulus might help. But if the barber and lemonade kid are prevented from doing what they do, the government money will just flow to SuperCuts and CVS, which will use the extra revenue to overpower competition and pad reserves.

In government, we face a spending problem, not a revenue problem, and in the economy overall, our shackles derive from regulation, not funds.