Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Government Regulation and Economic Stagnation

Economics / Market Regulation May 20, 2015 - 09:48 PM GMT

By: MISES

Economics

Peter St. Onge writes: One of the more interesting economic debates in the past couple of decades is why the economy is slowing down.

Since 2000, per capita GDP growth in the US has been 0.9 percent per year, compared to 2.3 percent per year in the previous fifty years. This is a big difference: at 2.3 percent growth we double in wealth every generation. At 0.9 percent it takes us close to a century to double. So why the slowdown?


Even fresh young blogger Ben Bernanke’s in on the game with his new blog, while Tyler Cowen has written a minibook on the subject, called The Great Stagnation.

One thing that most economists, left and right, agree on is that it takes investment to make an economy more productive. So, naturally, economists focus on investment rates. Which have indeed come down, across most of the industrial world, mirroring the US numbers above.

Misplaced Fears of Hoarding and Deflation

To Keynesians, any problem is a demand problem — it’s their one hammer to solve them all. So the position of Bernanke, Summers, and the ever-present Krugman is, with minor adjustments, that there’s too much savings sloshing around in this world instead of being invested. That savings acts as a deadweight on productivity improvements.

“Savings” for both Keynesians and Austrians means the money not spent on consumption. But Keynesians miss that you can do two very different things with savings: you can hoard it, or you can invest it. Hoarding means you secret it away, which terrifies Keynesians. Investing means you indeed spend the money on some productive good or service.

When the Keynesians complain about dead money, they mean there’s too much hoarding. But this completely misunderstands how hoarded savings affect investment. A dollar that’s unspent is equivalent to temporarily removing that dollar from existence. You may as well have buried it. This means that all remaining dollars increase in value.

To illustrate, let’s say you’ve got $100 billion running around the economy, and you burn $25 billion. What happens? The remaining $75 billion do the work of that original $100. Meaning each dollar rises in value by 33 percent. Now, if instead of burning that money you hoard it instead, the impact is the same: the remaining dollars in circulation rise in value. You get deflation. You still get your $100 billion spent, it’s just being accomplished with fewer pieces of paper.

So hoarding merely transfers purchasing power to dollars still in circulation. Meaning that Keynesian bugbear of “savings gluts” have no impact on investment. Because hoarding cancels itself by purchasing-power adjustment.

The Role of Regulation

So what is causing the slowdown? Cowen, who is among the few mainstream economists actually trained in Austrian economics, gets closer to what I think is the true cause, when he looks at supply-side problems. Still, I think he’s missing the obvious. Cowen claims that we have plucked the low-hanging fruit — excess land on the frontier, basic education of kids — and now we just have to suck it up and get used to the new normal.

The problem here is the timing. The frontier “closed” over a century ago, actually before the greatest leap in US economic growth (the “Gilded Age”). Literacy rates, too, leveled off a century too early. I suspect a statistical analysis would say that, by sheer coincidence, the exact opposite occurred: economic growth soared once the frontier closed and literacy rates leveled off.

So what is the cause of the slowdown? Well, we need something that actually occurred in the right timeframe. For me, the problem is pretty obvious: creeping regulation. It’s hard to quantify the impact of regulations: how do we measure a regulation against, say, selling street food or braiding hair without a license? So we need to use proxies.

Here’s a chart of the annual number of pages in the Federal Register. This is a proxy for how many rules come up, which is in turn a proxy for the regulatory burden. These took a huge jump starting in the 1970s, briefly interrupted by Carter’s deregulation drive, then resumed their march upward from the 1980s.

Comparing the productivity numbers to regulatory pages matches up pretty well: pre-1971 real GDP ran at 2.4 percent. Since 1971, it’s run at 1.8 percent. Still, the big drop-off since 2001 isn’t simply explained by pages — there was no big jump in 2000 in Federal Register pages.

So the timing’s not perfect, but there are other comparisons we should make as well. Specifically, we need to look at other countries because our view of the causes of the slowdown will change depending on whether or not all countries are experiencing a slowdown, or just certain countries.

In both the Summers-Bernanke-Krugman savings glut theory and in the Cowen low-hanging-fruit explanation, they are proposing something that should be affecting at least all rich countries. In the regulations explanation, we’d expect different harm depending on the regulatory zeal of particular countries.

The data supports the country specific — regulatory — explanation, simply because there are still rich countries that are growing. The slow-down’s not affecting everybody. Here’s a chart of performance during the so-called stagnation of the top five countries in economic freedom, ranked by Heritage’s 2015 Index of Economic Freedom:

Most interesting are the three countries that actually passed the US during the supposedly world-wide stagnation: Singapore, Australia, and Switzerland. Singapore only passed the US in per capita income in 2011, Australia in 2010, and even Switzerland was at the same income as the US in 2000 — and now it’s nearly 50 percent richer.

So what’s so special about these countries? In general, there’s almost nothing that, say, Australia, Singapore, and Switzerland have in common — language, size of country, resources, structure of economy, type of government. What they do have in common, though, is low regulatory burden, limited governments, rule of law. In fact, both Switzerland and Singapore are regularly threatened by the US as tax havens.

If, indeed, it’s this relatively business-friendly attitude that lets some countries escape the supposed Great Stagnation, we have yet another reason to doubt the policy prescriptions of the Summers-Bernanke-Krugman position. Rather than the expanded government role in lending, or Cowen’s pessimism, the solution is clear: put as much effort into removing regulatory and tax deadweight as we put into hatching new burdens.

Peter St. Onge is a Summer Fellow at the Mises Institute and an Assistant Professor at Taiwan's Fengjia University College of Business. He blogs at www.profitsofchaos.com. See Peter St. Onge's article archives.

http://mises.org

© 2015 Copyright Peter St. Onge - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules