Thursday, April 3, 2014

The New Reality -- World Wide Stagnation

The world is gradually adjusting to a new reality -- dramatically lower levels of global economic growth.  Modern economic policy, whether in the US, Europe, Russia or Venezuela, presupposes that arbitrary government policy can "stimulate" economic growth and that policies that reduce the return on investment and policies that make employees significantly more expensive have no economic impact at the margin. 

Economists, by and large, have supported this notion.  Economic incentives, according to most present day economists, are irrelevant.  Government, by expanding excess demand can convince business to invest and hire, even while government takes an increasing share of business income, expands costly business regulations, and dramatically increases the cost of employees.  Why economists believe this is an interesting question.

Today's economists believe that if you pass a law that imposes a minimum price on something and then raise that minimum price, there will be no effect on demand.  That's why most economists support the minimum wage and minimum wage increases.  Today's economists seem to believe that if you pass a law making it a capital crime to hire an employee, it will have no effect on employment.  The models that most economists use believe employment is simply a result of aggregate demand and that microeconomic  considerations are irrelevant.  Thus, tax rates, regulations, mandates cannot possibly effect economic behavior.

The problem with all of this is that economists are dead wrong.  Today's economy provides ample evidence that all of this is wrong.  The policies advocated by these economists are in place -- higher taxes, massive government debt, huge government spending levels, ever-tightening regulation of business.  What have they produced?  The worst economy in the history of the US -- ditto for Europe.

Pundits now cheer when economic growth reaches 2 percent -- a level that Europe would die for.  As opportunities dwindle for youth and the elderly are slowly finding the old promises don't fit the new reality, the economists argue for more of the same.

Free markets could easily deliver us from all of this, but free markets don't have too many defenders these days.  Maybe, the western world simply got too rich to be rational.  Unless free markets find a way to break through this morass, the future of the US and Europe is predictably dim.

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