Friday, January 29, 2016

The Paradox of Oil

Wall Street analysts seem genuinely puzzled about the macro-economic effects of the collapse in oil prices.  Welcome to the super-regulated economy.

In olden days, a dramatic collapse in oil prices was a good thing.  The economy could adjust, painfully, to the damage to the oil industry as workers and capital moved from oil to other areas of the free market.  That can't happen today.

We now live in an economy where it is incredibly difficult to get through the red tape at all levels of government in order to: (i) start a new business or to (ii) expand an old business.  To those problems add in the enormous piling on of labor costs from government-mandated employee benefits -- Obamacare, the right to sue for whatever, over regulation from OSHA, and on and on.

No one could seriously think of opening a lemonade stand in East Baltimore unless they have the 16 to 24 months required to jump through bureaucratic hoops at the local, state and federal level.  Going to work for your local drug dealer makes much more sense.

So, when oil prices drop, consumers do benefit, but not by near enough to offset the damage to the domestic oil industry.  With such a pitiful level of economic growth and job creation, workers displaced from the oil industry have nowhere to go.  

A few decades ago, before regulations at every level of government reached such titanic levels, resources were free to move from declining industries to burgeoning new companies.  No longer.  Government now virtually outlaws the free movement of capital and labor through excessive regulations.

Even if some eccentric soul decided to venture into a new business, he would find Dodd-Frank and Elizabeth Warren standing firmly in the way blocking their path.  You can only borrow what regulators say you can borrow. Local bankers don't make lending decisions any more.  Those decisions are made in Washington today and are dominated by political considerations.

Elizabeth Warren's contributions to consumer protection have effectively frozen opportunities for business expansion and the play out of the free market.

We are in the no-growth Dodd-Frank, Obama, Elizabeth Warren economy.  Things like economic growth and growing living standards are things of the past.  So, when an industry declines the US economy just sinks along with it into the quagmire.  The free market is no longer permitted to do its thing.  Very bad news for the average American.

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