The bane of economic growth

Welcome to Finance and Fury. Everyone is talking about bad economic conditions at the moment and bear markets – but what is the cause?

1. Slowing economic growth and a lack of recovery, higher inflation has many different causes that have piled up over the years – but at the core, I believe that it comes down to two major roots – ranging from fiscal to monetary policy failures – these policy failures could be put in other terms – which come from something called a political fallacy – a policy decision that is sold to the public as the solution to their problems, all to just create more problems down the road – for which, additional policy is created to then just repeat the cycle
2. I’ve been listening to Thomas Sowell’s book Economic Facts and Fallacies – in it he quotes Henry Rosovsky – “Never underestimate the difficulty in changing false beliefs by facts”
   1. The media and politician often spout one cause of a crisis – but this is often never the true cause but what is the most politically expedient for the population to direct their ire towards for the current issues that they face – to blame the government or central bank would not be in their best interest – instead, Russia, or China, or some outside force that they have no control over is what gets the total blame – but previous policy decisions that have gone wrong will never be brough up
   2. This could be considered an economic fallacy – however the issue with fallacies comes down to the initial policy being proposed is usually both plausible and logical in concept – but they have something missing
3. Plausibility gains the policy and the party behind this political support – this political support grows as the fallacy continues to be mentioned – How many times does a statement need to be said until it becomes the truth?
   1. This has been researched in depth in cognitive research – in one study called “The effects of repetition frequency on the illusory truth effect”, the researchers conducted different experiments showing people false statements to see how long it would take for these to become the truth – in their experiments, they found that perceived truthfulness increased as the number of repetitions increased – but the truth rating increases were logarithmic in shape – i.e. the largest increase in perceived truth came from encountering a statement for the second time, and beyond this were incrementally smaller increases in perceived truth for each additional repetition – so if you hear a false statement 10 to 11 times, this has less effect in instilling this a falsehood when compared to the second time that you hear a false statement – however, the more the repetition occurs, the less likely you would be to ever question the statement as to its veracity
      1. When it comes to government policy – There are always many missing or ignored factors that lead to unintended consequences – This is why it pays to look deeper into things that look too good at the time
   2. Sometimes what is missing is simply the definition of what is being proposed – this is a major issue with politics and the rhetoric of statements – mainly due to the undefined words being used in political speeches – these undefined words have a special power in politics
      1. Particularly when they engage emotional responses – using a principal such as fair, social justice or equality are some examples of this
      2. These are undefined terms through – however they gain major political support for policy ranging from fair trade laws, workers rights, minimum wages and the list goes on
      3. Words being undefined is an intellectual handicap – but it is a huge political advantage – as people will always have very different views and definitions on what each of these terms mean – but they can be unified under the terms regardless
      4. Who isn’t for living in a fair society – or having an equal society where everyone is treated the same?
      5. But what I think of these terms is not what others may thing – here lies the problems – For the rich to pay their fair share of tax is often a statement that is uttered by politicians, the media and the supporters of higher taxes on the rich – but what is fair? In the US, the top 10% of income earners pay 70% of the income tax, in Australia this is around 52% of all taxes paid are by the top 10% of income earners – is this fair? Well, it depends on your definition – as 60% of working age people pay around 7% of the total tax collected – the top 10% do earn 46% of the total income pool before transfers from government benefits – but is this still fair?
      6. The point here is that undefined terms and policies create real problems – these policies affect our every day lives
   3. And the unintended consequences of these policies that are simply based on rhetoric can take years to unfold
      1. And often the bad consequences cannot be easily be traced back to the policies themselves – either through the length of time that has lapsed, or the misdirection from political proponents who place the blame of the economic woes on others
         1. See, the population of North Korea are the most prosperous on earth and the western nations are the ones that are struggling
      2. But even if a bad consequence occurs right after a policy decision, many people may not connect the dots
      3. Advocates of policies that backfire may attribute the bad consequences to something else – there are even claims that the bad situations may have even been worse if not for the policies that they implemented
      4. Elected officials cannot admit that a policy or programme that they advocated for has turned out badly without risking their careers – even supports of those policies could find it painful to confront the fact that they were behind something that made the situation worse
   4. Evidence in many cases is too dangerous politically, economically and psychologically to let it come to light
      1. Nobody likes to admit they were wrong – if you are the politician, this could be career suicide
      2. But in many other cases the costs of not admitting that you are wrong are too high to ignore – such as private business or in private employment
      3. The real-world costs that those who are outside of the government are forced to face make people face reality no matter how painful it may be
      4. If you are in business and make the incorrect policy decision – say by increasing prices, or decreasing the quality of your good – but then you start losing revenues and profits – this is a signal that your choice was likely wrong – as a business owner, you cannot afford to lose money indefinitely – so you are confronted by the decision to admit the policy was a bad call and change, or refuse to admit fault and go into default
      5. However, if you are in government, the realities of your policy decisions never really affect you – you can lose money for others, as it is not your money you are losing – you can pass legislation that reduces the living standards of your constituents, but what do you care? You still get the same tax funded salary
   5. The real issue is that the difference between sound or fallacious policies by government do affect the standards of living of millions – and are rarely repealed, no matter the real-world problems that they cause
      1. If anything, the problems created can be good for governments, as this is something else that they promise you that they can now solve – there is no real incentive for a government to provide a service or solve a problem – as if there were no perceived problems that they could fix, their need to exist would soon cease

One of the largest problems comes from the zero-sum fallacy and policies that aim to rectify the perceived problems – this fallacy comes from the assumption that economic transactions are a zero-sum transaction – where what is gained by one is lost by another

1. An economic transaction is something that you encounter every day – employer to employee, where you decide to work for someone for a wage, renter to landlord, where you decide to rent somewhere at a given price and conditions, consumer and goods, where you buy food or other goods from a provider – the list goes on
2. These transactions would not continue to occur unless both parties were in a better place for undertaking these than not making these transactions – This is obvious but the implications are not obvious to policy makers
3. Why do economic transaction take place at all and under what terms? – There first needs to be the potential for mutual economic benefit, which is essential, but the terms under which this transaction will take place also need to be agreeable by both partied –
   1. The only way that a transaction can take place is if the terms are acceptable to both sides – doesn’t mean that it is perfect, but that both parties get an outcome that is positive from the position that they are currently in – in other words, their economic benefit is positive, and the utility in their situation is also positive
4. But now, say a government policy is imposed to help one side or another – be it a consumer of energy, tenants who rent, or employees – the list could go on – now there are three different parties involved in these transactions
   1. Now the terms that are acceptable for a transaction to occur are extended to three parties – and one of these is not able to be negotiated with – as the policy is the law
   2. The new terms by governments remove a vast sum of terms that would have been mutually acceptable to the two parties – these cuts down the number of terms that are available to make a transaction under – hence, fewer transaction are likely to be made – given that transactions only occur when they are mutually beneficial to both parties – it now means that one or both parties are now worse off in one respect or another – but it also means that less economic activity will occur and with it, less economic growth
   3. This general principal has many examples in the real world – energy price controls, rent controls, trade agreements – The more laws that exist– the more complex the economy becomes and the less transactions occur – major weaknesses of bureaucracy
5. A bureaucracy at its core is dehumanising and removes the concept of two individuals negotiating the terms that are economically beneficial to them – a bureaucracy is inflexible in distributing to the natural state of the job market, as creativity of the workers is brushed aside in favour of strict adherence to rules, regulations and procedures
   1. Reduction in innovation – medieval guilds for metallurgy, all crafts – Reduction in freedom of choice
6. As an example – the following are a few examples of ridiculous laws that are still on the books, but never repealed –
   1. It is illegal to wear hot pink pants after midday on a Sunday, In QLD, Taxi cabs are required to carry a bale of hay in the trunk, In NSW, Bars are required to stable, water and feed the horses of their patrons, Only licensed electricians may change a light bulb, If a urinal is not readily available, it is legal to urinate on the rear left tyre of your vehicle, It is illegal to be drunk in a pub, It is illegal to read someone’s tarot or give them a psychic reading as these are forms of witchcraft
   2. These are extreme examples that would not be enforceable – but are still the law – if you are bored, own a horse and live in NSW, may as will give it a go to rock up to a bar on your horse and require them to stable this under the law
7. But there are plenty of other examples that are still on the books that reduce the voluntary transaction of individuals – reducing economic activity, creating additional economic problems along the way and lowering economic growth
   1. The more governments as a bureaucracy enter the equation of economic transaction, the worse the economy seems to become – but then the policy makers come out with more solutions to these problems, to only have further negative effects – one of the most recent examples come from the UK government with their energy pricing policy, creating a collapse in the pound and UK pension funds
   2. Another examples come from global supply chains being shut down and business being shuttered for the best part of two years – the economic cost of which were never explored – then the inflation being blamed on other factors, like Russia, which has no doubt had some effect but not the root cause
8. From central banks – most boom bust cycles can be stemmed back to the monetary expansion and then contraction by CBs – all which are decided by committee – with nothing to do with supply or demand – they just say what money should be worst based around their best guess – non-dynamic and never correct – as it is impossible to be correct in that situation – but again the boom bust cycle is always blamed on exogenous factors – and this statement is repeated enough that it becomes the truth and hence – the parties responsible escape the blame once again

Best solution are less interventions – in an ideal world, politicians would be banned from making any new policy and instead, be set on looking at what is causing the most harm and then removing these one by one – With an average of 180 new pieces of legislation being created every year – the balance of more and more laws is not in our favour

9. The moral of the story is to not trust governments or CBs to solve problems
   1. As problems are likely those of their making – and giving them the power to solve anything not only doesn’t solve the problem, but creates more problems down the road
10. Centrally planned and controlled economy – the problems are by those doing the controlling
11. There are always problems in any economy – but markets come up with the best solutions in the quickest period of time

Under a free market there would be creative destruction, market volatility and economic volatility in measurements like GDP and inflation – but these would not be major issues when compared to the problems that governments create