Wednesday, May 31, 2017

Problems in Complex Systems Don't Always Have Simple Fixes

There's a quote attributed to HL Mencken, which Wikiquote assures us is a misquote, that "For every human problem there is an answer that is clear, simple, and wrong."  This observation seems to apply in bold italics to the economy.

One of the reasons we have President Trump today is that in his campaign he assured millions of people that the loss of jobs in America was due to bad agreements with other countries.  NAFTA was bad deal, resulting in jobs going to Mexico.  Trade with China is net loss in jobs for the US.  You all know those stories.  If we simply reached better deals those jobs would come back, and as the consummate deal maker, he can fix them.  Is there something to those stories?  A little, but those stories are far from a complete picture or an answer to bringing back jobs.

Let's start with a simple example: there are jobs that simply can't be outsourced.  Virtually every repair on everything you own has to be done locally.  You can't ship your backed up toilet to China for repair any more than you can send your broken central air conditioner to Mexico!  These things have to be done here.

Another example is home construction.  Yes, they're 3D printing concrete homes in a few places experimentally, but they're not making full sized houses and shipping them to the US.  It has to be done here.  According to the Financial Times, US homebuilding has been declining for a quarter century.  According to the article, sourced at Bonner and Partners, builders: 
“started work on the same number of houses in the past year as they did a quarter of a century ago, even though there are 36% more people working as residential builders now than then.”
That loss in productivity can't be caused by Mexican, Chinese or Bangladeshi workers.  The FT puzzled over this epic loss in productivity.  I think I can explain that, as I'm sure many of you can as well.  We'll get to that farther down the column.

Bill Bonner maintains that the 21st century has been an epic flop for America.
Economic growth rates have been trending down for 40 years. The number of people with “breadwinner” jobs – as a percentage of the working-age population – is at a 40-year low. And homeownership is back to where it was half a century ago.

There are pockets of prosperity. But get too far from the good neighborhoods and you find dilapidated houses… minimum wages… and drugs.
Add to these observations the fact that the percentage of people in the workforce is still on a par with the rates it had in the late 1970s, down significantly from its peak in the 1990s, and add that to the study we reported on two weeks ago saying that middle class wages have been in stagnation since the 1960s.  Sounds like Bonner is right about the 21st century being a flop.  At least for America.

I'm aware that I beat on the central banks and phony money all the time, and it's time to do it again.  In a normal, functioning economy, there's a thing called "creative destruction" that simply has to have its time.  The central planners have done their best to prevent this absolutely necessary phase.  Like weeding a garden or pruning back a tree, the economy has to get rid of the underperforming parts.  Just as jobs in the buggy whip industry had to go away to make room for the auto industry, and the vacuum tube industry had to give way to silicon, creative destruction is part of growth.

But big established businesses don't like destruction, if it applies to them, and government likes it least of all.  Businesses, and their insider owners, make campaign contributions and hire lobbyists. But politicians don't get invited to speak to industries that don’t exist yet. Politicians get no votes from people who haven’t been born nor tax revenues from businesses that have not yet been formed.  As a result, to quote Bonner:
The U.S. economy is slowing down. Now it creaks along, walking with a cane and trying to remember where it left the car keys.
The central banks policies have stifled innovation and so distorted the economy that it's simply dysfunctional.  In trying to keep the correction cycle from ruining the numbers for a few quarters, they've ruined it for years and as far into the future as we can see.
In an economy, the future sits at cheap desks in low-rent offices in bad neighborhoods.

Old businesses have yesterday’s methods and technologies; new business startups have tomorrow’s.

But “Americans are less likely to start a business, move to another region of the country, or switch jobs now than at any time in recent memory,” says the EIG paper. And “dynamism is in retreat nationwide in nearly every measurable respect.”

Forty years ago, nearly 6% of the population worked for a new company. Now, only 2% do. The job “turnover rate” was 12% in 1977; now it is barely half that.

Similarly, the startup rate has collapsed to only half of what it was in the 1970s. In 2010, more businesses closed than opened for the first time in history. Between 1983 and 1987, the nation added nearly 500,000 new firms. Between 2010 and 2014, only one-fifth as many saw the light of day.

The new businesses seem to be concentrated in small geographic areas, too – mostly between D.C. and New York, in South Florida, and in Southern California, with a significant block of growth between Houston and Dallas.

Most of the rest of the nation has been in an unrecorded recession – with more businesses closing down than opening up – for decades.

This means the average business is older than ever before… and that more people are more likely to work for one of these dinosaurs than ever before.

Also, as firms age, they tend to discard employees, not add them.

The idea of China or Mexico “stealing” jobs is largely fantasy. Old industries typically shed jobs as they age and die. Practically all net new jobs come from startup businesses.

The EIG study goes on to suggest that, in 2014, 1 million jobs went missing because of the lack of new business startups.

A startup business typically creates six new jobs in its first year. In 2014, there were some 150,000 fewer startups than in the 1980s.
These are profound, structural problems, not something that can be fixed by renegotiating NAFTA or "getting better deals" with the Chinese.  The structure at the root of this, probably the greatest concentration of cronyism in the world, is the Federal Reserve and the  The swamp has a vested interest in keeping things the way they are, at the expense of all of us and ultimately at their expense as well. 

Let's get back to the original issue, about why the productivity for homebuilding is in decline, and I said I thought I know why.  It's the same reason that health care costs grow at twice the rate of cost of living.  It's the same reason no matter what we spend on education, student performance doesn't go up.  It's the same reason tuition grows at three times the cost of living.  Over regulation combined with the effects of a broken, or nonexistent market.  Markets broken by, and over regulation created by, the big, freakin', out-of-control, government.
Just try to build a house.  In most places, zoning, building, administrative, and environmental regulations slow you down and add costs.  Either non-producing people have to be hired to deal with those regulations, or they consume the time of people actually building the house decreasing their productivity.  That's how it feels to start a business. 


  1. Good article, SiG. I'm glad you included regulation at the end, there. I am generally ignorant about economic dynamics, but I can't help but think that the regulatory "industry" created by our government - and worsened in the last three or four administrations - has put such a huge brake upon start -ups and even legacy businesses (e.g. the power industry, with the shut-down of coal, in spite of some amazing systems put in place to keep it clean) that it is responsible for much of the downturn.

  2. There are many facets to the problem but minimizing the off-shoring of jobs is unjust. It is difficult to "buy American" or to simply want to "not buy "Made in China" if you are inclined to. Everything seems to have that mark or label these days and that translates into "jobs."

    You are correct on the "local" nature of many jobs and I thank Mike Rowe and his efforts trying to bring back vocational tracks in education. Not every can or should go to "College." And there are many skills based jobs that we are losing the knowledge base to as those tradesmen retire. I think of it as similar to the lost formula for how the Roman's made cement/concrete and it took centuries for it to be rediscovered. How does that happen?

    But you are absolutely right about regulation. Today, when new houses should new new materials and technologies like solar panels, on-demand hot water heaters replacing the old water heater tanks, etc., and many more things I'm sure, the emplaced bureaucracies would rather sacrifice the future (talk about improving the environment in practical ways) in order to save a buck with cookie cutter housing designs and cheap products produced in places like China.

    American's need to learn that there are reasons to pay more for something and that cheap is not always good. Providing local jobs, benefiting the environment, spurring engineering and technology investment by growing demand curves and thereby business success makes the overall economy stronger. Sure cheap can be popular but then who wants to die in a pile of garbage. People's standard's have fallen way down and that is also a problem. Values, culture and expectations, of themselves, others and their society have fallen off the deep end. No one understands quality and it's benefits. People are stuck on stupid and "cheap." But maybe that is a reaction to the designs of the politicians and big business who care only about the bottom line. They are the globalists who think in terms of the global economy and don't give a hoot in hell about America. That is why Trump can talk about MAGA and people kin to what he is talking about.

    1. I think we're in complete agreement. I would only add one thing: it's possible the reason Americans are "stuck on cheap" is that wages have been stagnant for half a century. Nobody sees themselves getting ahead. Instead, they see prices inflating or "shrinkflation" (packages shrinking while price doesn't change as much) and their pay not keeping track.

    2. We see prices inflating _and_ "shrinkflation". Check out Ritz crackers (one of my addictions ;-), for example. Fewer sleeves of crackers, and the sleeves that are there are also shorter in length (fewer in the sleeve), yet the prices are higher - because the dollar is worth less now. Sucks for us folks on fixed incomes with savings that are being reduced by the inflation we are suffering these days.

  3. Those treaties were always intended to benefit the elite at the expense of the middle class.

    But out economic problems are actually very easy to fix. End all federal taxes on corporations. Cut personal income taxes. End foreign workers. Must be a citizen to work here. Reduce and eliminate regulations. Require that all regulations must be passed as laws in the congress and signed by the president before they can become "law". Put a sunset on all regulations laws not to exceed 5 years where they automatically expire unless they go through the process of being passed again in both houses and signed again by the president. Require that all laws (including what we now call regulations) be debated publicly and must be published for three months before congress can even pass it. Require that all laws be written in plain English and cannot exceed two pages. (if you can't explain it in plain English in two pages it is defacto proof you are full of shit and are trying to pull the wool over our eyes).

    Can you imagine the economic boom if we were to end business/corporate taxes? But federal elite greed doesn't want to allow it.

    1. Since virtually all of this is my "platform", yes; yes I can imagine the economic boom if we did this. (Paraphrasing, I know)

    2. This all began at the very start of this country. Research the "Whiskey Rebellion", and how the Father of Our Country" led troops to fight and kill citizens who did not want to be taxed on the products of their labor (distilling spirits, their source of income). Yes, the Constitution gives the government permission to pass taxes (tariffs), but this was short shrift for people who had just fought to be free of Britains taxations, and found themselves having to fight their own (brand-new) government.

      Sort of a prequel for Waco, perhaps?

    3. @Reg T

      Yeah, the whiskey rebellion was the beginning of the end for the idea that the constitution actually mattered or had any effect on the powers the government had over the citizenry and the states. My favorite (sarcasm) part is the fact that it is *still* (no pun intended...but when I realized it, it did make me snicker) illegal to distill alcohol without a (nearly impossible to obtain) permit for producing alcohol for human consumption, or (easier to obtain, usually) a permit to produce alcohol for fuel use. The whiskey rebellion was long before Prohibition, but I can't help seeing them as connected. And it really ticks me off when I think about the fact that the 18th amendment was repealed, but you wouldn't know it if you tried to do what Americans had done for generations before it was passed. It remains illegal to make your own alcohol without a permission slip from the government.

      PS: no, I have never distilled alcohol before, and I'm pretty sure I wouldn't know where to begin if I wanted to, but just because I don't exercise a right doesn't mean I don't resent having it stripped from me, y'know?

  4. Can you cite any examples of a government voluntarily reducing its total grasp, measured over a span of 75 years? If so, those are conditions which have worked before for your reform program; can you recreate them? If not, what evidence supports your reform program ever working?

  5. A good start would be a labor shortage. That, and elimination of H1Bs, a graceful exit from NAFTA, and switching existing regulations so as to benefit the United States as a country and the majority of the citizens of same, and you'll see a positive change. Of course, none of this will ever happen because it has nothing to do with reelection and the expansion of governmental powers.