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 Fed.gov.  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.