Wednesday, September 09, 2015
The West’s huge cost disadvantages, particularly because of regulations
By economic historian MARTIN HUTCHINSON
Modern telecommunications shrank the cost differential between rich and poor country product sources, making global supply chains easily feasible. Ever since the middle 1990s, therefore, the rich world has been getting poorer, as living standards across the planet began to converge. In the last decade, however, government actions have hugely increased costs in rich countries, making them less and less competitive – and lowering their citizens’ living standards far below the level dictated by the market. It’s time for Western citizens to rise up against this oppression.
Many commentators are currently bemoaning the parlous state of emerging markets’ economies. Yet their diagnosis is precisely the reverse of reality. Emerging markets now have a massive cost advantage compared to their developed brethren, they have further to grow without outrunning their living standards, they have by and large avoided the mistakes of the developed world and their growth rates remain safely in the black, even after population growth is factored in. It is the developed economies, not the emerging ones, which are in serious danger of falling backwards in absolute terms.
Before the 1980s, it was difficult for emerging markets to compete. Communications were expensive and difficult and most emerging markets were not fully aware of the needs of a modern economy, with poorly trained workers and whimsical regulations. Hence most production for the rich world was done in the West, with only a few industries, notably textiles/garments, fully open to competition from poor countries (and high protectionist barriers against poor country textile production until the 1990s.)
Since 1994, emerging markets have become fully competitive with Western countries. Under the influence of the fall of Communism and the emergence of new producers in Eastern Europe, they made a bonfire of many of the silly regulations that had hindered them. The surge in foreign investment which followed, which was partly motivated by the new ease of communication, rapidly improved the skill levels of emerging market workforces. Today, emerging markets are competitive against the West in almost any manufacturing sector and most services, so the West needs to up its game in order to ensure the preservation of its living standards – not the differential against emerging markets living standards, which is bound to erode over time, but the living standards themselves in absolute terms.
Instead of upping their game to meet the new tougher competition, Western countries have done the opposite, especially since 2008. They have added costs to the economy in a number of different areas, weakening their economic performance and their ability to compete with emerging markets. As a result the living standards of Western workers, especially those of only modest attainments, have gone into steady decline and many have withdrawn themselves from the workforce.
The most important area where additional costs have been imposed is through regulation, especially in the energy area. The global warming hysteria from about 2007 has caused government after government to pass heavy regulations forcing the closure of electricity plants while subsidizing hopelessly uneconomic energy sources. This has not only affected living standards directly, by increasing energy costs, it has also driven out many high-paid jobs in heavy industry, which depend on cheap energy to remain competitive with emerging market producers. The German saga, where energy costs almost double those in other countries have reduced the German steel industry to a fraction of its former size, is just one case where ideological fanaticism on the part of the elite has wrecked the livelihoods of ordinary people.
As important as the restriction of existing efficient power capacity has been the subsidization of new inefficient power capacity. Scams such as Solyndra in the United States, and the massive cost-inefficient wind farms in Britain, have all been instituted at enormous cost to the public, either directly through state subsidy or indirectly through regulations forcing utilities to take the uneconomic power at rates that make no sense in the context of their overall business. Each wind farm may represent only a relatively modest waste of taxpayer or utility-user money, but collectively they place a colossal drag on the Western economies concerned.
The “green” cost to Western economies is not limited to the global warming campaign. The regulation outlawed by the U.S. Supreme Court in June, which imposed $10 billion of costs on electric utilities for a benefit of only around $5 million, thereby achieving a cost/benefit ratio of 2,000 to 1 in the wrong direction, is just one of a myriad of additional costs that enthusiastic Obama-era zealots have imposed on the U.S. economy. Similarly in Europe, there is little or no democratic control over the regulatory enthusiasms of the EU bureaucracy. Globally also, the various international bureaucracies impose massive costs primarily on the “rich” West without any form of democratic control. As the $10 billion example above shows, the individual regulations may be obscure and fairly modest in their economic effects, but they quickly add up.
Infrastructure costs have soared through the roof due mostly to the regulatory bureaucracy but also to the excessively favorable climate for obstructive lawsuits. When a new tunnel under the Hudson River costs in real terms fifteen times what a functionally identical tunnel cost in the 1920s, the burden on the economy has become grotesque. Big-government politicians observe crumbling bridges and call for more infrastructure spending, but society has rationally taken the decision to spend less on infrastructure while its cost is so great. It is not greater Chinese efficiency that enables them to build new facilities at one tenth or less of the cost in the U.S., it is sclerotic U.S. bureaucracy and regulation and uncontrolled parasitic U.S. lawyers.
Government’s additional cost burdens on Western economies go far beyond regulation itself. The orgy of fines and related costs imposed on the banking system since 2008 now totals over $260 billion, according to Morgan Stanley research quoted in the Financial Times, and there is no sign of any slowdown soon. Extraordinarily, most of the fines have not been related to the outrageous bad behavior of the banks in the run-up to the crisis, such as Goldman Sachs’ deliberate design of securities destined to fail in the “Fabulous Fab” case, but have instead related to tiny manipulations of LIBOR and other systems that were never designed to take the stresses of multi-trillion volumes through the derivatives markets. Either way, that $260 billion alone represents about 0.6% of rich country GDP, and it is sheer dead weight on economic output, especially damaging because it has mostly been imposed for faults that nobody could have spotted at the time, with penalties imposed in entirely arbitrary and excessive amounts.
The West’s costs are also increasing for a reason entirely independent of government: a higher dependency ratio as the baby boomers age past retirement and the workforce shrinks. Governments have however persistently attempted to worsen this problem by mass immigration, adding immeasurably to the welfare burdens of society by letting in poor immigrants with few skills who languish at the bottom of the economic totem pole. While the higher dependency ratio should reduce the income of society as a whole, by reducing the number of workers, it should increase the earnings of the workers themselves (by all means, while making them look after an increasing number of dependents.) It is a bitter condemnation of the West’s immigration policies over the last couple of decades that this is not happening; instead, wages are declining even as dependency ratios increase, as the flood of immigrants pressures the lower end of the earnings scale.
The additional costs imposed by the higher dependency ratio are being exacerbated by the soaring costs of healthcare, which has been subsidized by government for far too long. Pharmaceutical prices are bloated by excessive intellectual property rights, while hospital care prices are bloated by sheer maddening bureaucracy and the trial bar. Patients are now flying to Third World clinics to get their non-urgent healthcare carried out at reasonable cost. The additional burden of a healthcare sector that absorbs 18% of GDP is a major burden on U.S. living standards and to a large extent those in the rest of the rich West where the market in healthcare services has been distorted.
The greatest recent additions to the West’s burdens however have come from the grossly misguided economic policies pursued since 2008. Economies have been loaded up with extra debt to pay for wasteful government boondoggles, and it has all been financed by a monetary policy far more extreme than any since the 1920s, making government debt cheaper but forcing up asset prices, especially those of real estate. I wrote two weeks ago about how big cities were now hopelessly uncompetitive as business locations; that is true only in the West and not by and large in emerging markets where real interest rates have been kept safely positive and real estate bubbles have been avoided. There is a certain “feel-good factor” to rising house prices which prevents their full cost from being felt until after prices stop rising, but in reality the economic damage they do is both immediate and long-lasting. The money wasted in superfluous real estate and on projects that are economic at normal interest rates is an additional burden on the Western economies, invisible now but crippling in the next downturn.
Western politicians are right to worry about declining living standards, and their countries’ strange inability to compete with emerging market production. However this failure is very largely the result of their own hugely damaging policies.
Beefing Up Obama's Pro-Amnesty Agenda
The Obama administration’s intention to force-feed a pro-amnesty agenda to a recalcitrant American public has reached a new low. The Department of Justice (DOJ) recently announced it had reached an immigration-related settlement with Nebraska Beef Ltd., a meat packing company headquartered in Omaha, Nebraska. The DOJ had accused the company of discrimination — because the meat packing company demanded that workers show proof of immigration status to demonstrate they were eligible to work legally in the United States.
The DOJ insisted Nebraska Beef violated the Immigration and Nationality Act (INA) because it required “non-U.S. citizens, but not similarly-situated U.S. citizens, to present specific documentary proof of their immigration status to verify their employment eligibility.” Yet the act itself states that “employers may hire only persons who may legally work in the United States (i.e., citizens and nationals of the U.S.) and aliens authorized to work in the U.S. The employer must verify the identity and employment eligibility of anyone to be hired, which includes completing the Employment Eligibility Verification Form (I-9).” Adding insult to injury, the act warns employers that they can be penalized if they fail to complete and/or retain those I-9 forms.
Judicial Watch put this outrage in the proper perspective: “You know the nation is in trouble when a U.S. business gets investigated by its own government for following the law.”
Regardless, Principal Deputy Assistant Attorney General Vanita Gupta, head of the DOJ’s Civil Rights Division, was adamant. “The department is committed to ensuring that individuals who are authorized to work in the United States can support their families and contribute to our country’s economic growth without facing unnecessary and discriminatory barriers to employment,” she stated. “We will vigorously enforce the law to remove such barriers where we find them, and ensure that affected individuals have a means of seeking relief.”
“Relief” in this case amounts to Nebraska Beef paying $200,000 in a civil penalty settlement, establishing an uncapped back-pay fund for people who lost wages because they could not prove they are in the country legally, and two years of compliance monitoring. The company is also required to train employees on the anti-discrimination provision within the Immigration and Nationality Act and to revise policies within its office.
The anti-discrimination provisions of the act can be seen here. The germane clause states that employers “may not treat individuals differently based on citizenship or immigration status. U.S. citizens, recent permanent residents, temporary residents, asylees and refugees are protected from citizenship status discrimination.” All well and good, save for one seemingly inherent contradiction:
How is a company supposed to determine a potential employee’s status and eligibility to work in the United States without documentary proof?
A 2014 federal audit conducted by the Department of Homeland Security (DHS) inspector general revealed the bigger stakes in play here, noting the Obama administration has not only been “inconsistent” in enforcing the provisions of the Immigration Reform and Control Act of 1986 (IRCA), but it reduced the average fine for businesses caught hiring illegals by a whopping 40% between 2009 and 2012. Now the DOJ’s Civil Rights Division is getting in on the act, helping to facilitate the administration’s pro-amnesty agenda.
All Americans should be outraged, but none more so than black Americans. Another disappointing jobs report Friday revealed that only 173,000 jobs were created in August, despite predictions of 220,000. And though the unemployment rate dropped to 4.4% for whites, a drop of 0.2% from July, black unemployment is 9.5%, up 0.4% from July.
Unfortunately, both of those figures hardly tell the real story. The daunting reality is that a record-setting 94,031,000 Americans were not in the labor force last month, and the labor participation rate is 62.6% — the lowest level since 1977. When those people are counted, the overall unemployment rate, trumpeted to be 5.1%, more than doubles to 10.3%. Even worse, wages for all American workers have declined from the time the so-called recovery began in 2009, right through 2014 — with lowest paid workers taking the biggest hit.
All while Obama champions amnesty for million of illegals who would drive those wages even lower — for as long as a decade.
In short, the fundamental transformation, or more accurately, the balkanization of America, continues. Assimilation has been tossed on the ash heap of history, in favor of the multiculturalist “celebrating our differences” nonsense that is tearing this nation apart. The transnationalists who would abet our descent into Third World-ism for cheaper labor and reliable big-government votes must be thoroughly rejected by an electorate that still treasures national sovereignty. And it’s about time presidential candidates other than Donald Trump heartily embrace the one irrefutable statement he has made (echoing Ronald Reagan, by the way): A nation without borders is no nation at all.
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Posted by JR at 12:34 AM