Tag Archives: political economy

Symptoms

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The headline for Greg Ip’s piece in The Wall Street Journal pretty much says it all:

In a Slow Economy, Negative Quarters Shouldn’t Surprise

No, they shouldn’t. But their frequent occurrence without the economy formally falling into recession is dispositively symptomatic of a slow economy. When economic progress is running at a sound 3.5% GDP growth year-on-year, a one quarter slowing of growth rate by, say, 1.5 per centage points—a common enough occurrence in an economy—would drop GDP’s year-on-year number to 2%. On the other hand, when economic progress is bumping along at that anemic 2% for its longer term, a 1.5 point drop takes growth to near zero. In the workaday volatile world of economics, a quarter’s slowing by 2 or 2.5 points—less common, but far from unheard of—moves the year-on-year number to outright shrinkage from merely slowed growth.

As this year’s first quarter GDP “growth”—a negative 0.7%–illustrates, coming as it does on a string of 1st quarter negative numbers and coupled with lots of quarters of less than 2% growth, here we are six years after the Panic of 2008 in a still slow economy.

Business Investing

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US businesses, feeling heat from activist investors, are slashing long-term spending and returning billions of dollars to shareholders, a fundamental shift in the way they are deploying capital.

Data show a broad array of companies have been plowing more cash into dividends and stock buybacks, while spending less on investments such as new factories and research and development.
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As the trend picks up steam, so too has debate about whether activist investors—who take sizable stakes in companies, then agitate for changes they think will boost share prices—have caused companies to tilt too far toward short-term rewards.

Vipal Monga, David Benoit, and Theo Francis in their Wall Street Journal article at the link lay the bulk of this reallocation of business funds to activist investors demanding a prompt return on their, and other investors’, return. In truth, there’s a lot to this.

There’s another factor though, that plays at least as important a role: government regulation. Regulation compliance cost the US $1.86 trillion in 2013—11% of our GDP. That’s the general case; there also are regulations surrounding increasing—even improving existing—physical plant. The EPA’s new water “protection” rule, for instance, gives the EPA—the EPA!—a say in whether, and under what conditions, a new factory can be built.

And taxes. Despite lots of Congressional chit-chat, there remains on the books, for instance, the medical device tax of Obamacare, a tax that takes money off the top line revenue—revenue coming into a company before the first dime is spent on company-related things. A tax that’s already caused companies to cancel expansion plans or to move them overseas.

Regardless of the cause, though, whether activist, regulation, to taxes, this misallocation of funds can only have a negative effect in the mid- to long run, even though it’s a short-term good for investors like me. This sort of thing is bad for business’ competitiveness and bad in the aggregate for American global competitiveness and technological leadership.

Should our government do anything about this? Of course not, at least not directly. It is bad business to allocate all those funds to buybacks and dividends at the expense of expansion, upgrade, and innovation, but the real economy, the private economy where actual citizens and market participants live and work, will do a fine job of handling this. There’s no need for government to “get impatient” and step in, because the time lags between the stock market and the actual economy are so variable and unpredictable. Which lags make it positively counterproductive for government to interfere.

It would be good, though, if our government moved to reduce the cost of regulation. A good first step would be simply to rescind a random 10% of existing regulations, and then begin serious rescission from there. After that, the real economy will deal with the activists.

Funny Thing

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…about competition and private cost control.

The Saudis and their OPEC colleagues, at the start of the shale and fracking revolution last year, made an overt decision to keep their own production up, which would allow prices to drop (much of OPEC—especially Saudi Arabia—had lots of cash reserves with which to handle the drop), which would kill American deep drilling and put those competitors out of business, restoring price control to OPEC.

However.

The US shale industry is by necessity becoming more efficient than ever. Low oil prices have become an opportunity. The Saudis have lit a fire under producers to trim the fat, deploy new productivity-boosting technologies and zero in on the most productive geology.

And

Just a year ago, popular opinion seemed to be that shale oil production was generally unprofitable if oil prices fell below $80 per barrel.

And

Statoil, for example, reported that just in a few months it cut its drilling time for new wells in Texas’ Eagle Ford formation from 21 days to 17. That kind of efficiency gain has helped “petropreneurs” reduce the cost of drilling wells from $4.5 million to $3.5 million.

Other companies are experimenting with new fracking fluids and different types of sand to create better shale-rock fractures. Some are effectively incorporating Big Data to better understand the sweet spots of geologic formations and optimal well-spacing to increase productivity.

The result is a rapid decline in the break-even price across shale plays. Already, analysts believe it is now $60 per barrel and before long will fall to $50.

Oops.

Government Imperative to Regulate

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This time in the commercial space industry. There is a bill slowly wending its way through the House that would limit—or not—regulation of the nascent commercial space industry. This is a bill that would

…extend and update federal protection for commercial launches from some potential liability involving property damage or personal injuries and fatalities on the ground. The legislation [also would bar] the Federal Aviation Administration from closely regulating fledgling space-tourism ventures for up to 10 more years….

There’s a hint about the wrong mindset there. The hint is clarified by the bill’s supporters’ attitude. They [emphasis added]

want to extend until the end of 2025 a so-called “learning period” during which companies and regulators are supposed to analyze operational data and consider the best way to create a regulatory structure.

Based on what theory do they think the commercial space industry must, of necessity, be regulated? What, even, is their limiting principle on government regulation?

The answers to these questions are, respectively, none and none. There is no need to regulate something just because someone wants to do it. Americans are not so stupid that our every action needs a rule to permit or prohibit it or to guide it. The lack of limiting principle is demonstrated empirically by the steady growth (and explosive recently, as that growth has reached the sharp bend in a typical growth J-curve) in the size of our government and the amount of regulation it’s committing on us.

What these guys don’t get is that a free market is a very fine regulator, and one that is both fast acting and flexible in all of its controls. A space company shows itself too dangerous? It goes out of business for lack of customers. It has no customer service worthy of the name? It goes out of business for lack of customers. Customers are reluctant to fly from concerns about recompense? Sounds like a market niche for insurers. Some other problem or reluctance? The market will fill the void, and quickly; it’s what competition does.

All government regulation does is protect the regulated companies from that competition, a function which achieves far more efficient regulation far more efficiently and without need of taxpayer-paid bureaucrats adding to the cost of the service.

The Congressional mindset is another argument for limited government. If it’s small enough, it can better be forced to keep its hands to itself.

What’s in Your Food?

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It’s not PC to ask or to know, according to the World Trade Organization.

The World Trade Organization (WTO) just ruled that America’s popular country-of-origin labeling law (COOL) enacted in 2008 violates global trade standards because it erects a trade barrier to US meat imports from countries like Canada and Mexico.

Japanese customers don’t get to know that the beef they’re thinking about buying came from the US. Nor do PRC diners. Nor do American customers get to know that their beef is coming from Canada.

Such knowledge constitutes a trade barrier, don’t you know.

What’s next? WTO ruling that food labeling generally is illegal? After all, if the food is known to be not halal or kosher, Jews and Muslims might not buy the food. Trade barrier.