Sunday, December 4, 2011

Smart Conservatism: The Economy (Part I)

I have spent enough time blasting talk radio and Fox News, so I want to switch gears and focus on what might a credible conservative movement look like in terms of policy. These first couple of posts will deal with the economy.

The unemployment rate just recently fell to 8.6%, but this largely reflects people dropping out of the labor market. Approximately 350,000 fewer Americans sent resumes out than in months before. There are millions of Americans who are out of work and their government has largely failed them. The Republican Party ought to provide a realistic alternative to the Obama administration's mostly unsuccessful policies.

First, we need to understand what is preventing a full economic recovery. The short answer is an unprecedented collapse in demand. Conservatives are right to worry about the effects that regulations can have on job creation, but we need to have a more precise understanding of what is ailing the economy. I can think of 7 reasons why regulations are not the chief problem.

1. The average hour work week has remained the same. If employers were concerned about meeting demand but were prevented from hiring new employees because of regulations, then we would see them ramping up the hours of the workers that they already have. This has not happened. There are currently 5.6 million workers who have part-time work but are looking for a full time job.

2. Comparing the current recovery to past recoveries shows that business investment as a percentage of the GDP has increased more now than in the past two recoveries. If businesses were not hiring due to overbearing regulations, we would see that reflected in their investment.

3. Small business surveys conducted by the National Federation of Indepedent Businesses reveal that 29.6% of business owners cite poor sales as their chief problem as opposed to 13.9% who cite regulations. If that survey is not enough, you can check out other surveys conducted by the Bureau of Labor Statistics, Small Business Majority, the Wall Street Journal, and McClatchy newspapers that all show the same thing (links here).

4. American exports are at a record high. This suggests that American businesses can sell their products when they have an available pool of customers. The problem with exports is that it is not enough to bolster the recovery. The Euro Zone receives 16% of American exports and one could logically conclude that this number is going to decrease in the coming years. 

5. In industries where regulations have increased, the unemployment rate in those sectors has been below the national average.

6. Surveys of business and academic economists reveal that the vast majority believe that the current regulatory environment is good for American business. A majority of economists surveyed by the Wall Street Journal in July also said that lack of demand, not uncertainty, was the chief cause of a weak recovery.

7. Obama has instigated fewer new regulations in the first 33 months of his administration than President Bush did in his first 33 months, although Obama's regulations have been more costly. One could argue that given the economic circumstances, President Obama should have enacted fewer regulations, but it simply is not true to suggest that his administration is killing the economy because of excessive regulations.

Again, our problem is a collapse in demand, not too many regulations. The goal of the conservative movement should be to address this problem without creating vast lands of new government and without driving our national debt to out of control reaches.

How to do that?

More to come...

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Ohio JOE said...

"The short answer is an unprecedented collapse in demand." And why is that? I is because of lack of Consumer confidence? And why is that? The consumers are afraid to buy that because of regulations, bail-outs and lack of capitalistic policies. It is not rocket science.

Anonymous said...

Pablo, I don't research like you do, and I know next to nothing about the economy, so my comments are probably pretty much useless.

But I think people are just afraid to spend money right now until they know how the economy is going to play out.

It seems like businesses are also afraid to hire more, and invest more into their businesses until there is more stability on the horizon.

I'm a very small business owner, and all I know is that our business has gone steadily downhill for a year, and it just seems to me that customers are simply reluctant to part with their cash for big ticket items right now.


Slick-Willy said...

First, 29% cited demand, but 13% cited regulation. Clearly both issues are directly significant.

Second, as OJ said, demand is caused by many things. Businesses are holding onto their $ to plan against the negative possibilities in this uncertainty. As a result they hire less people and less people have money to spend. Banks also loan less money to protect against loss for a number of reasons--again, less $ in the market. The people themselves are holding their $ more tightly because they have less of it and have become more responsible in these difficult times.

This conservation of $ causes the money multiplier (econ 101) not work like it normally does--it usually multiplies any $ in the market by 9 or 10. However, when people/businesses are tight-fisted, it flat out fails--one of many significant reasons the stimulus totally flopped.

It's important to understand that a reduction in demand does not answer the question about what we should do--it is merely a symptom of a bad economy.

Pablo said...

Slick Willy,

Actually there was one survey that had regulations at 13%. I have seen others that had it a .3 %. 13% was the biggest number I have seen. Plus, when you combine those numbers with all of the other reasons that I listed, it is difficult to argue that regulations are that much of a cause for our weak recovery.

In your second point, you are describing a collapse in demand. People hang onto their money and don't spend it. Businesses aren't hiring because nobody is buying things and so there isn't any sales. We all agree that businesses are uncertain. But my assertion is that regulations has little to do with it.

The multiplier effect is a perfect example and it includes what you described in your second point.

Lastly, my next couple of posts will describe what we should do. I was merely trying to set the table on this one and describe what our problem is.

Pablo said...


Your business experience probably trumps my interest in research, so don't be bashful about expressing your opinion. And what you are describing seems to go hand in hand with what I am describing and what Slick Willy is describing: People aren't buying things. That means you can't grow and hire more individuals. New regulations do affect companies in various ways, but it sounds like to me that regulations are not the cause of your business' slump. Lack of demand is.

Pablo said...

"The consumers are afraid to buy that because of regulations, bail-outs and lack of capitalistic policies. It is not rocket science."

Actually, it is very complicated and economists disagree over it. What I try to avoid is repeating slogans about something that I don't understand, which is what you just did here. I mean, bail outs? Businesses across the country aren't hiring because a couple of banks got bailed out in 2009?