Economists are Still Missing the Point on the Economy

A friend of mine on social media recently drew my attention to an article in Scientific American that drew my ire. Here's the Article. I find it amusing how economists can be so bright and yet so clueless as to the actual inner workings of the economy. But I guess when you are partisan and doctrinaire, it does give you blind spots. Here, the author is arguing that the American economy is rigged, and he blames insufficient regulation and enforcement. Obviously, I disagree with his assessment.

The American economy is rigged, just not in the way the author implies. He also is surprisingly clueless about the regulation of finance, given he was an advisor to the Clinton Administration. He talks about the relaxation of laws, but doesn't cite which laws specifically (using general terms throughout). From my perspective, corporate and finance laws have grown substantially year over year for a very long time. Sarbanes Oxley after the tech bubble burst and Dodd Frank after the great recession, are just two more recent examples. Also, anyone familiar with the regulatory state knows that they publish a vast amount of new regulations every year. Here's just the laws promulgated by the SEC's corporate finance division this year, for reference. The SEC is just one of a vast array of federal agencies, and each of the 50 states have a vast array of their own. Here's a list of federal agencies, also just for reference. Each of these agencies promulgates its own rules similar to the SEC taking up reams of paper. This is a vast and continuing expansion of regualtion, not a reduction.

The way the US economy is rigged is not from a lack of regulation or enforcement, it's through regulation and free trade. Regulations add a time and monetary burden on everyone participating in the regulated part of the economy (known generally as compliance costs). The companies that are best able to absorb the costs of new regulations are the large and rich multinationals who can afford to pay professionals to do proper compliance. Small local businesses, on the other hand, don't have the large amount of capital, or the credit lines, to hire the compliance people they need to compete effectively. The result is industry consolidation as small businesses are bought or go out of business, and the death of local competition. Since small business used to hire the majority of Americans, the death of these businesses harms the working man by reducing the supply of jobs in his local economy. With supply of labor growing continuously, this means workers are in a race to the bottom on wages to compete for a diminishing number of high paying jobs. Free trade further allows large corporations to shed middle and working class jobs by sending them to oversees markets that don't have our robust employee protections and high standard of living. Want to unionize? Now your jobs are all in South East Asia, feel free to unionize on the unemployment line. Why is everything made in China and Bangladesh? Because it's much cheaper to do business in those countries. Their low standard of living combined with comparatively little government oversight of the manufacturing process means it's much cheaper to make things there and ship them to the US and Europe. When you engage in free trade with the third world, their comparative advantage is low labor cost, while yours is large quantities of capital looking for better returns. The result is that capital then flows to the lower cost region of the world, profits come back on increased margins on labor, and the globalist corporation reaps a windfall in profits. 

Lastly, the author engages in some statistical misdirection that is common among left leaning economists. They point out there is a wider disparity between rich and poor in the US than other first world countries, but then doesn't bother to give you the raw data to see where this disparity comes from. Here, the author gives it away when he points out the USA has more billionaires that China and Europe. Well, even if the poor and middle classes all had the exact same standard of living in the USA, Europe and China, the fact that we have more rich people will give us a higher inequality rating simply because our rich are much richer, not that our poor are worse off. Moreover, there is ample evidence that even this is suspect as both Europe and China have long histories of hiding wealth from their governments. Examples: https://abcnews.go.com/International/ferrari-crackdown-italy-declaring-war-tax-cheats/story?id=16401014 . http://en.people.cn/n3/2018/0910/c90000-9499141.html . It could very well be that the reason we have more billionaires in the USA is because they have less incentive to hide their wealth from authorities, not that we actually produce the most wealth than China or Europe (though per capita GDP figures due tend to imply that we do produce more wealth, assuming these numbers are reliable, which they may not be due to the aforementioned tax evasion).

So what's the solution? Unfortunately, there aren't easy answers here. You can just accept job losses until the standard of living in the rest of the world raises enough to make it financially beneficial to bring jobs back to the US (some evidence of this happening as China and India have developed) but this means a long period of time where the poor and middle class suffer. Or, we can impose large tariffs on imported goods from these countries with low standards of living to protect our workers. The cost of this being that we would have to pay inflated prices for retail goods made overseas. Another options is that we can do a better job of regulating our local industries so we don't put small businesses at a competitive disadvantage to multinationals, but this would require massive rewriting of state and federal rules and regulations at a time when bipartisanship is at an all time low (i.e. highly unlikely to ever happen). My bet is we do nothing, inequality continues to rise and everyone plays the blame game without accomplishing anything.