Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
Does the GOP Have a Diagnosis For What Ails the US Economy Other than Obamanomics?
We know the left-liberal, progressive diagnosis for what ails the US economy, not just today’s woes but longer term: too much income inequality (we need to redistribute from the high-saving 1% to the high-consuming 99%), too little public “investment” (not enough spending on infrastructure.) So that’s Obamanomics, basically. It’s a Keynesian argument about demand.
But what is the GOP theory of the case? Some on the right would say, well, Obamanomics! But consider: from the end of World War Two through the 1980s, it took roughly six months for employment to recover to pre-recession levels after each post-war recession. But it took 15 months after the 1990–91 recession and 39 months after the 2001 recession. The current recovery is 57 months old, and we are still some 4 million full-time jobs short of prerecession levels.
Moreover, steep recession losses for mid-wage workers have not been matched by comparable gains during recovery. For the labor market overall, then, the Great Recession continues. But not for big business. Corporate profits returned to their pre-recession peak in late 2009 and continue to make record highs. While Dodd-Frank, Obamacare, and investment tax hikes have not helped, the US economy’s problems seem to predate Obama.
So here is one possible explanation: these jobless recoveries are the result of an economy now better at generating process innovation (creating cheaper, more efficient ways to make existing consumer goods and services) than what business consultant Clayton Christensen has termed “empowering innovation” (creating new consumer goods and services). Efficiency innovation frees up capital that’s then reinvested in still more efficiency innovation — often machines rather than men — rather than in job-creating empowering innovation as in the past.
Why might this be? Years of government policy protecting incumbent firms from competition and failure present one possibility. As Ashwin Parameswaran has put it: “Incumbent firms rarely undertake disruptive innovation unless compelled to do so by the force of dynamic competition from new entrants. The critical factor in this competitive dynamic is not the temptation of higher profits but the fear of failure and obsolescence.”
Shorter: dynamic innovation is created by maximum competitive intensity. Here is the disturbing conclusion from a recent Kaufman Foundation report:
A number of signs point to a secular decline in U.S. business dynamism, which goes far beyond the more recent effects of the Great Recession. For example, the rate of new firm formation—a key element of business dynamism and new job creation—has been declining steadily for at least the last three decades. Job reallocation—the process that moves workers away from contracting or closing businesses and toward expanding or new firms—also has been declining over the same period.
Even the tech industry is not immune. The study notes that the number of technology companies aged five years or younger — the fast-growing “gazelles” of drivers of job creation — has fallen below 80,000 versus a high of 113,000 in 2001.
Some examples of how the US prevents both startup entry and incumbent exit: a “too big to fail” financial system (made worse by Dodd-Frank) that rewards gigantism and macroeconomic risk rather than lending to small business; occupational licensing and patent laws that reward cronyism rather than promoting the entry of new, entrepreneurial firms; a complex corporate tax code biased against investment, where big companies are able to lobby for favorable tax breaks and subsidies. Reform in all these areas is one way, as Christensen argues, “to reset the balance between empowering and efficiency innovations.”
So, if you buy this theory: the US needs more creative destruction and more radical innovation, while also fashioning a strengthened safety net and an education system that teaches the technological and entrepreneurial skills that workers will need in the future.
Published in General
Destory the goverment sponsered “Safty Net”.
Some examples of how the US prevents both startup entry and incumbent exit: … patent laws that reward cronyism rather than promoting the entry of new, entrepreneurial firms …
Like what? Are you referring to the first-to-file provisions of the AIA?
How specifically do patent laws reward cronyism and hurt entrepreneurial firms? I thought patents were supposed to help entrepreneurs?
My thesis is that information technology tools have actually slowed down organizational decision making. It used to be that organizations had to make decisions while all the stakeholders were in the same room, and if the stakeholder wasn’t in the room he was out of luck. Now because of email, ubiquitous communication in the form of cell phones, etc., organizations believe they have the luxury, if not the requirement, to get input from all stakeholders and so they delay decisions slowing down the process.
In the same vein, productivity software like word processors, presentation software, and spreadsheet software have destroyed the incentive for job specialization within organizations. It used to be that even smaller organizations had typists, typesetters, draftsman, graphic artists, and bookkeepers so that writers, engineers, analysts, statisticians, accountants, scientists, lawyers, etc could focus on their specialization instead of preparing reports, prints, and technical documentation etc. Now because computing tools make this relatively simple everybody is expected to be their own typesetter, copy editor, draftsman, graphic artist, bookkeeper, etc.
Imho it’s called off shoring, and the reason its impact is getting progressively greater on US jobs (reaching higher and higher up the scale) is that more and more skilled and high tech goods and services can be produced at the same, or close enough, quality in developing countries for a fraction of the cost.
That’s why corporate profits have recovered while US jobs have not – corporations have maintained their competitiveness. Many US salaries (not just the low end ones) are now not globally competitive at current levels of productivity – which is why investment in infrastructure and skills/training/education (all of which contribute as productivity mulitipliers) is not necessarily a bad thing.
Abolish the racial grievance/industrial complex and allow employers to test and hire the best candidate for the job without regard to extraneous factors.
Reform patent troll enabling and rent seeking in copyright law.
Curb the legal culture that make every stakeholder’s prior approval required for every innovation or change, as Z in MT pointed out.
Replace the Wagner Act, which has hurt workers as much as AFDC hurt the poor. Our current labor union establishment continues to try to put out the fires affecting the working class with gasoline just as the “War on Poverty” programs did
Enforce immigration laws with E-Verify, biometric visas and a border fence. tilting the balance of power back to labor and away from capital.
Our problems are simply, really:
Or, as Walter Russel Mead likes to put it, the 20th century Fordist blue social model is imploding, and society is still feeling its way into what the model of the future is going to be.
I believe that the most serious problem we have is government interference in the economy. Bailouts and subsidies make bad ideas profitable while overly restrictive regulation (especially in the personnel management area) make hiring an employee as serious an undertaking as adopting an infant. Government pressure to make housing loans available to everybody, pretty much regardless of ability to repay, was the biggest factor in the inflation of the housing bubble. The continuing improvisation in the implementation of Obamacare is not only damaging in its direct effects on the healthcare market, but the fact that the president is just making laws up as he goes along doesn’t inspire much confidence in the average businessman. The EPA’s determination to regulate according to ideology rather than science doesn’t help either.
In consistency in policy and the fact laws can be made retro- active.
A $100M plant with machinery now has to pay to retrofit those machines for EPA rules. Big deal , it is only $12K. Well that comes out of anowner manager’s pocket.
There is tipping point to rules from government.
That’s why corporate profits have recovered while US jobs have not – corporations have maintained their competitiveness. Many US salaries (not just the low end ones) are now not globally competitive at current levels of productivity – which is why investment in infrastructure and skills/training/education (all of which contribute as productivity mulitipliers) is not necessarily a bad thing. ·February 26, 2014 at 4:03pm
It’s embarrassing, but the dirty secret of America is that we can’t invest more in infrastructure or education. Infrastructure is bogged down by too much legalistic red tape, while education is overly politicized.
There are various reforms on the horizon, but I have a hard time seeing them producing payoffs in the near future (or even the next five years).