Detroitification — It’s The Gov't, Stupid

Monty Pelerin / EconomicNoise.com

Facts are stubborn things.

No matter how hard the Washington crowd tries to sell an economic recovery, inconvenient and contrary facts keep rearing up to shatter their mythmaking. Few people any longer believe the claims of declining unemployment or low inflation at least based on purchases they make.

The fable of a housing recovery is now crumbling: New Home Sales Plunge 13.4% in July, June Revised Lower; Blame Rising Mortgage Rates; Starts 896,000 – Sales 394,000. Two weeks ago, the same author (Mish) provided this article: Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What’s Next For Housing?

Rising interest rates are blamed for the housing reversal. As the late Gilda Radner would have said: “it’s always something.”

The recession, declared over in June 2009, never ended. Over four years later there has been no meaningful sign of a recovery. In spite of unprecedented government and Federal Reserve stimuli, the economy has barely budged These actions have only masked the true condition of our economy and will make us poorer in the future.

Some wonder how bad the recession/depression might have been had government not acted. Others worry that we will find out when the Fed tapers.

What is Going On?

Newspapers and the economic cacophony emitted by pundits and political hacks only confuse the average person as to what is really happening.

Rising interest rates, the reason given for weakening housing, provide a convenient and plausible excuse. But explaining complex economic issues rarely can be answered by citing a single variable. Such an answer is simplistic and begs the more fundamental question of why interest rates are rising now. Addressing this issue does not lend itself to snappy sound bites. Furthermore, it leads into complex relationships that few are able or willing to follow.

An unwillingness to explore these more complex issues is just fine from the political standpoint. They lead to a host of inconvenient and embarrassing issues regarding Washington’s mismanagement of the economy. The also enable economists to leap into the weeds of their particular jargon, theory, empirics and political leanings regarding the economy.

Let’s keep this discussion simple, which can be done by assuming away some of the noise and complexities like economists are wont to do. Let’s assume away economics and economists for the moment. Let’s pretend that neither exists and try to take a common-sense approach to the economic problems of the country.

As an economist, I think it worthwhile so that others, untrained in this so-called discipline, may better understand the simplicity of what ails the country. The pejorative “simplistic” is one hurled usually by people trying to protect their turf by using smokescreens.

Economics for Dummies

The reason why the economy is not recovering and will not recover can be explained in five simple points:

1. Wealth and standard of living increases can only be achieved by producing more, not less.
2. Capital increases are required to produce more. Wage gains are directly tied to productivity gains and more capital enables productivity to rise. US workers earn more because they are more productive as a result of having more capital (tools and equipment) to work with.
3. The private sector uses and expands capital. Firms cannot achieve this result, go out of business. The remaining capital is taken over by better stewards. Successful firms grow, creating value, jobs, incomes, wealth and more capital.
4. Government destroys capital. It confiscates it from the private sector and uses it for consumption, effectively reducing the supply. Jobs, income and growth that otherwise would have developed do not. The rare exception is if government “invests” in capital projects like roads, infrastructure or meaningful education. If properly chosen, this government spending can assist in the production of capital.
5. The proportion of assets and capital confiscated has increased greatly over the last century. At some point, the capital and wealth left behind in the private sector is inadequate to reproduce itself. That is when economic growth turns negative and standards of living decline. Long before that point growth rates diminish.

It is this simple process which has crippled the US economy. Pointing to rising interest rates, declining innovations or a host of other variables as the cause of the problem is to miss the root cause of the problem.

continue article at Economic Noise:

http://www.economicnoise.com/2013/08/25/its-the-government-stupid/