Sunday, May 24, 2015

The New Normal

Some economists and politicians have argued for a new normal when discussing economic growth as measured by the GDP.  Maybe 2% GDP growth is all that can be expected from the economy going forward rather than the historical 3%-4%.  Other economists, like Martin Feldstein, go further to claim that the GDP calculation should be revised because it underestimates real GDP.  He argues that the current method must account for items as value and satisfaction that he considers too subjective to accurately measure.  Feldstein may have a point.  Other liberals would chime in that regulations like diversity, minimum wage, welfare, conservation, product liability, and clean air have only been measured for the economic cost of compliance to business and resulting litigation but the economic benefits are hidden from consideration.

There are surely experiential benefits that result from policies that support these outcomes, but we must ask: At what cost? With what unintended consequences?  With what efficiency and efficacy? Would these have been done anyway without laws and regulation?  Does the government have the constitutional authority in these regards?

All regulations have cost to business and regulations are, by their nature, coercive.  It consumes and redirects capital in ways that are often contrary to profit or even good business.  Profit is at the heart of capitalism but profit requires that the product or service be to a level of quality and reliability.  A business does not last long when its quality or customer service are faulty.  Pollution, litigation, product failure are all items that sully a brand and hurt corporate growth and profit.  Accordingly, many regulations would have been adopted over time.  In fact, one can argue that business will be less likely to go beyond what is regulated because it can face consequences from efforts not regulated.  Further, regulations are far too often ill-conceived in the cauldron of politics and therefore subject to the inevitable process of political corruption.

We must recognize that anything qualitative has subjectivity, which makes measurement difficult at best.  Feldstein is right to question the basis of the GDP calculation, but we must also say that any new means of measuring GDP should rightly be less subjective.

Even with the faults of the current method to calculate GDP it has a benefit of, theoretically, being consistently applied.  Therefore, given GDP growth over the past six years is some 50% less than its historical average, are we facing a new normal?  Consider this too, that there has been the largest expansion of government spending and debt in this same time frame coupled with growth in taxes and regulations.

Our answer is that the “new” normal is not new but, as we explain in our book Vigilance The Price of Liberty, is a consequence of the increases in government.  When government policies, especially in regard to taxes and regulations, are materially reduced economic growth will increase.

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