Reversing the Strangle

The world economy is being slowly strangled. Can it be reversed?

We can start in Asia. The mainstream narrative is that China will take over the world while Japan watches from its deathbed. Last week I argued that Japan’s decline is greatly exaggerated, a myth that covers the big swindle. This week it’s China’s turn under the microscope. More accurately, it’s democracy’s turn under the microscope.

What makes China unique among major economies is neither its fast growth nor its size. It’s the simple fact that China alone is not a democracy. This has enormous implications for how China handles the challenges ahead.

What are these challenges? One meta-trend today is that the US, Europe, Japan, even most “Asian Tigers” all face the same problem — growth is on a long-term downward trend. We’re not seeing widespread shrinkage yet, but the trend is clear.

Lower GDP growth is going to be very unpopular: voters have grown used to being richer, more educated, living easier than their parents. They won’t have a sense of humor when it stops.

Why is growth slowing? Because the modern crony-regulatory state is killing the golden geese. And they’re doing it with regulations. Regulatory strangulation. First a chart of the US Federal Registry, a list of all regulations issued annually:

 

 

And now a similar chart for the past decade in the European Union:

 

 

And now we can zoom out to the global level, again just over the past decade:

 

 

What’s driving this regulatory strangle is a dirty secret: the word “regulation” hides an ugly and deeply corrupt program of big firms writing big checks to big politicians. Buying rules that wipe out entire industries, and the rest of us can eat cake.

This gradual strangulation sends short-sighted politicans scurrying for band-aids to get past the next election. Like farmers eating their seed-corn, they push the Keynesian program: easy money, government spending, and debt-promotion. All to cover the economic harm from byzantine and destructive regulations.

At best, these Keynesian policies are simply robbing the future for a good time today. At worst, they’re part of the problem, doubling down on the regulatory strangle.

Clear-eyed observers can see the problem — we need far-sighted structural reform so the economy can get back to sustainable growth. Of course, this is a bit like wishing for World Peace on your birthday. And that’s the problem: politicians reach for the Keynesian band-aids because structural reform is politically expensive.

 

Easier a Band-Aid than a Surgery

 

So why is reform and deregulation so expensive?

First, structural changes hurt incumbent companies. And incumbent companies know how to write checks. Very large checks, in fact. This is why “deregulation” has often ended so badly. Lest we forget, for example, “deregulation” in the US financial sector had very little to do with opening the field to new firms, the supposed intent. And it had a whole lot to do with passing catastrophic gambles on to unsuspecting taxpayers.

Together with “we’ll just snuggle,” the term “free market” is probably the most abused phrase in the history of the species. It’s cynical cover for swindles great and small. To the point that, when you hear the term “deregulation” ooze from a politician, just skip the formalities and hand over your wallet.

The second political cost of deregulation is when the pain comes first while the gains come later. It either takes a wise and selfless politician (which you’ll find standing next to the unicorns). Or it takes a government that is insulated from both public opinion and from the crony capitalists. Since politicians attract lobbyists like privies attract flies, this is easier said than done. China,  alone among the major economies, has the power to take both voters and cronies out, clearing the way for hard choices.

China’s actually been here before, when they shuttered the “Iron Rice Bowl” of inefficient state-owned companies in the 1980’s, throwing up to 15 million out of work. And sparking one of history’s greatest upliftings from poverty. In the West, it’s fairly unimaginable that American or European politicians would toss millions out of work on an economic argument.

Back in the West, we might be waiting awhile for those wise and selfless politicians. For the simple reason that things haven’t gotten bad enough yet. The short-term-thinking “trap” can be very hard for a democracy to get out of: you need politicians who can sell sacrifice, and the voters will not buy sacrifice until things get bad enough. Like the frog in boiling water, voters won’t make hard choices until things start getting really bad really fast.

On the bright side, here is one silver lining in the tragedy of world-wide economic policy: if the clowns keep it up we might just get that boiling frog. Meaning we might just get voters fed up enough to endure short-term sacrifice for long-term gain. Until then, China’s got the best cards among the major powers, and now we’ll see how they play them.

In case you missed it, last week’s article on Japan is right here.

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Credits: Photo; Federal Registry Chart; EU Regulations Chart; Global Regulations