Green Room

Economics In Four Dimensions

posted at 2:25 pm on February 10, 2010 by

The most complex factor in the study of economics is time. Because liberal and statist economic theory does not properly account for the fourth dimension, it rarely predicts economic development accurately. The application of static thinking to a dynamic economy is equivalent to carving an ice sculpture out of warm water.

Take the example of the new pork bill Democrats are attempting to fry up in Congress. Even if this bill was an honest attempt to stimulate job growth, instead of the outright theft of taxpayer money to pay off favored constituencies, it would have minimal and short-term effects on job growth at best. This is because the engine of job growth is demand, particularly anticipated demand.

Training new employees requires a sizable investment of time and resources. Hiring comes with huge compliance costs, as well as incurring taxes and fees that workers don’t usually see on their paychecks – depending on your job and the state you live in, the total cost of employing you is probably double your hourly wage. This is an investment your employer makes in the hope of long-term reward. Marginal reductions in the cost of labor have a minor effect on the employer’s hiring decisions, because they are short-term incentives to make a long-term commitment. A foreman hiring day laborers for a short job might take on more workers, in exchange for a discount or subsidy payment, but expecting most businesses to respond to such incentives is like expecting a subsidy for wedding ring purchases to result in more marriages.

Government stimulus spending ends up doing more harm than good, because it removes money from the private sector through taxation, and when government debt reaches dizzying Obama heights, it makes corporate management nervous about the future. They understand that deficit spending jeopardizes the value of money, and they see massive tax increases lurking in its shadow. Businessmen know they’re a year away from the Democrats losing power in Congress, and they’ve got to survive three more years of Barack Obama, whose tendencies toward populist business-bashing and socialist spending make him dangerously unpredictable.

Investment is a calculated risk, based on the investor’s confidence in his ability to predict and influence future trends. In a command economy, future developments are shaped by the personality quirks of political leaders, and the demands of powerful constituencies. Political influence becomes the most valuable resource a large business can purchase… while small businessmen can only hope they aren’t crushed by regulations, mandates, and policy earthquakes rippling out from Washington. No one grows into an uncertain future, especially when the ruling party makes it clear they will confiscate the “winnings” from exceptionally successful enterprises.

The Wall Street interests that supported Obama’s candidacy were badly rattled when he turned on them. Obviously, they feel less confident in their ability to predict his actions, and their investment portfolios are likely to reflect this anxiety. Watching him perform an about-face under the pressure of crashing poll numbers, and begin courting them like Valentine’s Day sweethearts, will not calm their nerves.

In a socialist economy, their best-case scenario is modest growth and profits, since windfall success will turn them into political targets. The worst-case scenario is economic collapse brought about by Obama’s manifestly incompetent team, and his primitive wealth-destroying ideology. This vision of the future will continue to depress corporate growth, and resulting job growth, no matter what Obama says he will do today.

Political assaults on the banking and credit industries also do great harm to the economy, because they are the source of investment capital and consumer loans. Criticizing the profits of a bank is easy if you ignore the time factor – the previous risks and losses the bank had to endure. Banks and credit-card companies invest hard capital at a substantial risk of default, to earn money in the future through interest and fees. If they believe their ability to profit from this risk and expense is threatened, and they’ve been demonized to the point where they have no effective means to influence politics to their advantage, the only logical move is to reduce risk, and increase the price of the loans they feel confident in making. This hurts new businesses and low-income consumers the most, because they have the least impressive credit ratings.

Static theories of redistribution and “social justice” never account for the changes in behavior they produce. Money given or taken today produces a response tomorrow, which can be very different from the desired goal of social engineers. This is why higher tax rates never bring in anywhere near the revenue projected by greedy politicians. Redistribution schemes destroy future opportunity, for both providers and recipients.

It’s significant that socialists always talk about the catastrophes that will ensue if government takes no action, but they never want to discuss the possibilities denied to private industry when the government passes regulations or seizes wealth. No one mourns the investments that weren’t made, technologies that weren’t developed, or new markets that weren’t opened. The Left not only ignores the future, it proceeds as if we don’t have one… or as though it’s so inescapably awful that the only moral course of action is spreading the misery, so it will be easier to endure. That’s why we should never stop asking who will pay off those deficits someday, or what will happen when the government can’t borrow any more money from foreign interests, or the dwindling Social Security fund, to service its debt. The Left will never have an answer for those questions, because their economic theories are like a school of physics that assumes nothing in the universe will ever move.

Cross-posted at www.doczero.org.

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Many a year ago, I actually got a degree in economics, and the Doc is very much onto something here. If I could enlarge upon it for just a bit, there is a particularly pernicious error that tends to show up in economic thinking where two different subjects intersect.

One, as the Doc points out, is thinking about time. Now, time is handled to some degree in economics, but it is fairly rudimentary (“expected interest rates”, “forecast returns”, etc.). The other is conflating measurable quantities today with consensus quantities tomorrow.

The simplest illustration of this would be looking at expected interest rates 24 months hence. If rates today are 2% and those with capital to invest generally foresee 3% returns, while those with a use for capital foresee 1% interest costs, then — even with an average of 2%, lenders will defer lending and borrowers will defer borrowing.

Right now, business and consumer sentiment are showing large spreads in all sorts of future numbers — inflation, interest, and tax rates; costs of regulation; availability of raw materials, labor, and energy. Any standard economic formulae that treat these as fixed figures rather than probability clouds is merely providing guidance for nailing jelly to a tree.

cthulhu on February 10, 2010 at 3:09 PM

Another large factor impacting hireing, is the uncertainty of what the Government will do.

With the increase in Unemployment insurance costs, and the unknown burden which Healthcare reform will have… busineses literaly cannot have any means to predict the future.

Even contract law has been turned over by the Feds… with the Chrysler bonds being essentialy made worthless, when they should have been paid FIRST…

Business folks can’t make resonable investment choices right now, because of the Federalis constantly changing the rules… with more rule changes promised…

Romeo13 on February 10, 2010 at 5:54 PM

In a socialist economy, their best-case scenario is modest growth and profits, since windfall success will turn them into political targets. The worst-case scenario is economic collapse brought about by Obama’s manifestly incompetent team, and his primitive wealth-destroying ideology. This vision of the future will continue to depress corporate growth, and resulting job growth, no matter what Obama says he will do today.

I don’t think there is such a thing as ‘liberal economic theory.’ Also, if you are correct about growth, then how do you explain why the world’s fastest growing economy over the last thirty years or so has been a socialist one? Taxes suck and suck out real growth but if lowering taxes invigorates the economy and provides a solid platform for a thriving economy, why did we have an economy which collapsed at the end of the Bush Administration’s second term? One would think that your ‘fourth dimension’ would have had enough time to settle in and let those tax cuts have a more lasting positive impact but they did not.

I’m not doubting that lower taxes would be a good thing or that there are problems with Obama’s policies but you need to address why a statist socialist economic state is currently bankrolling America’s private and public debt. All of this takes place despite a conservative administration’s policies and stewardship for eight years.

I am not in favor of a statist model but your growth arguments are flawed.

lexhamfox on February 10, 2010 at 7:07 PM

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Ed Morrissey on February 10, 2010 at 9:20 PM

I described this over 2 years ago as “The Democrat Effect” – the rational response by firms to prepare for the inevitable insult to the economy from unsurmountable regulation, litigation, and taxation to come. These policies are absolutely purposeful, hence the related term “economic terrorism.”

Joe C. on February 11, 2010 at 6:32 AM