Sunday, August 18, 2013

The Wrong Kind Of Growth

Not all economic growth is created equal. If you spend money but afterwards have little to show for it, you have wasted it. Sadly much of the money America "invest it itself" each year through government spending and programs falls into this category. We need the right kind of economic growth, growth that is sustainable, with a purpose, well directed, and that has long lasting benefits. It should be in harmony with the environment and at the same time make economic sense. Proper planning often allows for rebuilding and improving rather then replacing and destroying everything currently on the ground.

Many of the worse examples of poorly directed growth can be contributed to poorly crafted government programs. I'm forced to think of  cash for clunkers, the problem is that many of the cars destroyed were not the nations worse "clunkers", but instead cars swept into the group because they qualified as a trade in. Another example is how America handled the move from analog to digital television, it cause the premature death of literally hundreds of  millions of  functional televisions, most hit the curb for trash pickup, and found their way into the nations landfills. Little effort was made to collect and recycle these units. To make things worse very few of the replacement units were made in America, the money spent on them quickly left our shores adding to our trade deficit and providing few jobs for Americans.

Jam into the poorly directed growth all the government money spent on hospitals and colleges that many Americans can no longer afford to visit or attend. While two totally different animals, both have been propelled into the future using tax dollars. This has influenced where they are built and the priorities of their design. Colleges have spent billions on theater style classrooms, massive parking garages, spacious student union buildings, and student housing that compete with the private sector. Hospitals often flee the city and construct whole communities on the edge of town leaving a hole in the neighborhood they left, this often results in the closing of local businesses and urban blight.

Growth need not be ugly and destructive, but when using huge amounts of other peoples money common sense often is the first thing to go as planners seek to create a clean slate where those in power can construct a monument onto themselves. Historically government has a poor record of spending our tax money well, it seems that those making the decisions are easily swayed by self interest or because they have no "skin in the game". Often they simply fail to demand a fair return on the money spent. This is what makes many tax payers skeptical about claims that infrastructure spending is the silver bullet that will be able to move us forward.

When looking at the quality of growth a flaw many refuse to acknowledge about quantitative easing is that it acts as a false tailwind that comes at a huge price when at some point it must end, it is not a situation or normal constant that can remain or exist, it is an abnormal monetary environment. QE carries with it huge side-effects by distorting and creating a false market as well as encouraging investors to take on more risk. Possibly the biggest flaw manifest itself in the squandering of opportunities that some see a get out of "problems free" card, but in reality this money is not free. One of the biggest concerns is that the withdrawal of this program by its design in effect creates its own headwind.

Recently the government muddied the water further on defining growth when they made a minor change in how the  GDP is calculated, this will have the effect of making things appear better and giving the impression of  even more growth, it will also improve the GDP / national debt ratio thus making our debt seem less dramatic. If government was interested in a more honest reflection on economic growth they could back bankruptcies out of the GDP as lost assets, fact is many debts are not getting paid down or off but simply being written off. In a recent post I wrote about how new business start-ups propel the economy forward when created but often leave a wake of destruction behind when they fail after a short time.

With each of the pull backs following the Great Depression jobs returned more slowly then the one before. This seems to be a trend as the world economy continues to change, this time the job creation is far less as small business the creator of jobs is under assault. With larger businesses having a number of advantages going forward and eating the lunch of their smaller competition it is no surprise that the National Federation of Independent Business recently reported that more companies reduced the size of their staff than increased it over the past month, marking the third straight negative reading. Some 12% of small businesses trimmed jobs while 9% added workers. Hiring intentions remained weak. "Overall, there is not a lot of promise for new job growth," said William C. Dunkelberg, chief economist of the NFIB. 

Today many regulations favor big business. They have the ability to raise money while many small businesses cannot. Regulations also weigh heavier on small firms. As their smaller competitors fail large firms pick up more business. This is one of the main reason for lack of new job creation and why this recovery will be so hard to sustain. The 1982 recession should never be used as a comparison as to what we have today. That recession was self induced when Fed Chairman Paul Volcker raised interest rates to curb inflation. The reason behind that recession is far different then what we face today making invalid any claims of similarity, as dropping rates quickly brought back a surge of activity.

Footnote;  Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest to you, may I suggest the post below that are related to this subject,

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