Tuesday, September 13, 2011

This Is What Economic Equilibrium Really Looks Like

Here is what I think is going on in the economy right now:

Employees like to hire people who already have a job. So most of the jobs created are going to people who already have jobs. One can argue that this just frees up that position, but the fact is that either the company will try to fill the absent position with either someone else who already has a job or promote someone from within to fill the position, or feel relieved that they can get rid of someone without having to fire them. Of course, losing someone to another company is costly -- you lose that person's knowledge, which cannot be truly regained even with training. So if a company does hire someone new, they will have to be trained for the position. This is why government stimulus doesn't work. All it does is reshuffle labor -- causing loss of wealth as companies lose people who know what they are doing.

Also, stimulus money allows companies to invest in more efficient technologies than they might otherwise have been able to afford. Of course, if your machines are more efficient, you don't have to hire as many people. So it is very likely that the stimulus money actually caused job losses. Of course, the businesses that got the money are now making high profits as well, for that very reason.

Companies are afraid to invest for several reasons. One is that they have no idea what Obama's health insurance plan is going to cost them. And you never know when the Obama administration will go after a company, prevent a merger (or allow it), etc. Nobody can figure out the rhyme or reason for any of their decisions (mostly because nobody knows exactly who are cronies for the Obama administration -- and note that cronyism isn't unique to the Obama administration, either). This is known as regime uncertainty. Who knows what will happen? Who knows what rules are coming down the pike? Who knows what regulations are coming our way? Best, then, to hunker down and, if anything, pay off debt. Many sensible companies -- and individuals -- are doing just that.

In fact, the fact that many people are preferring to pay down debt rather than spend more money is likely a factor in the economy's sluggish growth.

So investment has slowed, consumption has slowed, and savings too has slowed -- all to pay off debt. In fact, if this family did not have the debt it has, we would be investing, consuming, and saving. We can do none of the above because of both high debt and insufficient income. I have little doubt we are not the only ones in this situation. I have little doubt this is true of businesses and individuals. The only one not acting that way is the government (except the saving part -- they haven't done that for a long, long, long time -- if ever). No, the government is certainly spending -- and their "investments" do nothing more than distort the markets, making recovery take even longer.

I suspect that when people get out of debt, we will see more economic activity in this country. But that has to take place first. It probably wouldn't hurt if companies felt less uncertain about the future as well.
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